19 April 2011

Lightning and Flowers

This post is pessimistic, and a little melodramatic. While I consider myself an optimist, I'm also a skeptic, especially when it comes to the capitalist economy. As Walker has explained, there are many reasons to be skeptical of recent economic growth. The recent good jobs numbers, consistent GDP growth and increased consumer spending may seem all sunflowers. Walker's analysis however shows underlying structural issues that are yet to be resolved. In recent weeks there have been numerous developments that make the flowery economy we have now look stormy on the horizon.

There have been a number of recent reasons to fret. The effects have started to accumulate from instability in the Middle East and disaster conditions in Japan. Raising oil prices due in part to fear driven price hiking and in part to legitimate concerns about lowered supply without autocratic regimes have two effects. First they increases transportation costs, which slims margins, and ultimately lead to higher commodity prices. Second they lower consumer spending because each household spends more of its income on energy costs (at least warmer weather is on its way!). Some say this will not cause core inflation because wages have not been rising, but this view seems to come from a world where consumers have more bargaining power than your average Wal-Mart customer. In a healthy economy companies and consumers would weather this storm by taking slimmer profit margins and buying on credit. But with already razor-thin profits and skittish banks these changes could have more drastic effects. The disaster in Japan has begun affecting car production as the supply of crucial parts made in Japan has run out or slowed to a trickle. This means increased risk to an already struggling industry.

More structural issues are also beginning to appear. The New York Times recently reported on growing Asian inflation, due in part to increased bargaining power of workers driving up labor costs, that threatens to raise prices on consumer goods in the U.S.. As Walker has pointed out, wages have remained stagnant and thus cannot absorb higher prices.

All of these indicate looming dips in profit margins, whose high levels have been crucial to keeping the economy afloat. With lowering profits investors may lose confidence. This in turn of course leads to selling causing fear in banks to lend, businesses to hire, and consumers to spend. In short, we'd all end up like this:

A few months ago a friend of mine warned me against this kind of doomsday pessimism. He said that my politics made me more inclined to believe dire projections about the future of capitalism and the economy. As a result, he counseled, I need to be extra assiduous in researching these kinds of claims. I have not been particularly assiduous with this post, so if we're not headed for a post apocalyptic hell-scape I won't be too surprised. But at the very least we should be worried, and start doing the kind of research necessary to make less dramatic, but still dire, claims with confidence. That being said, a little melodrama doesn't hurt.