*The Age of Oversupply*

by on September 27, 2013 at 7:30 am in Books, Economics | Permalink

That is Daniel Alpert’s book and the subtitle is Overcoming the Greatest Challenge to the Global Economy.  I found this a fun and interesting read and I agreed with more of it than I thought I would.  I’ve stressed numerous times that some of the dilemmas of our current day can be understood through nineteenth century parallels and also through the writings of the classical economists.  So why not pull Thomas Chalmers and Malthus out of the closet and worry about a general glut of goods and services, juxtaposed with Bernanke’s global savings glut, and a dash of MMT at the end for good measure?  The more the merrier, I say.

Here is one representative overview passage from the book:

The supply of global labor and capital is too great, and demand too weak, for them to resume proper functioning without proper assistance.  This imbalance has been going on for years and nobody seems to know what to do about it.  Private markets haven’t solved the problem, not because they are inherently dysfunctional, but because the sheer magnitude of changes in the global economy, thanks to the fall of the Bamboo and Iron curtains, has created challenges too big for private markets, acting alone, to reasonably address.

I like the integration of the international dimension, but I do have some worries:

1. The book too often lapses out of its international context and falls into standard Keynesianism.  I don’t mean to prejudge against that approach, but we’re already pretty familiar with it and it doesn’t justify another book to spell it out.  The author should have spent more time in the nineteenth century, in China, or both.

2. Good infrastructure selection, as the author proposes, could boost growth but it won’t undo any general glut that might exist and it won’t help current unemployment a lot.  Those are not the workers who would end up being hired to build the new projects.  Rather than closing the book with policy prescriptions (always a downer in a trade book), the author should have spelt out a vision for where all this is likely headed.  In any case, we’re unlikely to spend another $1.2 trillion on infrastructure over the next five years, so what happens then?  Can we depreciate our capital stock back into a more dynamic recovery?

3. Even when I agree with Alpert, I don’t think “oversupply” is what he is pinpointing.  Like Krugman’s recent flirtation with demand-side secular stagnation theories, it is an embarrassment for these views that current nominal gdp is considerably higher — more than ten percent — than its pre-crash peak.  The price level is higher too.  On p.135 Alpert recognizes this problem and even mentions that his own theory may have predicted as much as six percent deflation, which of course isn’t there.  He doesn’t have a good explanation on this point and yet it is critical to his overall framing (though not to each and every particular argument).

Yes, I know, many wages won’t fall in nominal terms and that limits price deflation.  But it won’t get you the increase in nominal values we have observed, the wage truncation hypothesis has theoretical problems, and also it is failing recent empirical tests.  Arnold Kling considers some recent research on the Phillips curve (pdf) and finds it can’t explain why the rate of inflation remained as high as it did, given the recession we experienced.  Or take a peek at the recent empirical study by Coibion, Gorodnichenko, and Koustas (pdf, interesting on several counts).  They find, to put it bluntly: “Hence, there is no missing wage disinflation puzzle to match the missing price disinflation puzzle.  This strongly suggests that downward wage rigidity is unlikely to be the key factor underlying the missing disinflation of the Great Recession.”  In other words, that whole line of explanation seems to fail and that is going to mean no general glut of goods and services.

Still, I am happy I bought this book.  Bravo for the nineteenth century.

Addendum: Alpert replies by email: “As to the price level and wage rigidity – I imagine we have differing views on what is supporting both.  I believe I make a reasonable argument that easing has kept financial asset value (incl. real estate) from falling, and that wages haven’t fallen because, ex-Japan, the labor oversupply has been absorbed via high levels of underemployment in advanced economies, rather than by wage reductions. Put it all on a per-capita basis and have another look at aggregate wages.  Prices, of course, have fallen in the tradable sectors. And but for rents (incl. owners equiv) (protected by monetary easing), and healthcare and education (guild industries with extensive price interference from third party payor systems), we would not have price stability since the beginning of the great recession.”

1 Dan in Philly September 27, 2013 at 10:23 am

Just look at ancient Rome to see what happens when you have citizens who are fed without having to work. Mob rule, followed by a strongman rule. It was slave labor which allowed the Romans to acheive this state. In the modern world, technology is allowing more and more idle people who want the benefits of the modern world without any effort from them. As this class grows and grows in the coming decades, isn’t the final outcome more or less predictable?

2 uffs September 27, 2013 at 5:56 pm

I am forced to guess that the people you refer to who are fed without having to work are those in FIRE and other government subsidized sectors?

3 JonFraz September 27, 2013 at 8:38 pm

That’s leaving out a lot, and skewing the picture. In reality, Rome’s over-supply of labor– due to a flood of slaves from their early conquests– resulted in a lot of unemployed labor from the countryside moving into the city where they swelled the “Head Count”– the poor who owned no property. To prevent starvation and revolution the government (reluctantly and only after a demagogue tried to make himself king) instituted the grain dole. And a few years later to effect a more permanent solution, the Romans allowed the poor to enlist in the legions– previously you had pay to enlist so the poor were excluded. And in reward for their service their general would be allowed to assign them land in the provinces if they served honorably for their full term– and survived of course. This by the way is why so much of Europe now speaks Latinate languages: because legionnaire veterans were settled all over the western half of the Empire. Unfortunately this created the situation where soldiers tended to be loyal to their generals first and foremost, and rival generals might even go to war against each other. And meanwhile the Roman 1% was doing everything they could, legal and illegal, not even stopping at outright murder to prevent any reforms that might tax their own fortunes. Eventually things blew up to the extent that almost everyone left standing was ready to trust an autocrat instead.

4 Adrian Ratnapala September 29, 2013 at 3:02 am

JonFraz, thank you for knocking the simplistic Roman analogies on the head. And yet I think Roman parallels give clearer comfort to conservatives than progressives. The latter would do well to explain the differences between then and now.

Your observations could be interpreted as (a) redistributive policies worked for a very long time but ultimately erected the very demagogue-kings that they sought to preempt and (b) regardless of imperial rhetoric, moneyed interests were able to capture the machinery of government and lawmaking for their own benefit.

Over the long sweep from (very roughly) Marius to Constantine political power in Rome slipped from a diffuse class of upper-middle class slave owner to an imperial army and bureaucracy from which the rich bought favours and protection.

The uncomfortable thing is that when the Romans committed the sins of conservative Americans, they prospered. And when they committed the sins of progressive Americans, they declined.

5 JonFraz September 29, 2013 at 3:42 pm

The uncomfortable thing is that when the Romans committed the sins of conservative Americans, they prospered. And when they committed the sins of progressive Americans, they declined.

Huh? Rome only committed anything like “the sins of American progressives” very late in its career– when the (official) Christian Church became a vast engine of redistribution. And it’s hard to blame that for the Empire’s fall in the West, or the failure of the East to restore the Empire. The latter is due mainly to a catastrophe of planetary proportions, a volcanic winter of two years duration in 535-36 AD which created famine everywhere, and indirectly led to the Plague of Justinian in 541 which may have killed up to 200 million people. The early medieval period was in many ways a post-holocaustal world. Nothing the Romans did would have saved them from that doom.

6 Dave Barnes September 27, 2013 at 10:32 am

The problem was discussed and solved in the 1950s
http://en.wikipedia.org/wiki/Midas_World

7 Ray Lopez September 28, 2013 at 1:44 am

+1 Robots mugging other robots in Chicago to give the semblance of humanity to those actual humans who have not yet escaped planet Earth (“The Farmer on the Dole” (originally published in Omni in 1982)) There is no Great Stagnation, or, the more things change, the more they stay the same.

8 bob September 27, 2013 at 11:11 am

This touches on the one part of MMT that makes any sense: We have more capital than we know what to do with it. I wonder how much of that change in capital size comes from either fortunes that have no interest in consuming, or with personal retirement funds that balloon in size when people realize that they either delay their consumption, or die in the gutter.

If it’s the second part, then what we have is a permanently elevated supply of capital, but we’ll see a relative increase in demands as the boomers finally start spending their retirement funds, instead of saving.

If instead the issue is that big capitalists have no idea of what to do with their money, things will only get worse.

9 uffs September 27, 2013 at 5:58 pm

It’s a global phenomenon and therefore only the latter explanation fits.

10 mulp September 27, 2013 at 11:17 am

Yet again, an economist doing a lot of handwaving, the production hand, but ignoring the other hand, the consumption hand.

When only one hand is waving, you don’t really get the economy moving to the same beat. You need to wave both hands together so you set the beat by clapping them together.

When capital is getting a larger share of the production, capital needs to consume proportionately more of the production. When labor gets a smaller share of production, labor must consume less of production.

What the author is grappling with is both labor and capital are consuming less, while the productivity of labor and capital is increasing, with all the gains to production going to capital that sees the falling consumption of labor, so it cuts its production efforts while redoubling its efforts to take a larger share of production as its reward for owning the capital.

The labor hand is waving slower and the labor consumption hand is waving slower and clapping out a slower beat. The capital hand of production is waving faster, but the capital consumption hand is waving slower so the beat is slower and erratic.

The only way to get the beat of the economy faster is to increase consumption by both labor and capital so the sum is equal to the full capacity of labor plus capital production.

Economics is zero sum: capital plus labor production must equal capital plus labor consumption.

If consumption is constrained, then production must be constrained.

The biggest problem today is capital is just not consuming enough to match its share of production.

11 Remarkl October 8, 2013 at 8:42 am

“The biggest problem today is capital is just not consuming enough to match its share of production.

It is in the nature of capital not to consume as much as it produces. That’s what makes it capital.

The solution is to redistribute the returns on capital to consumers, who will spend “for” capital. The trick is to keep the carrot and sticks in place while giving money away. Five solutions: (i) free, COMPETITIVE higher education, (ii) earlier and more generous Social Security, and (iii) large subsidies for stay-at-home parents in two-adult households, (iv) increase the tax benefits of charitable giving, and (v) lower the minimum wage but provide a refundable income tax credit to replace it. In short, lower the labor participation rate and make everyone a better customer for the world’s oversupply.

12 Therapsid September 27, 2013 at 11:52 am

“Good infrastructure selection, as the author proposes, could boost growth but it won’t undo any general glut that might exist and it won’t help current unemployment a lot. Those are not the workers who would end up being hired to build the new projects.”

Could you express your contempt of the unemployed in any starker terms? I’m not sure I’m getting how much you look down upon the ZMP masses.

13 Chris September 27, 2013 at 12:10 pm

You say “it is an embarrassment for these views that current nominal gdp is considerably higher — more than ten percent — than its pre-crash peak. The price level is higher too.”

Do we need to account for the fact that policy stimulus (at least monetary policy stimulus) is working very hard? And that stimulus both public and private (ie massive growth in private credit creation) was even more massive in the previous expansion?

So instead of 6% deflation, shouldn’t we instead expect extremely loose monetary policy, low rates, little constraint on government deficits, massive expansion of debt-gdp ratios, asset price inflation and still a downtrend in nominal growth? Isn’t that what we have had?

14 Floccina September 27, 2013 at 2:56 pm

What I think about “The End of Average” is that the deltas are important. That means that unemployment can result if labor saving capital allows some businesses to lay off workers faster than other business can expand to put the newly available labor to work. Their is still plenty of work that if done would improve life. As an example: Their is even some work that is not done for cultural reasons like some high earning women clean their own homes. Some high earning men mow their own lawns.

15 Steve Sailer September 27, 2013 at 3:01 pm

Thank goodness that the problem of oversupply of labor in America will be solved by the Schumer-Rubio bill.

Oh, wait … never mind.

16 Noah Yetter September 27, 2013 at 7:03 pm

“…wages haven’t fallen because, ex-Japan, the labor oversupply has been absorbed via high levels of underemployment in advanced economies, rather than by wage reductions.”

Soooo…. wages haven’t fallen because wages haven’t fallen?

17 Boonton September 28, 2013 at 7:40 am

I’m unclear how you can have an ‘oversupply’ of labor or ‘shortage’ of demand? Print money, give it away to random people. Tada more demand. Problem solved.

18 Remarkl October 8, 2013 at 8:51 am

“Print money, give it away to random people.”

Why would they have to be “random”? How about old people? (Medicare is the Great Gray Hope.) Deserving students? Parents with working spouses and young children? Recently returned military vets?

You were so close…

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