Breakout of new realities

This week has seen a breakout of reality testing on the part of the world’s fiscal functionaries.

The German high court has given its parliament the authority to restore the eurozone and Federal Reserve chairman Ben Bernanke has committed funds to address the crisis in US employment.

Last month at the Jackson Hole conference, the Bernanke told the audience: “The stagnation of the labour market is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.”

The crazy reality of American politics is that Bernanke is attacked by the right for trying to raise effective demand and is threatened with dismissal by an incoming Romney/Ryan administration. Yet Bernanke is a registered Republican.

The unpleasant reality is that we should not expect the decisions announced yesterday to make any real difference to the US polarised debates. Republicans point out that far fewer jobs were created than expected in August, with many more people dropping out of the labour force, and the lowest labour force participation rate in 30 years appearances.

The strategic reality is that central banks rely upon their assumptions of a “natural rate of unemployment” (the so-called NAIRU – non-accelerating inflation rate of employment) to ensure that there is an underemployed class of victims that protect the interests of large-scale investors.

That’s why the Fed now believes that the new “natural” unemployment rate is closer to 6.7% rather than the 5% prior to the recession.

This fact is critical as the Fed adjusts the monetary policy: If the unemployment rate begins to approach 6.7% (not the pre-recession 5%), the Fed funds target rate will begin to rise. In Australia the RBA sees 5% as the necessary rate of unemployment.

That’s why Bill Shorten says he finds it difficult to live on $900 a day and supports four of the government’s “employment” department’s submissions to the Senate to keep our long-term unemployed and sole parents in poverty at less than $40 a day.

The segmented reality is that construction jobs may not replace lost manufacturing jobs in the non-mine states because of different skill requirements. The assumption that surplus labour can be shifted as a new form of wage slave along pre-Wilberforce lines neglects the skills and social realities that underpin hysteresis. Some mine owners such as Gina Rinehart point to a cross-sector skills mismatch and the fact that African mine labour can be hired for a fraction of the Australian wages.

The disturbing reality is that employment dynamics have a built-in hysteresis, driven by the effects of long-term unemployment. Data suggests that the longer someone has been out of work, the longer it takes them to find work. This means that after a deep, prolonged recession, as job vacancies rise, they will be filled at a rate different from when jobs were originally lost.

Geographic mobility constraints may explain some of it, as negative home equity makes it difficult for the unemployed to move. Economists however are sceptical that geographic “immobility” could explain the whole shift. If slow migration was the explanation, over time the Beveridge curves should start converging as migration picks up – people walk away from their homes, sell them, or find jobs locally.

We have the unfortunate reality that the present, post-crisis monetary state of affairs is that QE3 will have very little direct effect on the economy, just as the previous rounds of quantitative easing had very little direct effect. While the Fed needs to ensure that longer-term borrowing costs for households and businesses stay low, its billions of dollars of monetary intervention is too small to directly affect debt markets that are trillions upon trillions of dollars.

The new reality is hysteresis. In engineering the phenomena describes a system that responds not just to its current environment, but to the path it took. A thermostat switch will turn on at a different temperature than it turns off to avoid rapid switching. Built-in hysteresis will assure that the switch “event” depends not just on the current temperature but on whether the temperature got there by increasing or decreasing.

Dr Colin Benjamin is an entrepreneurship and strategic thinking consultant at Marshall Place Associates, which offers a range of strategic thinking tools that open up a universe of new possibilities for individuals and organisations committed to applying the processes of innovation, creativity and entrepreneurship. Colin is also a member of the global Association of Professional Futurists.

 

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