Posts Tagged ‘Second Great Depression’

P&B 13.5 Monopoly Smaller Output & Higher Price

It’s the most obvious criticism of mainstream, especially neoclassical, economics.

All of the major models and policy proposals of neoclassical economics—from the theory of the firm through the gains from trade to the welfare theorems—are based on the assumption of perfect competition.

But, as is clear in the diagram above, if there’s imperfect competition (such as a single seller or monopoly), the price is higher (PM is greater than PC), the quantity supplied is lower (QM is less than QC)—and, in consequence, excess profits are not competed away and the amount of employment is lower. (Of course, the monopolist can increase demand, and therefore output, through advertising, which for mainstream economists makes no sense for perfectly competitive firms since they are presumed to be able to “sell all they want to at the going price.”)

PPF

The existence of imperfect competition by itself undoes many of the major propositions of neoclassical economics—including (as I explained back in April) the idea that there’s no such thing as a free lunch (since, as in the Production Possibilities Frontier depicted above, point A inside the frontier represents an inefficient allocation of resources, and no new resources or technology would be required, just the elimination of monopolies and oligopolies, to move to any point—B, C, or D—on the frontier).

Readers may not believe it but imperfect competition is mostly an after-thought in mainstream economics. It’s there (and extensively modeled) but only after all the heavy lifting is done based on the presumption of perfect competition—and then none of the major theoretical and policy-related propositions is revised based on the existence of imperfect competition. (The usual mainstream argument is either imperfect competition isn’t extensive or, even if prevalent, imperfectly competitive firms act much like perfectly competitive firms, not restricting output or raising prices by very much. Therefore, perfect competition remains a valid approximation to real-world economies.)

market share

Now, however, imperfect competition seems to have returned as an area of concern—in the White House Council of Economic Advisers and in the Federal Reserve Bank of Minneapolis. The irony, of course, is that the market power of a few giant firms in many industries has been growing after decades of neoliberalism and the celebration of free markets.

As James A. Schmitz, Jr. explains for the Minneapolis Fed, new research

shows that monopolies are not well-run businesses, but instead are deeply inefficient. Monopolies do drive up prices, as conventional theory suggests, but because they also reduce productivity, they often ultimately destroy most of an industry’s profits. These productivity losses are a dead-weight loss for the economy, and far from trivial.

The new research also shows that monopolists typically increase prices by using political machinery to limit the output of competing products—usually by blocking low-cost substitutes. By limiting supply of these competing products, the monopolist drives up demand for its own. Thus, in contrast to conventional theory, the monopolist actually produces more of its own product than it would in a competitive market, not less. But because production of the substitutes is restricted, total output falls.

The reduction in productivity exacts a toll on all of society. But the blocking of low-cost substitutes particularly harms the poor, who might not be able to afford the monopolist’s product. Thus, monopolies drive the poor out of many markets.

The last time monopolies came to the fore in the United States was during the first Great Depression, when Thurman Arnold (from 1938 to 1943) ran the Antitrust Division at the Department of Justice, “taking aim at a broad range of targets, from automakers to Hollywood movie producers to the American Medical Association” in order to protect society from monopoly.

Is it any surprise that now, in the midst of the second Great Depression, attention is being directed once again to the idea that gigantic national and multinational corporations with growing market power are responsible for reducing productivity and crushing low-cost substitutes, thus hurting workers and the poor?

One possibility is to get tough again with antitrust legislations and rulings, and try to restore some semblance of competitive markets. The other is to resist the temptation to turn the clock back to some mythical time of small firms and perfect competition and, instead, through nationalization and worker control, transform the existing firms and allow them to operate in the interest of society as a whole.

P1-BX357_SCARS_9U_20160509114807

More than 7 years into the current recovery and all the talk is about the number of jobs created, the falling unemployment rate, and the prospect that workers’ wages are set to finally increase on a sustained basis. Problem solved!

But what about the 1 in 6 American workers who were let go during the Great Recession, victims of the 40 million layoffs and other involuntary discharges during the official downturn that began in December 2007 and ended in June 2009? Not to mention the fact that nearly 14 million people are still searching for a job or stuck in part-time jobs because they can’t find full-time work.

As the Wall Street Journal reports,

Even for the millions of Americans back at work, the effects of losing a job will linger. . .They will earn less for years to come. They will be less likely to own a home. Many will struggle with psychological problems. Their children will perform worse in school and may earn less in their own jobs. . .

Only about one in four displaced workers gets back to pre-layoff earning levels after five years. . .A pay gap persists, even decades later, between workers who experienced a period of unemployment and similar workers who avoided a layoff. Estimates vary, but by one analysis, people who lost a job during recessions made 15% to 20% less than their nondisplaced peers after 10 to 20 years.

And that’s just the tip of the iceberg. Workers who lost their incomes or received lower incomes if and when they found a new job have found it difficult to save and make purchases (and, in many cases, had to dip into what savings they had), own a home, send their children to college, and pay for healthcare.

Losing a job, of course, has more than just financial consequences for workers and their families.

Unemployment often is an isolating experience. A layoff can strip people of their identity as workers in a chosen field and their workplace-based social network of co-workers and other contacts. Researchers have linked job loss to stress, depression and feelings of distrust, anxiety and shame.

Alarming trends that emerged after the end of the 1990s economic boom may have been amplified by the latest recession. The death rate for middle-aged whites has been rising as a result of suicides, substance abuse and liver diseases, all potentially products of economic distress, according to research by economists Anne Case and Angus Deaton.

Data spanning the recession years show a link between high unemployment and increased abuse of painkillers and hallucinogens. The U.S. suicide rate climbed 24% between 1999 and 2014, a rise that accelerated after 2006, according to the Centers for Disease Control and Prevention. One study of Pennsylvania men who lost long-held jobs during the early 1980s found a spike in mortality following a layoff, with middle-aged men set to lose a year to 18 months off their lifespans.

Researchers have found that the children of people who lose their jobs perform worse on school tests and are more likely to repeat a grade. A father’s layoff is linked with a substantially higher likelihood of anxiety and depression in his children. In one study, the sons of men who were displaced from their jobs earned salaries that were 9% lower compared with otherwise similar children whose fathers had stayed employed.

And the list goes on.

What no one in charge seems to want to talk about is the fact that the economic trauma of the Second Great Depression “has left financial and psychic scars on many Americans, and that those marks are likely to endure for decades”—thus scarring not just millions of individuals and their families, but all of American society.

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Arthur Rothstein, “Resettlement Officials” (Maryland, 1935)

Bill McDowell is an American photographer and curator. For his series Ground, he chose images from the 175,000 commissioned by the U.S. Farm Security Administration in the 1930s and 40s—and was especially drawn to those Roy Stryker damaged with a hole punch to prevent their being used again.

McDowell compares the punched hole to “a portal [that] connects us to post-Depression America” in the wake of the 2007-08 global financial crash.

casselman-marchjobs2016-1 casselman-marchjobs2016-3

The new jobs report is out and, pretty much as expected, a bunch of new jobs (242,000, to be exact) were created in February and the official unemployment rate remained the same (at 4.9 percent). But workers’ wages actually declined.

What’s going on?

What’s going on is a key feature of capitalism: the reserve army of labor.

As Ben Casselman explains,

There is one downside to a growing labor force: If more people start looking for work there will be more competition for available jobs, holding down wages. Average hourly earnings fell by three cents in February, and the year-over-year rate of growth dropped to 2.2 percent, the slowest pace since last summer.

The fact is, the Second Great Depression created a large pool of potential workers who haven’t formally been part of the labor force but who would be willing to work—to take a job or search for a job—under the right circumstances. In the meantime, while they’re not part of the official labor force, these people do lots of things: they work at home, they work with and for their friends and neighbors, and they engage in a variety of other activities (both legal and illegal). They form part of capitalism’s relative surplus population.

Their existence—as potential members of the official labor force, first-time members of the labor force, or as reentrants to the labor force—puts downward pressure on all workers’ wages.

That’s how the reserve army of labor works: even as the labor force participation rate rises, workers’ wages continue to stagnate and their employers’ profits continue to grow.

distress

The gap between the richest and poorest American communities has widened during the current recovery.

From 2010 to 2013, for example, employment in the most prosperous neighborhoods in the United States jumped by more than a fifth, according to the group’s analysis of Census Bureau data. But in bottom-ranked neighborhoods, the number of jobs fell sharply: One in 10 businesses closed down.

“It’s almost like you are looking at two different countries,” said Steve Glickman, executive director of the Economic Innovation Group, which created a new tool called the Distressed Communities Index.

Chicago

And while Chicago doesn’t figure among the ten most distressed cities, large areas of the city (colored in dark red in the map above) figure high on the economic distress index—with large percentages of adults without a high-school degree, high poverty rates, large percentages of adults not working, high housing vacancy rates, low median income compared to the state’s average, negative changes in employment, and a loss of businesses.

In other words, while some communities have indeed experience some kind of recovery, many other areas remain mired in a Second Great Depression.

 

Reuters

The members of the political establishment in the United States seem surprised by the astounding success of Bernie Sanders’s campaign. Reuters even has the democratic socialist now leading by more than 6 percentage points.

As it turns out, the political establishment in the United Kingdom has had a similar problem: they don’t understand how Jeremy Corbyn has come to lead the Labor Party.

Simon Wren-Lewis argues that the Left’s success on both sides of the Atlantic really shouldn’t be a surprise. That’s because of the growing importance of the financial sector, which has fueled obscene levels of inequality and created the conditions for the Second Great Depression.

The establishment on the centre left often seems too timid or ignorant to talk about the power of the financial sector, and is therefore unwilling to challenge it. Many ordinary people who support the left in the UK and US do have some understanding of what has gone on. It should therefore not be surprising that they have moved away from established leaders towards those – like Corbyn and Sanders – who are willing to talk more openly about the power of the financial sector and inequality.

Why were politicians and the media so surprised by this success? I think it tells us how insular the Westminster and Washington bubbles really are. Political commentators talk to politicians who talk to political commentators. It tells us how embedded the influence of the City and Wall Street is. The media relies on economists from the financial sector, and so tends to see the economy from their perspective.

The blind spot is mostly to the left, because we have the Daily Mail and Fox News. As a result, it came as a complete surprise that a crisis caused by the financial sector that left that sector unscathed but instead led to a diminished role for the state, might make many people rather angry.

Surprised? Don’t be.

 

Lamppost+project+manager

Brad DeLong [ht: ja] has finally admitted he was wrong—just like the drunk man searching for his keys under the streetlight.

Back before 2008, I used to teach my students that during a disturbance in the business cycle, we’d be 40 percent of the way back to normal in a year. The long-run trend of economic growth, I would say, was barely affected by short-run business cycle disturbances. There would always be short-run bubbles and panics and inflations and recessions. They would press production and employment away from its long-run trend — perhaps by as much as 5 percent. But they would be transitory.

After the shock hit, the economy would rapidly head back to normal. The equilibrium-restoring logic and magic of supply and demand would push the economy to close two-fifths of the gap to normal each year. After four years, only a seventh of the peak disturbance would remain.

In the aftermath of 2008, Stiglitz was indeed one of those warning that I and economists like me were wrong. Without extraordinary, sustained and aggressive policies to rebalance the economy, he said, we would never get back to what before 2008 we had thought was normal.

I was wrong. He was right.

Finally, in a moment of apparent sobriety, DeLong has recognized the Second Great Depression.

But then DeLong goes back under his streetlight, arguing that the problems we face are ideological and political, not economic—as if capitalism has played no role in creating the conditions for this, the “longest depression.”