Nobel laureate Joe Stiglitz (if you don't have time, see here for a summary and here for another summary by Brad DeLong) has argued that at heart, there were large productivity increases in an important sector (agriculture before the Great Depression of the 1930s, manufacturing before the Great Recession of the last couple of years) that lay at the heart of the economic problems.
At first sight, this is a rather curious idea. If there is one statistic that represents economic progress, it's productivity growth. It's productivity growth that allows the purchasing power of real wages to increase without leading to increased wage cost. Productivity growth is the motor of economic progress, so it's a little curious that Stiglitz argues one can have too much of a good thing.
How does that work, in his view? Well, these productivity increases are so large that they lead to oversupply and a large fall in relative prices, shaking labor out of the sector, which depresses income, and thereby demand in the economy.
In essence, the economy just can't adjust fast enough to these changes, as normally excess labor would be employed elsewhere, but the transition period necessary to acquire the change of skills and move locations increases unemployment, which reduces demand.
It's a seductive narrative. Something so fundamental as the Great Depression of the 1930s or the Great Recession of 2008-2009 must have fundamental causes as well. There must be something deeply rotten in the economy for it to produce such perverse outcomes, destroying the livelihoods of millions.
Recently, some empirical support has appeared with the work of Eric Brynjolfsson and Andrew McAfee's Race Against the Machine: How the Digital Revolution Is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy. The theme is that the impact of new technology, most importantly information and communication tech (ICT) develops with such speed and has such a profound impact on the economy and jobs, that it's beyond the capacity of the economy to deal with.
First, simple, routine-based factory jobs could be automated away (or outsourced to cheaper places). This is what explains the decline of manufacturing, and how the displaced workers ended up in lower-earning savings jobs. Consumption was kept up by the bottom 80 percent of the American population spending 110% of their income (financed by credit enabled by increases in house values).
But now the progress of ICT, improving by Moore's Law, is doing the same in offices and even some professions. ICT has reached some critical mass by the mid 1990s, and organizations are increasingly figuring out how to take best advantage of its sheer limitless possibilities.
That's probably why production is (barely) back to pre-crisis levels, but there are 6 million fewer jobs around. Stiglitz's theme is that under normal technological development, the economy can cope by reallocating resources and labor from declining sectors to those that are growing. But in periods where important parts of the economy suffer from accelerated technological development, economies cease to be able to cope.
This produced the 1930s Depression (where technology ran rampant in agriculture) and has run into industry before the Great Recession of 2008-2009 and subsequent slow growth. What's more, rampant technological displacement has now spread to the service sector, the last vestige of employment growth. Where would all the displaced office workers go? They've got nowhere to hide.
However, this perspective of the crisis is odd, and way too gloomy, in our view. The US does reallocation of resources better than most other advanced economies, which generally have much more protective labor laws and/or less space, so more complicated planning laws. Also, for an American, it is more or less normal to move elsewhere if that is where jobs are, but this isn't so natural in many other countries.
So it's odd for the US to suffer from unemployment and low growth as a result of the acceleration in technology, because these effects should be less pronounced the better an economy can adapt and reallocate resources and re-employ labor to other sectors. If technological development now produces such dislocation that it goes beyond the capacity of economies to adapt, the US should be one of the last victims, not one of the first. However, countries like Germany and Japan have sort of survived this productivity onslaught in manufacturing pretty well, and it's interesting to wonder why (which would merit another post).
So while it's an interesting story, we don't see much reason to fundamentally alter our own crisis narrative, which is that stagnating real wages and rising inequality, together with financial liberation led to an increasing proportion of the population to use credit as a means of sharing in the increased wealth they saw around them.
When the assets on which that credit was based formed a bubble and then popped, the debts remained but the assets declined 40% in value, wiping some $9 trillion off household balance sheets. This produced a balance sheet recession, where the first priority of households was to rebuild balance sheets, leading to reduced spending and a fall in credit demand, despite record low rates.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
