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STRUGGLING ECONOMY
Why unemployment persists
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SPECIAL TO THE LAS VEGAS REVIEW-JOURNAL
Updated: Aug. 7, 2011 | 8:38 a.m.
Pundits and policymakers are easily perplexed by economic recessions and their most visible manifestation, unemployed workers. To these commentators, it is mysterious that labor unemployment remains high across the nation despite massive federal deficit-spending policies, financial bailouts and monetary easing. Here in Nevada, the official unemployment rate has remained in double digits for 29 straight months.
Befuddled, many prominent commentators grasp at straws to explain causes of the suffering. Some blame inadequate spending on education, health care or economic development. These claims fail to acknowledge the wealth destruction that would accompany the higher tax rates necessary to finance such increased government spending. The claims further ignore that state spending in the areas of K-12 education, health care and economic development has long been increasing exponentially.
What these misdirected pundits and policymakers most sorely need is a solid grounding in economics. They then would understand that systemic labor unemployment is not a mysterious or mystical phenomenon loosely attributable to any of a litany of potential causes that may bear, at best, some secondary relationship. In reality, the systemic unemployment associated with economic recessions has little to do with the labor market at all. Instead, it is the result of a misalignment in society's capital structure.
As Ludwig von Mises, Murray Rothbard and others have explained, capital is the result of individuals' decisions to store up their labor productivity in the form of savings, rather than to consume it immediately. This "stored" labor can be used to immediately construct tools, machinery or processes that will help individuals produce even more efficiently in the future. Or it can take the form of monetary savings -- allowing individuals to purchase the capital goods (i.e., the tools, machinery or processes) they seek.
For example, a farmer selling wheat might elect to save 20 percent of his income so that he can eventually purchase a tractor to replace his hand plow. Alternatively, the farmer can use the savings of others by purchasing it on capital markets. The price he pays for the use of others' savings -- the interest rate -- is determined by the total supply of, and demand for savings on the market. This reflects individuals' combined preference for delayed versus present consumption.
Once he obtains the tractor, the farmer can dramatically increase his yield, to the benefit of himself as well as his customers -- who will enjoy a greater supply and lower prices.
Thus, Mises astutely observed that capital accumulation is the key to improving living standards. He also recognized the corollary truth: that the assurance of private property rights is requisite for individuals to invest and plan long-term rather than to immediately consume what they produce. As he once wrote, "It is fashionable nowadays to pass over in silence the fact that all economic betterment depends on saving and the accumulation of capital. None of the marvelous achievements of science and technology could have been practically utilized if the capital required had not previously been made available."
So, how then, can capital accumulation -- the driver of "all economic betterment" -- result in that dreaded situation known as systemic labor unemployment?
The answer: It doesn't. However, falsified signals of the existing level of capital accumulation do exist -- produced by artificial expansions of credit -- and they distort the quantity and quality of capital investment.
In the United States, the two major sources of artificial credit expansion are the Federal Reserve, which creates new money in order to manipulate economy-wide interest rates, and the banking industry, which expands the monetary base by repeatedly lending against borrowed funds within the Fed's fractional-reserve system.
Per Rothbard, the expansion of artificial credit gives the appearance that more savings are available than is the case. As a result, entrepreneurs rush to borrow these illusory savings and invest in capital goods. Since the savings rate is implicitly overstated, however, these investments are made based on misinformation. While the Fed and banks can create the illusion that savings are plentiful, they can't change the reality that what actually prevails is a general preference for more immediate consumption.
The misinformation embodied in credit rates prompts overinvestment in capital goods -- lengthening and expanding production processes beyond what consumers actually demand and out of line with market fundamentals. The quality of investments also deteriorates as a result of the misinformation as well, since the requisite discipline over capital allocation is absent when the presumed supply is overstated. As borrowers rush to acquire the new credit, those who apply first are likely to receive a proportion of capital not justified by actual consumer demand, spurring "bubble" industries such as the late-1990s' Internet frenzy or the Southern Nevada construction mania of the mid-2000s.
So long as banks and the Fed continue expanding credit, the distortions grow more and more pronounced. But as the distortions grow, it becomes more and more clear, to more and more individuals, that the capital structure is seriously out of sync with the actual structure of demand.
As that understanding spreads, investors change their behavior. When major bubbles of complacency and misunderstanding are punctured suddenly, as we've seen recently, financial panic ensues and systemic unemployment results -- as the realization spreads that far too many workers are employed in the production of higher-order capital goods like Southern Nevada real estate development or heavy machinery in Michigan.
Restoring genuine full employment will require that society's capital structure reflect genuine market demand. But that will require ending the artificial and ultimately destructive credit machinations of the Federal Reserve and the banking industry.
Then workers will depart the "bubble" industries that repeatedly prove themselves unviable -- moving instead toward those that more accurately reflect consumer demand.
Geoffrey Lawrence is deputy director of policy at the Nevada Policy Research Institute. For more visit http://npri.org.
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Just let Liberalism (reward irresponsibilty) implode on itself. It's inevitable. The present "Tattoo" generation, as I call it, is not going to fix the Zillion dollar deficit.
@ Winston.Smith: Actually, I agree with you. My guess would be that those free trade agreements were demanded not just by "banksters," but by American industry as well. Primarily as a way to widen entry into foreign markets, but also as a way to break the power of American labor by vastly increasing the size of the labor pool. The rationalization, of course, is that it allows corporate giants like Walmart to "improve our standard of living" by providing cheaper goods. Not recognizing that in so doing, they are slowly reducing the buying power of their customers. And running the risk that sooner or later there will be so few good paying jobs left in this country that not enough people will be able to even afford the cheap goods that Walmart provides!
We are watching the slow motion demolition of the country. It seems inevitable, but it doesn't have to be. Still, it continues. And those that defend the army ants eating the corpse are as despicable as the perpetrators.
Let's see now, what's been going on for two decades here? Large sucking sound? Anyone, anyone? Yeah, NAFTA and GATT designed by the fascist/globalist banksters to export our manufacturing base and convert us into a service economy. DONE! How can we have our independence when we rely on low-wage nations for our goods? We cannot win in a global market because of the wage differential. Why has our government subsidized the transfer of factories to other nations? Why did we grant Communist China most favored nation trade status? Why do you think the government didn't realize there was a huge housing bubble about to burst? Why do you think we gave $16 trillion to overseas banks and corporations over the last three years? Why do you think we're involved in an Orwellian perpetual war paradigm, chewing up our resources and rewarding us with the hate of foreign nations?
Gee, folks, is there a pattern here? Why do you think Timmy Geitner said we'd have a "jobless recovery"? Our wages have to be brought down to match global levels because the banksters want us to go through tough economic times so our wills are broken, making us more amenable to world government.
Yeah, I know it sounds like some wacky "Conspiracy Theory", but it's happening right now, in your hometown.
War is Peace; Freedom is Slavery; Ignorance is Strength
The distortion of US interest rates (the rental price of US$) must have a terrible impact on our economy.
more spin ! a business owner-employer needs a steady, experienced hand from gubmit. that means predictable taxation and regulation. how else should one devise a business plan ? the empty suit is clearly out of its depth, guide by a neo-communist manual, and certainly isn't providing the predictability needed by business-employers. other countries have sane, steady hands at the wheel with predictable taxation and regulation. logically u.s. businesses must get a toe hold overseas. and should expand there as the empty suit's "boot on the neck" crusade bloats. coolest spin from the neo-com's this week is the whining that the s&p downgrade is because of fiscal conservatives. astounding that anyone would swallot that. the deficits have been building under liberal spendinging legislators for decades. to blame a sane legislator is the same as b*tching at a traffic cop when you get a ticket. no speeding, no speeding tickets, duh.
Jasper, right on buddy! Since 2001 over 40,000 AMERICAN factories have SHUT DOWN!!!! In 2009 1 billion cell phone were produced, none in the USA. Less than 10% of the employed in our country work in manufacturing!
PEOPLE, please get these numbers out! If you think I'm full of it, Google it.
Our largest export via ocean container ship is WASTE PAPER!
Don't just sit there REBEL!!!!! And don't tell me that the Republicans are at fault or the Democrats are, THEY BOTH ARE!!!!
Both parties have been screwing us for years! And do you want to know the reason; WE HAVEN'T BEEN PAYING ATTENTION!
Is Mr. Lawrence one of Obama's advisors? You got to be kidding me. It's about jobs stupid. Without jobs people do not have the money to spend, period. Why is that common sense fact so hard to understand. Why would a business increase its supply without the necessary demand? If a business has money to spend on hiring workers and producing goods, would these actions do any good without customers?
Barney had too much to lose as he kept his finger (to put it politely) on the pulse of these corrupt organization as he made money and got sweetheart deals thru his boyfriend....
Senator Harry Reids 2010 re-election radio ads touted jobs at Silver Peak' s Lithium Operation(Chemetall) as part of Department of Energy "Electric Drive Vehicle Battery and Component Manufacturing Initiative" Over one year later and No drilling(water) program is underway in Silver Peak and the only building going on is in Kings Mountain, North Carolina where Chemetall is using a majority of the grant money($28.4M) to construct a Lithium Hydroxide plant where oddly enough there is no Lithium production. The new state of the art Hydroxide plant in North Carolina is to replace the aging Silver Peak hydroxide plant.
So where are the jobs promised for Silver Peak, Senator Reid?