Labour market reallocation in the wake of Covid-19
voxeu.org
voxeu.org
An economy can usually make more of stuff, or substitutes, and/or consume relatively painlessly. The pain kicks in when the financial sector feels pain. The real economy reshuffles if it's financed adequately.
Monetary policy, currently, finds itself oddly theoryless. I think this has actually made for better decision making. The own goal of trying to save and/or reduce debt in response to a shock hasn't been scored.
So... I agree that the economy has had to do a lot of resource, shuffling. Some prices have gone up in the real economy. People are still unemployed, in sectors like travel that really got shut down. In others, there's are some struggling to find labour. Mostly though, it's a case of "look how easy that was." In the financial economy, credit is available, keeping everything ticking.
Isn't money just an abstraction over resources? In essence i think you're saying that creating goods is not a problem assuming there are sufficient resources to make the goods and sufficient resources to compensate the people making the goods.
While i don't disagree, doesn't that kind of go without saying?
I think the economics of money tends to compete on which common sense, to follow. Taken to the extreme, you could say that money doesn't matter. Only resources and the real economy matter.
That, IMO, is negated by the history of money economics affecting the real economy. Money shortage is a thing. If the economy hadn't been funded, the resource shuffling wouldn't have been possible... or more painful. People don't get compensated for resources and labour in exchange for goods and labour. They get compensated in money, which is at some point down the cascade, credit. If money is short, it doesn't matter what the productive capacity. That reshuffling doesn't happen smoothly.
So, no... I think. At least, not in a sense that commons sense implications can be applied. Money isn't just an abstraction over resources. It's a thing unto itself. Money supply issues, hyperinflation, financial shocks, credit shocks and have been more likely to affect major real economy problems than supply of actual stuff like oil. Oil shock is a thing. There definitely are real examples of crippling resource shortages. More often though, money supply is the issue.
Yeah, but all those things describe situations where money and resources got out of whack.
If the bank stops lending, we can no longer buy enough lumber to build the houses. The market slows significantly - instead of building 100 houses at a time, we have to build them one at a time. The demand for 100 houses hasn't changed (all else being equal), but the supply has. Prices probably go up, but until the bank starts loaning, the pace of the economy doesn't return to previous levels.
Or something like that. Way too complicated to distill into a single post.
That's why the financial sector is the weak link, and also why it's very well-compensated. Finance is a future-prediction problem: you do well if you successfully predict which investments will pay off, and you go bankrupt if you fail. Predicting the future has always been hard.
The reason we get these boom/bust crises is because instead of using their own judgment, many people, when faced with a hard problem, will just do what everyone else is doing. So the whole financial industry lemming-trains into bad investments, and then when they bust, they all go bankrupt and there's no resources to go around until the wreckage has been cleared away and placed in more independent manager's hands.
But the piper must be paid in the end. Ideally it’s similar to 2008 where the govt unwound all the extra money, over time, relatively painlessly.
Of course that’s not guaranteed at at all. If inflation gets out of control then you could see a major economic shock as the govt quickly unwinds.
One of the most straightforward ways the asset bubble will pop is if interest rates rise. For interest rates to rise there needs to be inflation at high levels for at least a couple of quarters. If we see another few months of inflation above 4% the fed will need to signal shift toward increasing the interest rate, only then will we start to see a rebalancing of investments away from assets and back into cash.
"Capital" isn't consumed by much of the tech industry in the same way as it was/is by manufacturing. If you're a toaster startup, you'll need a factory, steel, etc. Actual, physical capital that needs to come from somewhere. When your toaster startup goes viral and scales, you'll need more of that physical capital. For every toaster you sell, you'll need to buy more parts and materials.
A tech startup needs riskable money to figure out what they're making, but once it's profitable, they're not sitting across from bankers discussing finance. Also, when covid hits and demand for movies skyrockets, amazon prime or netflix can sell as much as people will by. There's no need for prices to go up. Marginal costs don't exist.
They're pretty much insulated from both real and monetary shock. All they care about is demand. There will not be a shortage of steaming content services' supply chain. A netflix is limited in how much it can invent, but it isn't limited in how much it can produce. Doubling the number of subscriptions or viewing times is trivial. They don't owe on loans.
They did? https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
We only started "unwinding" in 2018 and wasn't even close to undoing everything from 2008. Then the pandemic hit and all of that was undone.
What does "unwound all the extra money" mean? They didn't run surpluses, which means more money circulated out of the economy than in. That's why they were less reserved, this time, creating more of the stuff. They realised that it doesn't have to be paid back.
There is no free lunch. Eventually asset prices reflect underlying value - not too many dollars chasing too few assets. Eventually inflations forces higher interest rates and the value inflation disappears. Eventually bad assets are correctly priced and value disappears.
It’s like the financial crisis in 2008. You can go years with increasing prices, but if it based off false premises and not a true increase in productivity, then that value eventually disappears. If it happens suddenly it has massive ripple effects through the economy.
Often it does, because “printing money” avoids a cascading effect of negative feedback.
Imagine in the days before FDIC insurance that due to a sudden asset depreciation or error, a large bank does not have cash on hand to meet customer withdrawals today. Because of uncertainty, other banks are not willing to lend to the troubled bank on short notice.
If the Fed does nothing, customers will panic. They will sell their stocks, and withdraw money from other banks. Now the market is crashing and other banks are running low on reserves. Credit tightens up and interest rates rise. Businesses stop investing, consumers stop spending, and unemployment starts rising. This is a vicious negative feedback loop.
Instead, if the Fed had stepped in and simply materialized cash out of nowhere, and assured the public that they would guarantee all deposits no matter the cost, the entire crisis would be averted. When negative feedback cycles are so destructive, merely instilling confidence is about as close to a free lunch as you can get.
If my wages suddenly get reduced by 20% so I start borrowing against the equity in my home that solves the immediate problem but also creates another problem.
How do you explain hyperinflation, where there is too much money chasing too few resources?
I think the difference between inflation & hyperinflation is that "inflation" can be contained mostly within the real economy. Hyperinflation, has to have a macroeconomic, money supply related, explanation.
Lebanon's current mess, for eg, is more or less the consequence of letting Beirut banks do what stablecoin does, but the old fashioned way. High interest dollar accounts, backed by high interest Lira. Lira loans, backed by the same dollarized banking system. Dollars come in, and dollars are owed. Liras go out, and Liras are owed back. It works until the underlying currency bends. Liras come in. Dollars go out. A port explosion & widespread loss of confidence in the governing system are part of the story.
The upshot I'm driving for is that stuff happening entirely in the money markets causes determines goods flowing in and out of ports and fibre, not the other way around. It's not lebanon's ability to export goods that changed and killed its ability to import goods and resources. It's its inability to import dollars, and its ability to pay using Liras that collapsed first.
Perhaps a better solution is to make furlough portable, so that workers can read the writing on the wall and be part of the reallocation we are soon to see. [1]
[1] https://blogs.lse.ac.uk/covid19/2020/11/05/making-furlough-p...
It will be interesting to see how it all unfolds.
This is exacerbated by the fact that it's very hard to fire people and that most developers work for relatively large and stable companies that rarely go out of business. Both of these factors are pleasant for the workers (including myself), of course, but they can have a negative or stabilising effect on salaries. Regular shocks which would cause poorly run companies to go bankrupt without changing the aggregate demand for developers would help push developer salaries upwards.
My view is that competent developers can rise to the level of income they deserve, without sweating it too much that others with more experience are somehow keeping them back.
The gist of it seems to be the age old “problem” that older people are conservative and want stability while younger people want new things and to their own place in the world. It used to be solved naturally by older people dying and freeing up space, but recently society started progressing so much faster than before that people are not dying fast enough to “keep up” with the progress by taking their old and obsolete things, viewpoints and habits to the grave.
Im all for adequate safety nets. I like UBIs personally and the response to the pandemic (on both sides of the pond) isn't far off of that.