Being an economist must be the most amusing job in the world. It’s a laugh a minute. So many foolish pretensions, so many claptrap theories, so much pomposity and vanity…
We used to enjoy reading Thomas L. Friedman in The New York Times. Whenever he wrote about anything even remotely connected to economics we were assured a good chuckle. But he’s moved on to geo-politics. Israel this… Palestine that… It’s probably just as funny, but it’s not our field. The only thing we know about the subject is that it shouldn’t exist.
Now, if we want entertainment we turn to Paul Krugman. He’s not as funny as Friedman, frankly. And he’s right about things often enough to make him unreliable. But it’s still fun to watch a popular economist strut his stuff.
Krugman was really annoyed that the Senate refused to extend unemployment benefits, for example. He called them “heartless…clueless…and confused” as if that was some sort of revelation. We don’t know about ‘heartless,’ but clueless and confused could apply to just about every US Senate since the beginning.
And as for failing to extend unemployment benefits, was that really a bad thing?
“Where you stand depends on where you sit,” goes the expression. If you’re sitting in an unemployment office, you’re likely to be in favor of more benefits. If you’re paying taxes, struggling to make ends meet, you might resent having to pay more for others who don’t work.
Krugman points out that it’s not their fault. Unemployment compensation doesn’t really reduce people’s desire to find work – not when there are 5 applicants for every job. Still, adjustments need to be made…and not having any money coming in the door is bound to be a motivator to make them. (More on Krugman below…)
The real reason people are unemployed is that the price of labor is too high. We’re in a period of price and debt destruction. Output prices are going down. So, labor prices should be going down too.
But labor prices are ‘sticky’…they don’t go down easily. Especially when there is unemployment compensation to keep them stuck. Unemployment compensation just interferes with the correction, delaying the necessary adaptations.
You are getting tired of hearing us say this. But we are in a period of debt destruction. The world has too much debt…particularly the ‘rich’ part of the world…particularly the people who speak English…and particularly the US and Britain.
Instead of spending money they don’t have, people are beginning to save even the money they do have. This plays hell with the economy. Not only does it eliminate the sales it should not have had in the first place…it also reduces the sales it should have had – those that come from honest, current earnings. For now they must be foregone to make up for those that had gone before. Does that make sense?
Yes, it does. Sales that are paid for with credit are really a call on future earnings. They consume today what will be earned tomorrow.
That’s why sales that come from credit are the best kind – from an economy’s point of view. Usually, business pays its employees, who then buy its products. But when the employees spend credit – they’re spending money that hasn’t been earned yet. The employer gets extra current sales without any offsetting current expense. Profits go up.
There is some unwritten law in nature that everything must balance out somehow. So, if profits go up in a credit expansion, they’re bound to go down in a credit contraction. So are prices. And labor rates too.
Yesterday, the Dow managed an additional advance, a nice follow-up from Wednesday’s big move to the upside. Up another 120 or so points. Is this the start of a new bull phase? We don’t know. But we wouldn’t bet on it.
Not as long as the credit contraction continues. Bloomberg:
July 8 (Bloomberg) – Consumer borrowing in the US dropped in May more than forecast, a sign Americans are less willing to take on debt without an improvement in the labor market.
Borrowing that’s increased twice since the end of 2008 shows consumer spending, which accounts for about 70 percent of the economy, will be restrained as Americans pay down debt. Banks also continue to restrict lending following the collapse of the housing market, Fed officials said after their policy meeting last month.
“The trend in consumer de-leveraging is clear as credit has declined 11 of the last 13 months,” Joseph LaVorgna, chief US economist at Deutsche Bank Securities Inc. in New York, said in a note to clients. “Credit card debt continues to be paid down at a heady pace.”
Bill Bonnerfor The Daily Reckoning
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010.
Wages for the middle class have been going down for the last 20 years, while wages for the 1-3% have been going up for the last 20 years….. The middle class in the US has been oursourced, insourced, off-shored and layed-off by multinational companies – they set the wages, so if wages are too high, blame wall street greed for that.
there is no shame in collecting unemployment – it is prepaid and the benefits are finite –
we need make work programs for the unemployed – WPA/CCC – etc, lower the retirement age to 55 -
Why was my comment considered worthy of rejection?
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