Posts Tagged ‘uncertainty’


I’ve been listening to and reading lots of financial pundits over the course of the past week—all of whom use the same lingo (the U.S. economy as the “cleanest shirt in the hamper,” the “deterioration in risk appetite” around the globe, and so on) and try to explain the volatility of the stock markets in terms of economic “fundamentals” (like the slowing of the Chinese economy, the prospect of deflation in Europe, and so on).

Me, I’m much more inclined to think of terms of uncertainty, unknowability, and “shit happens.”

Let’s face it: stock markets are speculative markets, in the sense that individual and institutional investors are always speculating (with the aid of computer programs) about how others view the market in order to make their bets—with fundamental uncertainty, unknowability, and the idea that shit happens. That is, they have hunches, and they have no idea if their hunches are correct until others respond—with the same amount of uncertainty, unknowability, and the idea that shit happens. And then all of them make up stories (using the lingo of the day and often referring to changes in the “fundamentals”) after the fact, to justify whatever actions they took and their advice to others.

That’s pretty much the view outlined by Robert Shiller. It’s all about stories characterized by uncertainty, unknowability, and shit happens.

In general, bubbles appear to be associated with half-baked popular stories that inspire investor optimism, stories that can neither be proved nor disproved. . .

the proliferation of such stories is a natural part of economic equilibrium. Successful people who value their careers rely on an instinctive sense for what pitch will sell. Who knows what the truth is, anyway?

As time goes on, the stories justifying investor optimism become increasingly shopworn and criticized, and people find themselves doubting them more and more. Even though people are asking themselves if prices are too high, they are slow to take action to sell. When prices make a sudden drop, as they did in recent days, people tend to become fearful, even if there is a subsequent rebound. With the drop they suddenly realize that their views might be shared by other people, and start looking for information that might confirm their belief. Some are driven to sell immediately. Others are slower, but they are all similarly motivated. The result is an irregular but large stock market decline over a year or more. . .

It is entirely plausible that the shaking of investor complacency in recent days will, despite intermittent rebounds, take the market down significantly and within a year or two restore CAPE ratios to historical averages. This would put the S. & P. closer to 1,300 from around 1,900 on Wednesday, and the Dow at 11,000 from around 16,000. They could also fall further; the historical average is not a floor.

Or maybe this could be another 1998. We have no statistical proof. We are in a rare and anxious “just don’t know” situation, where the stock market is inherently risky because of unstable investor psychology.

I would only add one correction: we always “just don’t know”—not just in anxious situations of volatility (such as during the past week), but also in more stable periods. In fact, we don’t even know if we’re in a volatile or stable period (until a new story becomes the common sense that what we’ve been through was volatile or stable) and we certainly don’t know how a stable situation becomes volatile (and vice versa).

Really, all we can say, when it comes to bubbles, is: shit happens.


Until recently, we were certain what would happen with an increase in the minimum wage—and that would be the reason to oppose any and all such attempts. Now, it’s a guessing game—and that uncertainty about its possible effects has become reason enough to oppose increasing the minimum wage.

What the hell is going on?


First, the certainty: neoclassical economists confidently asserted that the minimum wage caused unemployment (because it meant, at a wage above the equilibrium wage, the quantity supplied of labor would be created than the quantity demanded). Therefore, any increase in the minimum wage would cause more unemployment and, despite the best intentions of people who wanted to raise the minimum wage, it would actually hurt the poor, since many would lose their jobs.

But, of course, theoretically, the neoclassical labor-market model was missing all kinds of other effects, from wage efficiencies (e.g., higher wages might reduce labor turnover and increase productivity) to market spillovers (e.g., higher wages might lead to more spending, which would in turn increase the demand for labor). If you take those into account, the effects of increasing the minimum wage became more uncertain: it might or might not lead to some workers losing their jobs but those same workers might get jobs elsewhere as economic activity picked up precisely because workers who kept their jobs might be more productive and spend more of their higher earnings.

And that’s precisely what the new empirical studies have concluded: some have find a little less employment, others a bit more employment. In the end, the employment effects are pretty much a wash—and workers are receiving higher wages.

But that’s mostly for small increases in the minimum wage. What if the increase were larger—say, from $7.25 to $10, $12, or $15 an hour?

Well, we just don’t know. All we can do is guess what the effects might be at the local, state, or national level. But conservatives (like David Brooks, big surprise!) are seizing on that uncertainty to oppose increasing the minimum wage.

And that’s what I find interesting: uncertainty, which was at one time (e.g., for conservatives like economist Frank Knight) the spur to action, is now taken to be the reason for inaction. And those who oppose increasing the minimum wage are now choosing the certainty of further misery for minimum-wage workers over the uncertainty of attempting to improve their lot.


They want less of a guessing game?

Then, let’s make the effects of raising the minimum wage more certain. Why not increase government expenditures in areas where raising the minimum wage represents a dramatic increase for workers? Or mandate that employers can’t fire any of the low-wage workers once the minimum wage is increased? Or, if an employer chooses to close an enterprise rather than pay workers more, hand the enterprise over to the workers themselves? Any or all of those measures would increase the certainty of seeing positive effects for the working poor of raising the minimum wage.

But then we’re talking about a different game—of capital versus labor, of profits versus wages. And we know, with a high degree of certainty, the choices neoclassical economists and conservative pundits make in that game.


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Not only are average incomes (as measured by either real median household income or real average incomes of the bottom 90 percent) in the United States falling. Economic insecurity has shown an upward trend.

One way to see this growth in economic insecurity is with the Economic Security Index, which measures the share of Americans who experience a major drop (say, 25 percent) in their available family income and who lack an adequate safety net.

Another way is via the U.S. Financial Diaries, a study in which researchers collected detailed financial data from more than 200 low- and moderate-income U.S. households over the course of a year. One of their research notes, “Spikes and Dips: How Income Uncertainty Affects Households,” provides a glimpse of how the current U.S. economy creates considerable financial insecurity for many Americans.


The Taylors (not their real names) are one example of the uncertainty and insecurity American workers increasingly face:

The Taylors experience a great deal of variability and uncertainty in their incomes. Molly and Dustin Taylor are a Northern Kentucky couple in their mid-30s with a seven-year-old daughter, Caitlin, and an 11-year-old foster son, Jesse. Dustin works odd jobs and scraps metal and electronics for cash; health problems make it difficult for him to work a steady job. Molly works in the cafeteria at a local elementary school; she earns a relatively consistent amount during the school year, but she does not earn income over the summer. The family receives food stamps and SSI benefits because of Caitlin, who has cerebral palsy. They receive regular financial help from Dustin’s mom, including free rent and utilities in a home that she owns. Molly and Dustin also share resources, including funds from food stamps and SSI, with family and friends: for example, Molly occasionally gives the EBT card on which the family receives food stamps to her parents to take to the grocery store, with the understanding that they will later pay her back in cash.

The Taylors’ total monthly income varies within a wide range – from as little as $1,390 to as much as $4,560 per month. Molly’s wages from her hourly job provide a baseline income that is relatively consistent at $1,000-1,400/month (beginning in November 2012…). Additional income comes from SSI and food stamps, which generally bring in around $800/month. Dustin’s occasional earnings, resources received from family and friends, and bingo and lottery winnings regularly feature in the family’s income statement, in varying amounts. For the Taylors. . .every month is different when it comes to income.

Although the Taylors manage to cover expenses each month, they are living precariously. Food stamps and disability payments are a crucial component of their budget, but when Molly can’t get to the benefits office for her monthly appointment to get recertified – which happened one month when the family car broke down and they couldn’t afford to fix it right away – funds can arrive later than expected. The Taylors are heavily dependent on Dustin’s mother for resources, including rent and utilities as well as things like school supplies, and they also rely on Molly’s parents and other family members, with whom they have an ongoing exchange of food stamps via sharing of benefits debit cards.

The need for multiple jobs and multiple sources of pay and benefits (both financial and in-kind), with widely fluctuating incomes and difficult decisions about what things they can buy and which bills they can pay—unfortunately, that’s the kind of uncertain, precarious existence the U.S. economy currently imposes on a growing number of American workers.


Gar Alperovitz puts forward a vision of economic and political change that embraces both uncertainty (mistakes will be made and new ideas will emerge) and radical transformation (new forms of economic and political democracy will be created in the process).

Lambert Strether offers some background to the cooperative institutions Alperovitz mentions in his talk.


Wednesday’s story about the Hydronic Lift, the Italian company that closed its doors while workers were on vacation, forces us to ask the following question: whose uncertainty are we talking about?

In recent years, neoclassical economists and right-wing politicians have focused exclusive attention on employers’ uncertainty in the face of changes in taxes and government regulations. Their idea is, the economic recovery is being held back by the high degree of uncertainty on the part of the nation’s “job-creators.”*

But what about workers’ uncertainty? In Italy, they don’t know if, when they go on vacation, their jobs will be available when they return. In the United States, workers don’t know if their incentive pay will be reduced or, more generally, if benefits will be cut, their wages reduced, their jobs eliminated, or their hours cut back.

Workers’ uncertainty is, of course, nothing new. It begins the moment their ability to work becomes a commodity. As Eric Hobsbawm wrote, during the Age of Capital (p. 258),

If any single factor dominated the lives of nineteenth-century workers it was insecurity. They did not know at the beginning of the week how much they would bring home at the end. They did not know how long their present work would last or, if they lost it, when they would get another job or under what conditions. They did not know when accident or sickness would hit them, and though they knew that some time in middle age—perhaps in the forties for un-skilled laborers, perhaps in the fifties for the more skilled—they would become incapable of doing a full measure of adult physical labour, they did not know what would happen to them between then and death. Theirs was not the insecurity of peasants, at the mercy of periodic—and to be honest, often more murderous—catastrophes such as drought and famine, but capable of predicting with some accuracy how a poor man or woman would spend most days of their lives from birth to graveyard. It was a more profound unpredictability, in spite of the fact that probably a good proportion of workers were employed for long periods of their lives for a single employer. There was no certainty of work even for the most skilled: during the slump of 1857-58 the number of workers in the Berlin engineering industry fell by almost a third. There was nothing that corresponds to modern social security, except charity and relief from actual destitution, and sometimes little of either.

And now, of course, those economists and politicians who are most concerned about employers’ uncertainty want to dismantle the same “modern social security” that has mitigated at least some of the “profound unpredictability” faced by those who are forced to have the freedom to sell their ability to work.

*What they’ve done, of course, is take a fundamentally Keynesian proposition—that investors cannot know what is going to happen in the future, and therefore make rational calculations about expected profitability, which makes investment demand unstable—and transform it into the idea that the government is to blame for the Second Great Depression.


As if on cue, one reader [th: db] directed me to a blog post about the current depression in Harlan County.

While many working Americans enjoyed a paid day off from work Monday, Labor Day meant nothing to many residents in Eastern Kentucky, where the coal industry is shrinking. Harlan County had the state’s highest unemployment rate in July, 17.2 percent. The national average was 7.4 percent. In Harlan County, where 29,000 people live, 1,906 were out of work and actively seeking employment, but there are hundreds more who are unemployed but have exhausted their jobless benefits, says an editorial in the Harlan Daily Enterprise.

“As a result, it is well documented that our entire community — whether you are working in mining, health care, education, private business or any other occupation — is suffering,” the editorial says. “It goes without saying that many are frustrated. Miners who have worked long, hard years have no prospects for jobs at this time. Many of these same miners have, or will soon, exhaust their unemployment compensation benefits. We shudder when thinking of what is next for them and their families. The support industries are seeing the same scenario.”


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