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It is economic
theory that informs statistics and not the reverse. In other words,
statistics should be interpreted according to theory. Unfortunately the
failure of a large number of economists to grasp this fact, including some of
the very smart ones, has had the most adverse consequences, consequences that
are still with us. The now discredited Phillips curve immediately springs to
mind. This little statistical study purported to show an inverse relationship
between unemployment and the rate of inflation, despite historical evidence
to the contrary and basic economic theory.
It was therefore
concluded that all that was needed to prevent unemployment from rising was a
little more inflation. Members of the Austrian school warned that the
statistics had been misinterpreted and that the recommended monetary policy
would eventually result in more inflation and more unemployment. Events
proved them correct.
This brings us to
the current state of US manufacturing. It is being reported with glee by the
media that US industrial production expanded for the third consecutive month
and that industrial capacity inched up from 69.9 per cent in August to 70.5
per cent in September. (Marginal movements like this under a Republican
administration are always met with derision from America's corrupt media). The
ISM Performance Manufacturing Index has been above 50 since August, lending
support to the view that recovery is underway. Many economic commentators
have now assumed that this expansion must increase the demand for labour and
that the only reason this has not happened so far is that unemployment is a
lagging indicator.
As I have pointed
out before, though a reduction in idle capacity increases GDP it is in no way
a measure of economic growth which is properly defined as capital
accumulation. The 1930s are a good example of what I mean. From 1933 onwards
there was a significant increase in GDP accompanied by a fall in idle
capacity. Nevertheless this period was still one of capital consumption as
evidenced by the fact that the amount of metal working machinery more than 10
years old rose from 48 per cent in 1930 to 70 per cent in 1940, a 45.8 per
cent increase. Then there was the tragic level of unemployment that was
maintained by the Roosevelt administration's insistence on keeping wage rates
above their market clearing levels. (These facts do not deter leftists from
praising this period as a roaring success for big government).
Rather than look
at an increase in capacity — which is still about 15 per cent below its
average as from 1967, a figure that Obama's media cheerleaders managed to
overlook — we ought to be examining the composition of the real
unemployment figures. At the moment the official jobless rate stands at 9.8
per cent, a figure that no one takes seriously. The actual rate if short time
workers and those forced to work part time are included is about 16 per cent.
What we have here
are millions of underemployed workers. We can therefore expect any downward
trend in idle capacity to be accompanied by increased working hours rather
than a reduction in the official unemployment rate. This fact has not escaped
most economic commentators, many of whom now believe that America is going to
be stuck with a massive and permanent pool of unemployment.
Once again, one
must apply a little economic thinking to the problem. They note that
increased earnings are coming from cost cutting which has meant rising
unemployment. From this they conclude that the consequent fall in incomes
will aggravate the recession by reducing consumer demand. These people do not
realise that they are assuming a simple two-stage economy: a production stage
and a consumption stage when in fact we live in incredibly complex
multi-stage economies with the result that
There are many
stages of payments which go to make up the gross income but which are not
involved in the computation of net income. The larger number of payments is
not from consumers to producers, but is made between producers and producers,
and tends to cancel out in any computation of net income or of net product value.
"In fact, income produced or net product is roughly only about one-third
of gross income." (C. A. Phillips, T. F. McManus and R. W. Nelson, Banking
and the Business Cycle, Macmillan and Company, 1937, p. 71).
As I have
stressed a great many times before, the end of a boom always begins in
manufacturing*. And this recession is no different. If the
underconsumptionists were right every recession would start with consumer
industries laying off workers followed by industries at the higher stages of
production. However, we find that the reverse is always true, a fact that was
well known to economists before the old wisdom was swept away by Keynesian
fallacies. In 1934 it was estimated
that of a total
of almost 14 million persons without jobs at the peak of unemployment in
March, 1933, 6½ million were from the durable goods industries, nearly
6 million were from the "service" industries, and only 1½
million were from the consumption goods industries. (Ibid. p. 235).
The classical
economists were spot on. What matters is production without which there can
be no consumption. They also understood the role of capital in raising real
wage rates. It is important to recognise this fact if a proper understanding
of wage rate movements is to be acquired. What matters is not an increase in
wages but an increase in wage rates — meaning the gross wage which
includes payroll taxes, health insurance, etc. — within a
full-employment context, i.e., one in which there is work for all those able
and willing to labour.
In this situation
wage rates can only continue to increase so long as the process of capital
accumulation continues. In other words, it is the accumulation of capital
that raises the "intensity of demand" (real wage rates) for labour.
(Mountifort Longfield, Lectures on Political Economy, Richard Milliken
and Son, 1834, p.195, and Nassau W. Senior, An Outline of the Science of
Political Economy, Augustus M. Kelley, 1965, pp. 69-72, 170-730).
What this means
is that America need not have to endure a large pool of able unemployed so
long as wage rates are allowed to adjust to market conditions and that the
unemployed are willing to work. Therefore the idea that GDP has to grow at a
certain amount to reduce unemployment by a given per centage is erroneous.
But it is possible that the boom has wasted so much capital that full
unemployment can only be restored by lowering real wage rates for a
considerable proportion of the labour force.
Moreover, the
situation would be greatly aggravated by a large pool of illegal immigrants,
something that doesn't seem to bother Congressional Democrats or leftwing
union leaders like the SEIU's Andrew Stern. Therefore those who think a
simple restoration of industrial production to its average level will be
sufficient to raise real wage rates and promote economic growth are making an
unwarranted assumption, particularly in the light of Obama's anti-growth
program, which is what his policies really amount to.
While one can
only speculate about whether there is now sufficient capital to maintain real
wages rates at previous levels (unfortunately one cannot measure the quantity
of capital) there is absolutely no doubt that Obama's energy policies will
literally make it impossible for America to maintain its capital structure
— let alone extend it. This means the vast majority of Americans will
suffer a massive drop in their living standards if these insane energy
proposals are implemented.
Even if his
energy policies were sound his tax, borrow and spend policies are thoroughly
destructive of economic growth. For example, reasonably informed commentators
recognise that his massive borrowing and huge deficits must eventually drive
up interest rates. What most of them don't get is that this will kill off time-consuming
projects, the sort that are instrumental in raising living standards. In
short, the rise in interest rates could be sufficient to kill economic
growth. This is because they would be reflecting the amount of savings that
the government was consuming at the expense of capital accumulation.
Americans have
yet to grasp just what the Obama White House has in store for them.
*I am
referring to the classic boom-bust-cycle
Gerard Jackson
Brookesnews.com
Also
by Gerard Jackson
Gerard Jackson is Brookesnews Economics
Editor
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