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Premonitions of Doom

Why, with rapid productivity growth and stagnant wages and cheap money that is easy for firms to borrow, isn't firm demand for workers already through the roof? Well, how much would you like to expand capacity if you knew the country had a large budget deficit, and that either big tax increases or a burst of inflation were likely in the future? When Paul Volcker and Bob Rubin say that a serious financial crisis may well be on the horizon?

Brad DeLong

Now I think we're getting somewhere. I lack the intellectual capacity to decide whether Kevin Drum's predictions of oil doomsday are correct. I'm a bit skeptical, and even more skeptical of James Kunstler's more dire predictions. Nor can I really tell whether or not Brad Setser's fears of Current Account Armaggeddon are well-founded. I think the Armchair Generalist is right to say that the threat of CBRN terrorism is overstated. And for all I know the Avian Flu will not, in fact, "kill tens of millions of people". Nevertheless, I'm made a bit . . . shall we say "uneasy" about all of this. As far as I can tell, any of these things might happen in the relatively near future. Thus, if I had a business that could become more profitable through rapid expansion I would be very reluctant to take out loans, even under favorable terms, to engage in said rapid expansion. Thus, robust productivity growth and decent GDP growth might not lead to the sort of rapidly growing labor force that would push wages up. Pile up enough small-but-real chances of Doomsday and people aren't going to want to expand operations.

This is, perhaps, one way to think about WalMart. Here's a company that, it seems, doesn't fear Doomsday and is, therefore, taking advantage of the opportunity to hire lots and lots of new cheap labor and expand. If there were more WalMarts out there eager to snap huge quantities of low wages workers than, slowly but surely, all these firms would start finding that they had to pay slightly-higher wages. And then a bit higher. And so forth, and all would be well (or, at least, some things would be closer to well). But there aren't lots of companies doing that. Perhaps because they're afraid that it seems -- not quite likely, but possible -- that some serious shit is going to hit the fan pretty soon.

April 14, 2005 | Permalink

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Comments

As far as the Avian Flu goes, does any disease really have adverse long-term economic consequences? Short term of course people spend a lot of money of healthcare in an epidemic and probably less on other stuff. But diseases, unlike wars, do not destroy physical wealth or capital. They leave it quite intact. That means that if ten million people die of the Avian Flu there’s going to be ten million (or more) people with inheritances to spend, some of them quite substantial.

Posted by: JonF | Apr 14, 2005 3:45:29 PM

"This is, perhaps, one way to think about WalMart. Here's a company that, it seems, doesn't fear Doomsday"

If you are actually a horseman of the apocalypse, there's not much to fear about Doomsday.

Posted by: Petey | Apr 14, 2005 3:50:33 PM

Think "slope" versus "cliff."

Posted by: David Sucher | Apr 14, 2005 4:00:35 PM

How much of the higher productivity jump that we have seen in higher paying jobs is related to a more rigorous training regimen?
If it takes 6 months, say, to get a full time employee into a productive mode, yet you see that on at least two important fronts [Current account and General fund] there are unsustainable trends, and that the powers taht be are doing nothing about them, and it could be argued, hand waving them away for another day, what would you do?

Consider that the increases in benefits are also deadweight that you have to carry for the longer training period, and it may explain some of the current weirdness.

Posted by: theCoach | Apr 14, 2005 4:14:49 PM

does any disease really have adverse long-term economic consequences?

if the worst-case predictions for avian flu turn out correct, there will be a lot less, um, labor in the world. that'll have some consquences.

Posted by: cleek | Apr 14, 2005 4:24:41 PM

Walmart doesn't fear Doomsday because a crashing economy provides more incentive for people to buy at Walmart so they can continue to afford to buy stuff. And in a healthy economy, there's still plenty of people who want / need bargains.

So Walmart really can only lose if people personally turn against the brand. Even in a depression, they're well placed to continue to employ lots of people cheaply and sell goods cheaply.

Posted by: John Biles | Apr 14, 2005 4:26:05 PM

Dammit, petey took the good one-liner!

All I was going to say is that Wal-Mart doesn't really fear market consequences for 2 reasons: #1, it can circumvent the market on account of its size (which leads to #1a, in the case of market failure among its suppliers it can simply create captive suppliers), and #2, it cheats.

Posted by: diddy | Apr 14, 2005 4:33:29 PM

The thing about labor markets is that there is a kind of assymmetry built in. Sure, there would be upward pressure on wages, if we were near full-employment. But, this is a Republican Administration and Republican Administrations make sure that we are never so near full-employment as to risk wage "inflation".

Absent some kind of effective, collective political power, wages will tend to stagnate, except in the best of circumstances. No unions, no rise in the minimum wage, weak professional associations, weak Democratic Party, etc., and wages will go nowhere.

It is not supply and demand alone, which drives wages, but, rather, it is a matter of productivity and politics. High productivity, high demand and politics combined can result in extraordinary rises. The biggest rise in wages in American history happened when?

Real wages rose by over 50% in one two year period. It came after a prolonged period of rapid productivity growth and occurred during a period of high labor demand and when Democrats were exercising direct control of the economy. The memory of that sudden shift in the distribution of American incomes is glossed over in many college texts, but Woodrow Wilson ought to be remembered for more than his 14 points.

Posted by: Bruce Wilder | Apr 14, 2005 4:38:05 PM

"Absent some kind of effective, collective political power, wages will tend to stagnate, except in the best of circumstances. No unions, no rise in the minimum wage, weak professional associations, weak Democratic Party, etc., and wages will go nowhere."

Hear, hear!

There's a reason wages have been flat since 1980.

Posted by: Petey | Apr 14, 2005 4:43:44 PM

As far as the Avian Flu goes, does any disease really have adverse long-term economic consequences?

Well the Black Plague helped bring down the Roman Empire and when it returned to Europe in the mid-fourteenth century it destroyed the economic system of Europe, spelled the end of the Feudal system since labor was in such short supply and therefore became valuable, triggered the Renaissance and the Reformation and the Age of Discovery. And of course the conquest of the Americas would have been a lot tougher if European diseases (smallpox, typhus, cholera, measles) hadn't decimated the native peoples in advance of the settlers.

Posted by: Freder Frederson | Apr 14, 2005 4:44:55 PM

So for any disease, read "unpredictable consequences".

Posted by: Wrye | Apr 14, 2005 5:17:54 PM

Well, even if nobody died think what would happen to the economy if 20% of the population got sick more or less simultaneously? You could probably count on any business where groups of people work shutting down for months.

Posted by: Tim H. | Apr 14, 2005 5:23:48 PM

"How much of the higher productivity jump that we have seen in higher paying jobs is related to a more rigorous training regimen?"

Wal-Mart has a 50% turnover and very little training. Retail training has overall seen a massive decline in recent years.

I don't think WalMart is all that secure against doomsday. They are very dependent on Asian imports for their low prices, and a massive decline in the dollar would destroy much of their branding advantage. In addition, that dollar-decline would mean an oil price increase, increasing transportation costs. I could easily see Walmart having to double its prices in a short time.

Posted by: bob mcmanus | Apr 14, 2005 5:23:51 PM

"They are very dependent on Asian imports for their low prices, and a massive decline in the dollar would destroy much of their branding advantage."

Only if China de-links.

Posted by: Petey | Apr 14, 2005 5:25:45 PM

does any disease really have adverse long-term economic consequences?

Long term, the thing to think about is how many people do you have to, um, remove from the labor force before it has an effect. A replay of the Asian/Hong Kong flu would be awful, with a few tens of millions of deaths, but it wouldn't make much of a dent in the fundamental economy. (Of course, the quarantines that would be thrown up--let alone the crater it would make in world travel and trade--would cause a recession.)

Higher casualty rates would start to make a difference, though you'd need to look at how the demographics shook out to know exactly how much of one. A flu pandemic that wiped out half of everyone over 55, but hardly anyone younger, might make less a long-term impact than one that skewed toward twentysomethings and children.

In the unlikely event that the avian flu's current 70 percent mortality rate continued as it spread globally, well, then we are probably talking about the End of Everything We Know and Hold Dear. If it comes to that, be sure to steal a few books on pre-industrial agricultural before fleeing the city. But there are many reasons to believe that it won't come to that.

Posted by: jlw | Apr 14, 2005 5:27:51 PM

Wages for unskilled workers will not rise much as long as the US continues to allow effectively unlimited immigration of unskilled workers.

Posted by: James B. Shearer | Apr 14, 2005 5:28:15 PM

What an odd world that DeLong lives in, where big tax increases don't have any negative effects, but the possibility of future big tax increases do.

Posted by: Thomas | Apr 14, 2005 5:35:30 PM

"Wages for unskilled workers will not rise much as long as the US continues to allow effectively unlimited immigration of unskilled workers."

For the 50 years prior to the Reagan Revolution of 1980, wages for unskilled workers rose despite immigration.

Posted by: Petey | Apr 14, 2005 5:36:25 PM

I tend to think what Brad's saying is a bit different from what you're saying, and that what he's saying is more correct. Fears about CBRN terrorism and Avian flu shouldn't have that mauch of an effect on economic behavior because there's always been some cognate of these: nuclear war with the USSR, a massive computer crash at the millenim, suitcase nukes, SARS, global warming, or what have you. (Yes, global warming is a bit different than the other elements of this list.) The point is, the existence of a certain number of these types of fears is not a specific feature of the present moment. As such, it can not have explanatory power for the difference between present economic behavior patterns and past ones.

Also, one should not presume CEOs to be generalists.

I think Brad's correct to point to specific features of the present economic outlook, and not just a general list of things which could induce jitteriness.

Posted by: blegh | Apr 14, 2005 5:37:47 PM

Re: Well the Black Plague helped bring down the Roman Empire and when it returned to Europe in the mid-fourteenth century it destroyed the economic system of Europe

Actually the survivors of Europe in the 15th century lived pretty well as a result of the Plague. As for the 6th century pandemic, it was the great-granddady of all pandemics, but it followed something even more catastrophic, a volcanic eruption in 535 AD that makes Krakatoa look like a firecracker and which produced a two-year nuclear winter effect, with famine all over the northern hemisphere. This, I would suggest, is what doomed Justinian's late Roman Empire. The Plague of 541 was just a coda.
In any event we aren't talking that magnituide of calamity, but something more along the lines of the 1918 flu panademic (which surpassed the Black Death numerically, but was proptionally much less because of the larger population base). What were the economic and political consequences of 1918?

Posted by: Jonf | Apr 14, 2005 6:06:24 PM

Walmart is like my grandfather, who profited from the Great Depression by going into bankruptcy law. Walmart is profiting from the race to the bottom. Their pool of customers keeps getting larger.

As for that fluffy bit of nonsense:
"If there were more WalMarts out there eager to snap huge quantities of low wages workers than, slowly but surely, all these firms would start finding that they had to pay slightly-higher wages. And then a bit higher. And so forth..."

read this and weep...
http://www.washingtonpost.com/wp-dyn/articles/A51521-2005Apr13.html

Posted by: camille roy | Apr 14, 2005 6:12:39 PM

What an odd world that DeLong lives in, where big tax increases don't have any negative effects, but the possibility of future big tax increases do.

I don't think he's ever asserted this. Rather, deferring necessary taxation by accumulating enormous deficits is going to have negative effects far beyond raising revenue now to cover spending.

Posted by: modus potus | Apr 14, 2005 6:18:32 PM

Oh good heavens. The Black Death in Europe produced exactly what JonF pretended to ask a question about- a long-term effect on economic productivity. It is well-known and one of the most basic facts about the 13th and 14th centuries that an overall rise in production was sharply set back for about 100 years by the negative effect on demographics of the Black Plague.

Frankly, I don't think jonF's ignorance is entirely honest in presentation, but- one of the consequences of the flu epidemic was an estimated 90% of the Parkinson's cases presenting between about 1950 and 1990. This class of Parkinsonism is characterized by an insidious onset at about age 55, which you will note is about 10 year short of the SS retirement age of 65. The clear implication is the premature removal, over several decades, of wage-earners and their purchasing power from the marketplace.

Posted by: serial catowner | Apr 14, 2005 6:22:53 PM

*sigh* I hate this. BOTH the conventional wisdom and the blogospheric wisdom can't see the light of day on this. Let me put it simply. We're changing from a industrial to a service based economy. The two types of labour are NOT at all equivilent.

It's about what I call productivity slack. With industry, basically, you were constantly at work. You increased the number of workers, and given the facilities, you increased your production.

With service based economics, you can't just increase the number of workers, production will not rise one iota. You're limited to the amount of labout you NEED done at any one time. For exmaple, Wal-Mart, if they hired 5 new people, that won't increase the amount of work that needs to be done very much. (Additional paperwork is about it).

Eventually, with a service based economy, the goal is to decrease the productive slack, until you get a point where your customers start complaining about it, then you're forced to hire more people. At that point, the slack goes right back out again. So unless you have a booming economy, Wal-Mart has no real reason to hire on more people. (Think of the holiday season where they hire a lot more people. There's a lot more work to be done).

By seeing labour as it really is these days, as a function of work that needs to be done, and not as it was during the industrial revolution, which was a function of how much you want to produce, you can get a better picture of what's really going on.

Posted by: Karmakin | Apr 14, 2005 6:44:37 PM

Unless of course one believes that oil is magically regenerating beneath the surface of the earth, one has to conclude that oil is a rather finite resource, and that a global civilization dependent on it will face some troubles as reserves begin to run dry. I'm not yet convinced that peak oil is here, or even that we're on the precipice of it (although I'm prepared for the possibility of being convinced of either of these things), but I think a bit of honesty is in order.

It looks as though we can probably produce plastics using the still abundant coal reserves of the world, and that the solution to the agriculutral conundrum is some combination of biotech and organics. And while I don't accept Kunstler's core thesis that the end of the suburbs is imminent, someone needs to say out loud that the only way to save the Pottery Barn and suburbanism over the longer term is probably nuclear power. I'm not some sort of eco-fundamentalist, but does anyone else feel just a little bit guilty and uncomfortable with the prospect of having to store and secure gigantor quantities of nuclear waste for the next 500,000 years so we can all live in cushy subdivisions?

As far as I know, its still anything but certain we will ever find a way to neutralize this waste, and some of the other solutions I've heard - building a space elevator and launching it into the sun, for instance - strike me almost as crack-potty (not to mention dangerous) as some of what this guy seems to be suggesting. Kunstler appears to be framing this whole subject in civilizational terms. It seems me to more of a moral question than anything else. What kind of a planet do we wish to leave future generations? Is this appropriate? Are we doing the right thing? Perhaps its time to frame it as such.

Posted by: Robin the Hood | Apr 14, 2005 7:16:12 PM

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