Sunday, December 14, 2008

Can we please finally get back to basics?

The unemployment situation in the US is truly scary, the nerds at the US Bureau of Labor Statistics publish a more inclusive unemployment figure (called "U6") than the one reported as headline unemployment which is arguably closer in spirit to European notions of unemployment. It now stands at 12.5%. There are some observations I think are worth making about both what is likely to happen and what it says about what has already taken place:

* Unemployment is a so-called "lagging indicator" in that there tends to be a delay before economic problems translate into unemployment (because of inertia in employment contracts, hiring etc.). So unemployment will probably go up a lot in the next year or so, upto 15% or more in U6 terms.

* For ten years, the UK and US have kept employment up basically on the back of what we now can clearly see was a massive - and often fraudulent - bubble/Ponzi scheme. This has hid a truly terrifying hollowing out of real productive capacity in these two countries. This kept employment in these countries in some sense artificially high. Artificial in the sense of not based in fundamentals and therefore not sustainable. (One thing that's striking is that even during the bubble, unemployment, properly measured was actually not that low, which underlines just how poorly managed these economies have been by those useful idiots Gordon Brown and Alan Greenspan.)

* Now that the bubble's burst, it's panic stations. Many of the major employers who make real stuff in these countries - as opposed to the bogus finance industry - have not been competitive for years. It's all very well to say labour will be re-deployed doing "other stuff", but do we here in the UK any longer have the large scale management and engineering know how to restructure fast enough? Equally, much of US management is disgraceful compared with northern Europe or Japan, and as fantastic as the US research sector is, it's simply not a big enough sector to keep millions of families going.

* Meanwhile, if you take the example of Germany (who've for years been derided by the Anglos for being "old-fashioned" for making useful stuff not keeping pace with all those wonderful financial innovations) their continuing productive capacity is astonishing. They are in trouble too, but their biggest problem is lack of consumer demand in the US (and consequently industrial demand in China), which means no customers for them. This is a huge problem for their economy, but it's important to realize that it's a second-order problem, driven by the collapse here and in the US. They make stuff people want to buy: we no longer have the capacity to buy anything, which hurts everyone. This is different from pursuing policies that lead to primary collapse.

* I hope the lesson has been learned, but has it? There is nothing to be gained by paying management tens of millions. GM's CEO makes vastly more than Toyota's (really!): but who's going under? Super-high pay creates perverse incentives. Put it this way: do you really want someone in charge of a firm who doesn't have enough passion to want to run the company for $1m a year, but would do it for $50m? To me, such a person is surely a bit pathological.

* It's simpler: you have to treat people well; train them; make good products; pursue engineering excellence; invest long term in schooling and public health and so on.

* These are simple social democratic ideas which have their worth in the US heyday between 1950 and 1970 and in northern Europe since the 70s. There has been a war against these common sense ideas by a handful of financial robber-barons and wannabe robber-barons. Can intelligent people now stop listening to these economic fairy tales and come back to reality?

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