Deflation without depression: Could fewer hours of work mean lower consumer prices and greater exports?
We revised this entry for clarity.
What is the difference between a depression and a 20 percent reduction in hours of work? We got to thinking about this and ran into some intriguing questions which we think should be pursued.
What is a depression?
There is some controversy over the definition of a depression, but sources we have read generally list these essential features:
- A fall in GDP of 10% or more.
- A fall in GDP for over 3 years.
- Very high unemployment – over 20%
- Deflation, i.e., falling prices for asset and goods
- Contraction of credit
Depressions also appear to differ from the more typical recessions of the post-war period by proximate cause.
According to the Economist:
…a recent analysis by Saul Eslake, chief economist at ANZ bank, concludes that the difference between a recession and a depression is more than simply one of size or duration. The cause of the downturn also matters. A standard recession usually follows a period of tight monetary policy, but a depression is the result of a bursting asset and credit bubble, a contraction in credit, and a decline in the general price level. In the Great Depression average prices in America fell by one-quarter, and nominal GDP ended up shrinking by almost half. America’s worst recessions before the second world war were all associated with financial panics and falling prices: in both 1893-94 and 1907-08 real GDP declined by almost 10%; in 1919-21, it fell by 13%.
The Great Depression, according to the Economist, was by far the steepest collapse of economic activity in American history – initially sustaining a 30 percent drop – but, surprisingly, not the longest – the record for that is still the 65 month depression of 1873-1879.
Eslake, according to the Economist article, believes depressions begin in the financial sector with a fall in asset prices and credit availability. As a diagnosis this explains much of Washington’s preoccupation with propping up failed banks and guaranteeing the value of bonds and securities.
Unlike a real depression, depression-like recessions began with the artificial tightening of money supply, as has been the case with recessions after World War II, and the implementation of National Security Council Memorandum 68.
Since the cause of the downturn is entirely artificial, it would be misleading to refer to the event as a depression: It is, in fact, a government engineered event as stated in the above article: “A standard recession usually follows a period of tight monetary policy…”
But, suppose this government engineered depression-like event began not with the policy driven tightening of money supply, but with the policy driven reduction of the labor supply, as in, for instance, the reduction of working time by 20 percent – from a five day 40 hour week to a four day 32 hour week.
We have been told by policy makers, business and economists that such a reduction would be inflationary, i.e., that it would lead to higher prices, and no improvement in employment.
But, there are some logical questions about a reduction of working time which suggest the outcome may be similar to a depression in certain features: deflation of asset prices and the prices of consumer goods and services, but without the massive and sustained unemployment of a depression.
Shorter working time could, in other words, pop credit and asset bubbles without throwing millions of working families into the streets.
Here are some of the assumptions and questions about the economic impact of shorter working time which occur to us:
Hours of work: A reduction of working time by 20 percent is clearly not much different from 20 percent unemployment of a depression except in the source of the event: In both cases the economy experiences a twenty percent reduction in the number of hours of work.
In our economy with an estimated 153 million participants in the labor force, a reduction of working time from 40 hours a week to 32 hours a week would mean about 1.2 billion fewer hours of working time per week. The same holds for a depressed economy experiencing 20 percent unemployment. In the latter case, however, that 1.2 billion hours of reduced working time roughly translates into about 30 million people without work.
Asset prices: Although we are not economists, based on our experience investing and day trading, it seems logical that the market value of the total national capital must be in some way related to the hours it is employed during a given period of time: if those hours are reduced, and the national capital is being utilized at, say, only 80 percent of its former rate, we would expect the total market value of the national capital should fall accordingly – leading to the kind of asset deflation seen in a depression.
If there is asset deflation how likely are consumer prices to rise overall? How likely is it that shorter hours will lead to inflation?
Availability of credit: What happens to credit availability and the value of the existing stock of debt – which must be related in some fashion to the market value of the national capital? What would happen to the value of bonds? Would a fall in market value of the national capital lead to Paulson’s and Bernanke’s clogged pipelines in the credit market?
Again, we are not experts on such things, and our support for shorter working time does not hang on some “right” answer, but, it seems probable that any reduction of working hours should lead to a general contraction of credit. The question is, again, given this credit contraction, how could a reduction of working hours be inflationary?
Consumer prices: And, given a contraction in the availability of credit and falling asset prices, combined with reduced nominal wage income, how is it possible to assert, as economists do, that shorter working hours are inflationary? Isn’t it more likely consumer prices would fall as well?
Exports: What effect would a reduction of working time have on US exports if the prices of goods and asset are deflating? Shouldn’t this lead to more affordable American made goods for consumers in other countries as well?
And, if so, doesn’t this imply increased demand for labor – additional hiring to meet export demand?
Wage effect: We do agree with economists on one thing: Reducing hours of work would tend to push up labor costs. But, given a reduction in hours of work isn’t this a favorable effect? And, it may not mean higher prices for consumer goods and services: it could, for instance, simply mean lower profits.
In a depression companies tend to conserve capital by discharging workers and reducing labor and operating costs, and, this a real difference between depressions and reduced working hours: Shorter working time, while reducing hours of work, would tend to insulate the labor force from a general fall in real income. Although working families should experience some fall in nominal wages due to fewer hours of work, would not the deflationary effect on asset and goods prices lead to an actual increase in the real wage?
These are the questions we have based on our brief experience with the deteriorating economic conditions the global family faces in the present crisis, but we will leave you with one more thought:
Government spending: During all depressions prior to the 1930s the standard operating procedure for government was to balance the budget in line with tax revenues. This has since been replaced with counter-cyclical policy which has been tested in recessions, but never during a depression.
There is a significant body of opinion which says it can’t work.
Which is surprising until you recall it was the greatly increased demand by government for war materials and munitions and years of support for a mobilized and militarized labor force, followed by a virtual monopoly on industrial goods production after that war, and the establishment of the dollar as the world reserve currency, which finally allowed Washington to break the back of the Great Depression.
At one point as much as forty percent of the US economy was devoted to the war. And, after the war other industrial powers lay in ruins.
Britain, by contrast, was less sanguine about efforts to stave off domestic depression after the war:
One underlying theme in the war time discussions was terror — I do not exaggerate — about the future balance of payments. The greatest exponent of balance of payments pessimism was Sir Hubert Henderson, who had been an ally of Keynes during the Lloyd George campaign for public works in the 1920s but had since become an in intellectual reactionary. (Milton Friedman once said of him that he began his career by writing a very good book on supply and demand and spent the rest of his life finding one area after another where he alleged they did not apply.) The official Treasury was nearer to his pessimism than to the Keynesians. The fear was that an economic downturn might be triggered by a fall in exports.
Owing to the unique position of the United States following WWII it was possible to maintain an unnecessarily long work week, but even with those unique factors the US eventually began running an unsustainable balance of payments deficit.
If that is the standard for government intervention to support asset and goods prices and economic activity in general, what does it take when, as now is the case, nearly forty percent of the economy is already government spending, and China – not the US – is functioning as the world factory?
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From Associated Press:
President Barack Obama issued a withering critique Thursday of Wall Street corporate behavior, calling it “the height of irresponsibility” for employees to be paid more than $18 billion in bonuses last year while their crumbling financial sector received a bailout from taxpayers. “It is shameful,” Obama said from the Oval Office. “And part of what we’re going to need is for the folks on Wall Street who are asking for help to show some restraint, and show some discipline, and show some sense of responsibility.”
The president’s comments, made with new Treasury Secretary Timothy Geithner at his side, came in swift response to a report that employees of the New York financial world garnered an estimated $18.4 billion in bonuses last year. The figure, from the New York state comptroller, drew prominent news coverage.
A sum, we are told, by Jonathan Alter tonight on MSNBC‘s Countdown, that is twice the amount which will be spent on the entire national mass transit system in Barack’s stimulus package.
By way of contrast: The Moron stood silent as contractor built showers for soldiers in Iraq electrocuted them.
Service men who were risking their lives for his Crusade.
Not a word, not a peep.
Is there any wonder that this man, Barack, evokes such adoration among his supporters?
One thing we wish to point out, however, since we on this blog see it as our mission to to strip you of every illusion regarding Washington: We have, so far given $350 billion to these same bankers, and Barack has requested $350 billion more.
That these bankers, in turn, consider themselves so apart from the disaster they helped impose on society that they lavish themselves with bonuses, as their banks spiral across the event horizon of collapse, is simply a function of the fact that this $700 billion is being spent to salvage the assets of the very wealthiest in our society – to prevent those assets from deflating in price.
Washington has decided these banks are too big to fail, and their billionaire and institutional owners are too rich to be poor.
The arrogance shown here, and rightly denounced by the Messiah, hangs on the delusion among the wealthiest tenth of one percent of our human family that they are irreplaceable.
Sooner or later Barack will have to confront this delusion, or submit to it.
The stories say it all: a nation of working families so trapped in a cycle of debt the least misfortune – theirs or someone else, it really doesn’t matter – carries them over into the abyss of despair.
Ervin Lupoe seems like he was a good man. School officials said as much, as did his neighbors and family.
His co-workers seem genuinely filled with grief, his former employer appears devastated with embarrassment at being singled out as complicit in the circumstances surrounding this horrible act.
According to the Associated Press, Lupoe and his wife were fired by Kaiser Permanente for what appears to be a discrepancy – perhaps a lie – in their application for child care:
Lupoe and his 38-year-old wife both were recently fired from their jobs as hospital technicians at Kaiser Permanente Medical Center West Los Angeles. They had lied about their income to try to get cheaper child care, Cortez said.
“They were terminated because in the health care field, records are an important part of the process, and people trust us with their health,” Kaiser Permanente spokeswoman Diana Bonta told the Los Angeles Times.
In the AP’s view, at the time of the firings, Lupoe and his wife were drowning in debt
Investigators found evidence of spiraling financial woes, including a bounced check to the Internal Revenue Service. Lupoe owed at least $15,000, as well as thousands of dollars on a home equity line of credit.
He also was at least one month behind on a mortgage for his home in Wilmington, near the ports of Los Angeles and Long Beach, Cortez said.
Not so fast, rebuts the LA Times, the couple’s financial situation,
…though pressing in recent months, did not appear to be especially dire. The Lupoes were behind one month in their mortgage, investigators said. They found notices of two bounced checks — one for about $15,000, the other for almost $2,000 — to pay for property taxes and penalties, according to the police sources. Investigators said it did not appear they were behind on their credit card payments.
In the last two years, the couple had finished a home remodel that included the master bedroom and bathroom, and purchased new kitchen appliances including an industrial-grade refrigerator, the sources said.
Two news sources look at the same information and come to quite different conclusions.
The true failure in both pieces, however, is the lack of context: For years Washington has encouraged and facilitated the accumulation of consumer debt to fund the expansion of the economy; and taken its share off the top to fund aircraft carriers which today threaten the global population.
The bizarre behavior of pouring ridiculous sums of money into home renovations – industrial- grade refrigerators? – was part and parcel of a deliberate policy by Washington to encourage speculation in the home mortgage market – a policy which today has saddled countless millions of American working families with negative equity in their homes, the contracting out of the most basic family duties, such as childcare, and the persistent danger that even the slightest perturbation in the labor market will render them less than penniless: in debt and homeless with no possibility of climbing out again.
The speculation unleashed by Washington spawned an entirely new form of pornography: Home renovation reality shows like Divine Design, and others, which lavished incomprehensible amounts of cash on kitchens and bathroom makeovers – promising to turn over-sized McMansions into oases of consumer excess.
Shows like Flip This House sprung up to show how a small group of well organized entrepreneurs make fantastic profit buying dilapidated homes, adding a few superficial improvements, and selling those homes into red hot residential property markets in a week or two.
Entire cable networks – HGTV, DIY, FoodNetwork, Fine Living – suddenly appeared out of nowhere to promote the gospel of residential property speculation, bringing in tow the late night scam artist promising millions in profits flipping homes in your spare time.
For sixty years, this has been the context of such tragedies – a context conveniently ignored by the Associated Press and Los Angeles Times as Washington begins a new round of speculation and bubble to address its constant and ever growing hunger for resources in pursuit of global hegemony.
And it ends with a bounced check to the IRS.
Empire is not the accidental policy of a moron from Texas which result in the slaughter of a million Arabs. It is a deliberate and complex policy in which that slaughter is intimately connected to slaughter of a wife and children by a father in California.
From Wimp.com: Santa comes to Washington to fill his gift bag.
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With Washington’s 60 year old ponzi scheme on Wall Street broken, Barack is faced with the fairly difficult task of salvaging a bleak situation – as he indicated in his inaugural address:
That we are in the midst of crisis is now well understood. Our nation is at war, against a far-reaching network of violence and hatred. Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age. Homes have been lost; jobs shed; businesses shuttered. Our health care is too costly; our schools fail too many; and each day brings further evidence that the ways we use energy strengthen our adversaries and threaten our planet.
These are the indicators of crisis, subject to data and statistics. Less measurable but no less profound is a sapping of confidence across our land – a nagging fear that America’s decline is inevitable, and that the next generation must lower its sights.
It is this last point, “a nagging fear … that the next generation must lower its sights,” which goes to the heart of this crisis.
First, you are N. Gregory Mankiw’s penniless uneducated fucking hillbilly – living from paycheck to paycheck. You have no savings, no investments, no assets of any kind except – perhaps – the home you live in. You probably have a negative net worth, with perhaps $9,000 to $10,000 in various kinds of consumer debt. There is a good chance you are under water on your home mortgage, as are 12 million other American families – a figure which Roubini predicts will reach 25 million before the year end.
Second, you likely work for a company which has announced layoffs in the past year, or will announce them some time this year, owing to greatly reduced demand for goods and services you and your fellow penniless uneducated fucking hillbilly co-workers are providing because you are all so deeply in debt you can look to a long life of crippling struggle to maintain any type of income to provide food and necessities for your family.
Third, you live in a state where government is straining under the burden of greatly reduced tax revenues, and the probability of even more difficult fiscal problems owing to the fact that you are earning, borrowing, and spending less.
Roubini puts your situation this way:
Households in the US have too much debt (subprime, near prime, prime mortgages, home equity loans, credit cards, auto loans and student loans) while their assets (values of their homes and stocks) are plunging leading to a sharp fall in their net worth. And households are getting buried under this mountain of mounting debt and rising debt servicing burdens. Thus, a fraction of the household sector – as well as a fraction of the financial sector and a fraction of the corporate sector and of the local government sector – is insolvent and needs debt relief.
It is no accident then, according to Roubini that the country is experiencing its worst economic downturn since the Great Depression:
… The lack of debt relief to the distressed households is the reason why this financial crisis is becoming more severe and the economic recession – with a sharp fall now in real consumption spending – now worsening. The fiscal actions taken so far (income relief to households via tax rebates) do not resolve the fundamental debt problem because you cannot grow yourself out of a debt problem …
It is perfectly understandable, also, that Barack has to address that other “nagging fear that America’s decline is inevitable…” since the continuation of the American empire rest on you continuing to use your credit card down at Macy’s.
Its all about consumer confidence, but you are not looking all that confident right now.
Well, its time for you to cast off that funk, ignore your misgivings, stop listening to your fears, and engage your logic:
According to Mr. Roger Bootle, “This recession demands that we employ logic and spend our way out of it.
Where Barack demands, “Starting today, we must pick ourselves up, dust ourselves off, and begin again the work of remaking America,” Mr. Bootle clarifies for us, that this is less a demand for dust free clothing, and more a plea we stop letting dust accumulate on our Visa cards:
A recession is a situation in which output, spending and income are all below normal or below potential. If output and income are to go up then someone must spend more. There is simply no other way. As a matter of logic. The only sensible debate is about who should spend more, on what, and how they can be persuaded to do so.
If you think in terms of aggregates, there are four candidates to do the increased spending: consumers, companies, the government, and foreigners. And for the world as a whole, there are no foreigners. So if we say that governments cannot be allowed to borrow more, because they are too much in debt already or because they waste the money, then we are left with only two candidates.
If we also say that consumers cannot be expected to spend more because they need to repair their financial position, then we are down to only one: companies. If companies could be prodded into increasing their spending on investment that could be a good thing. But in current conditions the chances of getting companies to expand their spending are slim. They react to the state of demand, which at the moment looks dire.
One can at least respect Barack on one point: Where Mr. Bootle implores us to return to our shopping, the Messiah more honestly frames the task at hand as work.
The difference is telling, don’t you think? Shopping focuses our attention on the product of our activity, the end result of our labors, and on the satisfaction of our needs, wants, and desires – fine dining, fancy cars, and 42 inch wide-screen high-definition plasma televisions.
Getting to work, however, focuses our attention on the effort and struggle of meeting those needs. It begins with want, and hunger, and ends that way as well – only when we switch from work mode to shop mode do we experience the pleasure and satisfaction we crave.
Which is why, on that bright blue morning in 2001 when madmen flew passenger planes into buildings for no good reason, the Moron begged us to go shopping.
Had he simply said, “Y’all git back to work, now. Ya’ heah?” we might not remember his years with quite the fondness we hold in our hearts today.
Unlike American economists, who conceal their profound hatred and disgust for you in arcane deeply mysterious symbology and tortured professional jargon, Mr. Bootle is rather breezy and forward with suggestions on how to fix this American decline:
Suppose we want increased consumer spending but do not approve of increased borrowing. The answer must be reduced saving. But I thought that we didn’t want that either! The logic is inexorable. To get higher consumer spending than would otherwise have been the case then collectively consumers will have to save less or borrow more. In the current environment, trying to boost saving is the economics of the madhouse.
Yes, it is insane for your to pay down your debt, it is insane for you to try to build a cushion against the loss of your job; it is insane for you to put money aside to educate your children, prepare to replace your car, or maintain your health care under the COBRA program – when you get laid off.
Stop saving and start charging!
I offer two morals and a suggested way forward. First, do not confuse the situation facing you as an individual with the position facing society as a whole. Second, do not confuse what needs to be done on grounds of equity or long-term economic health with what needs to be done to lift us from recession and prevent it becoming a depression. Some things which might contribute to the first objective would undermine the second.
There is a clear path ahead. In the short term, we must rely on an increased government contribution to demand through higher borrowing (although more by tax cuts, please) and increased consumer spending.
So, instead of reducing working time as the economy sheds millions of jobs, you need to get off your fat lazy ass and immediately go out and buy something – anything – with your Visa card today – it really is the only way to stem America’s decline.
And government should do the same – borrow flamboyantly and go on a – now – $900 billion dollar spending spree to create 4 million new jobs, at the cost of $225,000 per job.
A once in a lifetime Mother of All Shopping Sprees.
Or, to put it another way:
“Y’all git back to work, now. Ya’ heah?”
More afflicting the afflicted to comfort the comfortable from Bloomberg. Governments appear determined to protect the asset values of the very wealthiest in society using the taxes paid by the less well off. We do wonder if the net taxes paid by these corporations after this blatant scam will be positive:
The Japanese government may let a state-owned lender purchase stakes in companies that are struggling to raise funds as the economy deteriorates, according to a Trade Ministry proposal.
Under the program to be submitted to the Cabinet next month, the Development Bank of Japan will buy preferred and common shares in companies, the ministry said in a statement in Tokyo today. The government will guarantee a portion of the investments should the companies go bankrupt, it said.
The initiative may help businesses whose earnings are falling and borrowing costs are rising as global demand for Japanese goods plummets. Exports dropped an unprecedented 35 percent in December, deepening the economic contraction that the Bank of Japan says will become the steepest in the postwar era.
“Should big companies collapse, it would create a large number of unemployed workers and may trigger a series of failures among smaller companies,” said Masaru Hamasaki, a Tokyo-based senior strategist at Toyota Asset Management Co., which oversees the equivalent of $3.3 billion. “The purchase is meaningful in that it will likely prevent this from happening.”
This essay was first published in The Guardian’s Comment is Free.
By Mousa Abu Marzook
The Electronic Intifada
23 January 2009
Israel’s objectives from the war on Gaza were set long before its launch: to remove the Hamas movement and government, achieve the reinstallation of the Fatah leader, Mahmoud Abbas, in Gaza, and end the armed resistance. Two other objectives were not announced. First, restore the Israeli public’s wavering confidence in its armed forces after its defeat by Hizballah in 2006. Second, boost the coalition government in the coming elections.
Accordingly, we declare that Israel lost, and lost decisively. What did it achieve? The killing of large numbers of civilians, children and women, and the destruction of homes, ministry buildings and other infrastructure with the most advanced United States weapons and other internationally banned chemical and phosphorous elements. Almost 2,000 children were killed and injured in desperate pursuit of political goals. Many international organizations called these attacks war crimes, yet barely a word of denunciation was uttered by any western leader. What message does the European Union mean to send Palestinians by its shameful silence on these crimes, when it speaks incessantly on human rights?
If anything, the last three weeks, and previous 18 months, have proved that the Palestinians can never be broken by either starvation, economic strangulation or brutal attack. European leaders have only one option: to recognize the outcome of a democratic process they had called for and supported.
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The aggression failed to undermine or weaken the Hamas-led government, or turn Palestinians against Hamas. If anything, public support is stronger than ever in Palestine and worldwide. Hamas’s military capabilities have not been hurt, either. This explains Israel scurrying to sign such a strange agreement with the US to stop arms reaching Hamas. It is doomed to fail. As the former Israeli chief of staff Moshe Yaalon and Benjamin Netanyahu agreed, Israeli forces failed to achieve their objectives.
Why is Israel allowed a continuous flow of the most lethal arms, including banned weapons, while national resistance movements are denied the means of defense? International laws permit occupied nations to resist their occupiers, and that is a right we aim to utilize to the full.
Israel must accept the reality that it is incapable of breaking the Palestinian resistance. Similarly, Europe must accept that bringing back Abbas on an Israeli tank is not an option. Nor are attempts to win by ‘diplomacy’ what the might of the Israeli military failed to secure by force. To state that all aid for Gaza reconstruction must go through the illegal government of appointed Palestinian Authority Prime Minister Salam Fayyad suggests there is no end to some parties’ exploitation of Palestinians. We will never cease to pursue national unity, but we will never allow it to be attained by compromising Palestinian rights.
And to President Obama we say: the wave of hope that met your election was heavily dampened by your silence on the Gaza massacre. This was compounded by your pre-election statement siding with the Israeli settlers of Sderot. You would do well to know the history of the places of which you speak. Sderot, which may be known to some as an Israeli town, lies on the ruins of Najd, a Palestinian village ransacked in May 1948 by Zionist terrorist gangs. Villagers were forced from their beds and homes with nothing but the clothes they were wearing, rendering them refugees for the next 61 years. That is the story of Sderot. It is never a good start to get your tyrant and victims mixed up, but there is still room for a revival of passionate optimism. Only if you decide to fairly address the issue of the 6 million Palestinian refugees and the ending of occupation of Palestinian lands, including Jerusalem, will you be able to start a new relationship with the Muslim world.
Mousa Abu Marzook is deputy chief of the Hamas political bureau
He can be contacted at mousa DOT abumarzook AT gmail DOT com.