Tuesday Highlights

Good morning.

  1. LOTR from another point-of-view. Yikes.
  2. Urban deconstruction.
  3. The man-who-needs-to-buy-a-saddle noted. A co-conspiratorial advice.
  4. “higher productivity is not the answer” (to employment) … which, taken to its logical conclusion, is a call for a return to subsistence farming, after all employment was almost 100% then.
  5. Zapow!
  6. Cooi. A liberal against the teachers union in Wisconsin (or perhaps he’s just confused as to whom the “people” are in this case, i.e., the taxpayers).
  7. Intervention?
  8. Ms Arendt got excommunicated by the intellectual elite for suggestions of Jewish complicity with the Nazi genocide, I guess she just chose the wrong audience.
  9. Economics is a kernel, not the whole picture. Reductionism isn’t normally all that helpful in describing the human experience.
  10. Libya.
  11. Commit to memory.

43 Responses to Tuesday Highlights

  1. No, I haven’t forgotten who the taxpayers of Wisconsin are. More than 70,000 of them jammed the State Capitol, and Gov. Ahab Walker dismissed them.

    Taxpayers? Walker is against them. It was most interesting listening to the news on February 21st. From reports about Libya to reports about Wisconsin, if the geographic name had been stripped off, sometimes it was difficult to tell which was which. At least Walker has no fighters to strafe the people with, or, I fear, he would.

    It’s an interesting case of despotism. Usually despots try to put on a face of being with the people for while before their colors come clear. Certainly no one in Wisconsin voted to kill unions in November — and yet, Walker claims a mandate to do exactly that.

    In my history classes in the past few weeks we’ve watched films from 1933, when both Germany and the United States got new leaders to try to put their respective nations on a path to recovery. Walker is no Roosevelt.

  2. I think the most damming aspect of the Wisconsin story is that unions who endorsed Walker (poice and fire) were not included in his proposed law. A principled stance against all union rights in public employment I could respect but this is a blatent political payoff (and if the issue is really about money then this payoff is even more galling as police and fire unions are notorious for demanding and getting huge benefit packages).

  3. higher productivity is not the answer” (to employment) … which, taken to its logical conclusion, is a call for a return to subsistence farming, after all employment was almost 100% then.

    Is the notion that full employment and efficient employment are two different concerns really so logically difficult to understand?

  4. Cooi. A liberal against the teachers union in Wisconsin (or perhaps he’s just confused as to whom the “people” are in this case, i.e., the taxpayers).

    Yea ok. Mark it in your notebooks. Here’s the GOP high water mark.

  5. I think the most damming aspect of the Wisconsin story is that unions who endorsed Walker (poice and fire) were not included in his proposed law.

    The unions have more honor: The State Troopers Union revoked its endorsement of Walker. Late is better than never, I suppose; probably too late, though.

  6. Ed,
    Thaat’s right. In Wisconsin they used rubber bullets and tear gas to repel the crowds instead of strafing with AA and machine guns …. oh wait they didn’t. Oh wait saying something like

    From reports about Libya to reports about Wisconsin, if the geographic name had been stripped off, sometimes it was difficult to tell which was which.

    Is complete BS. I’ve seen discussions an accounts of the demonstrations held by both sides, and except for the difference in that the libs can’t pick up trash (because their “green” affectation is pure hypocrisy) …

    Please. You don’t “kill” unions by taking only their bargaining for benefits (not wages or hours or anything else). If you want to pretend that “honor” is involved by the left, recall that honesty is honorable and attempt (please) to recover a bit of that.

    Riddle me this Ed. If I agree that a right to collective bargaining is allowable, explain how you figure that the right not to join the union is rejected by you union hacks all the time. Try working in a public school and not join the teachers union. Why can’t you? Why?

    Boonton,

    Is the notion that full employment and efficient employment are two different concerns really so logically difficult to understand?

    Yes, because they are not. In the two limiting cases (subsistence and the Star Trek fantasy in which machines provide everything) employment is respectively 100% and 0% and the driving force behind the full/non-full employment is indeed efficiency. Try again.

  7. Not really. Consider it in terms of athletic performance. Let’s say your best time to run a mile is 10 minutes. If you’re running it in 10 minutes ten seconds or so you’re pretty close to your peak level. If, however, you have a cold this week and need 15 minutes to run it then you’re below your peak capacity.

    Efficiency would be relative to an increase in your capacity. Say after a long period of intense training you’re able to achieve an average best time of 7 minutes with 9 minutes when you have a cold. Improving efficiency allows you to be at a better place whether you’re healthy or ill, but that doesn’t alter the fact that healthy or ill is itself another concern. Simply increasing efficiency by itself doesn’t prevent colds (let’s just ignore the theory that stronger bodies have better immune systems and don’t get as many colds for now). If today you have a cold that in itself is a problem that is different from the problem of whether or not you’re at the best overall level you could be.

    Likewise increasing the economy’s productive capacity is always desirable, but it’s not a solution to recessions in itself because recessions aren’t caused by sudden spurts of inefficency.

  8. I think the comparisons to Libya and Egypt are a bit far fetched, but oddly it feels like the first people to raise them were on the right, not the left…..odd…..but then the right is pushing the ‘Beck Theory’ on its fringes which alleges that Egypt and related Middle Eastern revolutions/riots are all being staged somehow by radical American leftist groups like ACORN, George Soros and Bill Ayers. I thought this was confined to just Beck but catching some talk radio on Monday indicates that the meme has spread pretty far among non-elected right wingers.

  9. Boonton,
    The only places I’ve seen it were from Ed here (and on his site now) and from Mr Schraub of the Debate Link. I’ll point it out on my links page if it shows up on my RSS feed.

    Your efficiency example (running) has no impact or relevance to employment. Look at my two limiting cases, one where production is very inefficient … so everyone must work to eat or extremely efficient … so only a few (or none) need work to provide our material goods and services.

  10. Boonton,
    Sorry. In the last few days zero of the right wing feeds have made that comparison that I’ve seen. So if you think it’s spreading … it’s because you’re choosing to read blogs way out on the fringe.

  11. Your efficiency example (running) has no impact or relevance to employment. Look at my two limiting cases, one where production is very inefficient … so everyone must work to eat or extremely efficient … so only a few (or none) need work to provide our material goods and services.

    Actually this is a good illustration. Consider an unproductive economy (which I think might be a better term than efficient) where it takes roughly one person year of labor to feed about two people and the labor force participation rate is about 50% (that would be 50% would be adults in working age without any major diabilities or in institutions). In this economy employment is at 100% if everyone is to be fed. If not then there will be food shortages and starvation.

    Now consider your economy where a single person could produce enough to feed the entire economy by just pushing a button. This economy wouldn’t typically be just a tad shy of 100% unemployment. This economy could be at full employment and produce output far beyond simply being enough food to feed everyone (the extra production could be used to trade for consumption goods like Ipads for everyone!)

    You are still facing two different issues. One issue is are you as productive as you can be? This is the difference between one person feeding 1.5 people or feeding everyone. The other is are you at full employment? Just because one person can feed everyone doesn’t mean you’d want just one person to have a job. Other people working would mean even greater possibilities for material consumption beyond just having a full stomach.

    For the most part the first problem is a long run thing (like your average athletic performance) while the second problem is a short term thing (like you having a cold). Krugman’s point is the very legitimate (and it’s not even a ‘left wing economics point’) observation that things that may be perfectly good policies for one problem may do no good on the other.

    Sorry. In the last few days zero of the right wing feeds have made that comparison that I’ve seen. So if you think it’s spreading … it’s because you’re choosing to read blogs way out on the fringe.

    I haven’t followed any fringe blogs except the ones you may link too now and then. The meme is being pushed by Glen Beck on Fox News and at least a few talk radio outlets on WABC in NYC (WABC is a ground zero for right wing talk radio, where Sean Hannity and Rush got their starts). Being a meme in that arena requires more acceptance than simply showing up on a blog (since just about anyone can do a blog). There’s also the odd silence on the part of Republicans in regards to the Middle East revolutions. Initially I heard a few neocon types try to celebrate Egypt as a vindication of George Bush and the Iraq war (toppling a dictator in Iraq and having elections there motivated people elsewhere to want their own real elections). Then we have either silence or hints that the US should have offered more ‘support’ to Mumbarak least our ‘friends’ in places like Saudi Arabia think we don’t like them as much.

    This pattern would be consistent if right wingers are seeing the ‘Beck theory’ growing in popularity but don’t want to put themselves out of the mainstream by publically endorsing it. This is basically what they do. Don’t directly endorse the wingnut theory (birthism, death panels, ‘paling around with terrorists’, socialism) but don’t directly oppose it and drop rhetorical winks to those that are pushing it to hint that you may be sympathetic to its claims

  12. Boonton,
    Regarding the right/left wing writers/speakers making connections between Wisconsin and the Middle East (Libya and Egypt) I haven’t linked a single right wing blog (to the best of my knowledge) making that connection. You claimed that this was “spreading to right wing blogs” which I assumed meant you’d read such. As for “silence” … is this some sort of left wing talking point your parroting? I’ve linked right wing blogs practically every day that since the events began, how that constitutes “silence” is beyond me. Apparently you don’t follow the NRO corner because they’ve written about it every day. I have noted people dismissive of the relative silence from GOP Senators and the President (Democratic Senators being dismissed I guess just goes without saying).

    So … silence … that’s a meme that won’t hold water. Sorry.

    The problem with your analysis is that … it still seems wrong. Right now in our economy, production is just about back to pre-recession levels … but we have ~10% of the labor force missing. One possible explanation for that might be that in the last thirty years since the last large recession a lot of advances in automation have been put in place, but management didn’t skinny down their work force as much as their new automation would allow. In the tight market they did … and now don’t need to rehire those people to meet the demand. There aren’t shortages of “stuffs” but 10% of the workforce isn’t there.

    My extreme example wasn’t “Now consider your economy where a single person could produce enough to feed the entire economy by just pushing a button.” but an economy where one single person could produce all the goods and services for the entire nation. One person working could provide all the goods and services and commodities for everyone. He’s the only person employed. There are no jobs for anyone else … or a second person does decide to work, now there’s twice as much stuff and people can’t handle the glut. In that situation you have 99.99999 unemployment.

    Now I’ll allow that the term full and efficient employment do not mean what one would naively think and that they are technical jargon that mean specific things which aren’t what you’d expect. However, the naive notion of full vs efficient would not naturally be orthogonal (independent).

  13. Boonton,
    The point being that in the subsistence case 100% is required because the economy is highly inefficient at producing goods from labor. Because of that inefficiency you have everyone working. In the other extreme, the economy is extremely efficient, 1 person can produce everything everyone needs and is the only person who works and you have almost 100% unemployment. The efficiency of the economy at producing goods from human labor is must be connected to employment levels that the economy can sustain.

  14. The problem with your analysis is that … it still seems wrong. Right now in our economy, production is just about back to pre-recession levels … but we have ~10% of the labor force missing.

    Not quite sure this is correct. Here is Real GDP by year over the last ten years:
    http://www.forecast-chart.com/chart-gdp-inflation.html

    To me it looks like the chart’s trend should have us somewhere just shy of 115 where we seem to be at about 110 so we are still missing some production. Also it’s not quite 10% we are missing but 5% (remember unemployment wasn’t 0% at the start of the recession, let’s call it 5% since I don’t recall what it was).

    One person working could provide all the goods and services and commodities for everyone. He’s the only person employed. There are no jobs for anyone else … or a second person does decide to work, now there’s twice as much stuff and people can’t handle the glut. In that situation you have 99.99999 unemployment.

    Actually there would be 0% unemployment. Unemployment is the unemployed divided by the labor force. The labor force is everyone with a job plus those who want one who otherwise would be able to work. In this example why would the 2nd person decide they want a job? If the first person’s job is already providing him with everything he could possibly want, then what would he accept as compensation for taking a job? He’s no unemployed anymore than your kids living high and happy off the allowance they con out of you are unemployed.

    It seems, though, your way of looking at things runs smack into an argument for stimulus. If the economy is producing as much as it did before the recession sans a whole bunch of workers who are now unemployed seeking work, then stimulating the economy by increasing purchases should hit no supply constraints since the economy has suddenly gotten so much more efficient, discovering they can produce the same with something like 5-10% fewer workers. If it takes less flour to bake a cake, then you can bake more cakes for a given supply of flour.

    Because of that inefficiency you have everyone working. In the other extreme, the economy is extremely efficient, 1 person can produce everything everyone needs and is the only person who works and you have almost 100% unemployment.

    It may be a technical definition but it’s not so difficult as to qualify as jargon IMO. What you’re describing is a lower laborforce participation rate. Yes in an economy where labor produces a lot of output, you can afford to have a lot of people remaining outside the labor force mooching off the few who are in it. This seems to happen with the super rich who seem to pickup ‘house guests’ like that guy who was living with OJ. If you produced $20T worth of goods and services a year, you very well might shower millions of people with tens of thousands of dollars of gifts.

    But what you’re describing whether it’s a subsistence economy or a super economy with only 1 person who bothers to do the job of pushing the magic button to produce ‘everything’ carries with it an assumption of full employment. In your subsistence example, everyone who wants to hunt and gather food does. You don’t see people with empty stomachs who want to work to get food but can’t get work next to empty fields that can produce food but won’t because owners won’t let people work them. Likewise in your super economy example, if the second guy wants to work he can….the only reason he doesn’t is because he already gets all he wants from the other guy who does work.

    It became clear about 100-200 years ago, though, that modern economies suffer from a differnt type of economic problem, the cyclical recession. There’s no evidence that people don’t want to consume additional goods and services, there’s people available that can be employed to make more but yet they can’t get work.

    Or more simply you’re telling me 100 units of output are being made by 90 workers when a few years ago 100 workers made 100 units. OK, so why leave 10 workers unemployed? Why not make 111.1 units with 100 workers? That’s not a question of efficiency. 111.1 units with 100 workers versus 100 units with 90 workers is the exact same level of output per worker. Maybe with dramatic efficiency you could get 111.1 units with 90 workers, that’s great but you’re still left with the question of why leave 10 workers on the table?

  15. Boonton,
    In the 1 worker case, you cite

    Unemployment is the unemployed divided by the labor force. The labor force is everyone with a job plus those who want one who otherwise would be able to work. The labor force is everyone with a job plus those who want one who otherwise would be able to work.

    So in this case the labor force is eveyone with a job (one person) plus those who want one who are capable of working (say 40% of the remaining people) … so … 1 / many millions -> close to zero.

    One thing that I think is going on with this discussion is that you seem to miss the great increase in elasticity of a mechanized workforce. In a low efficiency economy to produce 5% more it requires 5% more workers. In a highly automated business/economy that’s no longer true. A typically business, I’d hazard, can double its output from their baseline average without adding a single person … and that is on the low end.

    Or more simply you’re telling me 100 units of output are being made by 90 workers when a few years ago 100 workers made 100 units. OK, so why leave 10 workers unemployed? Why not make 111.1 units with 100 workers? That’s not a question of efficiency. 111.1 units with 100 workers versus 100 units with 90 workers is the exact same level of output per worker. Maybe with dramatic efficiency you could get 111.1 units with 90 workers, that’s great but you’re still left with the question of why leave 10 workers on the table?

    I’m telling your that 200 units of output can be made by those 90 workers if they had a call to … and they didn’t really notice that they didn’t need the extra 10 until the recession gave them an imperative to pare back. So the real question is, why hire the 10 back. Not for any reason related to production … so why? There are no shortages and no problem pushing production up if the market asked. So you’re left with the problem that efficiency is in fact related to employment.

    Which begs the question, why do you think stimulus would work and not just get the producers to push to 140 units for a while and make more money. Which is the problem for you … why do you think stimulus will help?

  16. Unemployment = Those seeking work / labor force

    Labor force = Those with jobs plus those capable and seeking jobs.

    A factory worker laid off who is looking for work is part of the unemployed and part of the labor force. A woman who has a license to practice law but has decided to stay at home to raise her newborn is capable of working but NOT part of the labor force and would not be considered part of the unemployed.

    One thing that I think is going on with this discussion is that you seem to miss the great increase in elasticity of a mechanized workforce. In a low efficiency economy to produce 5% more it requires 5% more workers. In a highly automated business/economy that’s no longer true. A typically business, I’d hazard, can double its output from their baseline average without adding a single person … and that is on the low end.

    The question then is why? If you could double the output why not fire half the workers today and sell off half your capital? Your remaining balance could be ramped up twice as much to meet your average demand. In the meantime you’ll be more profitable.

    Which begs the question, why do you think stimulus would work and not just get the producers to push to 140 units for a while and make more money. Which is the problem for you … why do you think stimulus will help?

    Actually the question is pretty obvious why do you think efficiency is the problem? You seem to believe a massive increase in production is possible right now. Why leave so much production on the table when there are so many people who want? What would even more efficiency do when half of what we currently have isn’t even being tapped?

  17. Boonton,

    The question then is why? If you could double the output why not fire half the workers today and sell off half your capital? Your remaining balance could be ramped up twice as much to meet your average demand. In the meantime you’ll be more profitable.

    Uhm, half the people can’t run the machinery. Look a machine at half capacity doesn’t cost any more (expect a small maintenance and power increase) than that machine a 10% or 100% capacity. But you still need someone to drive it. You’re still not getting it. Look a farmer who has a 400 acre farm could likely work a 600 acre farm with no change in machinery … but that doesn’t mean he can just work the 400 acre farm with 1/2 a farmer.

    Why leave so much production on the table when there are so many people who want?

    What “so many people who want?” You claim our production is down 5% from where it should be. You buy hundreds of things each week. That means compared to pre-recession right now 5% of that which you’d normally consume is unavailable because of shortages. But that isn’t the case. There aren’t any shortages. Production meets the demand and demand drives production. We can produce more, with the same labor force, but demand isn’t there. And … before you start talking stimulus, remember if you artificially boost demand … that slack will be taken up by increased production from the unused capacity and no new labor will be hired.

    I don’t think efficiency is a problem. My vocation and job is to increase efficiency, mostly in distribution. I think those who call for lower efficiency (which would as noted boost employment) are Luddites stupidly wishing for the good old days when we had subsistence farming and the consequent 100% employment.

  18. Look a farmer who has a 400 acre farm could likely work a 600 acre farm with no change in machinery … but that doesn’t mean he can just work the 400 acre farm with 1/2 a farmer.

    I think you are still missing the point. Why is the farmer carrying 400 acres of land if he could grow just as much by working 200 acres twice as hard? Sell off the extra 200 acreas or work them twice as hard too.

    And … before you start talking stimulus, remember if you artificially boost demand … that slack will be taken up by increased production from the unused capacity and no new labor will be hired.

    So what’s the problem with that then?

    I think those who call for lower efficiency (which would as noted boost employment) are Luddites stupidly wishing for the good old days when we had subsistence farming and the consequent 100% employment.

    Who has called for lower efficiency? Krugman never said efficiency isn’t a good thing, he pointed out that the business cycle isn’t a problem efficiency can solve. So what? Any doctor will tell you antibiotics can’t cure the common cold, that’s hardly saying the medical community doesn’t think antibiotics are a good thing.

  19. Boonton,

    Why is the farmer carrying 400 acres of land if he could grow just as much by working 200 acres twice as hard? Sell off the extra 200 acreas or work them twice as hard too.

    The relationship between Acreage and how much he can produce is not the same as the relationship of how many acres he can work to how much is produced.

    So what’s the problem with that then?

    No “problem” just no increased employment due to stimulus, which putatively is your intended effect.

  20. The capacity utilization rates are around 85% or so. Most firms wil expand hiring and plant capacity if they suddenly see their sales double.

    But let’s assume you’re right, there’s no problem with stimulus level N. We just get more output but not more employment. OK, go to stimulus level N+1 and then repeat the process again.

  21. Boonton,
    Stimulus cannot be raised to infinite levels. In our case, GDP was, what?, about $12T. A $24T stimulus package might help employment for the short term, but it isn’t something that can be paid back, i.e., will break the bank. And when the stimulus recedes, those temps will be let go. And let’s see you and Krugman argue for a 12-16-24 trillion dollar stimulus bill because it’s just big enough.

    So. We’ve pretty much established that in today’s economy stimulus is unfeasible.

    The capacity utilization rates are around 85% or so.

    From my experience (in distribution and manufacturing) I’d estimate that’s off … as I said. As I said, I think especially short term, companies can double their output without requiring more people. A retail distribution company increases shipping by a factor of 4 or 5 in the Christmas rush … their staffing increases by nowhere near that much, more like 15-25%.

  22. Boonton,
    Why do you think capacity utilization is 85%? How would you measure that?

  23. $24T stimulus package might help employment for the short term, but it isn’t something that can be paid back, i.e., will break the bank

    Errr why wouldn’t it? You’re telling us our economy can easily produce double the output without additional capital or labor usage. What exactly needs to get ‘paid back’? To whom? How does making half the income you can help you manage your debts better?

    From my experience (in distribution and manufacturing) I’d estimate that’s off … as I said. As I said, I think especially short term, companies can double their output without requiring more people. A retail distribution company increases shipping by a factor of 4 or 5 in the Christmas rush … their staffing increases by nowhere near that much, more like 15-25%.

    This belies your estimate of 50% slack in the economy. Consider your retail shipping company as an extreme example where one brief period of the year will see an intense amount of activity. On the other side is a company with almost no seasonal variation. The company with a lot of seasonal variation will keep idle capacity laying around unused for the bulk of the year because the gain they get for using it during the rush season makes it work.

    The steady company, though, sees no gain by keeping lots of idle capacity. So then why would they add it?

    Here is where I think you’re making your error….. Consider a diner that easily seats 200 people. At meal times maybe 180 seats are taken. The place, then, keeps 20 spare seats for super rush periods. But you say look at the off periods of time. Maybe 30 are sitting there. So on average maybe there’s 50 people in the dinner at any given time period. So you conclude the diner can easily quadruple its output of serving meals before it has to expand its eating capacity by hiring a contractor to build an addition.

    But this isn’t the case. People don’t want to eat a meal at a dinner at 3 PM. They want breakfast, lunch or dinner. If demand expands 20% the dinner is going to find a line of people waiting at meal times (180 * 1.2 = 216). On average, though, the # of people at the dinner expand from 50 to only 60, well within the 200 seat capacity. But that’s simply not the way it works.

    Why, for example, do you see two Dunkin Donuts that are open like 16 hours a day? Why bother building a new store if the first one shuts down for 8 hours a day at night time? Why not let that one work 24 hours a day before considering an expansion? Because the places are already at capacity. During the day and night but not super-late nights the first D&D was producing at 100% so a new one needed to be opened to meet the added demand. Since D&D coffee brewed at 11 pm can’t be stored until 9 am, it doesn’t help that the store exists late at night.

    Likewise the diner only has a lot of spare capacity if it can somehow convince people to add extra meals in the day or shift around their usual meal times (hence ‘early bird specials’ for seniors and the idea of ‘brunch’). If the diner is able to manage an increase in demand like that then it has spare capacity. But if it doesn’t then added demand means it runs out of capacity.

    Now go back to your retail distribution business. If someone figures out a way to make a new type of Christmas Holiday happen in March, there’s plenty of capacity that can be tapped. But stimulus is more likely to just expand normal demand. So now what happens if demand shifts up, say, 20% in a distribution over the year that’s no different than normal? Slack time in March isn’t helpful because the business can’t shift that capacity to the Holiday rush Oct-Dec anymore than the dinner can beam its unused seats at 3 PM to 6:30 PM when the dinner crowd starts walking in.

  24. The relationship between Acreage and how much he can produce is not the same as the relationship of how many acres he can work to how much is produced.

    Inputs to production, though, are constrained by time and space.

    Consider the invention of a Star Trek transporter type machine that cost next to nothing to operate. The farmer wakes up at the crack of dawn, uses the tractor on his field. Sometime around 3PM or so he is done for the day. Before retiring, though, the farmer beams the tractor to China. There it’s the crack of dawn and a farmer there receives the tractor so he can start ploughing for the day. When he’s done he beams the tractor back to the US farmer whose ready to use it for another day.

    So one tractor works two fields. That’s great, today one tractor only works one field though. But that’s not quite the same as saying we can double our tractoring without buying a 2nd tractor. Since the transporter technology doesn’t exist, the field in China must be ploughed with a 2nd tractor, not by some rental deal of the first. From a strictly engineering POV, it is indeed the case that 1/2 of the tractor is being wasted since it just sits in the barn overnight as the farmer sleeps. But in terms of capacity utilization, the tractor is nearly 100% utilized since there’s no costless way to shuttle it around the world, chasing the dawn.

  25. Boonton,
    You live on the mythical planet where a farmer uses his tractor in his field every day, I see. Or fails to realize that, if he had a larger field, could pull a slightly wider piece of equipment (plow/seeder/spreader, cultivator). The point is that his tractor more than likely which is in fact sufficient for his 400 acres could do the job just as well (as the sole tractor) on twice the acreage.

    Similarly, when a company buys automation equipment they buy it with significant (and I claim greater than 15%) higher capacity than their current production requirements. That higher capacity is, by my estimate, greater than 50% and likely a factor of two.

  26. Here’s another way of looking at it. By me there’s two Dairy Queens and two Dunkin Donuts. Why? Making it even odder, the DQs are only open half a year and are owned by the same guy!

    Now here’s a guy who had a DQ. He made good money, saw demand expand as the neighborhood grew and traffic on the highway increased. Yet his DQ is only open half a year, if it was opened a full year he could handle double the output. Does he opt to open the full year? No he doesn’t. In fact he opens a new DQ not far away and it too is only opened half a year.

    So what gives? Whether its a DQ or a tractor it’s untapped capacity is only theoretical. The farmer can’t easily rent out the tractor when he isn’t using it. Those nearby have their own and sans a transporter anything beyond that makes the transaction a loss. Likewise while the DQ is theoretically capable of serving 2x as many people by simply being open yr round, the increased demand isn’t spread year round.

  27. See, the problem I have here is that assertion may be valid in your line of business but it doesn’t seem to hold for the entire economy. Consider the DQ question. I wouldn’t be surprised if the guy who started with 1 store saw his sales grow by something like 20-30% before he figured it would make sense to open another one.

    When talking about stimulus, there’s really no way to tell the difference on the ground between organic stimulus and gov’t stimulus. In other words have sales gone up 20% because the Fed. gov’t awarded a contractor 30 miles away a new jet engine contract? Or did they go up because this is a happening area that people are moving into? I doubt the DQ guy gave it much thought, he saw things looked good and decided to double down on his bet. If he did give it much thought, it wouldn’t have helped him.

    So then if your right that we already have such amazing productive capacity that stimulus wouldn’t work to increase employment…..well how’d we end up getting it? Why did modest amounts of growth provided sufficient incentive to open up multiple DQs, multiple Starbucks, multiple car dealerships, etc. etc. but now the gov’t couldn’t get a single new person hired unless it gave every single American a $45,000 stimulus check (enough to roughly double consumption?

  28. Boonton,

    See, the problem I have here is that assertion may be valid in your line of business but it doesn’t seem to hold for the entire economy

    Hmm. “My sector” of the economy for which I claim this to be true is manufacturing, distribution, and some of retail (for example, do you seriously think that Wal-Mart, Sears, or any other Big Box retailer couldn’t move ~50% more product without problem). And yes, there are some sorts of establishments for which this isn’t true, the tax preparers in April run-up and eateries that are full at lunchtime cannot without capital investment … but the existence of some sectors or particular businesses that are close to capacity doesn’t mean that most are … or that the elasticity of the economy isn’t greater than you expect. An idle worker that doesn’t have stuff to do but is employed costs a lot more money than a machine that is idle for an part of a shift … and as noted, when you purchase automation you don’t get it to just meet current capacity, but plan for growth … in a way that diner, with little automation, cannot do.

    Seeing that the modest stimulus we had didn’t impact unemployment in a measurable way … your argument that it did, fails.

  29. Actually the stimulus we did have probably saved 2M from unemployment which is not a trivial amount. More importantly the fact remains if you seriously argue that the economy is anywhere near 50% utilization then you’re basically saying if every single American got a check for $40,000 tomorrow there would likey be no increase in employment to meet the additional demand.

    I use eateries as a simple illustration, but it applies in quite a few places. Your automation systems are purposefully brought with a certain percentage of slack because expected demand growth is being built into the investment as is unexpected demand spikes. The 85% figure is probably better in that it represents the actual economy as a whole including built in, planned ‘slack’ to accomodate unexpected spikes and growth.

    More importantly, your ‘utilization’ is missing the point. If you don’t like my idea of a tractor that gets beamed around the world chasing the morning, then use your stove. You or your wife start cooking dinner at 5PM say. What’s it doing at 7 PM? Probably nothing. With a transporter, you could probably share that stove with 12-18 different families who all could use it on what to you are ‘off’ times thereby allowing you to spend only 1/12th the price for it…..but this untapped ‘capacity’ is not tappable without the transporter. As incomes go up around the world without anyone inventing a transporter, the stimulus takes place as the creation of 12-18 new stoves rather than ‘full utilization’ of one stove.

    I think what you’re seeing as 50% utilization is a combination of tappable utilization and untappable utilization. Since the untappable utilization is by definition unavailable barring some radically different idea….it should be excluded from the base in your percentage calculation. The result then is a utilization above 50% (let’s say 85%). The remaining shortfall of utilization then could be divided into planned and unplanned non-utilization. The planned non-utilization is the ‘slack’ that business wants to see in their capital so they can accomodate unexpected spikes in demand and regular growth over time. The unplanned slack is below that #.

    So let’s say that planned slack is 15%. If utilization is at 80%, an increase in demand will not result in added spending on labor and capital. At 86%, though, business will start to open their eyes. They are within the 15% ‘planned zone’. If this is a one time fluke then they won’t add spending, if though it seems like it’s not they will in order to achieve the 15% ‘planned slack’ zone they deem to be comfortable.

    Then we aren’t really disagreeing about stimulus in this sense….at a very low point there may be a zone where stimulus just taps the existing slack in the economy rather than increasing employment and capital. This does not require stimulus up to 100% utilization, though, to trigger added employment. There is a level of ‘planned slack’ that means that when business sees demand above that level, they will add employment and capital because they want to have a certain amount of slack (how much will vary by industry and individual company…even individual product line).

    Where we also disagree….well actually I think it’s just that you haven’t thought it out clearly….is that stimulus in a deep zone of unutilization does not really cost anything. Yes it costs in the sense that a check must be cut, funds borrowed, but by your own definition it can’t ‘break the bank’. Since spending on labor and capital isn’t increasing (assuming you’re deep in a zone of serious slack), the added income from stimulus spending literally has nowhere to go but into the banking system and ultimately into lending to the gov’t. Note how ‘the bank’ is charging next to no interest on gov’t borrowing these days even though gov’t borrowing is huge relative to only a few years ago…

  30. Boonton,
    “saved 2M from employment” assumes your assumptions on productivity elasticity.

    The 85% figure is probably better in that it represents the actual economy as a whole including built in, planned ‘slack’ to accomodate unexpected spikes and growth.

    And … I asked you once where you got that figure. You haven’t answered.

    Then we aren’t really disagreeing about stimulus in this sense….at a very low point there may be a zone where stimulus just taps the existing slack in the economy rather than increasing employment and capital.

    Sort of. I disagree that stimulus will be anything more than a temporary kick and that if the elasticity is more than you expect, the amount of stims required will be too high to make it affordable.

    And it can break the bank. The budget deficit is real.

  31. Actually I was basing 85% off of memory, looking at http://en.wikipedia.org/wiki/Capacity_utilization it appears 80% is more normal for America. Interestingly Japan, whose economy is based more around manufacture, appears closer to 90%. This leads me to think that your thinking about automation is actually backwards. More intense automation tends to mean less ‘planned slack’ in systems. Just in Time inventory management seems to be based on this principle as well.

    This would also make sense in that services require more people than machines and people are a bit more iffy. A law firm needs lawyers, your distribution center needs machines. When demand expands your distribution center looks at the catalog and orders an upgrade to its machines and more or less gets what it wants after you make your service call. The law firm, though, may hire a new lawyer just out of law school but he may or may not be as good as the current lawyers. In fact it may take a year or two to really find out if he’s any good. Hence the law firm may operate at a lower capacity utilization rate. Better to keep a good lawyer with nothing to do 50% of the time since finding them isn’t so easy. When it comes to, say, copiers in the office…..well maybe you’ll build 10% slack into your utilization rate to accomodate a few fast projects but not much more. It’s pretty easy to just add another copier when you need it.

    Sort of. I disagree that stimulus will be anything more than a temporary kick and that if the elasticity is more than you expect, the amount of stims required will be too high to make it affordable.

    The problem here is that if this concept is true then the idea of it being unaffordable starts being absurd. If the economy can produce a vast amount of additional GDP then there is the way to ‘pay for’ stimulus, the rest is just petty scorekeeping.

    Let’s go back to your original hypothetical of the supper efficient economy where George Jetson single handedly makes the entire output of the economy by just pushing a button. Let’s say that gov’t decides to stimuluate that economy and it does so by hiring his son and daughter and it pays each of them 1/2 of GDP. How does that ‘break the bank’? Either two things must happen:

    1. The economy expands production two 2X previous GDP.

    2. GDP remains constant and the kids, not interesting in work or consumption simply stash their checks in the bank….which at the end of the long financial system simply loans it back to the gov’t.

    The deficit is real but it’s mostly a short term artificat of producing below capacity. Saying you can’t afford it, then, becomes kind of absurd. It’s like saying because you’re drowning in debt, you can’t afford to take on some overtime that your boss offers you because you may have to fill your gas tank up on your credit card to make it to work. In that case you can’t afford not to take the overtime.

  32. Boonton,
    Well one thing that is going on, is you are doing a good job of clarifying for me one thing, how/why liberal economic thinking is fundamentally unserious about budget shortfalls. Witness:

    Since spending on labor and capital isn’t increasing (assuming you’re deep in a zone of serious slack), the added income from stimulus spending literally has nowhere to go but into the banking system and ultimately into lending to the gov’t.

    And

    which at the end of the long financial system simply loans it back to the gov’t.

    Uhm, loaning money back to the government is not going to rectify/repay/recover from a large deficit outlay. All it can do, ultimately provide funds so that the outlay is not of the “printing money” variety but taxes will have to recoup the outlay. And since taxes aren’t 100% you aren’t going to reap it all back in some weird zero-sum game. Thus if the stimulus is indeed short term, it’s all just bad, i.e., it costs money but provides no long term benefits.

    (updated slightly for clarity).

  33. Well one thing that is going on, is you are doing a good job of clarifying for me one thing, how/why liberal economic thinking is fundamentally unserious about budget shortfalls

    You’ve put forth a model that says if the gov’t issued about $43,000 to every man, woman and child in America there wouldn’t be a single new job created to meet any increase in demand. This, then, begs the question of where would the money go? It couldn’t go to salaries, you’ve defined it away. It can’t go to business investment, again you’ve defined current slack as more than sufficient to meet any increased demand. It can only go into the banking system and back into Treasury.

    Uhm, loaning money back to the government is not going to rectify/repay/recover from a large deficit outlay. All it can do, ultimately provide funds so that the outlay is not of the “printing money” variety but taxes will have to recoup the outlay.

    In that case, though, everyone basically has $43,000 sitting in their bank account….or if they enjoyed $43,000 in consumption that did not result in any additional hiring then by definition business has $43,000 sitting idle in their bank accounts. A $43,000 tax increase to ‘recover’ from the stimulus would have no impact on GDP in your model just as it had no impact on GDP to begin with.

    But you don’t really push your model to its limits. What happens when the stimulus policy is ‘N+1′, meaning you stimulate until employment starts to get impacted. Then the following starts to happen:

    1. First increased demand is meet by lowering unused capacity….that means hiring unemployed workers, maybe bringing people into the workforce who weren’t part of it (the housewife, maybe the guy who was thinking of trying to score a disability judgement or the guy who was considering early retirement) as well as unutilized capital.

    2. As these factors of production are sucked up, then the free lunch stops. Beyond full employment, the economy can no longer increase production. At this point if stimulus is stopped it literally pays for itself. If you keep pushing, however, then you either start competiting with capital (higher interest rates) to meet present demand by cutting out your future production or you start causing inflation (i.e. real GDP hits a peak while nominal GDP keeps rising).

    As for being ‘unserious’ about budget shortfalls. It’s deadly serious. By trying to focus on short term budgets you make the problem worse, like trying to escape a Chinese finger trap or quicksand by thrashing about. Thers is no real short term budget deficit problem, I challenge you to demonstrate a real short term budget problem that at the end of the day doesn’t reduce down to “I’m scared of really big numbers I don’t understand”.

    Thus if the stimulus is indeed short term, it’s all just bad, i.e., it costs money but provides no long term benefits.

    The problem here seems to be that you have things backwards. We don’t consume money, we consume goods and services. Money just keeps score on this.

    You’re saying that the economy can produce 100 units of goods and services, but is only producing 50 units….. But then you strangly assert producing an extra 50, even if only for a short term will ‘cost money’. Why do you think that makes any sense? Opting to produce 50 units when we have lots of bills is what is insane. Maybe you can lower your debts by declining an offer of overtime by your boss if you slash your spending to a near monastic level….but more likely you’ll just make yourself worse off.

  34. Boonton,

    Backing up a bit. You seem to be working different assumptions over the effect of stimulus in the first place, which seem to me require business and the economy to be unaware that the stimulus is going on. The basic assumption you seem to be operating under is that the problem is that the economy is somehow at a fixed point that is low, and it needs to be jumpstarted/bumped to a new fixed point at a higher employment/consumption rate. Thus that after a little bump, it will settle in at the new position. The problem is that assumes (a) the elasticity is low and (b) nobody will understand that the stimulus applied is short term and will go away (so that those new hires to cover the bump in production aren’t just temps). I don’t buy your fixed point assumption (especially because everybody is cognizant of the overt stim-as-manipulation).

    Furthermore, in your case in which everybody just takes the new stimulus money and saves it in the bank. You seem convinced that means the government gets it back (somehow). Uhm, how does that work. Yes, the “banks” have the money then … but the banks aren’t the government. Yes, they can then lend that money to the state, but they expect repayment. Government doesn’t receive its income from bank borrowing but from taxation. Since taxes (here) aren’t 100% the money won’t all go back to the state.

    In that case, though, everyone basically has $43,000 sitting in their bank account….or if they enjoyed $43,000 in consumption that did not result in any additional hiring then by definition business has $43,000 sitting idle in their bank accounts. A $43,000 tax increase to ‘recover’ from the stimulus would have no impact on GDP in your model just as it had no impact on GDP to begin with.

    I never said there would be no impact on GDP (which is why the GDP graph you show cite is basically irrelevant) but we’re talking about the impact of stimulus on employment.

    You’re saying that the economy can produce 100 units of goods and services, but is only producing 50 units.

    Right. Because people are only interested in purchasing 50 units. A company that can produce 5k widgets a day won’t unless it has buyers for 5k widgets a day. Look at your “jetson” limiting case. Adding another producer is worthless, there aren’t shortages or people wanting more stuffs, so producing twice as much, just means a lot of waste. So we have a (limiting) situation there where a small number of workers provide for everyones needs, but many/most workers are unemployed because of a highly efficient economy leaves them with no opportunities for work.

  35. The bump analogy is actually an interesting debate in itself. It may be that there’s multiple equilibrium points, if the economy hovers near a ‘subpar’ one it will get stuck there, if stimulus pushes it back to a full employment one it will stick there. Stimulus then becomes a bit like jumping a battery. There’s another argument that modern economies produce a constant ‘spending deficit’ requiring constant gov’t spending to make up the difference. I’m not really sure which is right but the second would explain why it seems almost all large developed economies constantly carry gov’t debt that is always rolled over and never entirely paid off.

    In terms of banks…..yes but at the end it doesn’t really matter. If the money goes into additional spending income (i.e. goods and services produced) goes up. If the economy produces more goods and services the taxes to ‘pay back’ the borrowing are simply taking a portion of things that weren’t going to be produced anyway. If the money doesn’t go into spending, if banks just lock it up, well there’s the money to ‘pay back’. If everyone refuses spending then at the end of the day there’s no actual goods and services that need to get ‘paid back’ to anyone. If Mr. Scrooge just wants his $100 bond to turn into a $100 bill but he always keeps both locked in his safe then no one actually has to produce $100 of goods and services to ‘pay him back’. The deficit is only an issue at a full employment economy where those getting paid back actually do want consumption goods and consumption good production cannot increase because the economy is already at full employment. Then someone is going to get squeezed whether its the taxpayer who has less consumption or the bond holder who gets screwed over on the money he’s owed.

    I never said there would be no impact on GDP (which is why the GDP graph you show cite is basically irrelevant) but we’re talking about the impact of stimulus on employment.

    Employment is often used as a proxy to income but it’s income that matters. You’re saying that the economy is such that if everyone got $43,000 consumption would go up dramatically but there’d be no need for new workers. Existing workers would simply get paid to work harder and/or business owners would reap added income from profits.

    The only way to get no income increases is to make a model where everyone, inexplicably, just doesn’t care to cash the $43,000 check or spend anything more.

    Right. Because people are only interested in purchasing 50 units. A company that can produce 5k widgets a day won’t unless it has buyers for 5k widgets a day. Look at your “jetson” limiting case. Adding another producer is worthless, there aren’t shortages or people wanting more stuffs,…

    In which case stimulus would be costless. Since no one wants more stuff you don’t have to make any stuff to ‘pay back’ anyone.

    But now you’re veering against the business cycle which brings us back to where we started. One question is whether the economy is as efficient as it can be. But the other issue is given a level of efficiency, is it making the most of that. It’s pretty clear that there is a business cycle with periodic recessions where people do want more, are able to produce more but the economy just doesn’t work. The other explanation is the ‘great vacation’ hypothesis which basically says what we’ve seen in the last few years is a sudden mass decision to just stop working by lots of workers who we call ‘unemployed’.

  36. BTW, interesting graph here
    http://www.frbsf.org/economics/datadive/2011/0302-a-long-way-to-go.html

    Two things jump out:

    1. Potential GDP, in the red line, is quite stable with a positive slope. This is sensible given that each year labor (population) and capital are increasing. That alone would increase potential GDP slowly (plus ‘know how’)

    2. While you have to look carefully, GDP has returned to the level it was at around 2008.

    The argument against stimulus, then, has to revolve around either the output gap being fictional….that some massive event happened in 2008 to make the real potential output of the economy less than it is now, in other words the smooth red line would suddenly have to nosedive down to the blue line level before returning to tis gentle upward slope. Or would have to argue that the output gap is somehow beneficial…..that suffering thru it somehow will cause the red line to start going up even more in the future.

    But in terms of ‘paying off’ stimulus, well we are leaving $1T on the table every year. A single year of that pays off the entire stimulus package plus half of the tax cut Obama signed at the beginning of this year.

  37. Boonton,
    What magical missing trillion dollars in tax revenue?

  38. Why does it have to be in tax revenue?

  39. Boonton,
    How else does the government make money? Go into manufacturing?

  40. Right off the bat, if gov’t takes about 20% of GDP in taxes then $1T more GDP equals $200B added tax revenue

  41. Boonton,
    How is 1T left on the table?

  42. GDP could be $15.5T, GDP is $14.5T (just eyeballing the chart of course). There’s $1T left on the table per year. Calculate the area under the curves and you have lost national income.

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