Textbook economics meets the real world

Ross Gittins explains why Textbook economics meets the real world results in workers getting stuffed around:

When one sector is shedding labour at a time when another sector is desperate for more workers, this allows the expanding sector to attract the labour it needs without bidding up wage rates unduly. That is, the process helps limit inflation pressure.

Get it? The squeeze on manufacturing is happening not by accident but by design. All the textbooks will tell you that's the outcome the rise in the exchange rate is intended to bring about (given that the boom is happen in mining rather than manufacturing).

Remember the recent decision to close the Mitsubishi car plant in Adelaide? It's a classic example of textbook economics working in real life. As soon as they heard the news, mining companies from around the nation rushed to Adelaide to try to recruit the skilled workers they so desperately need.

It was fortunate for many of the laid-off car plant workers the mining industry was booming at the time. But it wasn't a happy accident. The same high exchange rate that was the inevitable consequence of the mining boom was what finally did in the car plant.

Of course, there'll still be tears and pain among the laid-off Adelaide workers and their families. Their treatment has been brutal.

The market system is a great way for societies to become prosperous. But no one ever promised that capitalism is gentle. It ain't.

Emphasis Mine

At least, he is honest.

One problem he overlooks is that not all skilled workers are interchangeable. Unskilled workers can be deployed easily from one industry to another because they need a minimum amount of training to be able to do the job. Whereas it may take up to ten (10) years for a skilled worker to be proficient at their skill.

Skills cause a lot of friction in the labour market as workers cannot readily move from one sector to another.

Read more!

Economy.com's Zandi on Homeowners with Negative Equity

Tanta compares notes with Economy.com's Zandi on Homeowners with Negative Equity and is a little bit worried:

With a 20% price decline (peak to trough), I calculated 13.6 million homeowners with zero or negative equity; Zandi's updated numbers put that at 13.8 million.

Zandi didn't provide an estimate for a 30% peak to trough price decline, but my 20 million estimate is probably pretty close. Note: I calculated the percent of homeowners with mortgages with no or negative equity; Zandi calculated the percent of the total single-family housing stock.

Emphasis Mine

That is 20,000,000 households, not people.

Scared shitless, yet?

The Great Depression will probably be known as the good old days as the US economy implodes.

Read more!

Blogrolling

I decided to indulge in following the Next Blog link and see what pops up.

• Lost in my madness is a Spanish Language Goth blog of photographs and poems. Pity my Spanish is so bad.
• ESPRIT is an English Language blog of interior design, architecture, and viruses. The designs seem tame. The graphics of the virus are interesting.
• hawgblawg is an English Language blog by Prof. Ted Swedenburg from the University of Arkansas. This is mainly about Arab culture in the Mississippi valley.
• NIGORCHA is an English Language blog from India which features photographs of varying quality from quite good to no charge at the film processing place.
• Jewel Style is a Spanish Language blog of women's fashion photography. Looks most photographs are lifted from trade magazines, although the non-trade ones look professional.
• Toko Online Grosir & Eceran. Menyediakan Baju/Busana Muslim, Baju Koko, Jilbab & Mukena pilihan. is an online store blog from Indonesia. There is some quite stylish clothing advertised there.
• The Muffin Man Kipp in an English Language blog of cute child photographs.
• COMITE ORGANIZADOR is a Spanish Language blog that appears to a online record of the meeting of an organising committee.

And there ended my blogrolling as there was no link out.

Read more!

Still Pretending

Jim Kunstler writes that Americans are Still Pretending that they live in the greatest nation in the world:

Once the US gets into serious difficulties with our oil supplies. every other sector of the economy wobbles, including especially the food-growing sector, which cannot function without copious amounts of diesel fuel and hydrocarbon-based soil 'inputs.' Americans will go hungry, and not just the 'underclasses.'

Along in this process somewhere, there is huge potential for armed conflict with other nations. If the unraveling gets traction while George W. Bush remains in charge, the US may answer bellicosity from oil-exporting nations, or energy-hungry rivals, with truculence of our own. Things can get out of control very fast in such a situation. Nations that were happily selling us salad shooters six months earlier may be targeting our naval vessels with a different sort of shooter, say a Sunburn missile. In any case, we will be acting with a bankrupt, exhausted, and over-extended military, and the best case outcome would leave us merely isolated and marooned geopolitically on our own continent, with dwindling energy and mineral resources and an angry, demoralized population.

This time around we have more to fear than fear itself. The banking executives, government officials, and candidates for president are not doing the nation a service by concealing and ignoring our losses. Finance, as the driver of an economy, is finished, but the deployment of capital is still an indispensable arm of a real economy. Sooner or later we'll get back to money that stands for something and banks that function as credible repositories of wealth. But we haven't even started down the path to that place, and the longer we pretend that we don't have to go there, the worse the journey will be.

Emphasis Mine

Jim Kunstler has consistently pointed out that the USA is in no position to absorb the effects of peak oil. The policies pursued by the US government have only exacerbated the problem of running an economy on less oil.

I think the appearance of hunger among the US middle class would lead to an emigration of talent (mainly liberals) to other countries, and a growth in the radical right.

Would Fascism grow out of a US depression? The signs are there in the proto-Fascist movements that already exist. With the emigration of liberals, the politics would drift further to the right.

The world could face the prospect of a nuclear armed Fascist power with a very big chip on its shoulder. Interesting times indeed!

Read more!

CAPITALISM'S MYSTERIOUS TRIUMPH

Paul Krugman tries to explain CAPITALISM'S MYSTERIOUS TRIUMPH as Communism failed because of an inability to provide a sustaining reason for existance; only under crisis could it work.

But neither technological change nor globalization can explain the fact that socialist economies did not merely lag the West: they actually went into decline, and then collapse. Why couldn't they at least hold on to what they had?

I don't think anyone really knows the answer, but let me make a conjecture: the basic problem was not technical, but moral. Communism failed as an economic system because people stopped believing in it, not the other way around.

...

We see this kind of thing all the time, in microcosm. The market does not require people to believe in it; but the centrally planned economies that live inside a market economy, known as corporations, do. Everybody knows that financial incentives alone are not enough to make a company succeed; it must also build morale, a sense of mission, which makes people work at least somewhat for the good of the company rather than think only of what is good for them. Luckily, under capitalism an individual company can fail without taking the whole society down with it - or it can be reformed without a bloody revolution.

Why did people stop believing in socialism? Part of the answer is simply the passage of time: you can't expect revolutionary fervor to last for 70 years. But perhaps also the unexpected resurgence of capitalism played a role. By the 1980s Russia's elite was all too aware that the country, instead of overtaking the capitalist nations, was slipping behind - that Russia was failing to take advantage of new technology, that if anyone was challenging the West it was the rising nations of Asia. Communism lost any claim to the mandate of history well before it actually fell apart, and perhaps that is why it fell apart.

In the end, then, capitalism triumphed because it is a system that is robust to cynicism, that assumes that each man is out for himself. For much of the past century and a half men have dreamed of something better, of an economy that drew on man's better nature. But dreams, it turns out, can't keep a system going over the long term; selfishness can.

Emphasis Mine

This is now a common justification for Capitalism. We cannot rise above our selfish nature. We must learn to embrace it.

Jesus believed otherwise and was prepared to die for it. Love one another as I have loved you. That is not a surrender to selfishness but an appeal to our better nature (dreams if you will).

Capitalists would surrender in the struggle against our vices, but Communists should never despair that we are capable of improving ourselves and consciously choose virtue over vice.

Read more!

The Support Economy

In The Support Economy: Why Corporations are Failing Individuals and the Next Episode of Capitalism, the authors appear to confused about the nature of Capitalism. However, the book has a good discussion about misogny in advertising.

The authors confuse Capitalism with the existence of enterprises. They appear to confuse the effect of organisation in Capitalism with organisational narcissism. They do not recognise that organisations exist to reproduce Capital.

They condemn organisations for being based around the transaction. They do not recognise that the transaction is the basis for all economic activity. You cannot wish away the transaction without wishing away the economy.

They are correct about the increasing automation of the workplace.

They want to replace the transaction with advocacy.

They advocate a customer orientated organisation similar to the ideas of Tom Peters and Seth Godin.

They explained the long recognisation of women as the consumers (over a century), and how this led to misogny in advertsing.

Read more!

Bank of America Asks Congress for a $739 Billion Bank Bailout

Mish roundly condemns those "summer capitalists" as they want a socialist solution to a capitalist fuck-up as Bank of America Asks Congress for a $739 Billion Bank Bailout:

Supporters contend that a government rescue could be the fastest and cleanest way to force banks and investors to book their losses from bad mortgages — a painful but essential first step toward stabilizing the housing market.

My comment: Those supporters are socialist fools.

Mish's prescription is to let the market set the true value of the houses and let the financial institutions take the losses. This is to avoid the moral hazard of propping bad lending practices.

What is overlooked here is the question of whether housing is a social good available to everybody, or a commodity to be traded. Until we decide what housing is, we cannot decide on a solution.

This ambiguity about housing gives rise to crises like the current one.

Read more!