By Lambert Strether of Corrente.
Kidding! Partly. Hysteresis is the new seventy-five cent word suddenly popular among economists who’ve figured out — almost eight years on — that the effects of the 2008 crash and subsequent depression were and are long-lasting and irreversible. We used to call that the “new normal,” but that doesn’t sound scientific.
Larry Summers (WaPo, November 3) describes the emerging consensus:
Advanced economies are so sick we need a new way to think about them
Blanchard, Cerutti and I look at a sample of over 100 recessions from industrial countries over the last 50 years and examine their impact on long-run output levels in an effort to understand what Blanchard and I had earlier called hysteresis effects. We find that in the vast majority of cases, output never returns to previous trends.
While there is much more work to be done, I believe that, as of right now, , despite their exclusion from the standard models used in almost all central banks.
Austerity’s Grim Legacy
The idea that policies that depress the economy in the short run also inflict lasting damage is generally referred to as “hysteresis.” It’s an idea with an impressive pedigree… [B]ut I think everyone was hesitant to apply the idea to the Great Recession, for fear of seeming excessively alarmist.
At this point, however, . Even countries that seem to have largely recovered from the crisis, like the United States, are far poorer than precrisis projections suggested they would be at this point.
In the long shadow of the Great Recession
A recovery is under way, but only in a limited sense. The change in gross domestic product of crisis-hit countries is now almost universally positive. But GDP remains far below what might have been expected from pre-crisis trends. In most cases, growth has not recovered, mainly because of declines in productivity growth.
[E]stimates of potential output track actual output. Possible causes of hysteresis include: the effect of prolonged joblessness on employability; slowdowns in investment; declines in the capacity of the financial sector to support innovation; and a pervasive loss of animal spirits.
The etymology of hysteresis — “Not to be confused with Hysteria” — is interesting; from my OED: “Greek husterēsis short-coming, deficiency, from husterein be behind, come late, from husteros. And the definition: “[A]ny dependence of the value of a property on the past history of the system.” For example, if I turned the thermostat down yesterday, and the boiler isn’t blasting quite as much money into the air today, my heating system is exhibiting hysteresis. At this point, let us pause to reflect that Summers’ “standard models” can’t model a system that simple.
Anyhow, I want to go back to the original paper on hysteresis, by Larry Summers and Olivier Blanchard (NBER Working Paper No. 1950, “Hysteresis and the European Unemployment Problem,” 1986). But before I do, please look again at the passages quoted from our panel of experts. Hysteresis is seen as something very abstract, rather like the dictionary definition:
- Summers: “ never returns to previous “
- Krugman: “policies that depress in the short run also inflict lasting damage”
- Wolf: “the impact of past on subsequent “
Wolf doesn’t ask who is “impacted”; Krugman writes of “the economy,” a phrase that should always prompt you to ask “Whose economy?”, and Summers, like all the rest, never asks whose behind the “output levels” that are “impacted.” But the original paper from Summers and Blanchard is a little less bloodless. Quoting it:
The central hypothesis we put forward is that in explaining the current European depression In particular and persistent high unemployment in general. The essential point is that there is a fundamental assymetry in the wage setting process between insiders who are employed and outsiders who are want jobs. Outsiders are disenfranchised and wages are set with a view to insuring the jobs of insiders. Shocks which lead to reduced employment change the number of insiders and thereby change the subsequent equilibrium wage rate, giving rise to hysteresis. Membership considerations can therefore explain the general tendency of the equilibrium unemployment rate to follow the actual unemployment rate. A number of types of empirical evidence consistent with cur hypothesis are adduced.
(Of course, “equilibrium” is a nonsensical fetish object; “the economy” is in “equilibrium” about as much as an aircraft at cruising altitude is in “equilibrium”; any model of aircraft flight will include complex feedback and feed forward loops, which, as Summers points out, the standard, equilibrium-based models do not incorporate.) Now, it’s possible that “membership considerations” have been abandoned by professional economists in work subsquent to 1986; and my purpose is not to rehabilitate it as a formalism. However, what Summers and Blanchard’s original approach to hysteresis does do, and which I would like to restore to centrality, is treat working people as full-fledged, empowered agents in our “model.”
Here I want to turn to the long and excellent comment thread for this Naked Capitalism post: “Martin Wolf on the Low Labor Participation as the Result of the Crapification of Jobs.” — and here we’re finally coming around to aircraft. From Jetfixr in Flyover (lightly edited):
Chickens are coming home to roost in aviation. Maintenance shops are turning away work, because they can’t find help. The Air Force wants to retire the A-10s, because they are maintenance hogs, and they need those mechs for the F-35s.
You would think that “supply and demand” in this case would cause higher pay. Wrong. The free market never seems to work for working stiffs. Companies would rather spend the money bribing government to supply ways for them to keep labor costs down. Like letting non-mechanics fix airplanes, as long as they are “supervised” by a licensed mechanic. Or signing bi-lateral treaties forcing the FAA to accept work performed overseas, without any kind of FAA oversight..
Guys who grew up fixing cars and tractors on the farm are being replaced by newbies whose closest experience to “turning wrenches” is the Playstation controller.
When I started, there was a training policy. That went away in the 1982-86 recession, when the suits discovered how much money they could save by eliminating it..
Then, we had twenty years of 2% pay raises, when the defacto inflation rate was around 6%. This was pretty much the standard for everyone involved in any kind of manufacturing or product support.
The 35-40 year old guy with 15-20 years in is a scarce commodity. You have a situation now where the 50 year old guys still turning wrenches are being shown the door, replaced by 25 year olds with less than 5 years experience. Everthing I’m hearing from my buddies in IT, manufacturing, construction indicates they have the same problems.
On top of this is the suits attitude that, as far as managing tech help, you don’t need to know the job, you just need to know how to manage people.
Jetfixr is describing Wolf’s “impact of past experience on subsequent performance” with a vengeance, right? It seems that the traders and MBAs and economists believe that everything can be solved with price. In fact, that’s not true. You can’t conjure a skilled workforce into being by brandishing a paycheck; real experience needs to be respected and acquired over time; and it seems the neo-liberal dispensation has spent a generation or so systematically disrespecting the real experience and skills of working people working on real systems and throwing it away. (Yes, you can train people, assuming that the training programs aren’t just walking around money for politically connected training firms, or for-profit scams, but training takes time. And that’s what hysteresis is all about, no? And Jetfixr is also describing insider/outsider distinctions in the workforce: Mechanics and non-mechanics; overseas and domestic; 50-year-olds wrench guys vs. 25-year-old gamers; these are all “membership considerations.”)
Not just mechanics; pilots. From JerryDenim (lightly edited):
Pilots are drying up as well for the exact same reasons mechanics are, It’s the result of years of the same short-sighted, greedy squeezing of high-skill workers by management. They were too clever by half, they were so good at squeezing pilots at the low end of the scale for so long people are now walking away or refusing to sign up, basically John Galt in reverse.
I spent ten years being exploited as a “regional” airline pilot and I can tell you that whole industry is a scam and a poster child for what ails the American economy. Regional airlines are fake companies, mere shells that exist for two reasons and two reasons only; 1.) to arbitrage labor and ( 2.) to distance the real owners from their misdeeds and questionable practices. Frequently these supposed independent contractor regionals only have client, giving them zero autonomy and no leverage. In addition to controlling all of the work/flying contracts the parent company or “client” frequently owns significant portions of the regional airline outright… The dichotomy between the regional airlines and their mainline partners is a false construct, but a very important one psychologically for the labor force participants and of course for regulatory and business purposes. The legacy carriers after decades of successfully boosting profits/lowering costs by outsourcing flying to the “regionals” have finally pushed the arrangement to the breaking point. A regional airline job is sold to young aspiring airline pilots as the ticket to the big-leagues, the final stepping stone in the painful career ladder to a legacy airline job. Pilots know regional airline jobs pay crap and the job is tough when they interview, but no one tells these pilots that there is no defined path out of the regionals and many pilots get stuck in the regional ghetto, often bouncing around the bottom of a few regional seniority lists as they get furloughed or chasing short upgrade times as the legacy airlines cycle flying contracts through the “whipsaw”. A lifestyle and compensation package that seemed like a bitter but manageable pill at 24, tastes very different at 34 and by 44 it’s an entirely different proposition. … Meanwhile his quality of life, benefits and income are probably going down. After years and years of this and a few Frontline specials word has finally got out that borrowing two-hundred thousand dollars or more from Sallie-Mae for a university degree and some FAA certificates isn’t worth it for a dead-end job that pays 18k a year, destroys your personal life and can get you locked up for showing up to work with a little hang-over. …
Legacy airlines are now scrambling to fill flight schedules that the regional airlines simply can’t fly anymore for a lack of qualified pilots, but none are proposing the obvious solution: in-house the outsourced regional flying and give pilots a decent paycheck, contract and a stable career outlook. Instead they are lobbying Congress for more of the usual neoliberal solutions like raising the retirement age (yet again, they just raised it for pilots by five years in 2007 which was a five-year career shot to pants of regional pilot gen-xers and millennials already struggling with low-pay and crippling debt) and slashing the credentials required for employment. … Even though the outsourced regional airline business model is at the breaking point and delivering an unreliable and unpleasant product, mainline management continues to double down on the old playbook that killed the goose by pitting the various regional workgroups against one another in a vicious race to the bottom for flying contracts.
Unless the legacy carriers can get Washington and the taxpayers to ride to their rescue their crapification of the airline pilot profession will prove to be too clever by half. I’m betting on a combination of reverse socialism, regulatory forbearance, lowered professional credentials, and relaxed immigration for pilots who want to immigrate to the States from even more depressed economies will save the big three. Anything but a rational and self-preserving shift away from nasty neoliberal squeeze-the-worker policies of the past thirty years.
(Notice that JerryDenim also descibes Blanchard and Summers’ membership considerations). JerryDenim makes all the same points that JetFixr makes. Notice they also, each in their own way, draw the same lesson — having been given, by management, extensive on-the-job training in this regard. JetFixr says: “The free market never seems to work for working stiffs.” JerryDenim says: “Anything but a rational and self-preserving shift away from nasty neoliberal squeeze-the-worker policies of the past thirty years.” These hard lessons are, as well, hysteresis effects. They embody “impact of past experience on subsequent performance.” Do Summers, Krugman, and Wolf really believe that a workforce that has been taught these lessons will, like happy little dwarves, shoulder their tools and march off, whistling, to “return” “output” to previous “trends”?
But wait! you say. These are mere anecdotes. And so they are — only nearly eight years after the 2008 depression have studies begun to be made. (In their columns, Summers, Krugman, and Wolf might also be viewed as introducing a new academic speciality). However, what we can do is point to the effects of hysteresis in the United States. Vanity Fair — see Graydon Carter on “the voice of the New Establishment” — has published an important article, “The Disturbing Truth About How Airplanes Are Maintained Today.” Here’s the flip side of what Jetfixr and JerryDenim are experiencing:
[If my aircraft] needed a major overhaul, presumably it would be performed by the airline’s staff of trained professionals. If Apple feels it needs a “Genius Bar” at its stores to deal with hardware and software that cost a few hundred dollars, an airline must have something equivalent to safeguard an airplane worth a few hundred million.
About this I would be wrong—as wrong as it is possible to be. Over the past decade, nearly all large U.S. airlines have shifted heavy maintenance work on their airplanes to repair shops thousands of miles away, in developing countries, where the mechanics who take the planes apart (completely) and put them back together (or almost) may not even be able to read or speak English.
The airlines are shipping this maintenance work offshore for the reason you’d expect: to cut labor costs. Mechanics in El Salvador, Mexico, China, and elsewhere earn a fraction of what mechanics in the U.S. do. In part because of this offshoring, the number of maintenance jobs at U.S. carriers has plummeted, from 72,000 in the year 2000 to fewer than 50,000 today.
The work is labor-intensive and complicated, and the technical manuals are written in English, the language of international aviation. According to regulations, in order to receive F.A.A. certification as a mechanic, a worker needs to be able to “read, speak, write, and comprehend spoken English.” Most of the mechanics in El Salvador and some other developing countries who take apart the big jets and then put them back together are unable to meet this standard. At Aeroman’s El Salvador facility, only one mechanic out of eight is F.A.A.-certified. At a major overhaul base used by United Airlines in China, the ratio is one F.A.A.-certified mechanic for every 31 non-certified mechanics. In contrast, back when U.S. airlines performed heavy maintenance at their own, domestic facilities, F.A.A.-certified mechanics far outnumbered everyone else. At American Airlines’ mammoth heavy-maintenance facility in Tulsa, certified mechanics outnumber the uncertified four to one. Because heavy maintenance is labor-intensive and offshore labor is cheap, there’s a perception that the work is unskilled. But that’s not true. If something as mundane as the tray of a tray table becomes unattached, the arms that hold it could easily turn into spears.
To be fair, it’s not like a lot of planes are falling out of the sky because the MBAs who run the airlines on behalf of the private plane-using 1% decided to gut a skilled,
but hence expensive workforce, for a less-skilled and much cheaper one because markets; the article only lists five, although with this qualifier:
What effect does all this offshoring have on the airworthiness of the fleet? No one gathers data systematically on this question—which is worrying in itself—but you don’t have to look far in government documents and news reports to find incidents that bring your senses to an upright and locked position.
(Note that the Vanity Fair article, as well, describes hysteresis effects. The “off-shore” mechanics are, presumably, climbing the learning curve on aircraft maintenance for the same reason anyone would: Besides the money, and the hostages to fortune, it’s interesting, complex, and fulfilling work. But climbing the learning curve exhibits hysteresis, since it’s time-based, just as the concomitant degradation and insult of our own working people is also time-based. And what happens when the mechanics in El Salvador, Mexico, China reach the top of the learning curve, and collect their diploma, which will read, just as Jetfixr in Flyover’s reads: “The free market never seems to work for working stiffs”?)
And whoever would have thought that mechanics in El Salvador, Mexico, or China might not be able to read complex technical documentation in English? Well, the suits didn’t, and the executives didn’t. Or maybe they thought that documentation is just there for show; after all, “I don’t need to read the documentation for Excel!”MR SUBLIMINAL I know. I’ve read your formulas. Who knows? At this point, let’s note that aircraft maintenance is not the only essential infrastructure that exhibits hysteresis. Sluggeaux writes:
Without skilled trades-persons (such as electricians and jet mechanics), we will continue to experience catastrophic infrastructure failures like the Twin Cities I-35W bridge collapse or the PG&E San Bruno gas pipeline explosion.
We’d better hope we never get into a war with China. It will be a contest to see whose house of cards collapses first. This edifice of crap that corporate America has built can probably survive two weeks.
“I’ll be gone, you’ll be gone” only works with metaphorical golden parachutes. It doesn’t work with real aircraft; the best option there is using your seat as a flotation device. What will it take to get “the New” — now old — “Establishment” to recognize that hysteresis effects are lethal and, more to the point, could kill them? Sadly, I think something more attention-getting and immediate than columns by Summers, Krugman, and Wolf. Pass the popcorn, if the popper still works and there’s power. And corn.
 No seedcorn. We ate it already.