The stock market doesn’t seem too worried about the economy. Why?
See that graph at the top of this post? There is a pretty big dip in the Dow Jones Industrial Average during March and April. But compared to the drop in employment, the dip seems more like a blip. The following chart does a good job of illustrating just how much of an anomaly we are experiencing:
Basically, the economy as a whole is in very unusual territory while the stock market remains in, uh, very usual territory.
Here are a few reasons why this might be so:
- Government intervention. The Government sent checks to everyone and that provided some short term artificial stimulus.
- Sport’s bettors have become day traders. No, seriously.
- The economy will recover quickly and investors know it. Theoretically, stocks represent the net present value of future earnings from a company. If we have a “v-shaped recovery”, a few months lost income doesn’t hurt the total too much.
All of these things might be true, but there is a more troubling explanation that suggests we might be in for some pretty serious social unrest moving forward. Namely:
4. The people who lost their jobs don’t matter much to the economy.
Basically, the economy is divided into two parts, one part is for highly skilled workers and the other part is for “subsistence workers.”
So? Hasn’t this always been the case? Haven’t wealthy land-owners always exploited the local peasantry?
Yes, but peasants are different from subsistence farmers. The difference is that the land owners depend on peasants. They need the peasants to work. Land owners do not depend on subsistence farmers. Subsistence farmers only produce enough food for themselves.
Now, in a modern economy I think the rich still depend on the poor. But they don’t depend on the poor to produce (i.e., by stealing the fruit of their labor). They depend on the poor to consume. In an extreme version of this, the government would just hand out checks to everyone, and when the money is spent it mostly goes to capitalists and high skilled laborers.
Notice I didn’t just say capitalists. It turns out that in America at least, most wealthy people still work for a living. They just make a lot more when they work than poor people do.
It reminds me of this graph I saw when I was looking for jobs out of law school:
Basically, there are two types of lawyers. Elite lawyers and normal lawyers. There is very little ground. The average here is around $80,000/yr, but very few people actually make that amount. You are either going to make $50,000 or $150,000. Compare this to an overall graph of the income distribution in the US:
I actually don’t know what to make of this one. The last category includes the broad category of $250,000 and over, which includes a lot of numbers. It might just be a long tail. But then why is that second to last category so high, too?
Anyway, let’s move on. Jordan Peterson once famously noted that the most terrifying statistic is the possibility that people with an IQ of below 83 can’t be productive members of society.
In other words, about 15% of society can’t really do anything productive. They might still be working (for example, it might be too hard to distinguish a productive person from a non-productive person). But whether they work really isn’t that important to society. And a recession might be a good opportunity for certain companies to get rid of all the people in their organization they suspect might be marginally or negatively productive.
Eventually, these people will get hired and fired enough times (or go in and out of prison enough times) that it will start to show up on their record. It will be harder for them to get a job and eventually they will stop looking. That’s where this graph comes in:
One might look at this graph and worry think that 10% of society is just sitting around being lazy, and we need to get them a job. But what if we don’t? What if we are at a point in society where we are better off letting 10% or 15% of the working age population sit at home collecting welfare because if we try to employ them they will just make things worse?
And what if the bar for becoming a productive member of society is getting higher? If automation takes away the lower skilled jobs first, there is reason to believe the minimum skills required to function at a higher level than a robot is going to increase. If your marginal productivity is lower than a robot, employers might be better off building a robot and letting you stay home and collect disability. Besides, they take back all the money they give you anyway when you spend it renting a room and buying pizza (made by robots).
Now there is one additional factor that I would like to add about this underclass of subsistence consumers. Culture. Those people who are not sufficiently productive to hold down a job are likely going to continue reproducing. And they will teach their children how to survive in a world without engaging in the productive economy.
In other words, the world will not just have a two-track economy. We’ll have a two-track culture. People raised in culture 1 will be trained from day 1 to be integrated into the productive world, and people raised in culture 2 will excel at surviving (and reproducing) as a subsistence consumer (regardless of IQ). There will be a fair number of low-skilled jobs available for those raised in culture 2, but it doesn’t really matter if they take them. And the stock market knows it. If massive numbers of them get laid off, it won’t really impact the overall economic outlook of the nation.
Now, I’m not saying we’re there. Surely some people are. But does America truly have a self-propagating sub-culture of human beings that are not capable of (by nature or training) making meaningful contributions to society? If so, what do we do about it?
If there is such a thing, one thing we can’t do is eliminate the problem either by education or incentives. As a wise man once said, the poor will always be with us. The only real choice is to somehow find a way for people existing on opposite sides of a two-track world to coexist. Productive or not, those of culture 2 are still human beings, and they still have political power.
So, whether or not the stock market recovers (and perhaps even more if it fully recovers while unemployment remains high) I predict that society is at the beginning of a long hard road to figuring out how to live with two permanently differentiated economic and cultural tracks. In other words, things are only going to get worse.
