We have been spending a significant portion of our blog space on the subject of Structural Rigidity (SR) and this post will be no exception to that pattern. This post will review some of the clues and areas of concern regarding SR in the US, and then provide some other areas that may be hampering the flexibility of the US economy.
Review of Structural Rigidity Concerns:
From the others posts on SR, let me enumerate and review them here.
1. Some of the first clues I discussed were in regards to manufacturing and non-manufacturing sectors of the economy through the ISM reports. The ISM reports were showing a picture of SR with the price index very high and maintaining a level close to 70 for the past several months, a high number of commodities reported in short supply along with most being longer term shortages as the multiple months' commodities grew, and slower supplier deliveries. And sure enough, the PPI was Hotter Than Expected.
2. Minimum wage increases prevent the formation of human capital. This is another major contributor to the phenomenon of "sticky wages". This short article entitled Sticky Wages Hold Back Job Growth from the WSJ presents some of the reasons. Prices are the signaling device to markets of relative abundance or scarcity of resources. When prices become sticky then the market assumes there is not a shortage of labor and no reason to adjust the factor inputs in the production process. If capital became cheaper then we would see a shift in the inputs of capital and technology and possibly a shift away from as much quantity demanded of labor. The opposite is prevented in labor markets. Adam Ozimek provides some food for thoughts on the "structural labor market problems" at Lessons from South Africa’s Minimum Wage Problem. He makes the point that the people that do not get hired are the real losers if minimum wage is set above the market clearing price, especially for unskilled labor.
3. Mining and logging showed a more robust hiring than the other sectors and showed the least amount of increase for underemployed workers. Various moratoriums or over-restrictive regulations have prevented further developments in resource extraction industries. Of course, the BP oil blowout did not help the situation any also. It is also important when looking at various components of SR to consider if the factors are converging indicating less SR, or are diverging, which could signify growing SR in the economy.
4. Regionally, the metro areas show some divergence in rates of unemployment. States also showed this divergence, but it was shown that even if it was equalized, the low unemployment rates states could not absorb even a significant fraction of the total army of unemployed as well as underemployed.
Other Areas of Probable Structural Rigidity:
This in no way is meant to be a complete list of bottlenecks or components of SR, but just a first attempt at identifying some additional components.
1. The current economic slowdown has created a strong trend where men are losing jobs at a higher rate than women. Some have labeled it as "The Mancession" and most recently it was noted The Declining Demand for Men. These issues are related to structural rigidity, but are derived more from social and cultural norms, and practices. As such, these issues will continue with us for a long time no matter how much Warren Farrell wants to Save the males.
2. Natural resource extraction industries are notorious for rent seeking activity globally. The US is no different in that the complex rules, regulations, protectionism, taxes and yes, subsidies, distort the markets in hundreds of ways. This topic is too broad to cover all the areas and levels of these issues here, but an interesting aspect of it is when "Energy Leaders Blame Oil and Gas Subsidies for Weak Prospects". Some of the background information and facts are derived from the paper from "WWF for a living planet" at Fossil Fuel Subsidies. Upon careful reading of the analysis, they do identify negative externalities that are not factored into the price of gas and oil products. But they also imply that any reduction of tax rates below the maximum is a subsidy. Clearly, it is not strictly a subsidy and often applied on marginally producing wells, just as Alaska reduces or eliminates tax burdens on marginally producing wells.
3. Government rules and regulations in general prevent the reallocation of resources across sectors and the formation of new capital. John Stossel presents some good examples of these Regulations Overwhelming Small Businesses. Stossel also provides some interesting videos on his blog at Fox Business including an amusing one on how Government Kills Businesses. (Click on chart for clearer image.) 4. Not only do governments at all levels stymie the formation of capital and thus create structural rigidity, it also seems to be impeding the ability of government itself to maintain its investment levels. Mike Mandel shows how the average age of capital stock through the three aggregate broad sectors of residential, non-residential and government changed over the past 40 years at Our Aging Capital Stock.
Hat tip to Paul Krugman, who thinks that the problem has to do with the fact that government "can’t muster the political will" at Build We Won’t. Karl Smith shows that it is not because a lack of funds available at Spending Money Can Be Difficult for Some Middle-Aged Governments. He talks about the fact that the US government can not seem to spend fast enough to increase aggregate demand. There are no "shovel ready projects" out there.
5. The US education system is basically characterized as a monopoly market provided by government and has not fundamentally changed in decades. From my own observations, it has been unresponsive to the new needs of business or even government presently. High school has been more of a holding cage than a place that will create skills and knowledge sets that allow graduates to compete in the global economy. But I am not sure what the answers to these dilemmas are.
This post listed some of the structural rigidity issues covered so far on the Macro View of the Markets and briefly introduced some other areas for further consideration. Not only does it seem that government at all levels is getting in the way of capital formation and development, but is also creating rigidity in its own ability to create public goods. This is a deterioration and degradation of "the commons". Instead of Krugman and his ilk screaming for more spending, he should be shouting about how inefficient government is becoming in providing public goods and services.
Structural rigidity can also be shown by social mobility or lack thereof. I close with some thoughts on the middle class from Samuel R. Staley at Fluidity And Mobility: A Newly Defined Middle Class.
Traditionalists have argued that dynamic, open-market economies are the most dependable institutions for vaulting individuals and households to a coveted level of income security, whether through entrepreneurship, homeownership, steady employment or the financial cushion of a pension or savings account. Now, these staples of social stability appear to be in jeopardy. That doesn't mean the aspirations have gone away, or that these aspirations don't motivate Americans in the workplace or the ballot box. Quite the opposite. The quest for economic opportunity, aspiring to enter the ranks of a new middle class, is in our cultural DNA.