Say’s Law and the Permanent Recession by Robert Blumen

In “Say’s Law and the Permanent Recession“, Robert Blumen explains his belief that the current recession started in 2000, not 2008. He is not the first to make this claim. He does provide a very detailed argument to show that there has been no real economic growth in the US since 2000 and then explains why.

A Martian economist arriving on earth would have to admit the following: the US economy has experienced zero real growth since 2000. This is what I call the permanent recession. Permanent, because, unlike past downturns – there will be no recovery.

It is my view that we have been in a recession since 2000, that the economy has not recovered, and will not recover. I will first provide some supporting evidence that the economy is in a recession, and then explain why.

John Williams, an economic statistician and the proprietor of the web site Shadowstats, has produced a version of the real GDP based on the government’s nominal GDP deflated by his own GDP deflator. (The GDP deflator is sort of like the CPI, a price index that is used to convert nominal GDP into real GDP. For some reason they don’t use the same price index for both consumer prices and for this). Like Williams’ own CPI, his GDP deflator is computed with older rules from before the time when the BLS began cooking the books to hide inflation. Williams’ measure of real GDP shows low to negative growth over the period since 2000.

Another way of measuring the economy is through the capital stock. The US economy requires about a trillion dollars per year of gross investment just to replace capital consumption. Higgs has written that real net private investment for 2012 was at an indexed level of 60 compared to a baseline of 100 for 2007. Corporate America is sitting on huge piles of cash rather than investing it. American non-financial corporations hold more cash than they have for 50 years.

Many measures of labor markets show zero to negative wage growth. While this is to some extent due to problems in labor markets themselves, a shrinking capital stock should show up as lower wages. Look at the labor force participation rate: it is now at the lowest level in decades and is plummeting rapidly. Also check out the trend in median household income. Analyst Jeff Peshut at RealForecasts publishes some similar graphs showing the negative trends in the volume of employment in labor markets.

Anecdotally, the media frequently reports that new college graduates cannot find career path entry level jobs, so they are forced to enter the labor force on a low wage track doing relatively unskilled work.

Another way of looking at the size of the economy is through the rate of time preference. Higher time preference means less saving, less investment, and less capital accumulation. But how do we measure it? Interest rates and yields generally of all kinds of assets, both financial and corporate balance sheets, are a measure of this.

Profit margins reflecting internal yields on US corporate assets have increased in the last few years. According to what Andrew Smithers disparagingly refers to as “stock broker economics”, high rates of profit are good for stocks. The Austrian economist Jesús Huerta de Soto makes an under-appreciated point about profit margins and stock prices. Pervasively high or increasing rates of profit may show that the rate of time preference is increasing, implying that the capital stock is shrinking. If not time preference, then the perception of risk may be increasing, which would have a similar depressing effect on investment.

The entire article can be read here.

Blumen’s use of the word “permanent” is unclear. I believe that he is emphasizing that the current economic malaise may last for much longer than anyone thinks, rather that a complete collapse that requires a reset.

This entry was posted in Political_Economy and tagged , , . Bookmark the permalink.