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July 14, 2010

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I love these statistics, because they leave out the pre Reagan economy where wages increased regularly, for no good to the wage earners.

The statistics that are regularly skipped by focusing on the last thirty years are that, prior to that, we had an economy with double digit inflation and double digit interest rates.

Who did that hurt? Well, of course, the middle class and poor. Mortgages were at 17%, inflation over 10% and every person in the middle class was struggling to get their 8% raises to keep up with the runaway economy.

I clearly remember Jesse Jackson justifiably decrying the plight of the poor and those on fixed incomes in an economy where their incomes became significantly less valuable month by month.

Now we pick the Reagan years and complain that incomes barely have gone up in real dollars for thirty years. For those of us who lived through the Carter years the "staying the same in real dollars" plus consistently low interest rates and stable unemployment numbers WAS the good times.

I don't think most of us begrudge any of those people getting wealthy and the overt anger at the financial sector is because, over the last ten years, they didn't invest in the "right" things to sustain middle class jobs.

Interestingly, we (generalization of me and my contemporaries that I have discussed this with) believe that in supply side economics that is the reponsibility they have and have failed at since the dot com bust.

*gifted
*musician
*hoarding

And possibly many more.

I love these statistics, because they leave out the pre Reagan economy where wages increased regularly, for no good to the wage earners.

The statistics that are regularly skipped by focusing on the last thirty years are that, prior to that, we had an economy with double digit inflation and double digit interest rates.

Who did that hurt? Well, of course, the middle class and poor. Mortgages were at 17%, inflation over 10% and every person in the middle class was struggling to get their 8% raises to keep up with the runaway economy.

Why don't we go to the pre-Nixon/Carter years? The 1950s and 1960s weren't so bad, really, no were they? With really high top marginal rates, estate taxes, no hedge fun loophole, etc.

There was a problem in the 1970s, but the solution applied has created its own problems. The results are there to see, or not.

Thanks slarti, fixeded.

"Why don't we go to the pre-Nixon/Carter years?"

The answer to that is pretty easy, the pre Nixon/Carter years were when we implemented the Great Society and no Democrat wants to discuss how that is the change that destroyed the success of the fifties, not lowering the top marginal tax rate.

My question, of course, is: If those fifties were sso great why did we need the Greay Society in the first place?

It seems to me that there's already a bipartisan solution staring us in the face.

According to the Republicans, tax cuts for the wealthy don't reduce revenue: they increase it. So why don't we simply extend unemployment benefits, while rolling out another round of highly regressive tax breaks to pay for them? Everybody wins: the lucky duckies and undeserving hobos get to spend another couple of months on their backsides watching daytime TV, while Paris Hilton and her friends -- i.e., the people who actually work hard and create wealth -- can buy themselves new solid gold Bentleys, thereby stimulating the economy and creating jobs!

And best of all, it's deficit-neutral!

I'm reaching across the aisle here -- who's with me?

My question, of course, is: If those fifties were sso great why did we need the Greay Society in the first place?

Are you aware of the history that preceded the fifties? Therein lies a fairly obvious answer.

The answer to that is pretty easy, the pre Nixon/Carter years were when we implemented the Great Society and no Democrat wants to discuss how that is the change that destroyed the success of the fifties, not lowering the top marginal tax rate.

I'd love to have that discussion. I like crushing myths and misinformation, so it's actually my pleasure.

"Are you aware of the history that preceded the fifties? Therein lies a fairly obvious answer."

So, based on this, constant referral to the success of the fifties is wrong due to a distictly different historical context? I would agree with that.

No, the 50s were a boom period. However, that boom period was not enough to completely ameliorate the effects of centuries of structural poverty, which in the US had a racial facet.

The Great Society was needed to address that, and in many important ways was quite successful. Also, tragically, it was greatly underfunded and then defunded, mainly in response to the imperatives of the Vietnam war.

Now we pick the Reagan years and complain that incomes barely have gone up in real dollars for thirty years. For those of us who lived through the Carter years the "staying the same in real dollars" plus consistently low interest rates and stable unemployment numbers WAS the good times.

To those of us who lived through the neolithic, the Carter years *were* the "good times". Artificial caves! Pre-killed meat!
Parody to observe that, just bc there was a worse time at some point in the past does not somehow make the troubles of today disappear. Real wage stagnation is a problem, even if it isn't the worst problem in history.

"The Great Society was needed to address that, and in many important ways was quite successful. Also, tragically, it was greatly underfunded and then defunded, mainly in response to the imperatives of the Vietnam war."

This paragraph could use some more explanation. IIRC, through the sixties and 70's the cost of these programs continuously increased not decreased.

Everybody knows that you love me baby
Everybody kows that you really do
Everybody knows that you've been faithful
Ah, give or take a time or two

This paragraph could use some more explanation. IIRC, through the sixties and 70's the cost of these programs continuously increased not decreased.

The costs of these Great Society programs did not go up, and were a tremendous success:

The Civil Rights Act of 1964 forbade job discrimination and the segregation of public accommodations. The Voting Rights Act of 1965 assured minority registration and voting. It suspended use of literacy or other voter-qualification tests that had sometimes served to keep African-Americans off voting lists and provided for federal court lawsuits to stop discriminatory poll taxes. It also reinforced the Civil Rights Act of 1964 by authorizing the appointment of federal voting examiners in areas that did not meet voter-participation requirements. The Immigration and Nationality Services Act of 1965 abolished the national-origin quotas in immigration law. The Civil Rights Act of 1968 banned housing discrimination and extended constitutional protections to Native Americans on reservations.

As for the War on Poverty provsions in the Great Society legislation, some costs went up, many initiatives were underfunded or DOA, an what was left was largely gutted by Nixon and Reagan. This is from wiki:

The Office of Economic Opportunity was dismantled by the Nixon and Ford administrations, largely by transferring poverty programs to other government departments. Funding for many of these programs were further cut in President Ronald Reagan's first budget in 1981.

What was achieved:

From 1963 when Lyndon Johnson took office until 1970 as the impact of his Great Society programs were felt, the portion of Americans living below the poverty line dropped from 22.2 percent to 12.6 percent, the most dramatic decline over such a brief period in this century. The percentage of African Americans below the poverty line dropped from 55 percent in 1960 to 27 percent in 1968.

Medicare and medicaid costs have, indeed, gone up. But I would not call these programs mistakes or the drivers of the stagnation of the 1970s. In fact, I can't think of how any of the programs led to that.

Was it the creation of the Department of Transportation? Consumer Affairs? PBS? Safety standards for automobiles?

Eric,

Just so we are discussing the same thing, my perspective is that the Civil Rights legislation was distinct from the Great Society (War on Poverty, Medicare, SS, Head Start et al), and it was the most important legislation in our history (perhaps after the Bill of Rights but whatever).

Marty,

I think that yours is the familiar political shorthand, but the Civil Rights legislation was actually part of LBJ's "Great Society" , as were a lot of other measures that don't get mentioned a lot by critics (extensive environmental legislation, creation of the DOT, consumer affairs, PBS and arts endowments, etc).

Most people, I think, are referring to the War on Poverty legislation when they refer to the Great Society. But LBJ and his vision deserve the full treatment.

Now. not to quibble, but the poverty rate was already going down and was below 19% before any of the War on Poverty programs were passed, let alone had an effect. The poverty rate was below 15% by 1966 less than two years after the legislation was enacted, not really long enough for the legislation to have accomplished that and continued to decline through 1969. The programs continued until Reagan and some even exist today, but multiple economists, most notably of course Friedman, did attribute a large portion of the struggles in the 70's to the interventionist policies of the Great Society.

All simply from wikipedia "War on Poverty". It does follow that I could find more (on both sides) if I looked, but "myth" is all I was trying to get past.

The programs continued until Reagan and some even exist today, but multiple economists, most notably of course Friedman, did attribute a large portion of the struggles in the 70's to the interventionist policies of the Great Society.

Yes, but the actual evidence is thin. Unless you care to present some.

but "myth" is all I was trying to get past.

So because Friedman says so, it's not a myth? Sweet.

The poverty rate was below 15% by 1966 less than two years after the legislation was enacted, not really long enough for the legislation to have accomplished that and continued to decline through 1969

The programs received billions in funding the first two years. Definitely time enough to create an effect. And through 1969 there was even more time.

Wasn't there another war going on in the '60s and '70s? Why isn't the cost of that ever mentioned in these conversations?

Oh right--money spent on the military isn't real money.

"Wasn't there another war going on in the '60s and '70s? Why isn't the cost of that ever mentioned in these conversations?"

Not my stance that the Great Society was the only impact, just like it is not my stance that Bush tax cuts were the only impact in the 2000's. In fact, my stance is that the economy has cycles that in many ways are completely seperate from government impact.


The key contributor to the current economic downturn was the lack of innovation in the late 90's and 2000's that left little place for money to go except overseas for cost saving and into risky investments in mortgages to create returns that were acceptable to everyone from Buffett to the average 401k holder. The financial meltdown accelerated the impact of that lack of innovation and continues to extend it's impact because we don't have a new and exciting industry (or industries) to attract that investment. So, now, instead of putting that money into high risk investment it is sitting on the sidelines waiting for a place to go.

I am not alone in this view. If you read Michael Mandel (former chief economist at Business Week) he has a string of blog posts dating back to when he was at Business Week pointing out the downside of the innovation gap. His new blog is here and is great because he covers lots of topics in short posts that generate thought.

The 70s were a time of considerably higher real hourly wages than the 80s, 90s, or 00s:

I'm sure they were traumatic times for those who lived through them. On the other hand, right now is a traumatic time for a lot of people, and the fact that it isn't for a lot of other people isn't indicative of much - many people had a non-traumatic time in the 70s, too. Every time is a bad time for some and a good time for others; we have to look at the statistics to understand how bad any given time, and by the statistics on things that really matter, like real wages and unemployment, the 70s were better than subsequent decades. Maybe the nasty interest-rate shock in the 80s was necessary. Maybe unions did need to scale back wage increase demands a little. But the reaction was a massive overreaction, and the ideology that supported it has had its change to run the country, and the results have been mediocre.

Now that chart comes from a blog post discussing the idea that real compensation - including benefits - has steadily increased, as per this chart:

The post is worth reading to see which of those two graphs you think describes the real situation better, but in any case neither one shows the 70s as a period of dire deprivation by comparison to the subsequent decades.

Unemployment was bad for a long time, though not as bad as it is now, but it had a period of being worse in the 80s than in the 70s. I think it would be interesting to calculate an "percent unemployment year" measure that took into account both the length and depth of periods of high unemployment, maybe I will do that.

My concern is that things are not going to stay at the current level. The current level of unemployment & business investment is based on an expectation of a real recovery. If that expectation goes away, we will be right back on the disinvestment/liquidation spiral, but starting from a lower point.

Not that this has all that much to do with Eric's post.

Not my stance that the Great Society was the only impact, just like it is not my stance that Bush tax cuts were the only impact in the 2000's. In fact, my stance is that the economy has cycles that in many ways are completely seperate from government impact.

For the record, it is not my contention, nor was either cited piece suggesting, that the Bush tax cuts were the only impact in the 2000s. They were a contributor, for sure, but they were like one big cherry atop a sundae that was in the works for decades.

The answer to that is pretty easy, the pre Nixon/Carter years were when we implemented the Great Society and no Democrat wants to discuss how that is the change that destroyed the success of the fifties, not lowering the top marginal tax rate.

I think it is very easy to find something you don't like, and then look forwards in history until something bad happens, and declare a causal relationship.
Wikipedia suggests Nixon's price controls along with several exogenous shocks (eg the jump in energy prices). That's not to say that those are necessarily definitive causes...
But if what you said were true ie that government spending had become too large somehow and that this caused stagflation etc, I am trying to understand how Reagan 'fixed' this by making the deficit much, much worse in the 80s.

There's also this, via Krugman:

The 90s were a time of higher taxation and more balanced budgets. They are the best possible evidence that the deficit actually matters, but they are absolutely ignored by people who claim to care about the deficit because the deficit was done away with through defense spending cuts and tax increases, and the economy boomed under a Democratic President and everyone knows Democrats are bad for business.

The idea that the story of the 90s is just the fundamentally unsustainable dot-com boom is incredibly wrong. Yes, there was a stock bubble that was very small compared to the housing bubble, and yes there was some misdirected investment in tech companies, but then again a great deal of the anticipated opportunities did arrive - Amazon and Ebay and Apple and even Microsoft are still going strong, Google had hardly shown up by the end of the bubble, and in general the process of taking advantage of online business opportunities was in its infancy. It still is, actually (this is what I work on) which is part of why I'm optimistic about the ability of America to continue to prosper if it can just make some tweaks to the social contract and get unemployment down.

I think higher income taxes encourage investment and by providing an equalizing economic influence they expand the number of consumers which is good for business. They are not good for making a few thousand people in the US mega-rich, but they literally benefit about 99% of the population, even much of that part of it that would be subject to them (for instance, me).

It's no surprise that the mega-rich oppose them, and given their incredible influence over the media it is no surprise that they managed to convince a lot of ordinary people that higher taxes would be a disaster. Well, they got their chance to try it out. It failed. Let's try the thing that has worked before: taxes, spending, full employment.

Marty at 3:06 pm: "Not my stance that the Great Society was the only impact . . . "

Marty at 1:01 pm: "the pre Nixon/Carter years were when we implemented the Great Society and no Democrat wants to discuss how that is the change that destroyed the success of the fifties . . . "

Those don't look consistent to me.

Marty, if you are going to exclude Civil Rights legislation from that included under the "Great Society" label (not sure I agree with that distinction, but no matter), I think the biggest thing you are left with is . . . Medicare. Good luck with getting any Republican to stand up and announce a plan to repeal that.

Hogan,

Sorry, my dramatic side got away from me. The words were not consistent. The Great Society did play a key role in my mind, but certainly my economic views in general would not support the wording of my earlier comment.

The key contributor to the current economic downturn was the lack of innovation in the late 90's and 2000's

?!?

I'll go read the guy's blog just to see what he has to say, but if were to try to characterize the twenty years from 1900 until now, "lack of innovation" would probably not be what leaped to mind.

Can you expand this a little and explain what you're talking about?

"The idea that the story of the 90s is just the fundamentally unsustainable dot-com boom is incredibly wrong."

In case I wasn't clear, the dot com boom was a late 90's phenomenon and the bust (just as quick) early 2000's. In fact, in the tech sector much of the ramp up in wages and employment was driven by the various Y2k activities, even more than the dot com boom, and the precipitous end to that in 1999 or so had as big an impact on the tech downturn as the dot com bust.

but if were to try to characterize the twenty years from 1900 until now

Can you expand this a little and explain what you're talking about? ;)

The idea that the story of the 90s is just the fundamentally unsustainable dot-com boom is incredibly wrong.

How so? What else happened to the economy just prior to 2001?

Really, I'm curious.

Amazon and Ebay and Apple and even Microsoft are still going strong

Apple was around for quite a spell prior to 2000, as was Microsoft. They both had products, you see, that people valued. Ebay had, I imagine, a workable, sustainable business model, as did Amazon. That some companies survived completely fails to negate that a great many failed.

There would have been a few more links in there, but it seems that most of the big names from the 1990s have died or become penny stocks. Not just dotcoms, either. Tech stocks. Lucent Technologies, for crying out loud. You can go click on Cisco, Intel or Hewlett-Packard and see the same characteristic buildup to late 2000, then in the dumper. Most of those stocks still have not recovered, nearly a decade later.

Bubble? Sure as hell there was a bubble. Perhaps not as damaging as the housing bubble, when it burst, but it hurt.

Seriously, did you have any mutual funds? How could you not have noticed that?

"Put up a simple chart of revenues or growth over time, and they start screaming that you’re cherry-picking data; that you’re a liar for not mentioning Jimmy Carter, or something; or, the all-purpose response, 9/11! 9/11! 9/11!"

Mr Shrill

Russell,

This is a column he did on the topic introducing the concepts.

"Seriously, did you have any mutual funds? How could you not have noticed that?"

Heck Slart, I didn;t own mutual funds, I owned a little of everything from Lucent to Scient and Viant to Cisco to Juniper. Needless to say my fairly minimal 401k became nonexistent. :)

My condolences, Marty. I was about hip-deep in tech; I lost about 50%.

So, given that you know firsthand what happened circa August 2000, how can you say that there wasn't a bubble?

My brother had a software consulting business. Still has one, and even a decade later, it's a mere ghost of what it was in 1999. One of his customers (and at one point, his employer) was Lucent. He owned stock, too.

Sometimes, the whammy is double, or worse.

There are only two things that are important in the economy: unemployment and real median wages. If unemployment isn't low and real median wages aren't rising, then our economic policies cannot be said to be a success.

You can claim how great it is that interest rates our lower now (and it is! I love them!), but stagnant median wages mean that you can't afford the increases in rents or housing prices (and medical costs), because while they're rising, your income is staying the same.

There are segments of society who seem to be happy if the only metric is increased productivity and GDP growth: as long as some people are getting rich, then it is considered okay that the masses are being left out of it.

I guess I shouldn't really care-- I'm firmly upper middle class and I have options, and those overall GDP growth statistics are pretty likely to go straight to me. And Marty? What does he care? He's old, and he can sit back and mock the proles for not knowing how good they have it. But something's seriously wrong when we are pursuing policies of upward distribution rather than policies that blatantly and aggressively serve to maintain a strong middle class.

Needless to say my fairly minimal 401k became nonexistent

I'll one up ya both: Fresh out of law school, I was working at a corporate firm doing M&A and securities work. Since I had prior experience at a software/Internet company, I was handed a portfolio of clients operating exclusively in that space. When the bubble burst, circa 9/11, I and the other young associates in my space got the axe because the clients simply vanished in quick succession.

Pop. Pop. Pop. Like popcorn.

Needless to say, that was not the best time to be looking for a job. And unemployment payments were hardly enough to cover expenses in NYC, nor was anything about the experience akin to "fun."

Seriously, did you have any mutual funds? How could you not have noticed that?

I was 24 in 2001, 2 years out of college, and had $10,000 in my 401(k). It became $5,000. Hardly the end of the world for me, but it got my attention. I was also working at Ground Zero of the dot-com crash in downtown San Francisco, my dot-com employer went bankrupt and my previous dot-com employer got bought for a song and laid off most of my friends.

So yeah, I noticed. I also noticed that most of the people and VCs who had been involved in the early dot-coms got involved in the newer ones, many of which either make money or look to be in a much better position to do so. That does nothing for investors in individual dot-coms, but it does speak to the potential of the industry.

In chained 2005 dollars, the US economy grew from $8 trillion in 1990 to $11.2 trillion in 2000; it was 40% larger by the end of the decade. And yes, between 2000 and 2002 it then only grew to $11.5 trillion. That encompassed the dot-com crash (and Marty correctly points out that Y2K had something to do with it too). The 90s were not just the dot-com boom. There was a large, real expansion in the economy that was not undone by the subsequent recession.

There was also a real expansion in the economy during the 00s that has not been entirely undone by the subsequent recession. The economy grew from $11.2 trillion in 2000 (again in 2005 chained dollars) to $13 trillion in 2009, or a gain of 16%. Unfortunately unlike the 90s it was not accompanied by especially high employment growth and it was a regressive period for wage growth (these two facts being connected).

Just a cruel coda:

My stint on unemployment ended (well, the payments ended first, then my status as unemployed) when I went in-house at, of all things, a software/internet company. Then, a couple of years later, it, too, went bankrupt.

Anyway, the story has a happy ending, but that dot com bubble burst had me wandering the wilderness for a few.

"There are only two things that are important in the economy: unemployment and real median wages"

Except real median wages account for the raises in rent. etc. but not interest rates.

Glad us old people don't have to worry about those sorts of things, good to know while I am looking for a job.

"I'll one up ya both:"

Nah, you can't one up me. I had 7M (net after taxes) in stock options in December 1999 that were worth 0 dollars by the time they vested in February 2000 followed by no job in May. In 45 days I went from counting the days to semi-retirement to just a working stiff the rest of my life. sigh.

Marty wins!

Indeed.

Yeah, I fold. That may be the best misery poker hand I've ever seen.

Oh, sure, people have lost more. But rarely do you see the riches-to-rags transition happen that quickly, other than Louis Winthorp III.

My dot-com bust story wasn't particularly harsh. I was out of work for a couple of months and too depressed to look - although I did get my Dark Elf Magician to level 60 in Everquest and complete his quest for the Orb of Mastery, so it wasn't a total loss - then got rehired by a previous employer.

Marty, that is terrible. I'm always amazed at the number of people who did make it out the door with similar amounts of funny money - the frenzied atmosphere as people tried to do it being the main reason for the crash, in my opinion. When someone says the plan for their startup to make money is "go public", things are seriously fubared.

This is a column he did on the topic introducing the concepts.

Marty -

Thanks for the link. He presents an interesting idea, but I hope you'll forgive me if I say his argument seems weak to me.

He gives examples of things that didn't come to fruition, but several of the examples are things that actually are, now, delivering real products to the market. He seems to argue that ten years from bright idea to viable product is too long, but to be honest that timeframe seems about right to me.

The tech bubble stuff also, to me, doesn't seem like a total flameout. Lots of companies crashed and burned, and a handful got really good at what they did and are now highly successful.

The fact is that a lot of the tech startups weren't offering a whole lot of value to begin with. A lot of the solid, value-adding technology survived, and made a lot of folks a lot of money.

On the tech tip, I keep coming back to the Andy Grove article in Bloomberg. He argues that innovation creates jobs at the point that it scales up from bright idea to industrial or large-market production.

We offshore that stuff.

"My brother had a software consulting business. Still has one, and even a decade later, it's a mere ghost of what it was in 1999. One of his customers (and at one point, his employer) was Lucent."

BTW, Lucent was also one of my biggest customers, I have been in software consulting for most of my career. The company I managed outlasted all of my competitors, but all of the guys I know that run newer companies still struggle these days. It is a tough business, if he still has one he has done well.

Some bastards get lucky, though. My brother's college roommate started an Internet radio broadcast company, sold it to Yahoo via stocktrade (IIRC) and then got out from under Yahoo stock before it truly went in the dumper.

Currently 326 on the Forbes 400. Lucky bastard.

Well, I guess I've been in plenty of situations where I saw rents far outstripping local rises in incomes, so YMMV, I suppose: certain stagnant median wages was accompanied by a huge runup in housing prices.

And one of the things that has been a bit shattering to me is that, post-housing-bubble, where lots of real estate prices are still high, we seem to have to readjust our expectations for what kind of incomes will cover your housing costs-- but that was an effect of keeping interest rates artificially low throughout the Bush presidency, inflating that bubble.

No good tech bubble stories from me. I didn't get rich, but I didn't go down in flames, either. I went to some great dot-com parties, though.

What kind of software, Marty? Maybe you know him :)

...or maybe you are him. On the Internet, nobody can tell you're brothers.

"We offshore that stuff."

Yep, so it really isn't that innovative huh? The point is that the US economy has been built on being one innovation or two ahead of the global eceonomy. We have created jobs and industries that allow us the luxury of losing to offshore the string of industries that have gone there (manufacturing to software development to financial services).

What we haven't come up with in the last ten-fifteen years is the next generation industry we could do here. If we don't come up with the IP to drive a next generation economy then we have to compete even more on cost with the global economy and that will certainly limit wage growth and the ability of the middle class to survive.

"What kind of software, Marty? Maybe you know him :)"

If he is in the business it is a possibility. Or now I am looking for a job I might talk to him, so let's not mention my name......... :)

This is the most confusing thread in the history of threads, and I've got charts to prove it.

I'm going to explore Marty's link to Michael Mandel up above when I have more time, but I couldn't help spotting Mandel's latest endeavor is a roundtable on the innovation shortfall hosted by James Glassman.

James Glassman.

That James Glassman?

Dow 36,000 by 2008 (Why This Time Is Different) Glassman?

Whose chart of the future was better turned 180 degrees upside down for a 100% more accurate forecast of the future.

Who got everything (well, HE wanted more) he wanted over the next decade in the way of tax cuts to spur innovation blah blah blah. Including the dead, who are apparently stil innovating desite the gnawing of the worms.

So, I see everyone here, including me, was buzzsawed to some degree by the dot.com bust.

Did innovation stop or was it speculation that stopped?

If it was innovation that stopped or slowed, what caused that?

By the way, what kind of idiotic, innovative culture gets taken in by the Y2K hoax? That was very creative destruction.

And could it be that the nature of the innovation over the past number of years, while having its upside, might also have something to do with the vast imbalance in the distribution of wealth in this country?

I mean, what good is the innovation of online filing for umemployment benefits when those benefits are canceled in a time of no available jobs?

Just some questions.

I have a chart of questions asked over the centuries overlaid on a chart of answers, and the lines never intersect. If you turn it sideways, close one eye and hop up and down on one leg, it looks like Rome burning.

I mean, what good is the innovation of online filing for umemployment benefits when those benefits are canceled in a time of no available jobs?

Well, obviously it lets you lay off people who work at the unemployment office. Fewer public employees! Lower taxes! Yay!

"it looks like Rome burning"

But can you hear it say Paul is dead?

SAP, Marty. If I tell you any more, I'll have to kill you.

"There's class warfare, all right, but it's my class, the rich class, that's making war, and we're winning.” - Warren Buffet

Oh, that reminds me--happy Bastille Day, everyone! Allons, les enfants de la Patrie! Form up behind Thullen!

SAP, a boom and bust business all by itself. Anyone who could do it in 1999 was worth 200+ an hour and wouldn't consider getting a job because contracts were always going wanting.

My assessment last year:

Now, a good solid support and upgrade business but most of the big guys have it and the little guys still can't afford it.

The best you can do is sell add ons like Business Objects or integrations to content management systems that get you much smaller average project sizes but keep you engaged until they need an upgrade.

Should still be a good lifestyle business though if he has a good customer base.

Yep, so it really isn't that innovative huh?

Um, not sure what your point is there.

We have created jobs and industries that allow us the luxury of losing to offshore the string of industries that have gone there (manufacturing to software development to financial services).

I guess what I'm arguing is that no, we haven't.

We haven't had, and don't now have, the luxury of losing to offshore the string of industries that have moved there.

And if things continue as they have been, competing on cost may well become less and less of a problem.

Sorry, the para beginning "We have created jobs..." should have been italicized.

It's famine, Marty, with brief spurts of feast. My bro had to branch out into Oracle and various other enterprise packages, and it sure doesn't hurt that he put in time as Unix/HPUX sysadmin.

Currently he's doing SAP support, but he's having to live several hundred miles away from his family to do that.

Which is better than not having an income, to be sure. Still: things never did recover from the dotcom bust in that business, and have declined substantially since a couple of years ago.

JT: I mean, what good is the innovation of online filing for umemployment benefits when those benefits are canceled in a time of no available jobs?

I agree, which is why I want policies for full employment. Innovation is a solvent to stable business and employment. It puts people out of work, kills businesses, and drives down profit margins. Those are all bad things if you can't employ the displaced people elsewhere. Those are all good things in the long run if you can maintain full employment because they make the economy more productive and efficient. As I've said before, efficiency isn't all it's cracked up to be when unemployment is high.

The thing is, innovation and productivity increases are unavoidable even if you think they're undesirable. It's a force of nature. What you have to do in response is build an economy and a culture in which full employment is put first, because the factors acting against it are automatic and implacable.

The Internet in particular has been like pouring concentrated acid on an immense number of local middleman businesses. You don't need local suppliers for a huge class of goods where it used to be mandatory. Efficient, yes, but also acting to centralize and concentrate wealth. We should be doing something about that with taxation.

Russell,

The point is, if you look past the impact on individuals, for decades we innovated new indistries that made the economic impact of offshoring manufacturing minimal in the groth numbers of the economy. Both from a business and consumer standpoint there was that next American business that led the world economy. Cars, TV's, semiconductors, computers, new software, financial services, etc. When we had created and matured the market for them then someone figured out how to take the technology involved, move it overseas and use cheaper labor to deliver the same product.

But that was "ok" because the newest one drove growth. That cycle shortened as global commuication and networking made the transition to offshore easier and quicker, so the innovation cycle got squeezed. So now ten years is too long because the time to offshore is much shorter than that.

Now we live in a world where some innovation never drives a job here. It is possible that all of the companies that laid off people in the last two years have no intention of EVER hiring anyone back in the US. The downturn provided the impetus to invest in the offshore capability as a cost saving measure and most of the new jobs that come back will just be hired there.

So overcoming the innovation shortfall becomes more critical, in fact IMO, dire, if we want to restimulate job growth here.

It also requires a real focus on supporting small startups and smaller businesses in general who can't really achieve economies from offshoring.

sorry truncating rant.

John Thullen: "By the way, what kind of idiotic, innovative culture gets taken in by the Y2K hoax? That was very creative destruction."
Are you saying the Y2K bug was a hoax, because nothing happened? Because the reason nothing happened was companies and people spent a great deal of time and money fixing the problems before they happened.

The tech bubble was crazy, but we got the modern internet we take for granted out of it, along with a lot of data infrastructure upgrades, and lots of benefits that are hard to put a GDP number on, like Wikipedia etc. Whereas from the housing/derivative bubble, now that it popped, left us with a bunch of exurban McMansions, many of the best and brightest science grads recruited to Wall Street, and... nothing. Because Wall Street wasn't "innovating" anything other than ways to make more money for Wall Street.

Because the reason nothing happened was companies and people spent a great deal of time and money fixing the problems before they happened.

I was going to say that, but I thought pretty much everyone knew that but Thullen.

And then I thought Thullen must surely be doing some sly kind of leg-pulling that would be embarrassing to respond to, and that kind of cinched the matter for me.

Generally, I like to second-guess myself, but since everyone already has, let me move on to third-guessing (of the non-sly variety) regarding Y2K.

Yes, I recall all of the digital fixing that occurred, but I also recall fantastic claims of catastrophic failure in, for example, the many many valves used in municipal water systems, nuclear power plants, and other intricate systems.

Are we saying all of those valves were replaced or reprogrammed? Humanities major here, so bear with me.

Wikipedia, which Nate rightly extolls as innovation, has examples of failures that occurred, they were few and far behind. But, I wonder, some dog-racing betting machines are cited as having went haywire in New Jersey, I think.

Does this mean all of the other dog-racing betting machines in the world that didn't fail were fixed ahead of time, except for the ones in one location in Jersey?

As an aside, there is a sidebar with the Wikipedia Y2K article by Alan Greenspan about his role in misprogramming 2000 way back when.

Man, that guy is a one-man wrecking crew.

In the interest of not thread-jacking, don't respond to this comment.

Marty, thanks for the reply. I have no argument with any of the points you make at 5:39, thanks for the breakdown.

My only point about the ten years is that for some of the examples Mandel cites -- artificially grown skin graft tissue, frex -- ten years from bright idea to making money, with all of the things that encompasses -- scaling up production, developing a market, establishing distribution channels (including figuring out how to ship live tissue effectively) -- seems about right. Even if far too long from an investor's time-to-market point of view. Some stuff just takes time.

I disagree with Jacob's sort-of-blanket statement about innovation being a "solvent to stable business and employment". It causes change, but quite often the result is a net increase to business health and growth and the employment that comes from that.

Overall, I continue to find Grove's argument convincing. I don't really think the rate of innovation has slowed significantly, nor do I think folks are any slower at bringing innovation to the market. I just don't think it's turning into jobs in this country in a big way, because it is increasingly possible to offshore the labor component of scaling up and supporting a product or service in the market.

As several have noted, the basic dynamics behind that aren't likely to change. I'm not sure an explicitly protectionist policy is a good idea (although some of our "free trade" partners don't mind engaging in it) but we should, at least, use the levers available to public sector to provide *some* positive incentives for companies to keep jobs here.

When I say offshoring is not a luxury we can afford, I'm not so much arguing with Marty about the basic dynamics involved, I'm just saying that IMVHO it's a misstatement to say it's something we can afford. I don't think we can.

We need to find areas where we can create value that are less prone to offshoring, and we need to make it less knee-jerk attractive to send jobs overseas.

If as a result it costs N% more to buy a TV set or cheap socks, IMVHO that's a good trade.

The Internet in particular has been like pouring concentrated acid on an immense number of local middleman businesses. You don't need local suppliers for a huge class of goods where it used to be mandatory. Efficient, yes, but also acting to centralize and concentrate wealth.

I would argue with the claim of efficiency.

My wife and I are planning a vacation. Once upon a time, you would go to a travel agent. Now, all the information is online, so you do it yourself.

So, my wife spent about 10-12 hours over the last day and a half running all of the details to ground.

We didn't pay the "middleman", we did it ourselves ("who is this 'we' you speak of", I hear her say). Off the top of my head, based on my wife's billing schedule, 10-12 hours of her time vs. paying a travel agent is likely a wash, at best. Probably we lost some $$$$.

Actually, we probably lost a lot of $$$.

My list of things like that is very, very long indeed.

The self-service model, facilitated by the internet or not, is efficient for the guy that cashes the check. Everybody else, not so much.

The self-service model is basically a way to shift labor costs to the consumer.

So, no argument with your last sentence cited above.

In the interest of not thread-jacking, don't respond to this comment.

I will defy you, sir, and add my own two cents about Friedman.

If it doesn't fit his model, Friedman doesn't see it. Another word for that phenomenon is "having your head up your @ss".

It's a phenomenon that correlates very closely with "University of Chicago School of Economics".

Two cents over.

"The self-service model is basically a way to shift labor costs to the consumer."

Remember that, people. You don't cut to the chase too much more directly than that.

There is a dear, uncomplaining lady who sits near me at work suffering from a serious cancer undergoing chemo while taking care of her elderly mother at home.

We work at the Census Bureau, so you see the near future in terms of employment for her. I don't know her health insurance situation, but I hope to God she's on Medicare, for the time being, until November when Rand Paul and Sharron Angle abolish it.

This lady spends her day on phone trees with her supplemental "insurance provider" (for vomiting as a result of chemo, press 7), talking to various insurance apparatchiks on the other end, taking her medical care into her own hands, as we're told to do by idiots who, oddly enough, are in robust health, and trying to convince them to authorize and pay for the drugs she needs, despite her premiums.

We are a cruel society. We're poodles with sores jumping through hoops to maintain fiscal austerity for the under-taxed.

Let me ask you something. Before Nixon invaded Cambodia, did he ask Pol Pot to design the phone tree? Did he send Spiro Agnew over there on a secret mission before the bombing to extract one cruel idea that American capitalism could adopt for its efficient use?

Maybe Pol Pot suggested the plan to kill everyone who wore eyeglasses, but Agnew, having received campaign contributions from the opthamalogist lobby, politely declined, but leaned in and said "But tell us about this phone tree innovation your people are keeping on ice."

We are a cruel society.

I agree with this.

I don't think it would bother me quite as much as it does if we didn't take such pride in it.

Did he send Spiro Agnew over there on a secret mission

No, it was Kissinger that he sent. And it was Kissinger who, being a wearer of glasses himself, decided to deep six the "kill the myopic" concept and go with the phone tree instead.

What can you say? The man had a finely honed instinct for cruelty.

First the (service) work was done by free Americans, then by free Mexicans, then by imprisoned Americans*, now by imprisoned Mexicans. What's next?
In Iraq Bush&Accomplices fed the insurgency (even more) by importing cheap (effectively slave) workers from other countries instead of employing Iraqis for the reconstruction work. Given the effort to kill minimum wage requirements in the US (either outright or by redefining them to the point of effective death), could a similar situation develop in the US, i.e. could corporations import work slaves from low wage countries to do the work that can't be physically offshored (thus driving up citizen unemployment even more)?

*In some case step 2 and 3 in reverse.

I have to jump back to the Y2K deal. Yes, there were problems, probably most of the ones possible, prevented because of some portion of the money and effort spent on preventing them. In that sense, no, it wasn't, strictly speaking, a hoax. If we did nothing, we would have had problems, some serious, some just annoying. BUT (I'm feeling saucy today, so all caps) the problem was grossly exaggerated in terms of both its breadth and depth.

Lots of people made money pimping Y2K and scaring various interests, many with technologically ignorant leadership, into major overhauls of systems not in need of them. And there was plenty of media pimping to feed public hysteria, keeping the nailbiters glued to the tube for the latest apocolyptic prediction and the measures to take for survival. (A nutball neighbor of my mother-in-law's bought gold and stockpiled canned food and bottled water. An outlier, but still...)

I mean, most of the commenters here agree that we had to do something in response to the 9/11 attacks, but that doesn't mean we don't also agree that we've wasted lives, money, thought and effort in our response thus far, right?

While there were the Y2K doomsayers, I found that the primary driver by business was the real lack of knowledge as to whether systems needed to be updated.

We did millions of dollars of business in just helping companies identify the things that MIGHT be a problem.

Machine controls, building control systems, small off the shelf systems, etc. In some large companies there were hundreds of pages of potential risk items, and I won't even describe the government systems issues.

Lots of companies spent that money NOW, instead of later, to upgrade systems just to be safe. They got other benefits from the newer technology but wouldn't have moved as quickly to get it.

The smaller companies we could usually define the risk and mitigate it without massive expenditures simply because scale mattered in the decision. If some of them had to run their production lines for a few weeks on paper they could get that done.

The apocalyptic aspects were really more centered in government and Wall street systems where very short downtimes were unacceptable.

There was surely some unnecessary money spent, the vast majority was spent for a good reason and minimized the issues. We felt that as an industry we had performed a remarkably effective task over the last half of the 90's.

We occasionally knew that we had done a few things that weren't necessary except for the customers peace of mind, and always at their insistence.

At Y2K I was working on weather related systems. Without going into gory details, we did have customers for whom simple errors in data quality could result in significant harm.

So, we did a lot of due diligence. The number of problems we found and fixed was not that large, but it was worth putting in the time and effort to find them and fix them.

My most alarming and/or colorful Y2K memory is of a trumpet player I worked with at the time who got pretty paranoid and starting carrying a shotgun with him pretty much all the time.

I'm not sure exactly what he thought was going to happen, but he was ready.

Once you got used to it was OK, but in hindsight, it was definitely overkill.

The dude is known as "Y2K" to this day.

Marty, I don't doubt that you did high-value work or that you did so ethically. I also don't doubt that lots of other people did the same. I further don't doubt that others unethically did low-value work.

It would be difficult as an individual for you to speak for an entire industry. I don't doubt that you are expressing what you heard in your industry.

It's just that the rip-off artists don't usually brag publicly about their "successes" at industry gatherings or in industry publications. If anything, they will present their low-value, unethical work as the exact opposite, which is easy to do, since it looks the same on the surface. You just have to leave out or change a few key details. No sweat.

I don't have much in the way of facts to support what admittedly are my personal beliefs based on anecdota and the impressions I had in my professional experience at the time, but there is a compelling human-nature basis underlying all of it. There are points in time when some people are ripe for the duping, and there are always people waiting to dupe them.

I should add that I think, even among those who were sold something they didn't need, not at their own insistence, mind you, but because of a good sales pitch, some still got something of value. Maybe they didn't really need the Cadillac, but they did, in fact, get a very nice Cadillac, as opposed to a Chevy that was said to be a Cadillac.

On Y2K, I'm sure there was the dreaded Waste, Fraud, and Abuse on some of it. But the difference with 9/11 is that even if the money spent on Y2K preparedness wasn't strictly necessary in some sense, after spending that money, most of it ended up going to either fixes, or new systems which the companies could then use. Whereas with 9/11, most of the money has gone to blowing stuff and people up in other countries.

But another thought on the 90s. Even if innovation was lagging, which I'm not certain of, I think a lot of the bust (and lack of innovation, if there was any) came from bad business decisions, and not just on the parts of those damn new internet kids. Look at Lucent, mentioned above. It used to be Bell Labs, which for many many many years was one of THE premier research facilities in the world. The other part of it was AT&T's manufacturing division. AT&T figured to make short term profit by ditching the expensive research side, and thought their manufacturing part could sell to other telecom companies then. The problem with this idea is that research usually isn't profitable, at least not immediately, especially lots of the kinds of research Bell Labs had done. And it left AT&T without a major portion of its research division, which naturally enough means that AT&T wasn't going to come up with the next new big thing on its own.

AT&T was hardly the only company that decided to scale back on research in favor of short-term profit margins. Or to "right-size" the company by laying off people to increase profits, while the company was doing perfectly well. Short-term thinking, all of it, at the expense of the long-term health of the company and the country. I suspect a lot of this blame goes to the fact the execs were making huge stock bonuses, so as long as the short term stocks were going up, they could hang around long enough to haul in enough bonuses to make their F-you money and quit, and leave some other sucker to try and "extract more value" from the company.

And those practices definitely haven't stopped, especially on Wall Street.

"extract more value" from the company.

The preeminent management philosophy of the last 30 years.

I like to see people who want to build more value in to the company.

Sometimes I feel like I live in a nation of cannibals.

Whereas with 9/11, most of the money has gone to blowing stuff and people up in other countries.

Just to be clear, I didn't intend to suggest that the waste resulting from Y2K and 9/11 were equivalent in either scope or nature, only that the situations were analogous from the standpoint of something being necessary, but that at least part of the actual response was not. (And, hey, didn't we paint some schools or something because of 9/11?)

Nah, you can't one up me. I had 7M (net after taxes) in stock options in December 1999 that were worth 0 dollars by the time they vested in February 2000

Ouch. But at least you didn't do an exercise-and-hold and wind up owning AMT on the nonexistent millions. (I know people who did.)

Some of it probably was unnecessary. But a lot of that couldn't be told until you went and looked at the code.

And I think there's a qualitative difference between unnecessary in the sense of "we could have waited five years to upgrade this" and/or "Well the now we now we're okay" versus the kind of unnecessary that involves destroying things unnecessarily. Because the first offer some kind of benefits, even if they're not maximally efficient in some sense, but the other is just a waste

The tech bubble worked in a classic sense. A new market was opened, speculators moved in, the market overextended then burned, and the survivors rose from the ashes.

And like most bubbles involving a new industry, the ashes were fairly productive. Computers got cheaper, bandwitdh was more plentiful (although now it's fallen behind our first world neighbors in speed, access, and quality) --- the investment hysteria left behind useful infrastructure, that was used by more sober companies in the light of day.

And I don't think the cleansing fire did all that good a job, nor has government been able to step up and prune the obvious stupidity.

The statistics that are regularly skipped by focusing on the last thirty years are that, prior to that, we had an economy with double digit inflation and double digit interest rates.

Real interest rates under Carter were 3%. Now if you are arguing that both inflation and NOMINAL interest rates were double digit in the pre Reagan years, then you are arguing that we had an economy with double digit inflation AND double digit inflation.

Which is not much of an argument.

Who did that hurt? Well, of course, the middle class and poor. Mortgages were at 17%, inflation over 10% and every person in the middle class was struggling to get their 8% raises to keep up with the runaway economy.

If inflation was 10% and people were getting 8% raises then the issue was not inflation, the issue was declining real wages.

Declining real hourly wages have certainly been a problem since the early 70s.

I clearly remember Jesse Jackson justifiably decrying...

Find someone who cares what Jesse Jackson decried or did not decry and take it up with them.

For those of us who lived through the Carter years the "staying the same in real dollars" plus consistently low interest rates and stable unemployment numbers WAS the good times.

Average unemployment rate was 6.7% under Carter, 7.2% under Reagan. Real interest rates were lower under Carter than Reagan. If those are your criteria, the good times were under Carter - not Reagan. 1980 was a bad year - Carter appointed Volcker, a Democrat, to the Fed and Volcker did the right thing and got rid of the inflation you are complaining about and it cost Carter the presidency. Take a look at what Volcker says now.

Obama appointed Bernanke, a "libertarian-Republican", to the Fed and Bernanke is going to do the wrong thing and worry about inflation more than unemployment in an era of deflation and it will cost Obama the presidency.

As for anger at the financial sector - look, the US taxpayer is the backstop for all the financial risk being taken. But they do not get any of the profits from that risk taking.

You don't have to be angry to recognize a raw deal when you need a new one.

The post is worth reading to see which of those two graphs you think describes the real situation better

I can't find a clear explanation of what the source data is for either of the graphs, given that one of the graphs is attributed to a link that is now dead, and the other one I've traced back to a post that doesn't tell where the data comes from or anything about it.

Can you explain what data series the graphs are displaying?

Well Duff This:

Inflation and interest rates, both topping 18%, are so far beyond anything that Americans have experienced in peacetime—and so far beyond anything that U.S. financial markets are set up to handle—as to inspire a contagion of fear. Usually confident businessmen and bankers have begun talking of Latin American-style hyperinflation, financial collapse, major bankruptcies, a drastic drop in the American standard of living.
from here is a good description of the times.

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