Instability Is An Inherent and Inescapable Flaw of Human Life.


Is it true that whenever a market crashes you get a new fad for neo-Schumpeterian economists? The Boston Globe rounds up the craze for the late Hyman P. Minsky, an economist who died in 1996 but whose ideas are resurgent.

Minsky was a student of Joseph Schumpeter, the Austrian classical economist who popularized the phrase "creative destruction" to describe the business cycle. His best-remembered contribution to theory is the "financial-instability hypothesis," which grafts the greater-fool principle to the basic cycle. That is, once the creditworthy investors have all bought into an asset class, you get increasingly less creditworthy outer layers of investors, including a group that can only afford to service the interest on the loans they've taken to buy the asset. Beyond those folks is an exosphere of people who can't pay either interest or principal, and need the asset to keep appreciating.

At that point even a lateral price move will set off a cascade of margin calls. (It seems to me the damage would still be mostly contained to the outer layers—unless the original investors themselves started buying back into the hype in the late stages of the bubble. That's certainly been known to happen, with derivative and securitized debt products making it easier to be of the market but not in it.) After that bubble bursts, there is a near or total credit freeze. Then a few credit-worthy people see a new asset to invest in, and we start over.

The Globe boils it all down to a pretty inane quote: "Instability is an inherent and inescapable flaw of capitalism."

I was hoping Carlota Perez, who at least has the decency to be alive, would be the neo-Schumpeterian around whom the Keynesian consensus coalesced. But the Globe, Brad DeLong, The New Yorker, Paul Krugman and others have opted for Minsky, and we will not debate their profound wisdom at these proceedings. Another advantage is that the Minsky fad is testable. According to the Globe, he advocated (not alone) an activist Federal Reserve Bank that would become a lender of last resort in times of campus emergency. That is what happened in 2008 and 2009. (Though again, it seems to me the Fed has been more a lender of first resort.)

But the Globe sees Minsky treading a path even Keynesians fear to follow:

Minsky, however, argued for a "bubble-up" approach, sending money to the poor and unskilled first. The government—or what he liked to call "Big Government"—should become the "employer of last resort," he said, offering a job to anyone who wanted one at a set minimum wage. It would be paid to workers who would supply child care, clean streets, and provide services that would give taxpayers a visible return on their dollars. In being available to everyone, it would be even more ambitious than the New Deal, sharply reducing the welfare rolls by guaranteeing a job for anyone who was able to work. Such a program would not only help the poor and unskilled, he believed, but would put a floor beneath everyone else's wages too, preventing salaries of more skilled workers from falling too precipitously, and sending benefits up the socioeconomic ladder.

Just as politicians don't understand economics, economists don't understand politics. Assume the counterfactual that the "employer of last resort" concept has passed through all the legislative hoops about employing illegal immigrants and how death panels will determine which workers are lazy enough to be killed.

Now we have a United States Employment Agency (USEA) putting an employment floor under a big portion of the North American continent plus wherever Hawaii is. We have, among other things, permanent full employment. We will quickly get a large dose of in-loaded expenses, as states send their unemployment claimants to USEA and private employers realize they can lay off their workforces and bring in USEA contractors at a fraction of the cost. (Right? I mean wouldn't contracting out its hole-diggers be one of the ways USEA pays for itself without adding a penny to the deficit – as all new government programs, I'm told, do these days?)

So then what happens when, as Minsky believed, there is another recession? California's government has already shown itself to be incapable of maintaining previous-year levels of service in times of declining tax revenues. The U.S. government is quickly learning that, while there may be no floor to wages, there is a ceiling to how much debt even global credit markets are willing to absorb. Yet USEA would at this point be called on to increase its payroll to accommodate millions of newly laid off workers, and it would have no ability to say no.

It's interesting in a grisly-accident way, and the Globe's story, by University of Georgia history professor Stephen Mihm, gives a very good sketch of the culture of Minskitude. Thanks to Calculated Risk.

And a question for experts on Schumpeter: How is it that neo-Schumpeterians seem to come up with so many improbable statist solutions and papers with titles like "Towards a Schumpeterian Workfare State?"