Thursday, October 22, 2009

Strong Economy Weak Job Growth

The idea that the recession of 20080-09 was a "recalculation recession" rather than a "Keynesian recession" has merit. The chart showing that more than 55% of the jobs lost in this recession will not come back is solid evidence that "the world has and is changing".

The chart is also an indication of just how great the Schumpeterian proftits are going to be! Ever since the price of oil went above $30 per barrel, it has made great economic sense for businesses to invest capital in order to reduce costs. Of course, most businesses do not do this by drilling oil wells or learning how to hydro-crack methane rich shale.

Most businesses have only a few options. They can practice techniques designed to increase process efficiency, such as Japanese Kaizen production techniques: they can invest in robots, they can out-source work to low cost producers; or, they can lower administrative and communications costs through the adoption of "Web 2.0".

A widget producer that had become unprofitable using 2x inputs of labor and 1x input of technology might now be very profitable while using 1x input of labor and 1.5 inputs of technology.

History gives us cause for great hope. A year or so after the 1990-91 recession, "permanent job loss" reached a post WWII record of 45%. By 1993, the number of "new" jobs created was miraculous.

Right now, 85 to 90% of Americans have never "had it so good". The cost of living in America has reached never before lows. Real incomes for most Americans are at all time record levels. Over the coming decade, Americans are going to buy many things that have never been available before. Obviously, internet connected pocket computer/readers will be a common purchase. Another will be medical procedures made possible by DNA sequencing. Before these procedures can be applied, the "patient" will first have to spring for the sequencing. An economic boom is within sight.

Arnold Kling continues to worry inflation; central bankers have made more money available than ever before. To a significant degree, businesses and the public have not shown great interest in grabbing hold of this money. The sharp fall in the dollar in recent weeks demonstrates that demand for money in fast growing economies has taken hold.

Job growth is likely to follow the pattern of the past two recessions; unemployment will plateau while world wide economic growth will strong. The "jobless recovery" will stretch-out to a couple of years. Aggressive investors will make high returns while many cower due to the fear induced by reported economic conditions. After a time of preparation, huge Schumpeterian profits will cause many "new jobs" to be created.

Again, the idea that this recession is a recalculation is a good one. It takes more time to think-up and develop a new business than it does to resume an old one. The result will be a couple of years of strong US economy accompanied by weak job growth before it becomes obvious that we are living through the strong growth brought-on by the second half of the internet product life cycle.

in reference to:

"What does a "jobless recovery" mean? I do not like the term. Around 2003, when the term was first coined, I instead described it as a "productivity-cushioned recession." Either term describes the same phenomenon--GDP growing significantly faster than employment."
- A Recalculation Data Point, Arnold Kling | EconLog | Library of Economics and Liberty (view on Google Sidewiki)

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