22 July 2014

I Still Hate Neil Irwin

The morning, during the week, begins with a reading of briefing.com, via Yahoo! Finance, then a toddle off to the newstand for The Times and thence to the coffee place to inhale both. Most often, these toddles involve creating the rough draft of one of these missives. Since I don't put one up every day (it just seems like, at times), most never get past that stage.

Today's puzzlement: why do the mainstream pundits remain puzzled that interest rates remain low? It's as if, and likely so, that none of them ever read up any physics or chemistry. They view returns on investment in purely fiduciary terms, a fact which goes a long way to explain why few saw The Great Recession coming. That Giant Pool of Money was sitting out there in Y2K, and Masters of the World in the C-suites had no use for it. They simply couldn't figure out profitable, enough, ways to turn moolah into machines. So, the banksters ginned up fiduciary instruments in sufficient quantity to sop up the Pool. The Pool hasn't gone away, and the MotW still don't have any idea what to do. Share buybacks are the current new idea. That and sub-prime car loans. Read up on the latter, you'll get a chuckle.

The essay was nearly complete, in noggin, when I got Irwinned (a term, alas, that I'll be using a lot I suspect). OK, go read it. Just remember, you've read it all, save the quotes of course, here before. I don't run in the same circles, alas.

I do find him naive`, on a few points, though:
If companies increased their spending enough to close that gap, it would mean an extra $220 billion in annual economic activity and perhaps a couple of million more jobs. But there may be even more important and lasting consequences for this lack of spending by businesses.

Capital spending improves worker productivity. And worker productivity improves living standards.

The implication: as productivity rises, so do wages. In the Adam Smith notion of free market economics, yes. But the data are overwhelmingly contradictory over the last 4 decades. Little to none of productivity increases have ended up in wages. Employment doesn't, overall, go up. Just as the Foxconn guy intends to replace cheap Chinese hands with robots, so too do American capitalists. When 5 workers can build a robot which replaces 100 workers in use, you see that the arithmetic favors the MotW. And so it has happened. The Great Migrations, from farm to factory, in the 19th and 20th centuries, were based on unskilled labor moving to another unskilled labor. Given the leverage involved, with the current notion of income distribution, increasing STEM graduates will only create a larger pool of disenchanted and unemployed smart people. The MotW have shown little inclination to buy more STEM folks than they need, and they don't need all that many, especially when they can get them nearly for free from India. Guess who those Eastern European cybercriminals are? Yup.
"As manufacturing approaches full capacity, wage pressures will build and many businesses will be forced to redirect their profits away from stock buybacks and toward actual physical investment, which will help bolster U.S. GDP," [Scott Anderson, chief economist of Bank of the West] writes in a research note.

I gotta get me a pair of them rose colored glasses.

The real impetus for physical investment is better productivity, making more widgets cheaper; we're long past the time when ditches are really dug by hand. The MotW will only make such physical investments if they have, or foresee, unmet demand. But with the 99%'s share of income at best stagnant, there is no macro- unmet demand. Remember all that talk about 450mm silicon wafers? Hasn't come to be, has it? Productivity gains, from the perspective of MotW, depend on a) unmet demand with current capital and b) freezing out labor from the gains. The problem is that the MotW have gotten b) in spades but, as Your Good Mother said, "what happens if everybody behaves like you?" As the MotW squeeze out labor, and we don't get a new theory of income distribution, demand sags.

As demand for consumer widgets sags, so too does demand for more efficient capital. I think that's called a death spiral. Whee!!!!

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