Wall Street analysts and financial pundits are struggling with a “conundrum,” declared the talking head on MSNBC this morning. Retail sales in stores open at least a year (“same-store sales”) posted an unexpected increase of 3.3 percent in January compared to a year earlier. Furthermore, labor productivity rose a seasonally adjusted 6.2 percent in the fourth quarter of 2009. This productivity improvement also exceeded expectations and implied a fall in per unit labor costs. Yet, on the same day as these statistics were released,an unanticipated and substantial rise of U.S. jobless claims was reported. The concurrence of these data presented the conundrum: Why are businesses not taking advantage of their rising sales and declining labor costs to increase employment and output and earn higher profits?
The answer, as Mises told us, is that entrepreneurs and workers only belatedly and painfully free themselves from the false and frenzied optimism fostered by the inflationary boom, especially one that turns into a runaway bubble. Once people finally do recover a sober view of reality, a deep and abiding pessimism sets in and makes entrepreneurs especially wary of embarking on new and seemingly profitable ventures. As Mises explained it:
“The process of readjustment, even in the absence of any new credit expansion, is delayed by the psychological effects of disappointment and frustration. People are slow to free themselves from the self-deception of delusive prosperity. Businessmen try to continue unprofitable projects; they shut their eyes to an insight that hurts. The workers delay reducing their claims to the level required by the state of the market; they want, if possible, to avoid lowering their standard of living and changing their occupation and their dwelling place. People are more discouraged the greater their optimism was in the days of the upswing. They have for the moment lost self-confidence and the spirit of enterprise to such an extent that they even fail to take advantage of good opportunities. . . . The recovery and the return to ‘normalcy’ can only begin when prices and wage rates are so low that a sufficient number of people assume that they will not drop still more.”
Trillion dollar deficits, higher present and future tax bills, inflationary monetary policy and promiscuous bailouts to stabilize prices and wages are hardly the means to restoring the shattered confidence of entrepreneurs.
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Not to mention the fact that a good portion of the productivity gain is illusory from either laying off employees with poorer productivity, or cutting back on maintenance time, or consuming capital. Entrepreneurs realize that if they hire back people, they will be getting people with lesser productivity, and may have to repair or replace capital equipment in order to employ them. That can make the marginal cost of employing an additional employee quite high.
Maybe the lack of competition due to so many businesses closing is why sales were up. Same amount of sales, less stores = more sales per store.
This is one of the few pieces which has really captured the widespread sense of denial that seems to have been the modus operandi of most business execs of my acquaintance.
As a long-term gold holder, I have been preparing myself for the cracking of the denial (perhaps going on now) to be followed in short order by a wicked return of deflation followed by our long awaited inflationary release. That of course will be at the point where no one pretends anymore that the monumental debts that have been amassed can be repaid at anything like face value at current currency purchasing power.
I put this in greater detail in the posts highlighted below:
http://marketdepth.typepad.com/marketdepth/2009/10/golden-calendar-trade.html
http://marketdepth.typepad.com/marketdepth/2009/06/sell-the-banks.html
Yes, Labour productivity is a dubious measure.
Its often pointed out in Britain that Labour productivity is lower than in France. However, on closer examination that isn’t true on a like-for-like basis. The difference is that the rate of unemployment is higher in France and the unemployed are not considered in the productivity comparison.
In some circumstances falls in employment cause labour productivity to rise because the least productive workers are made redundant first.
Maybe I’m not reading with sufficient care or charity, but Prof Salerno seems to be putting forth a psychologistic rendition of ABCT.
The market is trying to correct itself in the face of extreme rigidity and government interventions. Investment ventures are slowly failing and this means a steady reallocation of capital and labor towards more warranted direct productions. The result of this re-ordering process is a contraction in the structure of production, higher marginal productivity of capital (higher profits), and a lower marginal productivity of labor (decline in real wages). Of course, such a condition necessarily means a high rate of interest, but the FED simply wont allow interest rates to rise towards the natural rate and purge the economy of previously accumulated malinvestments (during the inflationary boom). Thus, we should expect further malinvestments (a slight correctionary contraction may take place, but expansionary monetary policy assures that capital will still flow towards unwarranted productions).
Basically, this recession has entirely validated the ABCT, and it’s funny when the mainstream sits around and wonders why companies are not hiring even though their profits are rising (though most of those profits are illusory). They think profits are just some arbitrary number which is magically left over from the process of production–they don’t understand that it’s a real and independent economic phenomena.
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