Why is the slope up a hill steeper than the slope down a hill? Seems like it should be the same, but it never is.
Everyone knows that it’s easier to ride a bicycle downhill than to ride it uphill, or to fall into a hole than to climb out.
The economy works the same way. If a $1,000 investment drops to $800, that’s a 20% decline. But for it to go back up to $1,000, that’s a 25% increase. You see, the climb back up is steeper than the drop down.
Remember the good old days when things seemed to be going great and the Fed would increase interest rates to slow the economy down? Or a big increase in jobs would send the stock market down because it was worried that too many buyers would cause inflation.
The economy seems to be counter-intuitive. Good is bad, and bad is good.
For example, the decline in housing prices has virtually crippled the economy, but it’s a good time to buy.
Banks are in trouble. With zillions of dollars of bad loans on their books and with housing values – their primary collateral – continuing to fall, banks are scared to make loans. Murphy’s Law says, “If anything can go wrong, it will.” Murphy’s Law of Banking stings even more: “If you qualify for a loan, you don’t need it.”
For years, economists complained that Americans “didn’t save enough.” We spent all of our money. That was a bad, but it made the economy grow, so it was a good. Credit card debt soared which was bad, but the stuff we bought made the economy grow, so that was good.
Today, we’re nervous about what tomorrow’s economy is going to do or look like, so we are changing our behavior. Now, Americans are saving more which is good, but by spending less the economy won’t grow, so that’s bad. We are paying down that mountain of credit card debt, which is good, but that money isn’t being used to buy the stuff that new jobs would make, so it’s bad.
The Japanese are very frugal people and famous for saving. That’s good, we were told. We should be more like them. But the Japanese economy has been in a funk for more than 25 years. Its stock market average was 10,000 in 1984 and after a blip, is still 10,000 while the US stock market is ten times higher than in was 25 years ago.
Do we really want to be like the Japanese?
The 2012 presidential campaign has begun, and until the election, the political rhetoric is going to be all about jobs. The political parties will blame each other, but more importantly, both will make promises they can’t keep.
During each decade from 1950 until 2000, the US created on average approximately 150,000 new jobs per month. From 2000 until 2007, US job growth was about half that, or 80,000 new jobs per month (despite huge tax cuts, but we won’t go there). Then, during the Great Recession of 2008 and 2009, the country lost 8.5 million jobs.
Do the math If we can start growing jobs at the rate we did from 1950 until 2000, that’s a 5 year climb to get back to 2007 employment levels. And that’s before a single new job is created. But what if the job growth rate from 2000 through 2007 is the new normal? In that case, climbing out of this ditch and getting back to even ground will take almost 9 years.
What about all this whining about the loss of manufacturing jobs? The US is already the most productive country on the earth. Most countries aren’t even close to American productivity. Each US worker produces 7 times more a Chinese worker and 13 times more than workers in India. As US workers become more productive every year, fewer people produce more. Increased productivity is good, right? But it means fewer jobs, so that’s bad.
It’s deeper than that. We don’t make shoes and shirts anymore. That stuff was easy. Today, we make satellites and electronic components, the hard stuff which requires more educated workers than it did to make shirts.
The presidential campaign will be fought with quick and easy sound bites. The problem is that these issues have no quick or easy answers. What politicians do know is that tearing things down is easier than building them back up.
Up is steeper than down. Go figure. How does anyone make an A in economics when the right answer might be wrong and the wrong answer might be right?