Does Karl Smith Have This Right?

I was in the process of leaving a highly critical comment to this post by Karl when I started doubting myself, and dumped it.

His criticism of this WSJ article by Kathleen Madigan is that she conflates stocks and flows.  Flow is the change in a stock - right?  I guess that criticism has some merit; but is it relevant?

As a highly relevant aside, I would go after this statement in the WSJ artile:  "For all the talk of uncertainty, the increase in orders is a sign that companies are optimistic about the future. After all, no executive would expand production facilities if he or she thought customer demand was about to stagnate."   Not so fast, Kathleen. Increased spending on equipment and software doesn't necessarily indicate expansion, nor mean optimism about business growth. It might just mean optimism about keeping the same amount of business with still fewer employees, and jacking profits by reducing payroll.  (Oh, yeah - Lump of Labor.)

Anyway, back to Karl. He posts two graphs showing industrial investment in equipment and software along side of the total change in employees - both flows.  But look what he does to make the curves look comparable:  For the first graph, the left and right scales are different, necessarily.  Apples and oranges are nothing compared to billions of dollars and thousands of people.  But more importantly, the dollar scale is always positive, while the person scale goes deeply negative during the recession.  In other words, while the investment flow slowed down, it never came anywhere close to stopping.  You certainly can't say that about flow into the work force.

The second graph compares investment, normalized to 100% at the re-trough maximum, again to change in total employees.  The employees numbers are, inexplicably very different in the two graphs, though it's supposed to be the same data.   I think, if you're going to compare, it should be one normalized value to another.  As is, for either of these graphs, you can always do a scale expansion to make things moving in the same direction appear comparable when they're not.

I call Bull Shit!

My first thought was to look at YoY percent change in both - a flow vs a flow of a flow, I suppose.  But isn't the rate of change what's important when you're comparing two time series?  Now, expand the time scale back to 1960.  The investment data doesn't go further back than about 1996, but ignore that.  Look at the peaks in payroll change - pretty constant at about 5%, through the early 80's.  Since then, lower highs, and lower lows - the infamous jobless recoveries.

Karl appears to be thinking, though not speaking directly, in "Lump of Labor Fallacy" terms - right?  But there is no fixed amount of labor.  There is a shrinking amount.  The total number of employees is less now than it was in 2000.

By my assessment, Karl is willfully missing the point about labor vs investment, his similarities are contrived and invalid, and his entire post is bogus.   I'm pretty sure Mark would agree.  How about you?
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