L is for Layoffs (fwd)

Eugene Leitl Eugene.Leitl@lrz.uni-muenchen.de
Thu, 9 Aug 2001 13:09:39 +0200 (MET DST)

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Date: Wed, 8 Aug 2001 19:42:30 -0700
From: Technotranscendence <neptune@mars.superlink.net>
Reply-To: extropians@extropy.org
To: Extropy <extropians@extropy.com>
Subject: L is for Layoffs

L is for Layoffs
Peter Brimelow and Edwin S. Rubenstein, Forbes Magazine, 08.20.01

Forbes Magazine, 08.20.01

Does "Hayek's Law" condemn the U.S. to a Japanese-like L-shaped recession?

Are we in a recession, and if so, what shape will it have--V, U or L? It
will be six months, or maybe a lot longer, before we know the answers to
those two questions.

The official government story is the economy is still expanding. But don't
put too much faith in that. "When the Bureau of Economic Analysis first
estimated real gross domestic product growth for the third quarter of 1990,
it reported a positive number of almost 2%," says Randell E. Moore, editor
of Kansas City, Mo.-based Blue Chip Economic Indicators Survey. "It wasn't
until after the first of the following year that the 1990 third quarter was
revised to a negative number." So you can't be reassured by the fact that
the average forecast of the 50 economists Moore tracks is a slow but
positive 1.8% real growth in 2001. "The consensus typically doesn't forecast
recessions," warns Moore.

Houses are still being built and cars are selling well. But whole
industries, including capital goods, advertising and telecom, are in their
own recession. Layoffs in June totaled 125,000; company after company
reports billion-dollar losses.

So let's look on the dark side. If we're about to enter a real recession,
will it be a V-shaped recession like in 1980? That would mean a quick break
followed by rapid rebound. Or will it be a U-shaped recession like in
1981-82, in which the economy stalls and takes a painfully long time to get
going again? Or will it be an L-shaped one--a crash followed by a protracted
period of slow-to-no growth? Example: Japan in the 1990s, after the 1984-89

Jay N. Mueller, economist at Menomonee Falls, Wis.-based Strong Capital
Management, is an optimist (he still projects 1.5%-to-2.5% growth in 2001)
who nevertheless worries about several potential causes of L-shaped trouble:

. The low personal savings rate, which sank to -1.3% in early 2001. Capital
gains financed spending. But now many investors have capital losses.

. The high tax burden. The combined federal, state and local take was 32.6%
of GDP in 2000, significantly above the World War II high of 30.8%.

. The high debt burden. Business debt is 64.4% of GDP, up from 53.4% in
1994; interest on mortgage and consumer debt now consumes a near-record
14.3% of disposable income.

. Excessive business investment.

This may seem an odd concern. But excessive or misallocated investment
("malinvestment") is at the heart of a business-cycle theory that, at the
time of the Great Depression, was a serious competitor with Keynesianism.
Named after the birthplace of its two major proponents, Ludwig von Mises and
F.A. Hayek, "Austrian Economics" has attracted new attention with the
discrediting of Keynesianism--and with the unusual characteristics of this
postboom economy.

"The world economies have struggled this year in accordance with Hayek's
Law," says Mark Skousen, an occasional FORBES contributor and editor of the
Austrian-oriented financial newsletter Forecasts & Strategies. "Hayek's Law
states that the economy takes a long time to recover after an unsustainable
boom (1995-99). The excesses of the previous boom create an investment
structure that cannot be easily dismantled and transferred to new uses."

It's news to modern Austrian economists that Hayek had a law. But they do
see a point to Skousen's coinage.

"The expansion of the late 1990s and subsequent downturn are better
explained by Hayek's theory than by any other business-cycle theory," says
Roger W. Garrison, economics professor at Auburn University and an adjunct
scholar at the independent Ludwig von Mises Institute in Auburn, Ala. "The
artificiality of the boom probably dates to early 1996, when the Federal
Reserve lowered interest rates even though the unemployment rate was at or
near its 'natural,' or 'full-employment' level. The misallocations of the
late 1990s entailed overinvestments in future-oriented and highly
speculative projects--dot-coms and the like."

Garrison also notes that the economy, ominously, seems no longer to be all
that responsive to Federal Reserve stimulation. "All these features are
consistent with Hayek's theory," he says.

Another Mises Institute adjunct, Frank E. Shostak, chief economist for MAN
Financial Australia in Sydney, Australia, argues that the severity of U.S.
distortion shows in the record-high ratio of capital-goods investment to
personal consumption (see chart, below). He predicts "a severe liquidation
of capital goods production." Maybe you should short semiconductor-equipment

Depressing? Two more, even nastier, worries from the dark side:

. The strong U.S. dollar. Continued strength may choke manufactured exports.
A break, on the other hand, may choke off foreign capital imports, which
currently finance American government and industry to an unprecedented

. International weakness. Not only is there recession in some key markets,
like Mexico, but there are also potential crises, as in Argentina and Japan.
AIG International economist Bernard Connolly has told clients: "The
conditions seem to be falling into place for a global growth panic over the
next couple of months."

Austrian economists still have a healthy respect for the power of monetary
policy. Skousen even says he expects some short-term recovery because of Fed
interest rate cuts. But it will be "an artificial recovery that cannot be

So: V, U or L? Distinguished Chicago school economist Milton Friedman, now
at Stanford's Hoover Institution, thinks it will be a sort of V: "We are in
a mild recession, and there is a good chance that we will bottom around the
end of this year and go into a relatively mild expansion." Under the
circumstances, that's a somewhat bullish thought.