I was recently interviewed by Devon Douglas-Bowers of the Hampton Institute (HI) about the state of the economy. We talked unemployment, the effect of automation on labor, corporate stock buybacks, the implications of Federal Reserve’s near-zero interest rate policy, and the impact on the UK’s economy of its exit from the EU.
Unfortunately, despite my interviewer’s pleas, an editor there declined to publish the interview. The reason I was given was that “it goes against the HI’s viewpoint”. I was invited instead to engage in “a dialogue of sorts” about the topics we discussed. I therefore suggested that the Institute present a response to my comments, allowing me also an additional response, with the Institute of course reserving the right to get the last word. Alternatively, I suggested, we could do a follow up interview with questions challenging my original answers.
Despite the invitation to enter a dialogue and my acceptance of that proposal, I never heard back from the Institute. I am therefore publishing the full text of the interview here. I respectfully invite the Hampton Institute to engage in a dialogue about these important topics, rather than trying to suppress and ignore ideas that don’t conform to the preconceived notions of its editorial team.
Here is the full text of the interview:
Devon Douglas-Bowers: Talk about the current unemployment situation these days. The reports are that things have normalized, however, is that true?
Jeremy R. Hammond: That depends on one’s conception of what’s “normal”. We’re told unemployment has returned to a normal low rate at 4.4 percent. But the unemployment rate usually cited excludes among other things unemployed people who are so discouraged by the job market that they’ve given up looking. If the whole labor force is counted, the unemployment rate is 8.6 percent.
Also important to consider is what kind of jobs we’re talking about. A lot of the jobs that have been created are in domestic services, like in the restaurant or health care industries, not the kind of jobs that produce capital goods or exports.
That is, they aren’t the kinds of jobs that help generate economic growth. [I should not have said that. My thought was not well communicated. It is not that these industries generate no economic growth, which is untrue according to my own meaning of “economic growth”, i.e., an increase in societal standard of living. The point I was trying to make has been better communicated by Paul Craig Roberts, who has observed: “What we are witnessing in the United States is the first country to reverse the development process and to go backward by giving up industry, manufacturing, and tradable professional skill jobs. The labor force is becoming Third World with lowly paid domestic service jobs taking the place of high-productivity, high-value added jobs.” — JRH]
The structure of the labor force as a whole also must be considered. The unemployment rate was low at the height of the housing bubble, for example; but when the bubble burst, unemployment skyrocketed as the economy attempted to correct the malinvestment that the Federal Reserve’s low interest rate policy had caused to be directed into the housing industry.
Of course, the Fed responded to the recession it caused by holding interest rates artificially low by going even more extreme in its creation of currency out of thin air, which is the mechanism by which it pushes down interest rates below where they would otherwise be if determined by the market.
The purpose of this intervention was to prevent the necessary market correction from occurring. The corollary is that the next crash will be even worse than the last one. So, no, things are not at all “normal” if we define normal as a state in which we have a healthy economy growing on the basis of strong fundamentals, as opposed to an illusion of growth predicated on the creation of money out of thin air.
DDB: We’re seeing a lot of automation and we’ve been feeling the effects of it for a while now. How are people going to cope when their jobs could be automated in 10, 15, 20 years down the line?
JRH: We should welcome, not fear, advancements in technology that allow goods to be produced more efficiently. This is precisely how economic growth occurs, which benefits society as a whole, certainly including the labor force, as goods become ever more affordable.
Technological advancements do not cause net unemployment, they just cause a shift in the demand for labor. Sure, when the automobile replaced the horse and buggy, carriage makers went out of business, but this wasn’t a bad thing for the economy or society as a whole. Workers who had once made carriages could now earn an even better living working on Henry Ford’s assembly line.
Of course, people have to adapt to new conditions, but this is just a fact of life. Our species would be extinct if we didn’t learn to adapt as circumstances and conditions change. We just have to learn to adapt.
DDB: How have corporations been contributing to the employment glut by shifting their profits from re-investing in their companies for long-term stability to trying to increase their stock prices as much as they can in the short term? In what ways does this create a problem, not just for them, but for workers?
JRH: I don’t know that there’s a correlation between the spree corporations have been on buying back their own stock and job creation. If anything, I would assume the correlation would be negative as corporations buy their own stock rather than investing in, say, new lines of production that would require hiring additional workers. The stock buybacks come at an opportunity cost of real investment in the future of the company. The practice just makes each share appear more valuable on paper, but doesn’t represent actual growth of the company. The increased share value doesn’t represent real demand for the company’s stock. When the buybacks cease, if there is no real demand, this spells trouble for the corporation. And this has been happening on a wide scale, which has only set the stock market up for an even bigger crash than we could otherwise already expect as a consequence of the Fed’s low interest rate policy. Of course, as with the housing bubble crash, the next crash will spell disaster for a huge portion of the labor force.
DDB: The Federal Reserve has had a near zero interest rate policy for about the past decade or so. How has Wall Street gotten used to that and what problems may arise for companies, workers, and the economy as a whole when these interest rates start to go back up?
JRH: Fed policy is a lot like treating withdrawal symptoms for a heroin addict by shooting him up with another dose of heroine. It doesn’t actually help the patient get better, it only makes the withdrawal symptoms go away for a bit while actually prolonging his addiction and making it all that much worse in the long run.
In this analogy, of course, Wall Street is the heroin addict. If the Fed stops shooting up the patient, the withdrawal symptoms will begin.
In my opinion, the Fed is bluffing when it says it is going to start unwinding its balance sheet and allowing interest rates to rise. Simply stated, it cannot do so, and I think they know it. As rates rise, the malinvestment the Fed’s low rate policy has caused will begin to reveal itself, whether in the stock market, housing, or the bond market itself. The inevitable bust will be ushered in.
Also, business cycle aside, with its enormous amount of debt, the government cannot afford to allow interest rates to rise.
The Fed’s strategy at this point is to try to inch rates up just enough so that when the crash does come, they still have some room to maneuver. That is, they want to be able to respond to a recession by pushing rates down. They are trying to regain some leverage in that respect. It’s possible that we will see the negative interest rates in the future in the US, as we’ve seen in Europe. This bizarre phenomenon, where lenders pay borrowers for the use of the lenders’ money (like having to pay the bank to keep your dollars in a savings account, rather than the bank paying you interest), could never happen in a free market. It’s a consequence of massive government intervention and attempts to centrally plan the economy by engaging in price fixing of the rate of interest.
DDB: Going across the pond, with Brexit still in the process of being fully actualized, in what ways is Britain better/worse off than they were before economically? Are their parties in the EU that may attempt to punish the British for leaving the European Project?
JRH: I haven’t paid close enough attention to Britain’s economy to be able to offer an assessment of the pros and cons of having left the EU, in economic terms. There were threats to punish Britain for doing so, though I don’t know that any of these have been carried out by the EU or member states. But the bottom line is that Britain now is able to exercise more economic independence, which is a good thing. The more decentralized, the better. Central planning of the economy simply does not work.
The central fallacy of central planning is the assumption that government bureaucrats making decisions at best arbitrarily (assuming no corruption or ulterior motives) know better than the market with its pricing system how to efficiently direct scarce resources toward productive ends as defined by the will of consumers, which is to say by all of us.
There is no purer form of democracy than the free market. Whereas the market represents individuals engaging in voluntary exchange for mutual benefit, state interventionism and central planning represent the use or threat of force to expropriate resources for redistribution that benefits one group of individuals at the expense of another large portion of society.
Of course, Britain, like the US, has a very long way to go on the road to individual liberty and true economic prosperity.
Devon Douglas-Bowers is a 22-year-old independent writer and researcher. He is the Politics & Government Department chair at the Hampton Institute, and holds a BA in Political Science from Fairleigh Dickinson University. He has been featured in a number of online publications such as Truthout and Foreign Policy Journal. He hosts the Hampton Institute’s bi-monthly podcast, “A Different Lens.”