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taking stock

This is kind of a summary of my thoughts regarding the economy, my personal history intertwined with the economic history of the nation.

I'm trying to make sense of what the market has done over the past 40 years, and where it will likely head in coming decades, at what seems like a pretty weird time in history.

Growing up in the 80's and 90's, I think a lot of people, including me, just got a sense that the economy would undergo smooth exponential growth, with a few minor booms and busts now and then, for decade after decade indefinitely.

Looking at it now, in 2010, it's pretty hard to maintain that view, and a lot of things seems to have changed fundamentally.

Early in the year 2000 was the first year I had a "real job" (at an Internet startup company, not surprisingly), so it was the first year I was making enough money to open a stock portfolio and start investing. I dumped a lot of money into the market, mostly into technology stocks, traded on NASDAQ. It seemed like a sure bet, considering the constant predicable exponential growth of NASDAQ stocks up until that point, far outperforming regular less-technology-oriented stocks:

NASDAQ composite index, over the past 40-years:


Of course, getting in at the absolute worst time in history (when NASDAQ was around 5000), I lost a ton of money--I think I put in around 15 grand, and a year or two later, I had roughly half of it left (although in my defense, I think I still "outperformed" the overall NASDAQ market). Worse, I graduated college in mid-2002, right when the unemployment numbers started shooting up after the tech bubble burst. That meant I had to survive solely on savings for the next year and a half while looking for a job. I was unemployed for nearly that whole year-and-a-half, although did find some part time contracting work here and there. Despite how much I had lost in the market, I still had enough to live off of for that period of time, the catch was--I had to sell all of my stocks (aside from my IRA) to survive. Which meant that I bought everything at the peak and sold everything in the middle of the recession--the opposite of "buy low and sell high" like you're supposed to do if you don't want to lose your shirt. I'm guessing I wasn't the only one who was forced into this situation.

At the end of that year-and-a-half, I started grad school--the market recovered a lot while I was in grad school, and the unemployment numbers came back down to normal levels. Now there were plenty of jobs, but I was locked into grad school and wanted to finish up rather than take the bait. I resigned myself to missing out on all the market growth while I was doing something I enjoyed but getting paid very little for it. So I finished up, but as my bad luck continued, just before I graduated the economy crashed again, this time even harder! I had no money at that point, and had already started to get slightly into debt--so in order to look for work after graduating, I had to get much further into debt. Took me 6 months to find a job, and now I'm starting to pay off that debt. The sucky thing though, is that while every bone in my body told me I should BUY BUY BUY stocks in 2009 to finally be able to "buy while it's low", I had no money at all to put in. Once 2010 got underway and I had an income again, I figured I'd better put some in fast before things recover too much more. So I did add a bit more to my IRA, even though I had to essentially borrow (or at least--decide not to pay off debt, depending on how you look at it) money to do it. My rationale for borrowing money to contribute to my IRA is that the interest rate on my loans range from 4% to 6.5%, while my Roth IRA could potentially earn more than that and those earnings are completely tax free, unlikely a regular stock portfolio where your'd have to take 30% or so off the top.

Dow Jones Industrial Average over the past 40 years:


So far, I have been doing reasonably well this time around. Possibly from having picked better stocks. But I can't help but wonder if all the rules have changed and we're at a turning point in history. Before this decade, exponential growth seemed normal. But from 2000 till 2010, the Dow has just stagnated right around the 10,000 level... and crashes every time it tries to go any higher. It also makes me wonder whether the apparent exponential growth of the 80's and 90's was due more to inflation or actual value creation. Maybe stagnation is actually the norm, and that was just a misleading period??

It seems my biggest bit of misfortune has been being in school earning close to nothing during both of the major bubbles (the tech bubble which you can see most clearly on the first NASDAQ plot, and the housing bubble which you can see most clearly on the DOW plot), and both times graduating right when the crash happens.

The difference between this decade and the 3 decades before it seems most striking if you look at the NASDAQ plot. Between 1970 and 1980, the index went from about 100 to about 200, roughly doubling. Between 1980 and 1990, it went from about 200 to about 450, more than doubling. Between 1990 and 2000, it went from 450 up to a whopping 5000 (right when I got in), multiplying by more than 10 times. The Internet explosion happened around 1995, so most of that multiplying by 10 times was between 1995 and 2000. Then, within a single year it fell all the way back to around 2000 and stayed around there for another whole decade. Of course, in retrospect, you have to consider the 5000 level in early 2000 as simply a "bubble" not really indicative of any real progress... so in that sense it's probably more true to say that it has stagnated for the past decade rather than gone backwards. The Dow plot shows the stagnation without the huge spike, with the recent dip and recovery circa 2008 being just a minor artifact.

Tied in with this question of "where is the market going from here--will we ever get back on track towards exponential growth, or are we doomed to stagnation from here on out?" is the question of whether we will ever get back to the unemployment levels Americans have long considered "natural" of around 4-5%. Unfortunately, taking everything into account I would have to lean towards believing that many, if not most, of the jobs that have disappeared will never come back. Most of them are in the unskilled labor market, and much of that has already been exported overseas or replaced with technology. Many of the jobs were a side effect of the bubble that has burst, a false sense of optimism that things will continue expanding exponentially forever (I think it's quite possible my job in 2000 fell into this category). Today, it seems like there just isn't as much of a demand for humans to do unskilled labor in the US as there once was. These roles have already been replaced with a combination of robots, illegal immigrants, and wage laborers in third world countries. Even many tech support and programming jobs, which are technically "skilled" have already gone overseas. When I hear people arguing about whether Obama should have done more deficit spending or more deficit tax cuts to stimulate growth... I tend to be skeptical that either can work. Maybe one of them or both of them could, but then we'll be left with so much debt that it gets us into a precarious position. Is the only solution to just accept a higher level of unemployment like many European countries do, and put in place social programs that make unemployment less brutal? I'd like to think there's a way of getting back to full employment, but my gut is saying no. I hope I'm wrong!

Krugman has been saying all along that if only Obama had done a bigger stimulus package, with less of it dedicated to tax cuts and more of it dedicated to government spending--we would be well on our way back to full employment. Tea Partiers, as well as many mainstream Republicans, tend to assert the opposite, that we'd magically be back to full employment if we just cut taxes and forgot about any of the deficit spending. I don't think I believe either. It will be interesting to see what happens if the Republicans do take over in 2010 and/or 2012, and if so whether the economy will get better or worse. I suppose if they do take over, and the jobs *still* don't come back, perhaps it will finally be time to have a dialogue on what seems like the fundamental problem--what do you do when there's a lot of unskilled people living here and no need for unskilled labor to be done here? More education? Or stronger welfare programs?

On a side note, Paul Krugman (and Thomas Friedman, in the same discussion panel) pissed me off recently by criticizing Obama for "not having a strong enough narrative" to feed the public. And citing Ronald Reagan as an example of a President who did a much better job on that front. Jesus, do they really think spinning more narratives is the answer here? How about just confronting the issues individually--why do we always need some kind of grand narrative to get everyone to drink the kool-aid? Sounds like neo-con talk to me!

Also, interesting to note, although I hate to tie the two together, is that the late 90's was when the idea of the "technological singularity" really took off, although it had been gradually gaining momentum for a while.

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( 19 comments — Leave a comment )
ankh_f_n_khonsu
Sep. 20th, 2010 04:57 pm (UTC)
Yes, Krugman never met a bailout or a fascist he wouldn't take to dinner.

This post reads, for me, as though it were written by someone blind to their own privilege.

From my vantage you really don't seem to "get" capitalism. Have you read any Bucky? The Grunch of Giants, perhaps?
easwaran
Sep. 20th, 2010 09:28 pm (UTC)
I think you're right to wonder about the exponential growth. If this really is the stable state, then it's a puzzle known as the equity premium. It's true that we should expect population to grow exponentially, and wealth to grow exponentially with a larger base, and the spread between these two should be the interest rate one can expect to earn on investment of any sort. Since debt (like bonds, and bank accounts) is less risky than equity (like stocks), one should expect a slightly lower return on the former than the latter, because people are willing to pay extra for the lack of risk. But for the '80s and '90s, the return on bonds was hugely lower than the return on stocks, which doesn't make any sense at all. But when you count the last decade, that spread disappears.

But it makes sense that we probably should expect exponential growth (or at least, greater than linear growth) of some sort forever. Some forms of wealth (like knowledge production, technology, and so on) tend to lead to the creation of more wealth, at a greater speed. And it's not clear that there really is any reason to believe there's a limit to the creation of wealth (when we understand "wealth" broadly enough to include anything that people enjoy, including knowledge, friendship, community, and leisure time, as well as more mundane things like jewelry and real estate, which really are much more limited) that could stop the growth for any very long period.
spoonless
Sep. 21st, 2010 02:26 am (UTC)
Oh, regarding the equity premium puzzle... I think I actually heard about that in the late 90's, just before I started investing. My take at the time, was that it just meant that investors were stupidly risk averse... and so I went for stocks and ignored bonds =)

My take *now* is that it was simply a signal that stocks were overvalued relative to bonds. If it's disappeared now, then perhaps that's a good sign that things are back on track, and we're ready for (real) growth again soon.
spoonless
Sep. 21st, 2010 03:24 am (UTC)
answering my own question...
I found this chart of the growth of real GDP per capita in the US since 1790 on a blog named "Captain Capitalism" (http://captaincapitalism.blogspot.com/2007/08/real-gdp-per-capita-1790-to-present.html):



If this is legit, then it surely seems to indicate strongly that economic growth will continue regardless of population growth. Although interestingly, it looks like almost more like two linear segments connected together with different slopes, rather than an exponential curve. Where the slope change happened around 1940, after a brief surge at even higher slope. Why, it's almost as if we were dealt an entirely New Deal somewhere around that time! =)

Edited at 2010-09-21 03:27 am (UTC)
spoonless
Sep. 21st, 2010 02:34 am (UTC)

But it makes sense that we probably should expect exponential growth (or at least, greater than linear growth) of some sort forever.

One thing I'd like to find out about this, and maybe I can find it by sifting through some of the stuff on that OECD database you linked to... is to what extent market growth has tracked (or has been due to) population growth.

It seems like we could get a good estimate for how sustainable economic growth is by looking at that. If the economy has grown much faster than the population, then it's reasonable to expect it will continue forever. On the other hand, if it has grown at about the same rate, then most of the growth is due to population growth, which must taper off at some point, when the earth starts getting too crowded. Even disregarding the crowding issue, the birth rates in most developed countries are just barely at 2 per female, if not a bit less... which means contraction rather than expansion if it weren't for immigration. So the only thing we're waiting for then for the global population to level off is for the developing nations to "catch up" to the rest of the world and stop breeding as much.
easwaran
Sep. 20th, 2010 09:45 pm (UTC)
As for jobs being gone, I think there's a few misconceptions. Manufacturing jobs have been on a slight decline for a long time, despite the continuing increase of US manufacturing, largely because of automation and mechanization, which leads to increased productivity (=value of production divided by hours worked). Probably the biggest category of jobs lost during the latest recession are in construction, but that's largely because of the housing bubble beforehand - the housing bubble attracted large numbers of people into construction, many of whom left agricultural and custodial jobs to take them. This led to many openings in those lines of work, which brought illegal immigrants and others. Once people realized that housing was a bubble, construction slowed to almost zero, rather than to the rate that is needed to keep pace with increased demand - the bubble years had created far more housing that will be needed for several years to come. Thus, all of a sudden, there's a lot of people with no jobs to go back to. But illegal immigration is currently negative, and housing demand will eventually catch up to the supply, so those problems will go away.

Also, outsourcing and immigration can't cause permanent problems for job supply. Both of those increase the wealth of new groups of people, which eventually stimulates demand and creates more jobs. The point of trade, and economic progress, is that it leads to exponential growth and actual creation of new wealth, and not just shifting around a fixed supply of wealth. When programmers in India start buying Chinese products, that means that China can't export as much to the US, so US factories will have to make up the difference. When Mexican immigrants come to the US and become farm workers and janitors, they start buying food and products in the US, which creates jobs as supermarket cashiers and retail sales staff, and bus drivers, and traffic police. There are certainly temporary shocks to particular labor markets, but they definitely don't result in the division of a fixed pie to a larger number of workers - they grow the pie.

Also, it's not clear that European countries accept a higher level of unemployment than the US. They accept a higher level of unemployment during boom times, but lower levels of unemployment during busts. The cyclical average employment is fairly comparable.

Additionally, even if there really is for some reason a decreasing amount of work for people to do, that doesn't necessarily lead to increased unemployment. Instead, we can react the way we have in the past. 60 hour work weeks gave way to 40 hour work weeks, and in Europe those have given way to 35 hour work weeks. If automation means that we can produce the same amount of stuff with only 78.5% of the employee-hours of labor, then that means that if everyone shifted to 35 hour work weeks, we could maintain exactly the same amount of stuff per person, and exactly the same amount of unemployment, but with extra leisure time for everyone who is employed. The main obstacle to this is that people are used to bargaining for more purchasing power and fixed employment hours, rather than more leisure time and fixed purchasing power.

(Of course, we would need more redistributive taxation to prevent all the wealth gains from being concentrated in the managerial class, so that workers are able to share in the societal gains of their productivity gains.)
spoonless
Sep. 21st, 2010 12:28 am (UTC)
That's interesting regarding European unemployment--it makes sense that it would be smoother in European countries, although I'm surprised (and kind of skeptical) that it would average out the same. Just entering in "unemployment in france vs unemployment in US" to Wolfram Alpha gives this plot which shows very different levels... although admittedly it only shows the past 30 years for some reason which was mostly "boom times":

http://www.wolframalpha.com/input/?i=unemployment+in+france+vs+unemployment+in+us

Regarding immigration, I'm well aware that regular legal immigration cannot take away any jobs in the long run. What I was referring to was the illegal practice of paying illegal immigrants less than minimum wage to do jobs that they would otherwise have to pay a (legal) unskilled worker minimum wage to do.

Your comment that "illegal immigration is currently negative" would seem to undermine what I'm saying there, since in order for it to represent lost jobs you'd have to show that the number of illegal immigrants has increased rather than decreased--although a quick check on this site backs me up:

http://www.npg.org/popfacts.htm

"Immigration contributes over one million people to the U.S. population annually. The total foreign-born population in the U.S. is now 31.1 million, a record 57 percent increase since 1990. About 8 million of those are here illegally--a 4.5 million increase since 1990. Almost one-third of all immigration during the 1990s was illegal."

So I'm wondering how to reconcile this with your comment. I guess maybe it was positive for a long time, and then recently people have started cracking down on it so now it's negative? It does look like the NPR site may be talking about the immigration rates only up through 2000 although they don't say for sure. In any case, all I need for my claim to be true is that it *has* been positive for a while--although I suppose if it is negative for a while it could rectify the situation.

I like your idea of cutting back the work week--yes, I expect that would happen before we accepted higher levels of permanent unemployment.
easwaran
Sep. 21st, 2010 12:50 am (UTC)
It's true that there was a lot of illegal immigration in the '90s (which was a boom period in the US) and also in the middle of the '00s (which was also a boom period). But the trend in the past three years has been illegal immigrants leaving the country, which is what you expect during economic downturns. It has very little to do with any "crackdowns" - it's just basic economic motivation.

And I definitely was too quick when I claimed that the overall unemployment across a cycle was equal in the US and Europe. I don't have any evidence for that claim. But people have assumed that unemployment is generally lower in the US than in other countries, because of various employment protections, that make employers less willing to hire new workers in Europe. But precisely those same protections are actually protective in this sort of situation.

For more relevant data, you might check the OECD. Under "General Statistics" and "Key Short-Term Economic Indicators" look at "Harmonised Unemployment Rate", and note that from 2007 to 2009, the US jumped from 21st out of about 30 countries, to 10th. Only 7 European countries had higher unemployment than the US in 2009, and four of those were the PIGS - Portugal, Ireland, Greece, Spain, which were the Nevada, Arizona, and Florida of Europe. (That is, they pegged their economy even more tightly to the housing market than everyone else.)
easwaran
Sep. 21st, 2010 12:56 am (UTC)
And my other point is that immigration doesn't always increase unemployment. In the right circumstances, immigration can actually decrease unemployment, if the new immigrants demand enough houses and goods and services to increase employment among the current population while taking many of the worst jobs for themselves. (As far as I know, most studies suggest that immigration drives up the average wage of the non-immigrant population, even after accounting for any increase in unemployment that may occur.)
spoonless
Sep. 21st, 2010 02:23 am (UTC)
Again, it seems like you are talking about legal immigration... which wasn't something I ever mentioned.

If you're talking about illegal immigration, it's very hard for me to believe that a labor force more willing to accept less than minimum wage could drive *up* wages.
easwaran
Sep. 21st, 2010 05:11 am (UTC)
I'd have to look at the studies to be sure, but I think they were counting illegal immigration. It's true that a sub-minimum-wage workforce would be a downwards pressure on legal wages, but higher demand actually does a whole lot to stimulate economies. There are new jobs at every income level, as a result of increased demand. And if the illegal immigration ends up creating new sub-minimum-wage jobs rather than displacing minimum wage workers, then this will have the overall effect of raising wages for legal residents.
spoonless
Sep. 21st, 2010 01:51 pm (UTC)
Even if they were counting it as a part of immigration, that doesn't mean that illegal immigration itself pushes up minimum wage (since it made up about a third of immigration in 2000, and has apparently dropped since).

Again--just to be clear--I never said I was worried about immigration. The only thing I was worried about was the practice of paying people less than minimum wage itself. When I initially mentioned it I referred to it as "illegal immigration" but then later clarified that it was more the business practice that I was concerned about, not the people coming in itself.
easwaran
Sep. 21st, 2010 08:01 pm (UTC)
That's right - the practice of paying people less than minimum wage doesn't seem like it can do much to help anyone's wages. But the claim is that the benefit of having more people as part of the economy outweighs the cost of some of the wage floor being cut out.
easwaran
Sep. 20th, 2010 10:10 pm (UTC)
Note also - if the problem with employment is partly or largely driven by construction, then if we can issue loans at extremely low interest rates (as is possible because of current financial conditions), then we can easily hire the many unemployed construction workers and buy underused steel and concrete and build lots of things that it would be nice to have. This would greatly ease unemployment and put lots more money into the economy. I'm not sure why you wouldn't believe that.

(Sure, it would increase the federal debt, but the federal debt is not especially problematic right now - it's about the average size that most liberal democracies have had for most of the past several decades, through various economic conditions. The only real debt problem that the US has is that ten or twenty years from now, social security payments are predicted to be larger than payroll tax revenues, and this could easily be fixed by applying payroll tax to one's entire income, rather than only to the first $100,000 of it.)

Additionally, most states aren't allowed to run deficits, and therefore they are cutting jobs at exactly the time when unemployment is highest, rather than taking out loans to protect jobs at the time when interest rates are lowest, and then paying off the loans during periods when economic growth is doing well again.

The Republicans are right that increasing taxes on people making over $250,000 will decrease the profits of some small businesses, which will disincentivize them from making certain hires. But it will also raise money from rich individuals that aren't employers, which can be put directly into small business tax incentive programs to counteract the effect just mentioned.
spoonless
Sep. 21st, 2010 12:36 am (UTC)

Sure, it would increase the federal debt, but the federal debt is not especially problematic right now - it's about the average size that most liberal democracies have had for most of the past several decades, through various economic conditions. The only real debt problem that the US has is that ten or twenty years from now, social security payments are predicted to be larger than payroll tax revenues, and this could easily be fixed by applying payroll tax to one's entire income, rather than only to the first $100,000 of it.

I'm not finatically worried about it--like global warming, it's a problem, not a crisis. But I do think you'd be wrong to dismiss it entirely as a worry. I think we are starting to push up into the red zone, it is more the projections for where we'll be in another decade without major changes to the budget that is concerning. I tend to think that Obama did just the right thing, in balancing these concerns against the need for a stimulus package that ultimately did a pretty good job of sparking a recovery.
spoonless
Sep. 21st, 2010 12:43 am (UTC)
By the way, regarding the debt... I recently listened to a long Books-on-tape thingy that I got at the library, by Krugman... where he dramatically reads a long collection of articles he wrote during the Bush era.

For the most part, it's great. But I did notice a few funny things... for one, he used to rant a lot about Bush's fiscal irresponsibility and the national debt... both with "giving away the surplus" (the Bush tax cuts) and with starting the Iraq War. He seemed a lot more worried about the debt back then. It's interesting to compare this to what he says now in the Obama era, when the deficit and the debt are both even larger, which is basically not to worry. Granted, I think he still thinks it's a problem, he just thinks that a bad economy will lead to even bigger problems.
easwaran
Sep. 21st, 2010 12:53 am (UTC)
That apparent inconsistency actually makes a lot of sense. It's pretty standard Keynesian stuff - the way to fight recessions is with deficit spending, and the way to fund deficit spending during recessions is to run a surplus during booms. Additionally, running a surplus during a boom is a way to help keep it from "overheating" and turning into a bubble.

And of course, complaining that the Iraq War was fiscally irresponsible is reasonable, no matter what one's position on deficits is. It's always better to spend money on something that will actually be useful than to spend money on blowing things up. (Except in the very rare circumstance where the things you're blowing up are extremely harmful to the world economy, like Hitler.)
spoonless
Sep. 21st, 2010 01:18 am (UTC)

That apparent inconsistency actually makes a lot of sense. It's pretty standard Keynesian stuff - the way to fight recessions is with deficit spending, and the way to fund deficit spending during recessions is to run a surplus during booms.

Right, and if a Keynesian had been President in both boom times and bust times, we'd have nothing to worry about.

Unfortunately, Bush had very different economic ideas (if they count as ideas, rather than cartoonish justifications for helping out a certain political faction). If you have one people in office during the boom times who believe the right thing to do is run up a huge deficit during boom times, followed by a bust and a guy who believes the right thing to do is run up a huge deficit in bust times... then you're not in the best shape. Nevermind that the second guy was correct and the first guy was wrong, it's still a problem =)

For me, the nightmare scenario is that the tea party gets control of congress in 2010, and as things naturally start to get a little better with the job situation (which they would have done anyway) people attribute it to fewer Democrats being in office... and then they get to takeover the white-house in 2012, implementing massive tax cuts. Then, perhaps after their frenzied celebratory tax cuts after the first week in power, the truth sinks in that in order to balance the budget they're actually going to have to cut vital spending programs. There are massive protests against cutting whatever they decide to cut, and it never actually gets cut but instead the debt gets even larger.

Sorry, I guess I'm in a somewhat cynical mood about politics lately =)
geheimnisnacht
Sep. 22nd, 2010 10:31 am (UTC)
Christine O'Donnell won the Delaware Republican primary, I think some cynicism is in order. If things really go to shit, maybe I'll just stay out of the country. :)

I just can't see the moderates being swayed by Tea Partiers though...
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