Paul Krugman's op-ed (see below) in today's New York Times is a wonder. In his first paragraph he writes "There's nothing particularly mysterious about our [economy]". Yet, in the rest of his article he contrasts the American economy, apparently growing at about 2.5 per cent, with employment declining at about 0.5 per cent. In terms of orthodox economic theory, if that's not mysterious I don't know what is!

The decline in employment has been adequately explained -- to my mind -- by other economists I have read recently. They are saying that because manufacturing firms have something like a 25 per cent surplus capacity (other service businesses also have surpluses, but less so), then managements are taking advantage of the lull to make their firms much more efficient. And that often means shedding labour; pretty sizeable redundancies are announced quite regularly.

But no economist to my knowledge has yet dwelt on where the apparent growth is coming from. I think it's partially the ripple effects from the re-stocking of the armaments that were used in the Iraq invasion, the increasing ongoing costs of the American administration in what I term 'civic-Iraq', and the repeated expendiure on items stolen from installations in eastern-, or 'oilfield-Iraq', where there are few western journalists but, it seems, plenty of robbers and saboteurs. Anything that is removable, whether electricity generators, cabling, transport (even ambulances) is stolen at the first opportunity. Also, of course, there is the cost of replacing oil pipelines which are being so frequently blown up that the oilfields are barely able to produce enough oil to supply Iraq itself.

Government treasury officials have wonderfully ingenious ways of hiding vast discrepancies as off-balance sheet items in national accounts, which are quite as imaginative as those used by Enron and others in recent years, but chickens come home to roost sooner or later, and then we will see that the American budget deficit will be far worse than it is supposed to be.

And it is this huge budget deficit which Paul Krugman tells us is going to be his subject for another day. So it might be, but I'm not losing any sleep waiting for his solution because, although Krugman is very trenchant at criticising Bush and right-wing policies (and I often agree with him when he does so), I haven't noticed in the past few months of reading him that he has any sort of solution.

But I mustn't be too carping because I think that there is indeed something mysterious going on in advanced economies. Or rather, many constraints which are very different from each other and thus difficult to add together and compute in a meaningful way, are actually acting simultaneously against the sort of economic growth which has gone on almost uninterruptedly for the past 150 years. As in nature, when a species has had a free run for a period, it inevitably starts to be constrained by competitors, parasites, and physical parameters so, it seems, the western way of life, successful for so long and as healthy and joyful as a Norman Rockwell painting, is now coming up against some real nasties such as lack of time, fatigue, and increased stress levels.

I think it is probably a lack of free time to spend on new consumer goods which is the most critical. And it's most critical among the most meritocratic section of the population -- that is, among those who work the hardest and the longest but also have sufficient discretionary incomes which usually start a new consumer boom. Unless we can think of an entirely new mode of transport which could substantially reduce the average time spent in commuting and deliver its customers with less stress to their destinations at work and (particularly) at home, and unless we can imagine an entirely new form of home relaxation and entertainment that would be a vast improvement on television, then I just don't see any opportunity for new status goods as powerful as the motor car or the TV has been for most of the last century in producing the profits and investments which propelled western economies. Undoubtedly there'll continue to be a stream of innovative goods which will attract one portion or other of the population but I somehow can't see anything that will produce the tsunami effect hat sweeps through all socio-economic strata -- the sort of effect that the politicians and central bankers of western nations are desperately looking for.

Somehow, I think that the whole 'space-time structure' of the daily life of western man has now become constricted and locked together in such a way which gives little flexibility for future consumer-led growth. If this continues, then large-scale deconstruction and decentralisation will be needed, but I fear that nothing like this can take place voluntarily -- there are too many vested interests who hope that the stalled economies of Japan, Europe and America are hiccups. Only the decline of cheap energy will force it on us. When this starts to happen, as it will inevitably, I hope that a great deal more attention will be given to what anthropologists and biologists say about our genetic propensities and to the status satisfactions of living in communities rather than in the purchase of consumer goods. Once cheap fossil fuels start to decline in earnest, then we will probably never return to the large-scale manufacturing and distribution systems that have developed during the last century and a half. And alongside that will probably be the gradual disappearance of large-scale comprehensive centralised governance and the appearance of many more specialised lateral varieties.

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TWILIGHT ZONE ECONOMICS

Paul Krugman

For about 20 months the U.S. economy has been operating in a twilight zone growing too fast to meet the classic definition of a recession, but too slowly to meet the usual criteria for economic recovery. There's nothing particularly mysterious about our situation. But recent news coverage and commentary in particular, the enthusiastic headlines that followed a modest increase in growth and a modest decline in jobless claims suggest that some people still don't get it. So here's a brief refresher course on twilight zone Economics 101.

Since November 2001 which the National Bureau of Economic Research, in a controversial decision, has declared the end of the recession the U.S. economy has grown at an annual rate of about 2.6 percent. That may not sound so bad, but when it comes to jobs there has been no recovery at all. Non-farm payrolls have fallen by, on average, 50,000 per month since the "recovery" began, accounting for 1 million of the 2.7 million jobs lost since March 2001.

Meanwhile, employment is chasing a moving target because the working-age population continues to grow. Just to keep up with population growth, the U.S. needs to add about 110,000 jobs per month. When it falls short of that, jobs become steadily harder to find. At this point conditions in the labor market are probably the worst they have been for almost 20 years. (The measured unemployment rate isn't all that high, but that's largely because many people have given up looking for work.)

All this leads to a great deal of suffering -- not just lost income, but also the anxiety and humiliation that come with long-term unemployment. Is relief in sight?

Over the last few weeks, two numbers have led to a spate of optimistic pronouncements. One is the preliminary estimate of second-quarter growth, which came in at a 2.4 percent annual rate about one point higher than expected. The other is the rate of new applications for unemployment insurance, which has fallen slightly below 400,000 per week.

But while the growth and new claims numbers were good news, they didn't tell us that the economy is improving. All they said is that things are getting worse more slowly.

This should be obvious when it comes to growth. I saw headlines saying that in the second quarter growth "soared," even "rocketed." Huh? That 2.4 percent growth rate was a bit less than the average during our job-loss recovery. Just to stabilize the labor market in its present dismal state would probably take growth of at least 3.5 percent; it would take much more than that to return the economy to anything resembling full employment.

Meanwhile, about those unemployment claims somehow that 400,000-per-week benchmark has acquired a lot more significance in people's minds than it deserves. For example, claims came in at 398,000 yesterday and this was treated as good news because it was (barely) below the magic number.

Well, here's some perspective since November 2001 new claims have averaged 414,000 per week. A number a bit lower than that might mean stable or slightly rising payroll employment but as we've just seen, that's not nearly good enough. For comparison, in 2000 a year of good but not great employment growth weekly claims averaged 305,000. My conclusion is that the state of the unemployed won't improve unless claims fall a lot further than they have.

So is a real, unambiguous recovery just around the corner? Recent economic reports have had a "good news"-"bad news" feel to them. Businesses are starting to buy some equipment; that's good. But they seem to be engaging in replacement investment, not capacity expansion; that's bad. Consumers are spending; that's good. But rising interest rates seem to have ended the refinancing boom that put cash in consumers' pockets; that's bad. And so on.

The best guess is that growth in the second half of the year will be faster than in the first half, possibly high enough to create some jobs, but not high enough to make jobs easier to find. In other words, in terms of what matters most, the economy will continue to deteriorate.

All this is, of course, an indictment of our economic policy a policy that has managed the remarkable trick of generating immense budget deficits without giving the economy much stimulus. But that's a subject for another day.

New York Times -- 15 August 2003

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