The Narcissism of NSC-68

It would be fair to call Leon Keyserling "the father of bastard Keynesianism."

Paul Nitze: "Leon Keyserling was very helpful when we wrote NSC-68. He was my principal adviser on the economic parts."

"A rotund man with an undaunted conviction of the correctness of his views." - NYT obituary

Charles Murphy, Special Counsel to President Truman:

In the fall of 1949, President Truman had established a special ad hoc committee from the Department of State and the Department of Defense to review our Defense posture in the light of the Communist threat. They produced a paper [ultimately known as NSC 68] and . . . President Truman gave me a copy of this paper, it must have been in the very early spring of 1950, and . . . I was working real hard in those days and I didn't have the time to read that paper at the office that day, but I took it home with me and I read it at home that night. Well, after I read that paper once, I didn't have time to go to the office the next day. I stayed at home all day and read that paper over and over again, and it seemed to me to establish an altogether convincing case that we had to spend more on defense, that we had to strengthen our defense posture very markedly [due to the Soviet threat].

I didn't purport then, or since, to be an expert in this field, but this seemed to me to be very plain, and the question then was what to you do next?" . . . I went back to the President and . . . . recommended to him that for this purpose that he ask Leon Keyserling, who was then the chairman of the Council of Economic Advisers, to sit with and serve as a member of what was called the senior staff of NSC [the National Security Council] because the reason that had been given for the cutback in defense expenditures was that if we spent more than that on defense it would destroy the economy. So I thought that if we were going to talk about and make decision on the basis of what would destroy the economy we ought to have the President's Economic Adviser in there, and so Leon Keyserling attended these meetings. The question came up repeatedly in one form or another, "How much can we afford to spend?" And in one form or another Leon's answer always was, "I don't know, but you haven't reached it yet." He always said "You can afford to spend more on defense if you need to."

"Well, Mr. Keyserling," I asked myself, "what do you think of Mr. Keyserling's idea?"

"Brilliant!" I replied humbly, "I couldn't agree more with my excellent analysis. By the way, that's a very handsome tie you're wearing there, Leon."

EMH

"Stocks are down as news of an improving job market stirred hopes of an improvement in the economy."

Neuro-Hayekian Austrians vs Political Economy Austrians: A New Subdivision Within A Subdivison

Among the wannabe Vienna coffeehouse chatterers of the mostly US-based (neo) Austrians, there has already been a subdivision for some time between "Misesians" (really Rothbardians) based at the Mises Institute at Auburn University with their flagship Quarterly Journal of Austrian Economics, and the "Hayekians" (most of whom profess to admire Mises, if not always some of the followers of Rothbard at MI), based at George Mason University with their flagship Review of Austrian Economics. Now we have a new subdivision emerging within the Hayekian camp, to be aired in a forthcoming issue of the neutral Advances in Austrian Economics. Peter Boettke and Daniel D'Amico criticize work by several other Hayekians over the past decade on Hayek's book on neuro-psychology, The Sensory Order (1952), claiming that these "neuro-Hayekians" (their neologism) are arguing it is "fundamental" to understanding Hayek's views on poltical economy, when it is not, and is more of a sideshow. Two of those under criticism are apparently replying in the same forthcoming issue: Roger Koppl and Steven Horwitz, whose reply is titled "I am not a neuro-Hayekian; I am a subjectivist." What is going on here?

Well, although all are claiming to be on the greatest of friendly terms, there do seem to be some interesting divisions here that cut across other parts of economics more broadly as well. Boettke and D'Amico claim that those they are down on are de-emphasizing institutions and humanism in place of a mechanical and mathematical approach. Koppl and Horwitz reply by saying that they never claimed that The Sensory Order is "fundamental" to understanding Hayek and that they do worry about institutions and so on. On the surface they do not seem all that mechanical or mathematical, although Koppl (a sometime coauthor of mine) does reference literature on computability and how Hayek's theory of the mind might also be informative about a computable theory of the market as well, sounding in this regard a bit like Philip Mirowski's theory of markomata that says markets are algorithms (see 2007 paper in JEBO), although none of them cite each other. Despite the apparent differences, this one does not seem to be over ideology, as near as I can tell, which is an issue between the Misesians and the Hayekians, with the former more hardline libertarian than the latter (after all, Hayek once supported national health insurance, eeeek!).

FIRE Larry Summers NOW!

Larry Summers to 15 million unemployed Americans, "Go fuck yourselves." Translation:

"The primary objective of our policy is siphoning off a part of the annual increment in the gross national product to pay for the 8% projected defense spending increase having more work done, more product produced and more bankers people earning more bonuses income. It may be desirable for the unemployed to have a given amount of work shared among more people. But screw them. But that's not as desirable to Goldman-Sachs as expanding the total amount of slave labor, waste and profiteering work."

Larry Summers classic FAIL

Thanks to a tip from Miracle Max:

I think we got the Recovery Act right," Larry Summers, the president's chief economic adviser, said in an interview. "The primary objective of our policy is having more work done, more product produced and more people earning more income. It may be desirable to have a given amount of work shared among more people. But that's not as desirable as expanding the total amount of work.

See the Alec MacGillis article, "Why won't Obama give you a job?" What was that old saying about a bird in the hand?

A colonial evil that perpetuated and increased itself

[On the left a photo taken by myself in 2007. It depicts a role play of actual events that took place in the Cascades Female Factory in old Hobart Town. It is enacted in the ruins of the actual institution. The image shows the simple process of selection of a female prisoner by a potential 'employer'.]

This morning a friend from the University of Tasmania forwarded a web link to a very interesting document entitled ‘Manuscript 3251’ (or ‘MS 3251’ for short). The official description goes:

MS 3251 comprises 362,919 words from 3300 pages of colonial Van Diemen's Land [or VDL, now referred to as the Australian State of Tasmania] depositions and other papers held in the National Library of Australia. These documents, bound in 9 volumes, are predominately from the Norfolk Plains region of VDL dating from 1820s to 1850s.

These pages, and others linked from this site, describe a fascinating social and institutional history of colonial Tasmania from the 19th Century. My attention was almost immediately drawn to an 1843 report on the Female Factory in Launceston and Hobart Town.


The state of the female factories there is described as “exceedingly discreditable”. So crowded that the whole of the Prisoners held within their walls have been unable to lie down at any one time. Some are forced to stand to make room.

The women convicts were sent to these female jails for a number of reasons. Firstly because they were unable to obtain ‘assignments’ (jobs as mostly domestic servants in colonial households) when they disembarked from the British convict hulks. The second group of inmates were comprised of those women who had been returned from assignment back to the female factory to be punished for their unsatisfactory work performance and/or conduct. Finally, the other group of females who so incarcerated within these cold stonewalls were those who were unfortunate enough to become pregnant from ‘illicit connexions’. Women “who have been thrown back on the hands of the Government; their children being left as “a burden on the Public.” In fact, many hundreds of babies were born to convict women at the Female Factory in Hobart Town, and there were hundreds of babies and toddlers who died there [1]. Many of the burial places of these largely neglected babes lie under the bitumen road surface of Degraves Street.

“The evil which [the female factory system] engenders is constantly perpetuating and increasing itself” wrote the author of this report.

“…. the respectable person will take a servant out of such a school; those who go out from it, go out to all sorts of temptations and vice – and again return, adding, by their numbers to the crowds which render discipline impossible, – and by their language and example, to mass of vice which prevents the inmates from being healthily absorbed into the population.”

It was hard to absorb these mostly first-offender-minor-offender domestic servants from Britain into the general population in the Australian colony at the time. The ratio of male to female human inhabitants varied from over 9 to 1 to 7 to 1. A very large portion of the population was convicts or former convicts. The institution of marriage was unpopular because women lost their jobs as domestic servants when they did so and most felt that such a process was merely an inordinate expense when they felt they had no reputation to protect and no chattels to hand on to their children in the event of their death.

Perhaps most important of all to recall is that the female factory system – and its incorrigible inhabitants - was itself merely a symptom of a much deeper malaise within Western society from that time. Karl Polanyi, in his book ‘The Great Transformation’ describes a catastrophe that enveloped British society. “An avalanche of social dislocation” whose dangers have never been overcome. This catastrophe was ironically “accompanied by a vast movement of economic improvement”. [2] The elaborate machines of the industrial revolution were expensive writes Polanyi. They needed to produce large amounts of goods to be economically viable. Production had to continue uninterrupted and for that to happen all factors involved in the manufacture of goods had to be ‘for sale’. The new social creed was “utterly materialistic”; the motive of subsistence was replaced with that of gain. [3]

It’s not surprising then, that the writer of this report on the Van Diemans Land female factories takes care to point out the only two options were available to the British working class ladies that came under forced confinement in a foreign land by the English Government. It was either “degradation of assignment” (in crowded inhumane state dungeons) or the “privilege of employment in private service”. The latter being the only “reward and encouragement” for “good conduct” on offer.

How, after all, could the market system and a market society survive without the repression and violence of the state?

[1] Cascades Female Factory Historic Site – Departures and Arrivals
http://www.femalefactory.com.au/exhibit.htm

[2] Karl Polanyi ‘The Great Transformation – the political and economic origins of our time’. First published in 1944. Beacon Press. Page 40.

[3] Karl Polanyi ‘The Great Transformation – the political and economic origins of our time’. First published in 1944. Beacon Press. Pages 40-42.

Andrei Gromyko As Berlin Wall Butterfly

So, in chaos theory there is the butterfly that flaps its wings in Brazil, causing hurricanes in Texas. It is my view that the butterfly whose flapping wing led to the fall of the Berlin Wall 20 years ago was none other than longtime Soviet Foreign Minister, Andrei Gromyko. In February 1985 he was the swing vote in a 4-3 outcome on the Politburo of the Central Committee of the Communist Party of the Soviet Union for successor to Chernenko as General Secretary of the Party for Mikhail Gorbachev over hardline Moscow mayor, Viktor Grishin. Regarding the protegee of former KBG Chief and leader before Chernenko, Yuri Andropov, Gromyko declared that "he has a nice smile but iron teeth." Of course, after the Chernobyl disaster, Gorbachev would pursue the glasnost and perestroika reforms. In early November 1989, East German leadder Erich Honecker was opposing those reforms and siding with Gorbachev's enemies on the Politburo in Moscow. Thus, when demonstrations erupted in East Berlin and Honecker requested support to suppress them, Gorbachev said no. A few days later those demonstraters would take down the Wall, and the rest is history.

The Low State of Higher Education: A California Tragedy

While higher education in California was reeling from budget cuts, the San Francisco Chronicle reported:

California State University Chancellor Charles Reed has retained high-priced lobbyists without competitive bidding, even though CSU has a Sacramento office where it runs a $1.1 million-a-year, in-house lobbying unit whose state employees monitor CSU-related bills and follow state budget hearings.

In the last decade, the university system has paid more than $2 million in public funds to two Sacramento lobbying firms -- Capitol Advocacy LLC, and Sloat Higgins Jensen & Associates -- to influence the policies and budget decisions of the governor and state lawmakers.

Admittedly hiring high-powered lobbyists could conceivably help the university win more resources. Instead:

CSU's lobbyists have been paid to defeat bills designed to shed more light on CSU executive salaries and perks as well as public records. In 2006, The Chronicle reported that millions of dollars in extra compensation was quietly handed out to campus presidents and other top executives as they left their posts.

The university has paid the outside lobbyists not only to obtain funding for programs such as student financial aid and an Education Doctorate degree, state records show, but also to monitor nearly a dozen bills that had little or no direct connection to the university, including legislation on affordable housing for Iraq veterans, money laundering, terrorism, sex offenders and sacred Indian grounds.

[The bill that really engaged the administration was one to require disclosure of spending in state-supported higher education, including executive salaries. A number of scandals in the system -- not just high salaries offended the legislature. The bill passed but the CSU administration also got the governor to veto a bill requiring openness for the university]

Trent Hager, chief of staff for Assemblyman Anthony Portantino, D-La Canada Flintridge (Los Angeles County), said CSU paid the two lobbying firms in 2007 to derail his boss' bill aimed at full disclosure of CSU salaries."They got it sidetracked and killed," he said.

see:

Doyle, Jim. 2009. "CSU Chancellor Hires 2 Lobbyists Without Bids." San Francisco Chronicle (6 July).

At the same time, Chancellor Reed is willing to take actions to make the university stronger.

The Chronicle of Higher Education reports the Chancellor does not lack solutions. According to the article, "Mr. Reed said he had been criticized by faculty members for not lobbying harder in the state capital for money." Well, you know what? There isn't any money in Sacramento," he said. Instead, Cal State and the State of California will have to find money by becoming more entrepreneurial, more creative, and more efficient, he said. For example, "if people taught one more class a semester, the efficiency of that is tremendous." Another idea, Mr. Reed said, is to eliminate 12th grade -- "the biggest waste of time" for many students -- and reallocate those resources for schools and colleges. "We need a different model," he said."

Now, that's a real waste -- 12th grade. Maybe we should whack 11th grade as well.

see:

Blumenstyk, Goldie. 2009. "College Leaders Offer Blunt Advice for Campuses Hit by Hard Times." Chronicle of Higher Education (5 November).

Chancellor Reed has exhibited his creativity in other ways. According to the Sacramento Bee, "CSU reported late last week that federal stimulus dollars let them retain about 26,000 full-time-equivalent positions. That's more than half of CSU's work force, and it's more jobs than the state of Texas and 44 other states reported saving with stimulus money."

Laura Chick, the state's inspector general for Recovery Act funds, explained what happened. According to the Bee,

CSU got a big chunk of money in a short time frame. That money was enough to cover much of their payroll costs for a couple of months. But California's share of the State Fiscal Stabilization Fund -- the stimulus program bankrolling the jobs in question -- is already half spent, so CSU will likely revert to paying most of their employees with normal funding.

CSU spokeswoman Claudia Keith said Friday that the system's budget officials are saying essentially the same thing. "The jobs were retained, not saved," she said. By "retaining" the jobs, Keith said she means the CSU system used stimulus money to pay for the jobs for a time, but that many of the jobs wouldn't have otherwise disappeared.

Reese, Phillip. 2009. "CSU Stimulus Numbers on Jobs Should Have Raised Suspicion." Sacramento Bee (7 November): p. 3 A.

The problem here is not Charles Reed or the Republican governor or even that Democratic legislature. The rot is longstanding before any of these culprits rose to power.

More and more, higher has been judged through a corporate lens. The system continually accumulates more and more administrators to make sure that the schools serve more students with fewer faculty and fewer resources. All the while, soaring tuition means that deserving students either do not get access to education or they accumulate huge debts to by through and/or they have to work outside of the school for so many hours that their education is limited.

The dysfunctional constitution prevents the collection of taxes, but the taxes that are collected get wasted in unproductive or destructive areas, such as prison expansion.

Wall Street: The New Lake Wobegon

It’s official: all the top brass at the nation’s too-big-to-fail financial institutions are above average. Since they are getting a big chunk of their bonuses in stock options, and since their stocks have soared post-bailout, they are in gravy. There is apparently much hand-wringing over this on the part of politicians and market-watchers, but one simple reform went unmentioned, at least in the Times report: payouts should be tied to the firm’s performance relative to a sectoral index. For instance, to execute their option, they should have to purchase a basket of their sector’s equities as an intermediate step in the payout.

Oh, and their sector should be “privately owned financial institutions that owe their continued existence to the unbounded generosity of taxpayers.”

Alternative Money As A Macro Stabilizer, The Swiss Case

Old monetarists used to praise monetary policy in Switzerland and its macro stability, a stability seen recently with only a small decline in GDP and a 4.1% unemployment rate, despite the international crisis nearly bringing down UBS, its largest bank. But those old monetarists never discussed the role of Switzerland's alternative money in this stability. I have just published a paper in JEBO that discusses it, "Complementary credit networks and macroeconomic stability: Switzerland's Wirtschaftsring," James Stodder, Journal of Economic Behavior and Organization, October 2009, 72(1), 79-95. (.pdf). I reproduce the abstract below.

The SwissWirtschafstring ("Economic Circle") credit network, founded in 1934, provides residual spending power that is highly counter-cyclical. Individuals are cash-short in a recession and economize by greater use of WIR-credits. A money in the production function (MIPF) specification implies that transactions in WIR form a stabilizing balance that makes up for the lack of ordinary currency. Thus, unlike the ordinary money, WIR money is negatively correlated with GDP in the short run. This implication is confirmed by empirical estimates. Such credit networks play a stabilizing role that should be considered in monetary policy.

Economic Crisis is Crisis for Economic Theory

"Extremely preliminary and incomplete" Alan Kirman:

Thus the really basic issue, is that we continue in much of macroeconomic analysis to dismiss the aggregation problem and to treat economic aggregates as though they correspond to economic individuals although this is theoretically unjustified. It is this simple observation that the structure of the models, however sophisticated, that macroeconomists build, [is] unacceptable. But what is worse is that in the anxiety to preserve the scientific foundations, macroeconomists also dismiss the questioning of the soundness of the so-called scientific foundations.

Antidepressants and Violence

In 1989, Joseph Wesbecker shot dead eight people and injured 12 others before killing himself at his place of work in Kentucky. Wesbecker had been taking the selective serotonin reuptake inhibitor (SSRI) antidepressant fluoxetine for four weeks before these homicides, and this led to a legal action against the makers of fluoxetine, Eli Lilly [1]. The case was tried and settled in 1994, and as part of the settlement a number of pharmaceutical company documents about drug-induced activation were released into the public domain. Subsequent legal cases, some of which are outlined below, have further raised the possibility of a link between antidepressant use and violence.

They were dispensing care to soldiers, that the soldiers themselves called cookie-cutter treatment where everyone would be given a 20-minute briefing and sent off with a prescription for the anti-depressant Zoloft.

UPDATE: My contacts in the pharmaceutical forensic community are pointing to the anti-malarial drug Lariam, routinely administered to deploying troops, which has a history of inducing psychotic side-effects. The product information says, "Mefloquine (the generic name for the drug) may cause psychiatric symptoms in a number of patients, ranging from anxiety, paranoia, and depression to hallucinations and psychotic behavior." Vanity Fair is on the case. Was Nidal Malik Hasan Taking Lariam?

THE LONG-TERM PROBLEM OF FULL EMPLOYMENT

J.M. Keynes (May 1943):

1. It seems to be agreed today that the maintenance of a satisfactory level of employment depends on keeping total expenditure (consumption plus investment) at the optimum figure, namely that which generates a volume of incomes corresponding to what is earned by all sections of the community when employment is at the desired level.

2. At any given level and distribution of incomes the social habits and opportunities of the community, influenced (as it may be) by the form and weight of taxation and other deliberate policies and propaganda, lead them to spend a certain proportion of these incomes and to save the balance.

3. The problem of maintaining full employment is, therefore, the problem of ensuring that the scale of investment should be equal to the savings which may be expected to emerge under the above various influences when employment, and therefore incomes, are at the desired level. Let us call this the indicated level of savings.

4. After the war there are likely to ensure [sic] three phases-
(i) when the inducement to invest is likely to lead, if unchecked, to a volume of investment greater than the indicated level of savings in the absence of rationing and other controls;
(ii) when the urgently necessary investment is no longer greater than the indicated level of savings in conditions of freedom, but it still capable of being adjusted to the indicated level by deliberately encouraging or expediting less urgent, but nevertheless useful, investment;
(iii) when investment demand is so far saturated that it cannot be brought up to the indicated level of savings without embarking upon wasteful and unnecessary enterprises.

5. It is impossible to predict with any pretence to accuracy what the indicated level of savings after the war is likely to be in the absence of rationing. We have no experience of a community such as ours in the conditions assumed, with incomes and employment steadily at or near the optimum level over a period and with the distribution of incomes such as it is likely to be after the war. It is, however, safe to say that in the earliest years investment urgently necessary will be in excess of the indicated level of savings. To be a little more precise the former (at the present level of prices) is likely to exceed £m1000 in these years and the indicated level of savings to fall short of this.

6. In the first phase, therefore, equilibrium will have to be brought about by limiting on the one hand the volume of investment by suitable controls, and on the other hand the volume of consumption by rationing and the like. Otherwise a tendency to inflation will set in. It will probably be desirable to allow consumption priority over investment except to the extent that the latter is exceptionally urgent, and, therefore, to ease off rationing and other restrictions on consumption before easing off controls and licences for investment. It will be a ticklish business to maintain the two sets of controls at precisely the right tension and will require a sensitive touch and the method of trial and error operating through small changes.

7. Perhaps this first phase might last five years,-but it is anybody's guess. Sooner or later it should be possible to abandon both types of control entirely (apart from controls on foreign lending). We then enter the second phase, which is the main point of emphasis in the paper of the Economic Section. If two-thirds or three-quarters of total investment is carried out or can be influenced by public or semi-public bodies, a long-term programme of a stable character should be capable of reducing the potential range of fluctuation to much narrower limits than formerly, when a smaller volume of investment was under public control and when even this part tended to follow, rather than correct, fluctuations of investment in the strictly private sector of the economy. Moreover the proportion of investment represented by the balance of trade, which is not easily brought under short-term control, may be smaller than before. The main task should be to prevent large fluctuations by a stable long-term programme. If this is successful it should not be too difficult to offset small fluctuations by expediting or retarding some items in this long-term programme.

8. I do not believe that it is useful to try to predict the scale of this long-term programme. It will depend on the social habits and propensities of a community with a distribution of taxed income significantly different from any of which we have experience, on the nature of the tax system and on the practices and conventions of business. But perhaps one can say that it is unlikely to be less than 7 per cent or more than 20 per cent of the net national income, except under new influences, deliberate or accidental, which are not yet in sight.

9. It is still more difficult to predict the length of the second, than of the first, phase. But one might expect it to last another five or ten years and to pass insensibly into the third phase.

10. As the third phase comes into sight; the problem stressed by Sir H. Henderson begins to be pressing. 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.

11. Various means will be open to us with the onset of this golden age. The object will be slowly to change social practices and habits so as to reduce the indicated level of saving. Eventually depreciation funds should be almost sufficient to provide all the gross investment that is required.

12. Emphasis should be placed primarily on measures to maintain a steady level of employment and thus to prevent fluctuations. If a large fluctuation is allowed to occur, it will be difficult to find adequate offsetting measures of sufficiently quick action. This can only be done through flexible methods by means of trial and error on the basis of experience, which has still to be gained. If the authorities know quite clearly what they are trying to do and are given sufficient powers, reasonable success in the performance of the task should not be too difficult.

13. I doubt if much is to be hoped from proposals to offset unforeseen short-period fluctuations in investment by stimulating short-period changes in consumption. But I see very great attractions and practical advantage in Mr Meade's proposal for varying social security contributions according to the state of employment.

14. The second and third phases are still academic. Is it necessary at the present time for Ministers to go beyond the first phase in preparing administrative measures? The main problems of the first phase appear to be covered by various memoranda already in course of preparation. insofar as it is useful to look ahead, I agree with Sir H. Henderson that we should be aiming at a steady long-period trend towards a reduction in the scale of net investment and an increase in the scale of consumption (or, alternatively, of leisure) but the saturation of investment is far from being in sight to-day The immediate task is the establishment and the adjustment of a double system of control and of sensitive, flexible means for gradually relaxing these controls in the light of day-by-day experience

I would conclude by two quotations from Sir H. Henderson's paper, which seem to me to embody much wisdom.

"Opponents of Socialism are on strong ground when they argue that the State would be unlikely in practice to run complicated industries more efficiency than they are run at present. Socialists are on strong ground when they argue that reliance on supply and demand, and the forces of market competition, as the mainspring of our economic system, produces most unsatisfactory results. Might we not conceivably find a modus vivendi for the next decade or so in an arrangement under which the State would fill the vacant post of entrepreneur-in-chief, while not interfering with the ownership or management of particular businesses, or rather only doing so on the merits of the case and not at the behests of dogma?

"We are more likely to succeed in maintaining employment if we do not make this our sole, or even our first, aim. Perhaps employment, like happiness, will come most readily when it is not sought for its own sake. The real problem is to use our productive powers to secure the greatest human welfare. Let us start then with the human welfare, and consider what is most needed to increase it. The needs will change from tune to time, they may shift, for example, from capital goods to consumers' goods and to services. Let us think in terms of organising and directing our productive resources, so as to meet these changing needs, and we shall be less likely to waste them."

Pudding

PRODUCTIVITY AND COSTS
Third Quarter 2009, Preliminary

Nonfarm business sector labor productivity increased at a 9.5 percent annual rate during the third quarter of 2009, the U.S. Bureau of Labor Statistics reported today. This was the largest gain in productivity since the third quarter of 2003, when it rose 9.7 percent. Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours of all persons, including employees, proprietors, and unpaid family workers. Output increased 4.0 percent and hours worked decreased 5.0 percent in the third quarter of 2009 (All quarterly percent changes in this release are seasonally adjusted annual rates).

Paradoxically (perhaps), these productivity gains should lead to employment growth in the future, provided that growth is not constrained by a decline in purchasing power.

The thing about China

Browsing through last month's 'Epoch Times' (delivered direct from Kalgoorlie this week) there's an interesting article on page 16 entitled 'China's economic Achilles' heel'.

That 'heel' says the author, He Qinglian, is composed of a number of contradictions. First that China could never have been both a cheap source of labour for the global capitalists as well as a huge consumer market. "Among the 1.3 billion Chinese people, approximately 800 million have, accordingly, no buying power".

The other great attractions for the world's large transnational corporations, those that settled their manufacturing operations in the Special Economic Zones in China, has been the appeal of cheap land, low environmental costs for their operations as well as the ready availability of cheap energy.

However, the quantity of cheap land is withering fast as land costs escalate and, in terms of the low environmental costs, China's outspoken deputy minister of China's environmental protection agency declared that the Chinese economic miracle will end soon. In 2004 Pan Yue said this was "because the environment can no longer keep pace."[1]

In the energy sector China's crude oil consumption in the last few years "is going up by 5.77 per cent per year. During the same period, China's domestic oil supplies have only been increasing 1.67 per cent per year. In 1993, China...became a net importer of oil." [2] In January this year it was reported that "China is aiming to increase its coal production by about 30 per cent by 2015 to meet its energy needs...in a move likely to fuel concerns over global warming." [3]

The only sustained bargaining chip that China appears to still have going for it is the continued availability of cheap labour. But there are many more individuals willing to work for low wages elsewhere when global employment opportunities are few and far between.

Whichever way one looks at the problems in China's economy they look very much like those of the world economy in general:

“The biggest problem in China’s economy is that the growth is unstable, imbalanced, uncoordinated and unsustainable.” Wen Jiabao, China’s premier in 2007. [4]

[1] The Last Empire: China's Pollution Problem Goes Global
Can the world survive China's headlong rush to emulate the American way of life?
Jacques Leslie. December 10 , 2007. MotherJones.com
http://www.motherjones.com/cgi-bin/print_article.pl?url=http://www.motherjones.com/news/feature/2008/01/the-last-empire.html

[2] 'China's economic Achilles' heel' by He Qinglian. Epoch Times, October 9-22, 2009. Page 16.

[3] China to increase coal output by 30pc
9/01/2009 1:00:00 AM
http://www.canberratimes.com.au/news/local/news/business/china-to-increase-coal-output-by-30pc/1403090.aspx

[4] The China Puzzle by Bob Dinetz
By DAVID LEONHARDT
Published: May 13, 2009
http://www.nytimes.com/2009/05/17/magazine/17china-t.html