Unemployment is a symptom of recession but not a cause. Repairing the problem of jobs by finding something for people to do for pay, writes Frank Shostak, will not fix the underlying issue that keeps the economy from fully recovering. FULL ARTICLE by Frank Shostak
Source link: http://archive.mises.org/13959/is-a-reduction-in-unemployment-the-key-to-us-economic-recovery/
Is a Reduction in Unemployment the Key to US Economic Recovery?
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Stimulus work is just a fancy term for welfare payments. Doing nothing or going out and wasting effort on jobs no one cares to get done (because we aren’t voluntarily buying them) is only different in the form that the person “working” a stimulus job actually thinks he is employed and will no longer be available to the productive market.
Stimulus “work” is even more damaging than unemployment checks.
A reduction in unemployment is the key to a political future and a population which is not about to revolt.
I’ve read many articles by Frank Shostak and he always uses a few terms that he assumes his readers are fully knowledgeable with. These are:
1. real savings (and the pool of)
2. real wealth
3. money
Frank’s argument is that increasing the supply of money is not the same as increasing the supply of “real wealth”. But if he leaves these terms undefined, or assumes they are obvious, he will not have the same impact that he would were he to define these terms.
Real wealth is one of those terms like pornography that is easy to recognize, but not so easy to define.
One problem is that money (today) can be either fiat money or commodity money. If it is fiat money, then its value is 100% derived from its use as a medium of exchange. However, commodity money, such as gold and silver, have 2 components that determine their value: medium of exchange and use as a commodity. It is difficult, if even possible at all, to determine the proportion of value that commodity money (say gold) has based on these two attributes. This makes it difficult to distinguish between money and real wealth. Thus, one can become confused when Frank argues that increasing one is not the same as increasing the other.
Anyway, I think that the article would benefit from a definition or a link to a previous article where Frank defines these terms.
Read September 17th Shostak post for the answer to your questions
I’ve read that article too, and one has to read or search the entire article to find anything resembling a definition of real savings. The nearest to a definition of “real savings” is a hyphenated phrase – final consumer goods.
I would argue that this is NOT clear and not even what (I think) Frank means. The final consumer goods would be the “real” part, but final consumer goods is not necessarily savings.
As I understand Frank, the difference is in the use. This is a subtle point. The same good, say bread, if consumed by the baker, is NOT real savings. But if that bread is not consumed by the baker and is instead given to the carpenter to sustain him while he builds a new bakery, then that bread is now part of the pool of real savings.
I realize that most people reading these articles here have no problem understanding Frank. However, I’m not aware of any other author who consistently uses the terms “pool of real savings” as often as does Frank. I like the term, I just think he should define it in a few concise sentences. Then I could point to that when people insist that money and wealth are the same thing.
Eric,
I think Frank assumes that you’ve read his 2004 article on the “Subsistence Fund.”
http://mises.org/daily/1596
Anytime Frank refers to real savings he is talking about the subsistence fund, which is the accumulated “savings” of consumer goods as seen from the perspective of the producers in the last production stage. You can think of the final stage producers in a modern economy as the retail store owners (e.g. grocers) that buy up all the consumer goods (durable and non-durable) to resell most of what they buy. What ever is resold (i.e. not consumed by the final stage producer) is considered to be their “savings” and as such is added to any pre-existing savings that together define the “pool of funding” or “real savings.” This pool consists of the “sum” of all available non-durable goods and the unconsumed portion of all available durable consumer goods. The size of this pool is important because it supports the producers of the intermediate (capital) goods that allow consumer goods to be made with high physical productivity. This positive feedback permits continual growth of the pool and a decreasing social time preference, as greater physical productivity permits longer periods of production (and vice versa) and reduces the ratio of final stage producers to all producers.
The theme of most of Frank’s articles is how mainstream economic ideas and policies tend to inhibit real savings growth. A true crisis erupts once the pool begins to shrink, as this would imply that the creation rate of new savings is less than the consumption rate of prior savings: i.e. the production structure must be contracting.
That’s exactly what I was looking for. If in the future articles one refers to the pool of real funding, a hyperlink right the the section in that article from 2004 (The pool of funding and money) – would be helpful to someone new to Frank’s writings.
I checked the source html and unfortunately, the section headings don’t have tags one could use for a direct link. But at least a link to the article would be great.
thanks
The point about purchasing power is well made. Unemployment in the US is blamed partially on how “expensive” US workers are. They “demand” higher wages than their Asian counterparts. However, the relative utility of US wages versus those in other countries is quite low. Call center employees in India who earn the equivalent of $6/hour have far more purchasing power than similar employees in the US who earn $10/hour. They enjoy less in the way of government services such as roads, but can obtain good health care for a tiny fraction of the relative cost here in the US. This dichotomy is overlooked by a large number of analysts.
It can be argued that we enjoy a “higher standard of living” here in the US. From a libertarian point of view, how much of that standard is coerced? If it was left up to each individual, would they elect to have all of the extra elements that are required by government? (i.e. housing codes, vehicle safety, insurance, etc.)
Make-work projects and the artificial economic increase they bring is an attempt to mask the falling purchasing power of the populace at large. One could easily conclude that inflation is the true culprit here.
A low paying job is preferable to zero income. It allows survival and hope for the future. The overspending by government combined with the destruction of the dollar’s purchasing power by the Fed have prolonged the recession and ultimately will cause lower living standards for Americans. Once prices start jumping, voters will realize that their prosperity has been stolen even if they did not lose their job.
Agreed, if you;re suggesting that the purpose of the economy is to provide the maximum number of us with a living, and that unemployment is essentially the most important problem to be faced. But maybe you’re not saying exactly that.
As for inflation (that is, price inflation, as most of us understand the term) that dire specter has been held over us for as long as the recession has been in place. And yet we’re still much closer to deflation. We won’t have price inflation until we get back (if ever) to conditions of full employment and high consumer confidence. Estimates for that happening range up to another ten years, at the rate we’re going.
Are we out of the recession? Hardly. Using the definition they’ve been using to tell us it’s “over”, all they’re saying is that the problems have not been increasing since a year ago this past spring. We have plateau-ed at the high point, and haven’t yet appreciably started coming down.
Let’s not anticipate that our prosperity will have been stolen by general price inflation until something like that actually happens. It hasn’t yet, except in a few limited areas (I notice prices at office supply stores like Staples have been going up fast).
No one won’t say what Milton Friedman did – Western workers have to be willing to accept wages of the same value as those in India and China if they want to continue to do the same work. Otherwise they have to get new magical highly-valued skills (assuming such skills exist).
P.S. I know some are going to point out the minimum wage prevents workers from accepting wages and conditions comparable to that in India and China.
Purchasing Power Parity says that a worker in India is actually receiving higher wages than US workers are. $6 per hour in India is the equivalent of ~ $17 per hour here in the US, which is higher than average and median wages for US workers.
The assertion that US workers “have to” accept lower wages doesn’t take into account how low the wages are in real terms. The cost of living here doesn’t allow workers to accept lower wages. If we were to accept extremely low wages ($1-$2/hour), we would no longer be able to afford legal housing or many of the other requirements made by government. In many cases, wages below a certain point mean the cost of working exceeds the profit. So, unless one is anticipating price adjustments commensurate with wage decreases, accepting lower wages is just a pipe dream. The policy makers in Washington have indicated, loud and clear, that they will not allow deflation. If that is the case, how are workers here supposed to cope with non-subsistence incomes?
“the main driver of economic growth is an expanding pool of real savings.”
Perhaps I do not adequately understand Shostak, but although I concur that employment is not the measure of economic development, it is savings plus investment. GNP is the sum of consumption + savings and investment, where growth depends on savings and investment.
I cannot imagine that Shostak does not view investment as important for economic growth, so did I misinterpret what he wrote?
Where do you think the funds for investment come from ?
In Frank Shostak’s view, which is correct in my opinion, savings are crucial to fund non-inflationary investment going forward.
Personally, I wish Frank was in a position to influence monetary policy at the Fed or the Bank of England. No-one on the Federal Reserve Board or the Monetary Policy Committe of the Bank of England ( with the possible exception of Andrew Sentance ) gets the fundamental truth outlined in this article – ie. that savings are the essential requirement for non-inflationary growth.
Right now all the major central banks are actively destroying the savings base. In Japan, the savings rate has dropped from 18% to 2% over the last twenty years, due to historically low interest rates.
Another major problem with the Fed policy of keeping interest rates at historically low levels is that no-one in business believes that interest rates are going to stay this low forever. As a result, businesses are to some extent paralysed by waiting for interest rates to revert to more normal levels. Consequently, the Fed the ECB and the Bank of England may actually be delaying the investment and economic activity that they think they are encouraging.
Allen, without real savings, investment is impossible. An expanding pool of real savings will lead to lower interest rates in a free market– enabling an increase in investment.
An expanding pool of real savings is the main driver of economic growth.
Sally C., your view is that when Shostak says ‘savings’ he means ‘savings and investments’. In that case when a business immediately places earnings into the business it counts as savings, while if someone saves his money for 30 years, or burns it, it is in the same category as having invested it. That is a tenable argument, but if words are used differently than in their ordinary meaning, it should be stated as such. Generally economists differentiate between that which is ‘saved’, and that which is ‘invested’.
“For instance, policy makers could follow the advice of Keynes and Paul Krugman and employ people in digging ditches or various other government-sponsored activities. Again the aim is just to employ as many people as possible.”
And war is the most efficacious government-sponsored activity for achieving the Keynesian nirvana, which he never precisely defined, of “full employment.” War employs the highest percentage of the population. Not only does it employ vast numbers, but it also reduces the employable population through military casualties; a double-edged Keynesian sword, so to speak. Keynes implicitly addressed his introduction to the German edition of his GENERAL THEORY (1936) to Adolph Hitler, who thereafter adopted Keynesian-style, full-employment economic policies with a few macabre twists of his own invention, which included the standard drafting of unemployed workers into the military and cranking up the production of arms for blowing up Germany’s neighbor, and he added such Nazi embellishes to Keynes’ policies such as concentration camps and ovens to employ or eliminate the natural enemies of the Keynesian-German state such as Jews, Gypsies, mentally and physically deficient employees, etc. Franklin Roosevelt noticed, and with his milder Keynesian New-Deal policies failing to alleviate horrific unemployment and only serving to make it chronic, FDR maneuvered to get America into a full-employment war. (See Percy Greaves’ PEARL HARBOR, THE SEEDS AND FRUITS OF INFAMY. Krugman, of course, approved. As Krugman pointed out in his NY Times column of November 10, 2008 (http://www.nytimes.com/2008/11/10/opinion/10krugman.html?_r=1), “”What saved the economy, and the New Deal was the enormous public-works project known as World War II, which finally provided a fiscal stimulus adequate to the economy’s needs.” See: http://www.jesus-on-taxes.com/ON_PAUL_KRUGMAN.html
The significant features of this article are:
1. The Fed believes in the unemployment nostrum.
2. It will use massive QE to try to create inflation.
3. Excess reserves are being used by big banks, not regional and local banks which are lenders to small businesses, about one-half of the economy.
4. Result: stagflation.
Dr. S, another fine article.
Michael, it is the followers of Keynes and his GT, not Austrians, who hold that full employment is what economies should be all about. Only Keynesians such as Krugman believe that “full employment” should be the objective of economic policies at any cost, which is why war is considered the ultimate and most efficacious economic policy in a (Keynesian) government’s tool chest. Austrians temper their desire to relieve unemployment with concern for their fellows and a modicum of common sense.
Michael, price inflation is a phenomenon that inevitably results, cēterīs paribus, from monetary inflation. Once it gets rolling, it can prove difficult or impossible to stop before it wreaks havoc on the economy, social tranquility and morality. See, for example, the condition of the economy in Zimbabwe now, or that of the United States during the 70s and early 80s. Your statements about inflation and deflation are hopelessly naive and your economic forecasts are worth what you are paid for them.
Micheal, I urge you to look more deeply into Austrian monetary theory, which has so much more to offer on the issue of inflation than Keynesian economics, which can best be summed up with the statement, “Bring it on!” You may think its an imaginary bogeyman, but when it was raging in this country during the 1970s, Keynesian economics and economists were driven into hiding because they had shouted, “bring it on,” and it steamrolled them.
Michael, you said, “…until we get back (if ever) to conditions of full employment…” Can you explain what you mean by full employment? Keynes himself used different definitions at different places in his GT. What say you?
“Michael, it is the followers of Keynes and his GT, not Austrians, who hold that full employment is what economies should be all about. Only Keynesians such as Krugman believe that “full employment” should be the objective of economic policies at any cost, which is why war is considered the ultimate and most efficacious economic policy in a (Keynesian) government’s tool chest. Austrians temper their desire to relieve unemployment with concern for their fellows and a modicum of common sense.”
Ned: Your comment betrays a vision of a dualistic universe, where Good, in the form of good Asutrian thinking, does endless battle with Evil, in the form of misguided or malign followers of the demon Keynes. It’s a very seventh-century view of life, and one that the Byzantines would be very familiar with.
In fact the population of the United States consists overwhelmingly of ordinary PEOPLE. And these people would normally consider that ‘the economy’ exists for our convenience. That is, to provide everyone with jobs. Most would not recognize the name Keynes, much less be able to summarize his philosophy.
Governments exist to do things like make sure there’s no great number of people in extreme need. A very real measure of our current government’s unpopularity is displayed in the recent finding that one in seven Americans now lives below the poverty line. It’s a failure of good government.
From time to time I do try to inject a note of intelligence into the discussion on this. But usually the responses I get are on the order of “Oh, you think the government should employ half the country digging holes, and the other half filling them up again.”
So I won’t belabor the point. You close by asking my definition of full employment.
I’ll go with the Fed’s definition. Usually the best balance between full employment and the onset of wage and price inflation is around four percent unemployed. Below that and the fires of increase get stoked. IMO when unemployment goes below about 5% it’s time to raise interest rates and dampen lending before the economy starts to overheat.
That’s MBCT, or michael’s business cycle theory.
Everyone is employed. Whatever you do is your job and whatever you get is your salary. If you sleep all day, that is your job.
Powerful article Dr. Shostack. Thanks again!
*Dr. Shostak
..sorry, I couldn’t edit or delete last comment for some reason.
Will the President pray with us?
11/07/2010
Dear President Obama:
In your press release dated November 06, 2010 you indicated that you “asked to sit down… with leaders of both parties so that [you] can have [a] …discussion about what [you] can do together to move this country forward.” I have a couple of suggestions. Firstly, it will require more than you and the party leaders. It will also require the support of the American people. And, we should, and must be included. Secondly, I suggest we make some more history. Select a prayer from the Bible to pray on the air live on Ulee Daway Radio’s blogtalkradio.com/prayermeetingliveonline on Monday, November 15, 2010 at 11 a.m. D.C. time.
Please review the attached press release as soon as possible and if time allows notify me of your decision. Your advance notice will allow many more Americans the opportunity to witness your living faith live. I am not looking for an interview or a Q&A, only a prayer for America’s economic recovery. From noon to 1p.m. Central Monday through Friday I lead the Biblical prayers as I host the prayer meeting. Should your staff have time they may listen in and brief you on the format.
Thank you for your consideration and much continued success.
Very truly yours,
Ulee Daway (Elder Lucious Clarence Conway, Jr.), Owner, Ulee Daway Radio, Host, PRAYER MEETING LIVE! ONLINE, Associate Minister, Lewis Temple Church Of God In Christ,
HC 76 Box 54, Eagletown, OK 74734 (580) 306-4300/(580) 835-2358
Press Release
President Obama Reviews New Economic Recovery Plan From Unlikely Source: Ulee Daway Radio’s Historic Internet “Prayer Meeting Live! Online”
Eagletown, OK, November 8, 2010: Lucious Conway, 47, and his listeners eagerly await President Obama’s response to the Ulee Daway Radio request that the President lead a prayer for America’s Economic Recovery selected from the Holy Bible one hour before the Monday, November 15, 2010, Noon EST reconvening of Congress. Blogtalkradio.com/prayermeetingliveonline is the first and only live weekday noon-time and Sunday a.m. prayer meeting in the more than 41 year history of the internet.
President Obama’s November 6, 2010 Press Release indicated his interests in “…what we can do together to move this country forward.” Let us pray suggests host Ulee Daway. Should the President decide to call in to the toll-free “Pray for America Economic Recovery Hotline” at 1-877-903-5596, Christian listeners throughout cyberspace around the world will be encouraged, inspired and perhaps will even begin to once again believe in the promise of change that swept the President into office.
Prayer has proven positive in matters of Americans physical health as well as her fiscal well-being evidenced by the Fulton Street Revival of 1857. Ulee Daway Radio believes according to 2 Chronicles 7:14 it is worth a try. The question is does our President.
I like your point. I saw something like this in another website, but your explanation is much better.
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