Tuesday, March 5, 2013

Poor Economics

Paul Craig Roberts is always good when it comes to US foreign policy. His economic analysis is often lacking, stuck in protectionist thinking.  He accurately sees faults and shortcomings in the current system, but his recommendations are some version of protectionism – instead of going after the root of the problem, he deals with the leaves.

He properly calls into question the mirage of recovery:

Officially, since June 2009 the US economy has been undergoing an economic recovery from the December 2007 recession. But where is this recovery? I cannot find it, and neither can millions of unemployed Americans.

The recovery exists only in the official measure of real GDP, which is deflated by an understated measure of inflation, and in the U.3 measure of the unemployment rate, which is declining because it does not count discouraged job seekers who have given up looking for a job.

But he looks to protectionism to provide the answer.  He faults Republicans in Congress for looking to expand the number of visas for foreign workers at a time when so many are jobless:

…if skilled employees were in short supply, they would not be laid off. Moreover, if the skills were in short supply, salaries would be bid up, not down…

Of course, I will set aside the point that government has no business getting in the middle of a company and its desired employees.  Globally, demand for skilled workers likely is increasing (I don’t have data, but given what is happening in India and China, I believe I am on firm footing here).  This is likely true in the US as well (but what “skills”?).  But workers in the US don’t compete only with other workers in the US.

In any case, while demand is likely increasing, this says nothing about the impact to salaries.  The supply is growing as well – witness the glut of over-educated Americans thanks to government subsidies of higher education, as well as the tremendous increase in higher education in the developing world.

Roberts tangentially suggests the supply glut:

The National Science Foundation's report, "Doctorate Recipients From U.S. Universities," says that only 64% of the Ph.D. engineering graduates found a pay check.

I will suggest that they have not found a paycheck on terms that they desire.  At what price?  That is the question that the market demands.

Roberts goes on to castigate all businessmen:

There was a time not that long ago when US corporations accepted that they had obligations to their employees, customers, suppliers, the communities in which they were located, and to their shareholders. Today they only acknowledge obligations to shareholders. Everyone else has been thrown to the wolves in order to maximize profits and, thereby, shareholders' capital gains and executive bonuses.

There are likely as many variations on this idea as there are business leaders.  Suffice it to say that most companies that focus solely on the bottom line while completely ignoring everything else will soon find they have no bottom line.  In other words, understanding all aspects of the company and its relationships results in a more profitable corporation.

Even if one accepts his blanket characterization as correct, who is Roberts to say what the owners of capital should expect from the managers of their capital?  Should someone other than the owner of capital make the decision?

Offshoring jobs reduces labor costs and raises profits, but it also reduces domestic consumer income, thus reducing the domestic market for the corporation's products.

This is economic nonsense.  Lower prices do not destroy jobs.  Lower prices are a boon to consumers.  They leave wealth in the consumers’ pocket.  This can be used to buy other goods, or to invest in productive opportunities.  The seen and the unseen – this is not a new economic concept.

John Maynard Keynes made it clear long ago, as has Greece today, that trying to reduce the ratio of debt to GDP by austerity measures doesn't work.

This is also economic nonsense. The problem is that there is no such thing as austerity today – where is government spending being significantly reduced?  What passes for austerity is actually a method to place the weight of the banks and other politically connected classes on the backs of the middle class.  This is not austerity; it is only the final convulsions of crony-capitalism.

Roberts touches on the crony capitalism, but doesn’t lay the blame squarely on it.  This is where the blame lies – not on companies trying to lower cost and increase profits, but on companies using government to gain advantage through central banking and favorable regulation. 

The conversation begins and ends here.

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