Posted on 07/07/2004 10:25:04 PM PDT by wormsy
The Sink-or-Swim Economy The New York Times ^ | June 8, 2003 | HARRIS COLLINGWOOD
What is it with this economy, anyway? Going strictly by the numbers, the most recent recession has been mild in comparison to previous downturns. Since the economy peaked in March 2001, the major markers of economic health -- industrial output, personal income and wholesale and retail sales -- have all traced smaller declines than in the average post-World War II recession. That's why many economists, among them Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government, are inclined to dismiss today's complaints about economic stress and anxiety. ''People got spoiled by the 90's boom,'' Frankel says. ''They forgot what recessions are like.''
But Frankel concedes there's something odd about this latest economic decline. After a short-lived retreat in 2001, gross domestic product after adjustment for inflation actually grew throughout 2002 and managed a 1.9 percent gain in the first quarter of 2003. Yet the economy shed more than 500,000 jobs between January and April. And as Frankel notes dryly, ''Wages are not doing so well, either.'' The latest evidence of wage stagnation: the Labor Department's report last month that the average weekly paycheck, once inflation and seasonal factors are considered, shrank 0.3 percent from March to April of this year. All the contradictory signals have economists wondering what manner of beast stands before them. ''In recent economic history,'' says Robert Hall, an economist at Stanford University's Hoover Institution, ''there's been nothing quite like this continued modest G.D.P. growth combined with continuing declines in employment.''
Different economic indicators have pointed in opposite directions before, of course, but something other than the usual short-term statistical noise is at work here. What's weird, and deeply unsettling, about today's economy is that the big picture bears so little resemblance to the small picture, that is, to everyday life. The big picture shows the economy tracing a gentle, rather lazy slope -- a few tenths of a percentage point up or down, nothing too drastic. Closer to ground level, meanwhile, the action is nonstop and frenetic. At any given moment, some people and businesses are enjoying outrageous good fortune. Others are falling under a rain of slings and arrows.
But when the people making money faster than they can count it are placed, statistically speaking, alongside the people reduced to counting every penny, all that up-and-down activity averages out to something that looks like stability. Economists have a term for the local-level volatility that affects individual firms but doesn't show up in the big-picture statistics. They call it ''idiosyncratic volatility,'' and it is the signature of our economic age. Not to mention the source of much of our anxiety.
Alan Greenspan, chairman of the Federal Reserve Board, noted our idiosyncratically volatile time in a 2002 speech in which he reviewed the behavior of the U.S. economy over the past two decades. Technological innovation, as well as deregulation and trade liberalization, ''fostered a pronounced expansion of competition and creative destruction,'' he observed. ''The result through the 1990's of all this seeming-heightened instability for individual businesses, somewhat surprisingly, was an apparent reduction in the volatility of output and in the frequency and amplitude of business cycles for the macroeconomy.'' Translated from Fed-speak, that means that for the past 20 years, individual companies have prospered or failed, entire industries have grown up while others have vanished and, when all that frantic sinking and swimming in the economic waters is plotted as a graph of overall output, it looks like a gently rising curve. Meanwhile, the periods of economic expansion keep getting longer, while the recessions get shorter and less severe.
That's the sign of a robust system, says Michael Mauboussin, who is paid by Credit Suisse First Boston to think big thoughts about markets and financial behavior. ''It takes two essential features to make a system robust,'' he says. ''You need diversity, and you need interaction. That describes the American economy. You have diversity, a lot of local agents doing their own thing based on local information. And these agents interact in the marketplace; at some point, two agents will meet at a price. Then you have a big diversity in outcomes -- some buy, some get bought, some win, some lose -- and that makes for a robust, stable system.'' A few lines of John Ashbery's seem to apply: ''The whole is stable within/Instability . . . /a Ping-Pong ball/Secure on its jet of water.''
Recent economic and technological developments have made the system even more robust and stable -- and its constituent parts more idiosyncratically volatile. ''In the 1950's,'' Mauboussin says, ''the economy was asset-driven: resources were concentrated in big factories. Business gets bad, and the factory's running at only 50 percent capacity, but you still cling to that factory, because it's too hard and too expensive to replace. Today the economy is people-driven. That gives you much more flexibility, easier resource allocation.'' Or less technically, it's simpler to get rid of people than a factory. At the same time, thanks to the proliferation of information technology, market signals reach companies faster. They react more quickly and flexibly, reallocating resources -- cutting jobs -- at the first hint of weaker demand.
''Flexibility is good in the aggregate,'' maintains Frankel, the Harvard economist. It's hard to argue with him. Since the end of World War II, the duration of the average economic expansion has increased to 54 months, while the duration of the average recession has shrunk to 10 months. That's a big improvement over the herky-jerky economic cycles that characterized the prewar decades, when the average expansion, at 26 months, was barely longer than the average recession, at 21 months. ''In the old days, all the earthquakes were 6's on the Richter scale,'' says Donald Ratajczak, a consulting economist and retired Regents professor at Georgia State University. ''Now they're all 3's.''
That moderation has been achieved, paradoxically, by transmitting job insecurity up the economic ladder. Recessions used to land most heavily on manufacturing workers, the part of the labor force that would be furloughed any time manufacturers misread the market signals and made more goods than they could readily sell. So-called core employees -- managers, headquarters workers, most administrative personnel -- were spared. ''Goods producers used to take 70 percent to 80 percent of the job loss,'' says Ratajczak. ''Now they only take 45 percent to 50 percent. The rest falls on the core employees who used to be safe.''
The changing pattern of layoffs is a portent of the ''friction free'' economy that many economists aspire to. ''It's an economist's wet dream,'' says Roger Martin, dean of the Rotman School of Management at the University of Toronto and a former co-head of the Monitor Consulting Group. ''Economists love maximum efficiency. But people don't. We want market efficiencies to make us richer, but we don't like what an efficient market feels like.''
Of course we don't. Nobody likes to lose, and efficiency is one of the chief prizes of capital's victory over labor. Martin's thesis is that capital completed its conquest of blue-collar labor in the 80's, when Ronald Reagan broke the U.S. air-traffic controllers' union and Margaret Thatcher crushed the British coal miners' strike. White-collar workers held out until the recession of 1990-91, when thousands of middle-management jobs -- for example, in the defense sector -- were vaporized. That got through to the labor force: there were no ''core jobs'' anymore. Management had the whip hand. In the name of efficiency, volatility had trickled up to middle management, and resistance was futile.
Greenspan has taken note of this development, and as with idiosyncratic volatility itself, he doesn't sound too upset about it. In Congressional testimony in 1998, when the economy was defying historical precedent by growing rapidly without accelerating wage inflation, Greenspan opined that widespread fear of layoffs served a useful purpose by keeping workers' wage demands in check.
or an economist, a little fear may be a salutary thing, but the rest of us find it harder to appreciate. At lunch on a bright spring day, a friend obsesses over the fate of a former colleague, an engineer with 20-odd years of experience who was a senior manager of a firm working on Boston's Big Dig, the $14.6 billion infrastructure project that began in 1987 and is still going strong. Toward the end of last summer, a chronic illness acted up -- he was working brutal hours, 100 percent of them billable to the Big Dig -- and his doctor ordered him to take some time off. Puttering on his boat one afternoon, the engineer collapsed. He nearly died, and spent close to two months in intensive care. He was eager to return to the office, where his friends were, but his recovery was slow, and it was March before he was back at work again. Two weeks later, he was fired.
''Ultimately,'' my lunch companion says, ''his friends fired him. He thought they would stick up for him. But all they said was: 'You earn X and you bill Y. Don't let the door hit you on the way out.''' She stares out the restaurant window at the traffic, or maybe past it to her own uncertain prospects. In the aggregate, sure, flexibility is a good thing. But we don't live in the aggregate; we live down here at sea level, and these days every time someone who seemed unsinkable vanishes beneath the economic waves, those around him recalculate their own odds of staying afloat.
The human nervous system wasn't built for extended uncertainty. Like other animals, we react predictably when faced with a threat. Our pulse accelerates, our breathing comes in shallow gasps. Ordinary biological activities -- digestion, immune function, tissue repair -- shut down until the threat has passed. And there's the rub. In the wild, the threat passes quickly, one way or another. But for homo economicus, the threat never goes away, even or especially if it never quite arrives.
Unlike most other animals, points out Robert Sapolsky, a neuroscientist, human beings can -- and often do -- experience stress simply by imagining stressful situations. No immediate threat is necessary. ''For 99 percent of the beasts on this planet,'' Sapolsky tells lecture audiences, ''stressful situations include about three minutes of screaming terror, after which the threat is over or you are over. We humans turn on the exact same stress response thinking about 30-year mortgages.'' And mortgage-induced terror often lasts much longer than three minutes.
Sapolsky likes to say that Hans Selye, the Canadian scientist who discovered the stress response (and borrowed the word ''stress'' from metallurgy to describe what he observed), ''was smart, creative, insightful and totally incompetent at handling laboratory rats.'' Following up on a colleague's discovery of a particular hormone thought to be stress-related, Selye started injecting the hormone into rats to determine its effects. But injecting the rats was a fumbling, painful process that usually culminated in Selye's chasing the rats around his lab with a broom. Still, the study did yield some results: all the rats injected with the hormone developed stomach ulcers. But so did the control group of rats who were injected, Selye-fashion, with saline solution. Selye concluded that the hormone didn't cause the rats' ulcers; the rats developed ulcers because they were constantly being chased by an angry scientist wielding a needle and a broom.
Rat stories are a staple of Sapolsky's repertory. He likes to tell audiences about a series of rat experiments that all took place in cages with floors wired to deliver a mild shock at a time of the experimenter's choosing. In one experiment, a rat was shocked 10 seconds after a warning light went on. Armed with that predictive information, the animal mellowed right out, absorbing the shocks with minimal stress response. Absent the warnings, however, the rat would develop ulcers. In another experiment, rats learned they could sometimes prevent the shock by pressing a lever. No ulcers. Then the experimenters shocked the rats even though they had pressed the lever. Still no ulcers. The lever promoted an illusion of control that forestalled chronic, unrelieved stress.
Would that our cages came equipped with warning lights and levers. Unable to predict or control the shocks that life administers, we respond to chronic, unrelieved stress just as do the most unfortunate rats: muscle atrophy, diminished sex drive, hypertension and all the other ailments that ensue when we shut down all processes except those needed to deal with a clear and present danger. This is what leads researchers to predict that 50 years from now, the biggest public health problem in the developed world will be depression.
Credit Suisse First Boston's Mauboussin invited Sapolsky to speak last year at an annual conference attended by some of Wall Street's most accomplished players, people who earn millions of dollars by investing billions of dollars of other people's money. ''Here's Sapolsky,'' says Mauboussin, ''he doesn't know a thing about money management. Here are all these money managers, they don't know anything about neurobiology. But when he was finished, they all said, 'That guy is playing my song.' ''
Think about that. The attendees at Mauboussin's conference sit at the tippy-top of the American economic pyramid. And yet they identified with Sapolsky's tales of stressed-out lab rats as readily as any wage slave worried that the next paycheck might be the last. That's the devil's bargain of the sink-or-swim economy: from the highest to the lowest, the price of ever-greater collective stability is ever-greater individual insecurity.
Although we drift in the same sea, it's hard to feel we're all in the same boat. Isolation, Mauboussin theorizes, is another byproduct of idiosyncratic volatility. Robust systems depend on interaction, and interaction is a function of connectivity -- the e-mail and cellphones and Web sites that enable us to communicate with anyone anywhere and transact business 24 hours a day. ''It's a funny thing,'' he notes, ''but as connectivity has increased, average firm size has decreased. Connectivity accelerates disaggregation.'' The more connected we become, the more complete our isolation.
But why reach to blame technology for our growing atomization when good old competition is close at hand? As Frankel says, lowballing it as usual: ''There's a trend toward dog-eat-dog.'' The fear of layoffs that Greenspan noted extends vertically to the boss and horizontally to anyone younger, smarter, cheaper who threatens our jobs. So much for worker solidarity -- it's hard to make common cause with someone who, we suspect, wants to snatch the bread from our mouths. In such circumstances, Hobbes's ''war of all against all'' is less a bleakly accurate observation than a self-fulfilling prophecy.
Solidarity is an artifact of an age before idiosyncratic volatility. Before there was a Federal Reserve System or unemployment insurance or friction-free labor markets, the economy bucked and skidded like an old jalopy with a bad clutch. But its volatility was a collective phenomenon. The Great Depression made up the common substance of experience for an entire generation. Today the larger economy traces an arc that little resembles the shape of individual fortunes. It rolls ahead serenely, as our lives grow ever more crowded, anxious and solitary.
When dot-coms were going to take over the world, there was much approving talk of the free-agent economy. Have skills, will travel: human capital was like any other form of capital in the friction-free economy, there to be reallocated as the market might dictate. In this new stage of economic evolution, our job security would evaporate, but our wealth would increase. Or so went the sales pitch. In reality, our jobs are less secure, but all the job-hopping doesn't make us richer. Academic studies have shown that about 60 percent of the people who move from job to job (voluntarily or not) wind up with lower lifetime earnings than their less adventurous counterparts who remain for years with the same employer. Still, the notion persists that we can and will climb from a well-paying job to one better, as the bidding for our services heads ever higher. ''Everyone thinks they're going to be a major-leaguer,'' Ratajczak says with a laugh. ''Everyone's above average.''
But rising doubts may be eroding that assurance. As retail sales stagnate and consumer confidence remains low, the economic navigators at the Federal Reserve worry about deflation. In a deflationary environment, people defer immediate purchases of already cheap goods because they assume that prices will be even lower next month. But the calculus may be different this time. Consumers may be reluctant to buy because slowly, grudgingly, they are losing faith in the American master narrative, with its promise of social and economic advancement in return for hard work. Americans have always taken for granted that better days are coming. Is our present angst the first flicker of suspicion that the better days have already been and gone?
Not worth reading the rest of the article after reading the first paragraph. This idiot thinks the start of a recession marks an economy "peaking".
It's certainly not anything you could call "journalism." I sure hope it was on the editorial page.
PS: Isn't it remarkable how the very thought of religion is utterly foreign to these people?
Therefore I say unto you, Take no thought for your life, what ye shall eat, or what ye shall drink; nor yet for your body, what ye shall put on. Is not the life more than meat, and the body than raiment?Instead we get a steady diet of rats, and ulcers, and neurobiologists, and investment bankers, and billions upon billions in hedge funds...Behold the fowls of the air: for they sow not, neither do they reap, nor gather into barns; yet your heavenly Father feedeth them. Are ye not much better than they?
Which of you by taking thought can add one cubit unto his stature?
And why take ye thought for raiment? Consider the lilies of the field, how they grow; they toil not, neither do they spin:
and yet I say unto you, That even Solomon in all his glory was not arrayed like one of these.
Wherefore, if God so clothe the grass of the field, which today is, and tomorrow is cast into the oven, shall he not much more clothe you, O ye of little faith?
Therefore take no thought, saying, What shall we eat? or, What shall we drink? or, Wherewithal shall we be clothed?
(For after all these things do the Gentiles seek:) for your heavenly Father knoweth that ye have need of all these things.
But seek ye first the kingdom of God, and his righteousness; and all these things shall be added unto you.
Take therefore no thought for the morrow: for the morrow shall take thought for the things of itself. Sufficient unto the day is the evil thereof.
Fyi, according to the NBER dating committee, the recession started from March 2001 and ends in Nov 2001. And yes, they foresaw ur qns as I pasted below.
Q:The most recent data indicate that since November 2001, the unemployment rate has risen from 5.6 percent to 6.4 percent and payroll employment has fallen by almost a million jobs. How can the NBER say that the economy began an expansion in November 2001?
A: The NBER defines expansions and recessions in terms of whether aggregate economic activity is rising or falling, and it views real GDP as the single best measure of economic activity. Real GDP has risen substantially since November 2001. However, this growth in real GDP has resulted entirely from productivity growth. As a result, the growth in real GDP has been accompanied by falling employment. Unemployment has risen because of falling employment and because the labor force has been rising.
That is, you can't argue that the article is not worth reading based on "This idiot thinks the start of a recession marks an economy "peaking"."
You seem to be making the mistake of assuming that "the data" is [or "are"] accurate.
Suppose, though, that the data isn't accurate. Suppose that the real unemployment figure is much lower than 6.4 percent, but it still looks like 6.4 percent to the ivory tower geeks because:
1) The ivory tower geeks wouldn't know an S-Corporation from a C-Corporation if the S-Corporation hit them upside the head with a 2X4, and all their methods of tracking 10,000 employee C-Corporation hiring and firing are absolutely worthless when it comes to tracking 1-Man S-Corporation [or LLC] consultancy outfits, or Husband & Wife "Fictitous Name" plumbing outfits, or 1-Man "Under my Own Name" carpenters,Just because the "statistics" tell you that the work is not there doesn't mean that you should assume that the work is not actually there.- and/or -
2) There are legions upon legions of Americans who are so fed up with an impenetrable tax code, an impenetrable federal criminal code/civil code/regulatory bureaucracy, and especially a set of confiscatory federal tax rates, that they've simply decided to move offline and work in the underground economy [this sort of thing is particulary popular among e.g. African-Americans*, when they moonlight as e.g. car "detailers" or beauticians],
- and/or -
3) A very significant portion of the apparent increase in productivity in the United States is due to the fact that there are 10,000,000 guys named "José," none of whom have Social Security numbers [or, at best, all of whom have the same, identical Social Security number], all of whom work construction, or landscaping, or meatpacking, or crop-picking [with their wives working (nanny/au pair)-ism], and none of whom show up on the books of the "official" economy.
* I could attribute the participation, in the underground economy, of, e.g., African-Americans, to [shall we say?] "less than benign" motives, but I don't think we need to go there.
But the cost to keep that employee on the payroll has gone up very substantially with health insurance, workers comp and all the other goodies to maintain him...
It's more than a suspicion. It's the realization by more and more Americans that the job of each and every citizen is on the chopping block, either to be sent overseas or to be taken by an illegal immigrant or an H1-B/L1 immigrant. And it's the realization that this process will continue until middle-class America is reduced to the living standard of Mexico, India, and China.
it's the realization that this process will continue until middle-class America is reduced to the living standard of Mexico, India, and China.
This is not as bad as you think. If the congress had tried to severely restrict influx of foreign professionals, the flow of capital to India and China would be even faster. Instead, by accepting new immigrants, the tax base increase, the economy remain vibrant and we slow the flow of capital outwards.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.