It’s the People, Stupid. Economics as the Lost Social Science
One of the problems we have with economics is that it has become exclusively a study of capital and its movement across markets. And while this is a primary function of the dismal science among its less dour siblings in the social sciences, we have increasingly come to dehumanize the human elements of the field. While it is true that the field has long situated itself as the blip of rationality in a collective of human studies muddled by the abstract and emotional, we’ve come to start looking at markets and capital as a means to an end rather than the end result of human decisions, rational or not.
Perhaps this is why we have what feels to be an imbalance in economic metrics in 2019. From a Macroeconomics standpoint, we appear to be doing well from a capital standpoint. Major corporations continue to sit at or near record profitability while jobs are being added at a steady clip. Beyond a few tumultuous months in Q4 2018, the stock market has slowed but still sitting on a general high note. GDP growth of around 3% is far from runaway growth but seen as a stable positive indicator.
At the same time, there are just as many stories about the economic plight of many Americans. While simultaneously crowning new billion dollar companies in Silicon Valley, 46% of Americans are unable to readily afford a $400 emergency. One urgent care visit, car insurance claim, one call of a plumber could all simultaneously put nearly half of us in dire straights. It’s one of the few unifying issues in America today as it affects the urban masses undergoing gentrification with the same tenacity as the small town blue-collar worker who traded his factory job for a grocery store apron.
Even as unemployment rates have continued to sink toward lows not seen since the height of the economies of the 90s, wages have been stubborn. Normally when an economy sinks below the generally accepted “full employment” rate of 4% or so, the scarcity of labor would start pushing wages upward as companies need to compete. With what has been a sustained full employment rate, we should see inflation as well, which has been mostly stymied, except in inelastic necessities such as food, housing, medicine, and education.
We have a great economy that is somehow missing out on vast swaths of the people. Millennials have somehow managed to become the generation of the burgeoning tech billionaire and urban hipsters while objectively being the first American generation of the modern era to be worse off than their parents, a phenomenon punctuated with every list of consumer brands and institution killed. As this large cohort is primarily hitting their 30s, with the eldest nearing 40, the ongoing student loan yoke, low homeownership rates, and stagnant wages are proving to not be a brief anomaly as a result of timing into something more sustained. Will we speak about this period and its lost Generation as Japan regards the cohort coming of age during their own prolonged economic stagnation? With American wages consistently stagnant for most of the past 40 years, a lifetime for half of Americans, even as home values continue to rise and the top 10–20% of earners enjoyed robust returns on their investments, it’s hard to not start wondering if we aren’t actually on our second lost generation based on the current trajectory.
Yet the economy is doing well by all macro metrics. Jobs keep being made, the stock market has proven (thus far) resilient to any major corrections as a result of the stock buyback as a result of the tax law changes taking effect in 2018. Mergers and Acquisitions continue onward and shareholders have rewarded the bright executives finding avenues to find new highs in value. Our financial institutions and venture capitalists buy onto new ideas, hoping they are taking part in the best new thing.
The 7 million Americans behind on their car payments are missed from all economic discussion, not out of any nefarious cruelty, but because Economics has forgotten how to study people and how the absence of capital influences markets and behaviors. While these delinquent represent some 2% of all Americans, their collective net worth is largely negative, get bypassed entirely in economic academia.
This is a folly.
Even dismissing any humanistic feelings around fairness, the blind spot in studying markets and capital in the absence of the human element is bound to catch up to us and become an obvious parable in hindsight. In bypassing looking beyond sheer growth metrics and the distribution of wealth, we risk missing the signs of dysfunction and imbalance and the return to the 7–10 year boom and bust cycles that marked the first gilded age of the 1880s-1930s where industrialization and subsequent urbanization trends created separate systems for capital owning and non-owning individuals. Growth was a tenacious, temporary condition lasting only as long as the market could sustain itself before any number of calamities could result in crashes of 20, or even nearly 40%.
Ultimately economics and the markets as a whole are driven by the decisions, rational and emotional alike, of human beings with individualized interests. When large portions of a population are lacking the means of economic agency, to consume, invest or otherwise engage in the economy, it is only a matter of time before such misery trickles up to the capitalist in need of markets to service. Assuming that each individual has an innate demand for certain goods or services, their inability to partake in a lost opportunity for the entrepreneur and capitalist who would otherwise meet that need if met with demand. A lack of access to capital, currency and social mobility is unactualized demand that pulls down the economy. Sustenance based economies, wherein most families allocate most resources into survival needs, suffer not just from a lack of demand, but a lack of innovation and opportunity in a self-defeating cycle.
However, few economists want to venture out of the supply side capital oriented study that has dominated the field long enough to become the field itself rather than one of a number of theories built around a set of conditions. In doing so we have created a glaring blind spot that is bound to hit us in the pants whenever the confluence of conditions send us into the next panic, one that will be harder to get around next time.
Already the strain should be more apparent than it is. It’s hard to not look at our current top-heavy monstrosity and see an elephant precariously walking a tight rope too worn and thin to sustain its weight. Lowering federal interest rates to as low as .25% in the immediate aftermath of the great recession as a means to alleviate the self-inflicted jolt that sent banks cowering away from risks of all kinds. Quantitative Easing was a temporary means of increasing the money supply to avoid the kind of prolonged pain and ongoing failures that made the Great Depression a particularly sordid affair. However, we have yet another contradiction where even as we have seen a return to normalcy with regard to labor as well
As of December 2018, the markets were hesitant at the prospect of the 4th .25% raise in the federal interest rate under new Fed chair, Jerome Powell, even with the culmination of those raising bringing the total rate to 2.5%. To put into perspective, the most similar economy to the one we had now, the dot com era of the late 90s-2001, interest rates largely hovered in the 5–6% range. With the historic rise of the stock market over the past 3 years, robust corporate profits and low inflation and unemployment, it should be expected and even welcomed to get back toward more normalized rates.
A lot has been discussed around the audacity of many corporations receiving generous treatment under the 2017 tax bill going into stock buybacks rather than employees or the companies themselves. It is quite telling that most companies saw the best opportunity to invest a fallback was in its own stock rather than acquisitions, equipment, expansion or labor belies the weakness underlying their own good fortune. Companies are not preparing for an influx of demand, but rather to position itself better against the next downturn.
This is why we need to go back to understanding people. Because an economy that has thousands of retailers closing amid lackluster demand signaled by a notable decline in consumer spending is one that needs to look past financial sheets, supply-side orthodoxy and reconsider what it means for an economy wherein we only look at the existence of capital and markets and not the human beings whose decisions and behaviors hold more influence in our long term fates than any of us desire. And we cannot study something we choose not to see.
Economics is, after all, the dour sister of the social sciences.
