Permanently higher unemployment (!)

I read a lot of economic news, and it’s not every day I come across an article as startling and unnerving as this report that the “natural” rate of unemployment may have increased from 5% to 7%. That’s the word from “Nobel Prize winner Edmund Phelps and Pacific Investment Management Co. Chief Executive Officer Mohamed El-Erian.” I don’t know if they are right, but it seems like they could be. They certainly know a thing or two about economics.

This topic always gets me riled up because deep down I don’t believe that there’s anything natural about a system that actively prevents more than one in 20 people from working (and then blames people who need public assistance for high taxes). I’m not really qualified to prove this, but it seems pretty logical that the real problem is that a large stock of unemployed people are needed to keep wages unnaturally low. In a natural system, markets would be allowed to function without the Federal Reserve’s active meddling to keep people out of work so their capitalist buddies can have lower labor expenses.

Of course, unemployment has not always been subject to this supposedly natural minimum. Here’s an interesting chart that overlays the unemployment rate with a variety of political and economic events. It doesn’t really look like there is a correlation between minimum wage increases and unemployment, and umeployment used to be well below five percent. Decide for yourself.

If it is actually true that the “natural” rate of unemployment is a moving target to be raised as high as needed to keep the dividends flowing, we’ve got even bigger problems than I suspected. In any case, there is a fundamental problem here: capitalism sees labor (people) as servants to capital (money).

It seems like there could be an analogy to a car that has had a (very small) hole punched in its engine. Maybe the car can still run, but it needs more fuel to get the same amount of power. Alas, that means more heat in the system, which potentially puts more stress on the various pipes and potentially enlarges the hole.

What happens next time there is a financial crisis? Does the “natural” rate jump to ten percent? (or maybe only nine?) Or do we have a real blowout and wind up on the side of the road?

Of course it is not certain that the definition of “full employment” has really changed by two percent. The article presents this as a minority view, and a 40% jump (5% x 1.40 = 7%) in anything would be really dramatic. But even if the change is only a fraction of what Phelps and el-Erian describe (say, an increase to 5.2%), that is still hundreds of thousands of people who are going to be excluded from working and trying to get money flowing in their communities.

What would happen if we looked at investors as the inflationary force, rather than blaming people who are actually making and doing things for their income?

We might wind up with a system like the Mondragon cooperatives in the Basque Country of Spain, which are owned and democratically controlled by their workers. These co-ops managed to get through a long and brutal recession during the ’80s and ’90s without laying off members. A recent article even claims that the local unemployment rate was as low as one percent while Spain’s rate spiked to 27 percent. (if anyone knows the source of this figure, please say so – I’m a bit suspicious of its accuracy).

Even if this number is only referring to the valley where the co-ops started – and now comprise 60 percent of the workforce – it’s still worth exploring. It might not be possible to achieve this level of employment throughout the economy, but that doesn’t make this any less desirable as a local goal.

There is already a lot of interest in creating sustainable local economies, and it seems like “sustainable” should include the opportunity for as many people to work as possible, as well as loss of wealth to outsiders who already have surplus wealth to invest. Any time a system has a leak that isn’t somehow compensated, it is by definition unsustainable

My intent is not to beat up on folks who are just trying to retire and see the stock market as their best option. That’s part of the myth of investment -they might be the next Warren Buffett or George Soros, but almost certainly will not. Those micro-investors have no control over the firms in which they invest, and can only hope that decisions are made to reflect their interests. Instead, I’m talking about those like Buffett and Soros who have real control, and who create their own economic weather. They might be brilliant and friendly and philanthropic and good, but they still have way too much money.

I’m also not saying that there is no room for passive investors to make a buck here and there. The problem is that investors have apparently  overrun the system, and are exerting an inflationary pressure that is keeping millions of people out of work. This wealth should be distributed based on physical contribution to production by people who are really invested in the firm. We should be talking about a “natural” rate of investment, above which an overabundance of hungry investors drive inflation.

As I said, I can’t prove this is so, but it seems like a reasonable explanation for what is happening. We had a basically jobless recovery since the last recession in 2001, and nobody seems to be seriously predicting we will approach full employment anytime soon. Unless we find ways to dramatically reshape ownership, we’re going to see a lot less good work for the foreseeable future.

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