As best I can tell, all of the most prominent economists who (we’re assured) know how to get us out of the current recession, are experts on the Great Depression.
Let’s stipulate for argument’s sake that these guys are experts on the Great Depression and that if we were magically transported back in time to the America of the ’30s they could centrally plan our way out of an economic crisis.
Did I say centrally plan? I meant to say centrally bank, sorry. When you spend lots of time reading old books, you get your euphemisms confused.
Many people have observed that the current economic crisis is not identical to the Great Depression in important ways. Many of these observations are true and many are not, but they’re all boring and beside the point.
The modern central banking framework is designed to solve the Great Depression. Unfortunately for modern economists, America of the 2010s is not America of the 1930s in lots of important ways.
I’d like to start with an anecdote, since modern economists don’t like them. I have an uncle who was a cabinet-maker for the last 20+ years. He was laid off when the housing bubble collapsed. Let’s compare the ’30s version of my uncle with the modern version.
In the ’30s if a cabinet-maker was laid off, he was qualified for approximately 90% of the jobs in the US economy (I made up that number, but I doubt it’s off by too much). In today’s economy, he’s qualified for approximately 50% of the jobs in the US economy. However, this misses the bigger picture which is that many of the jobs that he’s qualified for today are vastly inferior to his old job (in reality, I’d argue, but in his opinion for sure). Being a waiter or a cashier just isn’t the same a building cabinets.
Central bank stimulus today then will not spur hiring in the same way that it would have in the ’30s, as modern labor is no where near as interchangeable as it was in the ’30s.
My uncle spent a few years being re-educated so that he could work in the healthcare sector. His new job was in no way created by the fact that interest rates were low, perhaps besides the fact that it may have made it cheaper for him to go back to school. He thanks the taxpayers for all the money they gave him while he was being re-educated though.
It gets worse. The Fed can’t control which sectors of the economy will be spurred by lower interest rates. In the ’30s, this didn’t matter too much because almost all sectors were relatively labor-intensive compared to today’s economy. Today, low rates are more likely to spur innovative sectors of the economy (see all the stories on the rise of a new tech bubble). These sectors employ virtually no one like my uncle.
The US economy has not been short on cheap, low-skilled labor for a long time. The areas of the economy that would employ moderately-skilled guys like my uncle don’t really have room to expand at this point. The same thing may be happening with housing. At this point, if low interest rates were going to make you buy a house, you would have done so sometime since interest rates were historically low starting in 2002. There are no decent homebuyers left who haven’t already bought a house. They’ve all bought homes. Similarly, there may be no new good industries that will employ lots of low-skilled workers that haven’t already started – low-skilled labor has been prevalent and cheap for a long time and interest rates have been low for ages.
Low interest rates may actually discourage this sort of job creation, as in today’s economy low interest rates may encourage firms to buy expensive machinery that replace actual human laborers.
I can’t help but mention increased low-skilled immigration and increased free trade as contributors to this problem as well. The US has been actively exporting low-skilled work overseas (this is the point of free trade). This policy may be good if you have a population of static abilities and skills, but the US has also actively been importing more un-skilled laborers (effectively open immigration). So we’re simultaneously importing more competition for the type of jobs we’re having trouble creating and exporting more of the supply of the sort of jobs that we want to create.
The aspect of the economy that’s more difficult to control is the habits of savers. If you saved money in the ’30s you basically had to put it in a bank – the government can use monetary policy to control what happens to money in banks. Today, savers have much more control over what they invest in. Inflation therefore, won’t make me spend my savings today like it would have in the ’30s – now I can buy gold and other currencies too easily.