Monday, March 16, 2009
Ecomomy Oscillates
During my working career I learned something about constrol systems. I learned the meaning and the effects of positive and negative feedback, proportional, integral, and derivative control signals, feed-forward systems, process controllers, and other things. I think of our economic system as being similar to a process. It is a process with positive feedback. When the economy is rising, the feedback signal is also rising and causes the economy to expand faster than it should. When the economy is falling, the feedback signal is also falling with the result that the economy tends to fall into depression rather than recession.
What is the feedback signal? The feedback signal is the news about the economy. Then the economy is declining, merchants hold back on ordering to refill inventories, hold back on hiring replacements to workers who retire, and finally let workers go in the expectation of little business in the future. When the economy is rising, merchants are eager to fill depleted inventories and try to hire more workers to handle the expected increase in business.
State Governments add to the positive feedback. When the economy is declining, tax revenues also decline. State employees are let go and State-funded programs are discontinued or reduced. Many people think that States should in fact operate just that way. When everyone else is laying off workers, the States should do the same. And vice versa.
Of course, not every employee is laid off or fired during a downturn of the economy. When unemployment reaches ten percent, ninety percent of available workers are still employed. Booms and recessions affect mostly those workers that are the least desirable, the ones that can be shed during recessions and hired back during good times. Because of the oscillation (I use that term rather than instability) of the economy, the economic system necessarily creates an underclass of workers who lack permanent jobs.
Is there anything government can or should do to reduce the amplitude of the oscillation? I believe Abe Lincoln's aphorism: government should do for the people those things the people can not do for themselves. The people themselves, especially the members of the underclass, can do nothing to change the amplitude of oscillation. I think that government can do something. What it has to do is to provide negative feedback to the system. When the economy is falling, government should provide temporary but useful jobs for the unemployed workers and should inject money into the system in ways that slow down the decline and perhaps even reverse its direction. When the economy is rising, government should then take money out of the economy by increasing taxes and putting money aside for the next recession.
Politically, this is hard to do. It's hard to persuade politicians to increase taxes when the economy seems to be rising out of a recession. The instinct is the opposite: "Let the good times roll." Nobody wants to squelch a boom in which daring investors (gamblers) are about to make fortunes. Nobody will agree that the economy is overheated and that the oscillation has risen above the median point.
What we need is some policy or institution in our economy that will provide the needed damping of the oscillation or the negative feedback needed to stabilize the system. This policy or institution should be immune from political pressure.
OK, I've posed a problem. I don't know the solution. I await your proposals.
What is the feedback signal? The feedback signal is the news about the economy. Then the economy is declining, merchants hold back on ordering to refill inventories, hold back on hiring replacements to workers who retire, and finally let workers go in the expectation of little business in the future. When the economy is rising, merchants are eager to fill depleted inventories and try to hire more workers to handle the expected increase in business.
State Governments add to the positive feedback. When the economy is declining, tax revenues also decline. State employees are let go and State-funded programs are discontinued or reduced. Many people think that States should in fact operate just that way. When everyone else is laying off workers, the States should do the same. And vice versa.
Of course, not every employee is laid off or fired during a downturn of the economy. When unemployment reaches ten percent, ninety percent of available workers are still employed. Booms and recessions affect mostly those workers that are the least desirable, the ones that can be shed during recessions and hired back during good times. Because of the oscillation (I use that term rather than instability) of the economy, the economic system necessarily creates an underclass of workers who lack permanent jobs.
Is there anything government can or should do to reduce the amplitude of the oscillation? I believe Abe Lincoln's aphorism: government should do for the people those things the people can not do for themselves. The people themselves, especially the members of the underclass, can do nothing to change the amplitude of oscillation. I think that government can do something. What it has to do is to provide negative feedback to the system. When the economy is falling, government should provide temporary but useful jobs for the unemployed workers and should inject money into the system in ways that slow down the decline and perhaps even reverse its direction. When the economy is rising, government should then take money out of the economy by increasing taxes and putting money aside for the next recession.
Politically, this is hard to do. It's hard to persuade politicians to increase taxes when the economy seems to be rising out of a recession. The instinct is the opposite: "Let the good times roll." Nobody wants to squelch a boom in which daring investors (gamblers) are about to make fortunes. Nobody will agree that the economy is overheated and that the oscillation has risen above the median point.
What we need is some policy or institution in our economy that will provide the needed damping of the oscillation or the negative feedback needed to stabilize the system. This policy or institution should be immune from political pressure.
OK, I've posed a problem. I don't know the solution. I await your proposals.
Labels: business cycle, oscillation of economy, recession
Saturday, February 21, 2009
A Contrary Thought about Taxes
The other day I heard a report on the news about a state legislator who argued that since many large corporations are laying off employees the state should do the same. I suppose that if the legislator were a member of the federal legislature he would argue that the federal government should also lay people off during recessions, just like other enterprises.
What on earth was he thinking? Unemployment is increasing during a recession because large corporations are laying off workers by the thousands. Governments should follow the trend and make unemployment even worse? Where are all of these unemployed workers going to find employment and wages to support themselves and their families? I guess this legislator thought that the unemployed workers could simply hibernate or live with their relatives until times got better and the recession turned into a boom.
This legislator was speaking in the context of whether to raise taxes. Unemployment causes additional problems for states. There's unemployment insurance, of course. There's welfare for people unable to find work when the unemployment insurance runs out. There are increased medical costs as unemployed workers turn to emergency rooms for needed medical care. And so it goes.
I tend to view the problem of unemployment as a societal problem. We have constructed a society in which unemployment seems to be a natural consequence of the way the economic system operates. We all have a responsibility to care for those less fortunate than those of us who still have jobs and good incomes. How is this caring to be done?
It can be done in a haphazard way by letting various religious and other charitable groups provide food and shelter for those who are out of work and money. This method doesn't apply the obligation to care for the unfortunate evenly. Only those of us who contribute money and labor to these charities bear the load of caring for the unfortunate. In addition, there aren't enough charities to take care of all the unemployed.
It can be done in a fair way, with each person who has a good income contributing a fair share. That means that government provides the food and shelter and the money comes from taxes. Using this argument, I assert that taxes on those still employed should be raised during a recession to pay for supporting the unemployed.
I know this argument will drive the legislator in question crazy.
What on earth was he thinking? Unemployment is increasing during a recession because large corporations are laying off workers by the thousands. Governments should follow the trend and make unemployment even worse? Where are all of these unemployed workers going to find employment and wages to support themselves and their families? I guess this legislator thought that the unemployed workers could simply hibernate or live with their relatives until times got better and the recession turned into a boom.
This legislator was speaking in the context of whether to raise taxes. Unemployment causes additional problems for states. There's unemployment insurance, of course. There's welfare for people unable to find work when the unemployment insurance runs out. There are increased medical costs as unemployed workers turn to emergency rooms for needed medical care. And so it goes.
I tend to view the problem of unemployment as a societal problem. We have constructed a society in which unemployment seems to be a natural consequence of the way the economic system operates. We all have a responsibility to care for those less fortunate than those of us who still have jobs and good incomes. How is this caring to be done?
It can be done in a haphazard way by letting various religious and other charitable groups provide food and shelter for those who are out of work and money. This method doesn't apply the obligation to care for the unfortunate evenly. Only those of us who contribute money and labor to these charities bear the load of caring for the unfortunate. In addition, there aren't enough charities to take care of all the unemployed.
It can be done in a fair way, with each person who has a good income contributing a fair share. That means that government provides the food and shelter and the money comes from taxes. Using this argument, I assert that taxes on those still employed should be raised during a recession to pay for supporting the unemployed.
I know this argument will drive the legislator in question crazy.
Labels: recession, taxes, unemployment
