Wednesday, October 7, 2009

What's the purpose of an "economy"

In an October 12, 2009, article in Reuters, we are told:

The worst U.S. recession since the Great Depression has ended....

"The great recession is over," NABE [National Association for Business Economics] President-Elect Lynn Reaser said.

"The vast majority of business economists believe that the recession has ended, but that the economic recovery is likely to be more moderate than those typically experienced following steep declines."

At Dictionary.com we learn that we can describe an economy as "the management of the resources of a community, country, etc., esp. with a view to its productivity."

That is consistent with what the NABE folks think. From that article:

The NABE survey, conducted in September, predicted real GDP growth expanding at an annual pace of 2.9 percent over the second half of this year. Output for all of 2009 is expected to contract 2.5 percent and next year, rebound 2.6 percent.

On the other hand the folks at Wikipedia offer a different definition: "an economy is the ways in which people use their environment to meet their material needs."

The difference between these two descriptions is informative. One is about people meeting their material needs. The other could be about computers and robots using resources to increase something called "productivity."

This first view is what economists measure without regard to what is being produced. It could be food for people. But it could be robots that produce more robots designed to produce robots. The benefits of productivity are quantified only in the sense that electronic numbers representing value transfer between the producer and the entity receiving the product. In an obvious sense today, everything that the economists measure are really the results of computers exchanging data.

So we apparently are about to see the end of The Great Recession because "productivity" is rising, according to the data.

About that second definition, the one that says an economy is about people meeting their material needs. Unemployment is still rising and jobs are still being lost. So while productivity may very well rise, it appears it's not accomplishing much towards meeting people's material needs.

Well, that's not exactly true. It's increasing the material wealth for substantially fewer Americans than it did three years ago. And it appears it is likely to continue in that direction, an increasing productivity that benefits fewer and fewer Americans.

I suppose at some point the first definition economy could consist of millions of robots serving the needs and desires of fewer than 10,000 people. Maybe even fewer than one person.

But if productivity is rising, "economists" apparently would see the economy as "healthy."

It should make one wonder, though. Are the "economists" who are quoted in news stories and "journalists" who write those stories people, or are they simply computers regurgitating data created by other computers? It's hard to imagine a human being accepting, much less announcing, information that describes an economy as in a "jobless recovery." But apparently it's all a matter of your definition and what you think the purpose of an economy is.

We don't seem to have a common definition for "an economy." Those who think it is all about productivity apparently don't see an economy as purely a description of activity engaged in to feed, clothe, house, entertain, or transport me and mine or you and yours. Instead it is purely a description of numbers exchanged between computers.

So if 10,000 Americans out of 300,000,000 are sufficiently involved in creating those numbers and the numbers are increasing to the benefit of those 10,000 then by definition the economy is fine. If the remaining 290,000,000 die from starvation and exposure it will keep some of the remaining 10,000 busy as morticians. That will show up as increased productivity indicating that the economy is growing.

Of course, that example would be rejected as unreasonable and ludicrous. So let's look at real examples occurring in real time now in what economists and journalists are describing as a "growing" economy.

This month the Mortgage Bankers Association is holding a convention in San Diego. What are their "people" saying? According to a report:

The Mortgage Bankers Assn. said Tuesday that it expected home foreclosures in the U.S. to continue to rise before leveling off late next year. The reason: Job losses have replaced adjustable subprime loans as the main cause of defaults.

Jay Brinkmann, the group's chief economist, predicted that unemployment would rise through next summer, causing delinquencies to rise. And because of the loss of income, it will be increasingly difficult to keep troubled borrowers in their homes by modifying their loans, he said.

As a result, the foreclosure rate is expected to increase "through the latter part of next year," Brinkmann said in San Diego at the trade group's annual convention. "And even when it starts to come down, it's going to come down very slowly."

We know that more folks are going to be thrown out of their homes. No, they probably won't die. Yes, families will break up as a result. But hey, productivity is going up. In fact, some economist will soon note that the vacancy rate of apartments is getting too low, spurring construction of more apartments. So people losing their homes to foreclosure actually could be reported as an increase in productivity within a few months.

Under the economists' definition of "an economy" it's purpose is being achieved.

Let's take a look at another foreclosure situation recently reported.

More California hotels are being pushed into foreclosure as tourists and businesses alike scale back their travel plans and owners are unable to pay their mortgages.

Statewide, more than 300 hotels were in foreclosure or default on their loans as of Sept. 30 -- a nearly fivefold increase since the start of the year, according to an industry report released Tuesday.

..."I have never seen so many lenders contemplating mothballing properties," said Jim Butler, a hotel lawyer and chairman of the global hospitality group for Jeffer, Mangels, Butler & Marmaro. "It can and it will get worse for the hotel industry."

The reality of this report is found in the probable multiplier effect of these property closures.

First, as each "property" closes it means a loss of jobs - service jobs. You remember "service jobs." Those are the jobs that were created in the past several decades to replace the loss of manufacturing jobs. "Service jobs" were the jobs economists and politicians pointed to as part of our growing employment and productivity.

Second, in addition to lost jobs, as each "property" closes state and local governments will see a reduction in related tax revenue which already declined in 2008. In the immediate term, the loss in sales tax and "occupancy tax or hotel tax" revenue will be significant to many tourist and convention destination cities and counties. That will result in more job losses. But in the longer term, properties will be devalued resulting some long term loss in property tax revenue.

This situation is not limited to California and the projection that it will get worse is very clear. Smith Travel Research is the primary source of hospitality industry projects which are being reported as follows:

Occupancy is projected to slide again in 2010 by 0.6% to 55.1%, while ADR (average daily rate) is forecast to decline 3.4% to $93.16, and RevPAR (revenue per available room) is expected fall 4% to $51.29.

That's on top of the STR's projections for 2009: an increase in supply of 3% and a drop of 5.5% in demand. STR's forecast projects 2009 hotel occupancy to be down 8.4% to 55.4%, ADR to decline 9.7% to $96.43, and RevPAR to end with a 17.1% decrease to $53.43.

Lower occupancy rates and lower room rates mean it will be a buyers' market for those properties in foreclosure well into 2012, if any buyers can be found.

The point is that the loss of these jobs in the next few months are not going to be offset by recent "less bad" sales and profit reports by Intel which closed two American plants this year - its 200mm wafer facility in Hillsboro, Oregon and the D2 plant in Santa Clara, California. Not-so-bad profits at Intel are not going to materially help laid-off, newly-homeless American Intel former employees meet their "needs," though a very few other Americans will show increasing asset values on their month-to-month balance sheets.

If because of how it is defined, a nation's economy can be healthy even though the increased productivity benefits only a few citizens, then that definition, "the management of the resources of a community, country, etc., esp. with a view to its productivity," is a problem.

To this writer, the definition should read "the management of the resources of a community, country, etc., with the goal to meet the material needs of, and increase the material wealth of, all the people residing therein."

Using my definition The Great Recession in the United States appears to have only just begun. And depending on which definition guides public policy, The Great Recession in the United States may extend for more than a decade.

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