Look: I am eager to learn stuff I don't know--which requires actively courting and posting smart disagreement.

But as you will understand, I don't like to post things that mischaracterize and are aimed to mislead.

-- Brad Delong

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Friday, September 30, 2011

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?

1 comment:

BadTux said...

Thing about investments in capital equipment is that you can't stop, 'cause equipment wears out. My employer has a buncha 6 year old Dells. They're at end of life. They gotta be replaced whether we want to or not, 'cause they won't run Windows 7, they won't run the new corporate standard Office 2010 that is all we can license from Mickeysoft for our new computers, and they're just plain dying left and right in the first place. So regardless of whether we want to or not, we're investing in capital equipment.

So anyhow, you can delay capital equipment purchases for a while. But sooner or later, you gotta buy capital equipment, or go out of business. We wouldn't have a business if we let all our old computers die without replacing them, DOH!

Regarding the stock market I'm not interested enough to pay attention, since the stock market has become totally divorced from the productive capabilities of the U.S. economy or any business fundamentals of the underlying companies and turned into a rigged gambling casino to benefit certain large market leaders. If I wanna play games in a gambling casino I'll just take a short drive down the highway to Vegas, yo.

- Badtux the Business Penguin