(Business 101: Pretty graphs make everything better)
Imagine, if you will, a country or city-state called Libertopia. We have just overthrown our evil socialist masters and made a new government from scratch. By some magic video game miracle, we don’t start with any debt, outside enemies, and have a fully functioning market-driven farming and industrial base that trades all over the world. There will be no empty bellies in Libertopia tonight (except for the orphans who aren’t working hard enough in the monocle polishing factory).
In my imaginary country only property owners can vote. So after the revolution we get together, review the collected works of SugarFree, hem and haw, drink our fill of mead. and decide to go with the idea of keeping our borders closed to the nearby Outsiders. We are, after all, a tight community with a shared background.
What would happen?
At first not much at all. Business would go on as usual, and we would stay competitive with our neighbors. But under the “nativist” model, as time goes on, domestic market limitations and labor issues start. The heads of industry and farming may start to clamor for more talent and workers.
The voters finally listen and get together. After a few rounds of brandy and the feasting on deep-dish pizza, we decide to open our borders just a little bit; letting in a yearly allotment to meet our needs. To keep things simple, these Outside workers aren’t citizens, nor do they have a vote or receive welfare (which doesn’t exist in our country, comrade!). This “restrictionist” model, however, still causes worker shortages, especially if the economy starts heating up.
Business is doing great – so great that more Outside workers are needed to meet demand. Once again the voters get together, do a few squats, and finish off a keg or two. We decide to open the borders all the way, allowing everyone who wants to come in. After all, things are looking fantastic for business.
But we begin to notice that the citizens are starting to get angry. There are protests and labor strikes because they have to compete with the Outsides for jobs.
Now what’s the point of this simplified and rather silly story? Using the scenarios above I’m trying to minimize input variables for the idea of something like the Laffer Curve, but instead of dealing with taxation, we are touching on immigration. I imagine such an idea has already been explored before, but hey, I’m no economist (we can tell! – ed). This is not an economic model either, but something soft and political science-y.
Is there an optimum rate of immigrants – we’ll call it the “Jerbs Curve” – before the citizens get resentful (the Resentment Index?) with having to compete for wages with the Outsiders? See Chinese rail workers or the Irish immigrants as an example. And is there a point where they get angry enough at this perceived unfairness that they revolt and put in a new leader? Or in a real world case, have enough electoral votes to put in someone like Trump?
If there is such a thing as a Jerbs Curve, it would only skew the line in one direction or another: adding in welfare, illegal immigration, race, identity politics, war, the state of the economy, political party dynamics, and countless other variables.
Perhaps the conclusion to all of this, if we can make one, it is that the world is a complicated place that often defies the most simple of models. Something as dynamic as a highly populous country with millions of inputs, variations, outputs, needs, and whatnot is impossible for anyone to predict. As far as intellectual exercises go, you can create models that are perfectly logical, but do they reflect the real world at all? How would they be when implemented or exposed to the real world?
The always-worthwhile Don Boudreaux made a post yesterday at Cafe Hayek, calling out Dr. Keith Ablow from Fox News.
It’s true that the pace of introducing new labor-saving techniques has magnificently quickened in the past two hundred years. This fast pace continues today. Yet still we encounter no evidence that labor-saving techniques permanently increase unemployment.
You’ll reply “This time is different!” Perhaps, but I doubt it. And I’m so confident in my prediction that I’ll put $10,000 of my own my money where my mouth is.
I will bet you $10,000, straight up, that in not one of the next 20 years will the annual U.S. labor-force participation rate, as measured by the U.S. Bureau of Labor Statistics, fall below 58.1 percent – which is the lowest rate on record at the Bureau of Labor Statistics.
Maybe one has to have a mathematical bent to see it thus, but if one happens to do so (and I do), that was glorious. Don Boudreaux consistently hits the right notes on a free market tune. If we have the luxury of educated Millennials with a basic grasp of capitalism and markets, however tenuous, it may well be thanks to him.
BUT.*
Galileo was convinced the tides were caused by the Earth’s rotation and solar orbit. In 2011, OPERA scientists announced they had recorded neutrinos moving faster than the speed of light; this was later corrected by plugging their GPS in properly and calibrating a clock. Edwin Hubble attempted to calculate the age of the universe and faceplanted hard enough to make people wince eighty-eight years later.
Even the greats can overlook something. I propose exactly this has happened.
Innovation and automation are not causative to permanent unemployment gains and overall economic job loss. When economic models are reliant on false scarcity, they consistently fail. Imminent starvation due to human overpopulation was overturned by the green revolution. Peal Oil fell to fracking and exploration. What we “know” about production capabilities has been revised, over and over ad infinitum.
On the left, the Apollo space module. On the right, more processing power than the Apollo space module.
For an explanation of why this is so, we go to the oft-cited buggy whip industry. The advent of the automobile decimated this established industry, along with just about everything else related to horse-drawn transportation – once a major industry. Yet the lost of this sector resulted in a widespread economic gain. The automobile added enough real economic growth that the costs of industry sectors removed through obsolescence were still vastly outstripped by the generated economic output. In real ways, the former buggy whip makers were materially better off without their old jobs.
Innovation and machinery were behind the explosion in the clothing industry. We can now buy more clothing, for cheaper, than we could in the days when middle-class women owned four dresses plus a Sunday-best.
Subject put on her Sunday best to have picture taken. It’s a lovely hat.
Imagine what that did for closet-makers. Innovation and automation are the reason we have access to more, cheaper and a better variety of fresh produce than we did even twenty years ago.
This is what progress looks like; not the “progress” which regulates and strangulates the markets to put ordinary necessities such as eyeglasses, antibiotics, clothing and transportation out of the reach of the common man in the name of his own best interests, but the kind of progress which puts a TV in every middle-class home and a personal automobile in the driveway of even the common laborer. Notions that used to be astonishing in our grandparents’ day but were the reality for our parents, recall.
Boudreaux is correct about economic models dependent on a false scarcity that is not there. The math is sound, the economic theories well-explored, for all that the same are missed by more mainstream and “enlightened” economists. What Boudreaux misses, I theorize, are another kind of failed economic modeling: those dependent on ignoring a true scarcity.
Pensions which calculated annual rate of returns only truthfully deemed reasonable in the Magical Land of Not Gonna Happen and underfunded thereby. The housing bubble of the late Oughts can be condensed in layman’s terms to the battle between those who said they aren’t making any more land vs those who postulated there might be fewer available buyers if the price went high enough.
The assumption of growth will not be borne out in economic models reliant on ignoring true scarcity.
Our economy is adding people to the economy at a faster rate than it is removing obsolete jobs and retirees. The scarcity being overlooked is job creation. It isn’t happening fast enough.
This isn’t easy to see. Imagine the BLS is playing a great game of Find the Lady with job creation. One can examine charts and run the math with calculator, pencil and paper until one’s eyes cross. It doesn’t add up until one remembers how Find the Lady really works.
“…workers in the U.S. business sector worked virtually the same number of hours in 2013 as they had in 1998—approximately 194 billion labor hours.1 What this means is that there was ultimately no growth at all in the number of hours worked over this 15-year period.
…The most important thing we know about those 194 billion labor hours is that the mix of labor supplied to the US economy deteriorated drastically during that 15 year period owing to the sharp decline of the goods producing economy in the US and its replacement by the low productivity HES Complex (health, education and social services).
… Accordingly, there is every reason to believe that real GDP growth has been considerably lower than reported. That is, it has been more consistent with a stagnant economy that generated zero labor hour growth in the business sector; a pick-up in food stamps and disability dependency from 23 million to 60 million over the 15 year period; and which saw real household income fall from $57k to $52K or by 8%.
The circumstantial evidence has grown since Stockman wrote this in 2014.
Labor participation rate (Boudreaux’ own standards, of which I fully approve) is near 40-year lows.
Despite spending more on health care than any other country, American life expectancy decreased for the first time in nearly a quarter of a century. This was attributable in part to a sharp increase in deaths of white men and women in their prime working years lacking higher education, and driven by suicide and drug abuse; deaths of despair in a demographic which once enjoyed higher employment numbers.
Correlation is not causation; I’m just sayin’.
The natural mathematical result of innovation and automation is an improvement in economic function which streamlines processes and frees capital to slosh about in the system until it is soaked up in ways not available previously. As computers got faster, they got smaller and lighter and cheaper. The average American now has at their fingertips for trifling sums what was once available only to the scientists and engineers of NASA.
The average American is also in economic decline; making less, with fewer opportunities and less mobility.
These two statements show something within the system is malfunctioning. Badly. America added just shy of 46 million people to the economy since 1998 and 0 labor hours for those people. The rising government dependence,
This is what full employment looks like. No, really.
the increasing deaths, credentialism, licensing schemes (25% of today’s workforce, up from just 5% in 1950), declining labor participation, entrepreneurship, incomes and mobility could not exist simultaneously in a rapidly-innovating free market such as economists claim we have.
One of these assumptions must be false. The math does not work. The natural formula of innovation is being subsumed and arrogated, and the numbers proving so only worsen as our population rises.
This points to jobs being removed from the economy at a faster rate than new job creation plus new population.
If my theory holds, Don Boudreaux will indeed lose his bet. Labor participation will reach 58.1 percent via mere attrition unless the innovation formula is allowed to resume it’s course. Further, if my theory holds, then at our current path the labor participation rate will not reach 66 percent (last seen in the ancient bygone days of 2008) in any of the coming two decades.
