Monday, March 17, 2008


by the Sandwichman

Forget about Bear Stearns. It's the long term fallout from the credit crisis that people should be worried about. In a word: unemployment. Somebody has to pay to clean up the mess the financial oligarchy has made.

You know who.

Ultimately, the only way to underwrite the Fed's bailout activity is through wage cuts for ordinary working people. Massive wage cuts. For structural and historical reasons, such cuts can't occur smoothly and easily. So the first round of real wage cuts takes the form of inflation combined with a freeze of nominal wages. We've already seen the beginning of steep increases in food and energy costs. The credit crisis will supply the motivation for capping employment earnings.

There's just one problem (or several): the erosion of dispoable income, combined with an end to easy credit will work its way through the system to depress effective demand for commodities. And don't look to Keynes for a solution. For one thing, it's the long run -- he's dead. For another, Keynes never offered a magic solution for indefinitely continuing to stimulate demand in an already credit and inflation bloated system.

Keynes's answer -- applicable long before we would have gotten to this point -- was essentially the same as Marx's: limit the hours of work.

In a letter to the poet, T.S. Eliot, dated April 5, 1945, Keynes identified shorter hours of work as one of three “ingredients of a cure” for unemployment. The other two ingredients were investment and more consumption. Keynes regarded investment as "first aid," while he called working less the "ultimate solution." A more thorough and formal presentation of his view appeared in a note Keynes prepared in May 1943 on "The Long-Term Problem of Full Employment." In that note, Keynes projected three phases of post-war economic performance. During the third phase, estimated to commence some ten to fifteen years after the end of the war, "It becomes necessary to encourage wise consumption and discourage saving, –and to absorb some part of the unwanted surplus by increased leisure, more holidays (which are a wonderfully good way of getting rid of money) and shorter hours."


Anonymous said...

Once again. (I know it is boring.) Real GDP growth and stock market have no direct influence on unemployment. There is a trade-off between labor force, inflation and unemployment

J.Goodwin said...

Holidays and short hours seem a world away during tax season.

I can hardly remember what they are like.

Sandwichman said...


The phone rings. I pick up the handset and say hello. A voice issues from the phone saying hello. Did the ringing phone cause the voice in the phone to speak? You could graph the time series. Ringing phone at time t, voice at time t+n. What would that prove?

Anonymous said...


Theoretically, similarity (functional dependence) in the evolution of two processes with a time lag is the necessary sign of causality. In any case, two processes with a causal link should look like presented in my post.

Comparison of two synchronized time series for one country represents a historical approach to the proof of a potential causal link. Another (theoretical) issue is that the same link is observed in other developed countries as listed in the following post This allows logical proof of the existence of the causal link between the change in labor force and unemployment rate.

I do not know any other way to prove the presence of causality. Both ways mentioned above can be also used for validation of the link.

The practicality of the prediction curve and corresponding relationship consists in the fact that, at a five-year horizon, one can predict the evolution of unemployment in the USA with the inherent uncertainty of corresponding measurements, i.e. with the best possible precision.

At a two year horizon, one can predict inflation rate with an uncertainty (st. dev.) of 0.4% what is two times lower than that provided by any other economic, financial, etc. model.

As to your example, it proves nothing

Sandwichman said...

As to your example, it proves nothing

That was my point about your empirical "predictions". A similarity and time lag in the evolution of two processes may indeed be suggestive of causality but it neither demonstrates nor explains it.

Anyway, I'm not interested in debating this with you because you seem to just want to hijack my post to blow your own trumpet. If you're not going to engage in the slightest with what I've said, why should I listen to you? It's like spam.