Another Amazingly Bad Article On The Economy In The Atlantic

I’ve drifted back to reading the Atlantic (thinks in large part to the great coverage of my son’s platoon in Arghandab), and find it – OK. There’s good stuff, and then there’s Sully. I ought to feel kinship with him – neither one of us fits into a neat partisan slot – but mostly just shake my head when I read stuff by him (note – for a great counterpoint re Palin from a progressive feminist, read this).

But I digress. The point of this post is to share my – pretty hostile – reaction to a column by Derek Thompson on why we’re having a jobless recovery.

Thompson suggest three reasons why companies are fast to fire and three why they are slow to hire.


1. Weak Unions
2. Executive compensation
3. The nature [magnitude, I think he means] of the recession


1. Firms expect a slow recovery
2. Blame the modern world [globalization]
3. The nature of the recession and the stimulus

Let’s go through them.

Weak Unions. Yes, highly-unionized industry tends to keep workers beyond where it’s economically sensible because they have to. But – in a recession like this one, what we would have wound up with are a bunch of bankrupt companies as sales collapsed because the consumers closed their wallets. There’s a counterclaim, which is that had fewer people been laid off, the wallets might have stayed a bit more open, but that’s countered by the wealth effect of collapsing home prices and the near-death of the non-public works construction industry. So no, I don’t think we would have been better off this cycle in a counterfactual world where industrial unions were still strong.

Executive compensation. Executive behavior is clearly an immense driver for the bad decisions that many companies made. But the reality is that it’s not (as much) executive’s desire to juice their equity packages and compensation as the fact that executives who didn’t manage quarterly stock prices get fired. It’s the investors, stupid. We’ve built a hair-trigger investment community that trades more than it invests. And for any public company – or nonpublic company where there is investor control – the holders of the reins (who, amusingly include fund managers investing pensioners money) are going to make executives perform in the short run or can them. This is the worst of his misjudgments, in my view, because it leads to the most misguided prescriptions. It’s not aligning executive pay in the long run that will change things, but changing the investment rules so that investors are there predominantly for the medium and long term that will have an impact.

The nature of the recession. Well, yeah, this is a big recession. But other recessions just as big from a GDP perspective were already hiring back (see the charts in his article) – so if the question on the table is “where are the jobs” this is kind of a useless point.

Firms expect a slow recovery. Well, firms expect a slow recovery and are uncertain about what that recovery will look like. (see below)

This is a nub of the issue (see my post below) and the hard reality is that our decline to the norm isn’t going to be universal, it’s going to be targeted as individual sectors of our economy suddenly have to face global competition – at a far lower cost. The image I have in my head is of our economy as a glacier calving off giant slabs of jobs and businesses. People in those slabs are in bad trouble – their old jobs aren’t coming back and neither are their skills going to be very valuable. They’re going to melt into the global ocean of labor.

The nature of the recession and the stimulus. Here we get into meaty territory. We made the decision to bail out the financial sector and got essentially nothing for it (yes, we may get most of our money back, but because it happened so quickly, and was done in such a slapdash manner (and if you don’t believe my assertion, read “House of Cards: A Tale of Hubris and Wretched Excess on Wall Street“) that no meaningful extractions – in terms of improving the impact that the financial sector has on the rest of the economy – happened. We saved them, and instead of demanding as a part of the rescue that they go to rehab and straighten up, we handed them a bottle of Oban and the keys to the economy – again. Those decisions by our policymakers were made, in large part, because of the incestuous nature of the policy, political, and financial leadership of the country (see this) ; Ortzag knew where his next job would be – even if he didn’t know what logo would be on the card – and even if there was no conscious backscratching, no one with an outside perspective who might have asked “why?” was at the table.

At some point, our political class needs to cough that person up, and sit them down with the political and financial elites, and let them ask some hard questions. Our journals of public ideology – like The Atlantic – ought to leading that charge. Maybe someday they will.

Update: added link to story about a specific example of DC’s revolving door

6 thoughts on “Another Amazingly Bad Article On The Economy In The Atlantic”

  1. Interesting article, I suppose we should thank you for reading the Atlantic so that the rest of us don’t have to ;). Seriously, I always appreciate reading your perspective on these issues even though we’re about as far apart in worldviews as we are geographically ;)

    I did have one question though regarding this:

    It’s not aligning executive pay in the long run that will change things, but changing the investment rules so that investors are there predominantly for the medium and long term that will have an impact.

    I’m not sure what “investment rules” you’re referring to or what you propose to change. I could see something along the lines of lengthening the period (I think it’s a year but I might be mistaken) at which a capital gains is considered “long-term” so long as we reduce (or eliminate) the tax rate to compensate investors for their increased risk. Did you have something else in mind?

  2. Mark me down as curious for what you had in mind there as well.

    Just tax changes (and would that make a sufficient dent considering the global stage)? Or are we looking at some sort of artificial velocity limiter? I’ve heard proposals of adding these to the exchanges before, but primarily as extremely short term brakes intended to prevent the more hilarious side effects of automated trading systems.

  3. A.L. I was going to post on your earlier article about the economy but decided I didn’t have anything useful to say. But, I think I might have something on this one.

    Your point about executive pay, and investment incentives at public corporations really only effects that portion of workforce employed at public corporations (yes I grant the secondary ripple effects). Last time I checked the majority of the workforce is employed by non-public companies.

    I have been a manager in a non-public company and I currently work in the IT sector as an independent contractor and formerly worked at a Fortune 500 firm.

    Hiring managers make a pretty simple calculation when they consider hiring some one.

    1) Do I really need to hire someone? If not, I won’t, because hiring someone is a risk and definitely will be a cost . A single bad employee can ruin a million dollar piece of equipment or alienate my best customer. Once I hire someone, it is difficult to fire them if business does not stay robust. So the benefit may go away while I still have the cost. So the Atlantic article is dead wrong to say “weak unions” are to blame. Unions make it more expensive to hire people both in terms of salary but more importantly through work rules. You want to make it easier to hire people, make it less expensive to hire them and easier to fire them.

    2) Will this potential employee create more value for the company than they cost? Cost includes salary, taxes, benefits, training, office space, administrative overhead and some portion of the risk described above. Recent laws and proposed laws have made it more expensive to hire someone and way more difficult to calculate the real cost/benefits. For instance, if I am one of the 65k businesses potentially effected by the proposed tax increase on those earning more than 250k (which will be up for consideration again in two years, I think) then the marginal benefit of any new revenue that a new employee might bring to my business potentially goes way down. Plus, I don’t know for sure what the cost of the new healthcare regulations will be except that they will be higher than they are now. In my particular case the part of the healthcare law requiring a company to file a 1099 for almost any vendor has basically eliminated the ability of anyone to hire me as a contractor for a short period of time. This last summer I worked for someone for a week and all they have to do is write me a check. Now for that same 1 week job, they have to fill out a 1099. Won’t happen.

    I realize there all sorts of macro things going on such as cost and availability of capital, globalization of the marketplace, trade balances and so on. But the net effect of the current trend in laws makes it more expensive and more risky to hire someone. Potential employers react by delaying hiring (overtime is cheaper than a new employee), demanding higher qualifications (education levels, employment history, drug testing, background checks – to reduce risks), and lower costs (if admin and benefit costs go up, take home salary goes down or stay stagnant). BTW one benefit of offshoring is the ability to rapidly add and reduce workforce as conditions demand and when working through a big vendor you are sharing some of the risk. If their employee causes problems you can look to get some compensation from them. Cost per se is only part of it.

  4. Thorley, Treefrog – I need to spend some time doing research to say anything remotely smart, but I’d say there are four leverage points –

    1) Accounting standards – how do we treat options granted and investments help for a short vs. long term. It might be interesting to have a more rigorous “mark to market” standard for securities held for less than two years.

    2) Managing leverage. Require greater capital for portfolios with a churn over a certain threshold, and where the debt is below a certain maturity. Medium-term positions financed with short-term debt are a big part of what screwed the big banks.

    3) Tax policy. I think that racheting taxes up on short-term trading as well as short-term compensation would be a good thing to so.

    That’s my off-the-wall thinking…let me do a little homework and see if it makes any sense at all.

    The goal is to slow down the cycle somewhat, and to make sure that people who are playing aggressively are doing it with capital, not debt.


  5. Marc, I have to confess that it is possible I don’t understand the arguments in the link well enough to make good comments. I basically understand things like supply side and demand side policies but I am not familiar with the exact definitions of some things mentioned in the various linked articles and so I might get some things wrong. But the resulting conversations and corrections might be useful to some readers.

    To begin with, the intent of my original comment was pretty limited. I wanted people to understand how actual hiring managers make actual hiring decisions. The thought process I laid out was one that my company used during a time it expanded from around 50 employees to nearly 300 in less than two years. So I think that, as far as it goes, it is valid, regardless of the macro-economic conditions.

    I know from my experience that if you raise the cost of hiring a worker, increase the risk of hiring a worker, and make the resulting out put of the worker less profitable; fewer workers will be hired than otherwise would be hired, if all other factors remain the same. And I will add we have increased the amount of money we pay people not to work. I didn’t see anything in the linked articles to change my mind.

    As for the points raised in the chain of linked posts and articles, I think that the measurements being used don’t capture all of the things happening in the economy and have to be used more carefully by both sides when drawing conclusions.

    So just to take one point. The whole Zero Marginal Product business, which begins with noticing that productivity has gone up recently while employment has remained low. Tyler Cowen’s conclusion is that companies laid off their least productive workers and that those who are unemployed have ZMP. Krugman seems to be saying that employment growth always lags productivity growth and that since unemployment is down in all demographics Cowen is wrong and supply-sider’s mothers dress them funny. Yglesias says geographic discrepancies in the unemployment numbers are too great to support Cowen’s conclusions. Otherwise everyone in Las Vegas would move to Washington D.C.

    As is brought out in the comments there are a number of problems with all of this. Now here is where my lack of knowledge may get me in trouble. I don’t know the exact definition of ZMP. I don’t know whether it is a relative measurement whereby raising costs of the worker can cause his marginal productivity to decline or whether it is absolute and simply measures the workers out-put. It also seems that he is using what I take to be a context sensitive measure: productivity; interchangeably with a measurement: skill or worth, which is inherent in an individual. But I could be wrong.

    With those caveats, it seems to me that Cowen is missing some important things. First, in many cases companies do not take individual productivity into consideration when laying workers off. In some cases layoffs are made according to seniority. In the case of large companies, equal opportunity concerns are part of the calculations. In other cases the workers are productive in both absolute and relative terms until there is a merger or divestiture, then some portion of them become redundant. In still other cases the company has to hit a number and they just start with the highest paid employee in the division and work their way down the line until they hit the goal. Or they just close down the plant or division. Second, the output of the workers laid off or not hired may not show up, at least immediately, in the productivity measurements even though it is real, and will show up eventually when quality declines, regulatory violations occur, accidents happen or machines (or software) break down, or customer service declines. As those things happen, profits or productivity then measurably declines. Finally, when the government intervenes to shut down oil drilling in the Gulf of Mexico, cuts off irrigation for farmers in Washington state, bans logging in an area, or in a similar fashion an oil spill drives all the tourists from an area; I don’t know how that is treated by the ZMP calculation but it certainly does not mean the individual workers were “less productive”.

    That being said, it seems to me that people of working age who are not working either can not, or will not, do something that other people find useful, necessary or amusing; at price others are willing to pay.

    This is where I think Krugman is wrong. He says that if Cowen is correct then companies would simply lower their pay to a point where people are indifferent to whether they work or not, and he knows they are not. I can tell you that companies in my field have lowered their pay. I am a contractor and talk to other contractors and know that many of my friends are being paid a lot less for the same work by the same companies than they were three years ago. Companies are also shifting work to “low cost geographies” both within the United States and abroad. The local newspaper in my town has cut the pay of its employees and raised the cost of benefits.

    Contrary to Krugman, I also know people who choose not to work for those lower fees. They might not be indifferent but they do choose not to work. Some have severance packages, some make do on a combination of unemployment benefits and one working spouse, some work off the books, some take retirement or disability and so on. I don’t think we do a real good job of measuring those things. The closest measurement I have heard is “discouraged workers” and I don’t think that is wholly accurate. I think a lot of people simply look at the choices available to them and choose to do something that is not considered employment even though it may have economic value to them or their family. A friend of mine gave up her job as a lawyer to stay at home raise her children. I chose to be a contractor and I am often not working. I am not sure what statistic my or her activity or lack thereof is captured by, but I am not discouraged, I am pretty darn happy.

    I think Krugman is right that employment is a lagging indicator but this chart:
    seems to indicate that it is lagging much more in this recovery than in past recessions except for The Depression. He seems to be saying that simply lowering interest rates to zero will not have much effect in increasing demand. I haven’t read enough of him to know what he thinks of other demand side remedies and I don’t understand his hostility to supply side remedies.

    My critique of Cowen sort of puts me on the same side of the debate as Yglesias but I think he is wrong about geographic immobility. I am from Pittsburgh. Every week when you watch the Steelers play an out of town game you will see huge numbers of Pittsburgh fans in the stadium. Most of those people were born in Pittsburgh and live near where the game is being played. They moved because there wasn’t any work in Pittsburgh after the collapse of the steel and coal industry. I joined the Army, my sister moved to Texas and my brother moved to Cleveland of all places. Two of my best high school friends moved to the D.C. area and one moved California. Another of my friends worked in Baltimore and Philly before moving home. The same is true of the families of my high school buddies. Most or all of their siblings moved out of Pittsburgh. I know that people move for economic reasons.

    Yglesais illustrates his point by asking why people don’t just move out of Las Vegas for D.C. Now, if you ever try to drive in D.C. from 3:30 to 7:30 PM on Fridays you know that a lot of people have moved to D.C. and the surrounding areas. I personally know several people who moved from Pittsburgh to D.C. and a couple who commuted from Pittsburgh to D.C. coming back home on weekends. It just doesn’t make sense for a blackjack dealer or cook or busboy to move to D.C. The job prospects aren’t all that much greater because the employment growth in D.C. has been in government jobs or defense and security industry, which mostly require higher education. If you don’t have a degree and go to D.C. and work a lower paying job, you have higher cost of living and higher crime and not much better pay. If they unemployment rate stays high in Las Vegas, people will leave. But, they will go to places where they think they can find work. I know people are moving into Pennsylvania and West Virginia from other states to work in the natural gas industry. In the meantime, with extended unemployment and other strategies they can stay put for a while hoping for a recovery in the Las Vegas economy.

    Well, if you are still reading, I hope this was interesting or useful. Thanks for the platform. Please keep up your good work.

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