The Great Divergence

[kandrathe]

If it's a tax credit for hiring, you might be wise to stipulate that you only get the credit for employees who worked for more than X months.

Edit: Okay, I think I get what you're saying. Tax credit for new hires, on a permanent or semi-permanent basis, as a % of their salary, kicks in only after a certain number of months. I know what I'd do as a business if faced with that opportunity: Replace my entire labour force.

Being charitable, I suppose you could simply apply it uniformly to all workers, regardless of whether they're new hires or not. That would lower the marginal costs of hiring and decrease the savings from firing - a direct incentive to employment.

So, yes, that should work. Probably a more efficient method than what has been adopted. Expensive, though - we're talking about subsidizing every worker in the whole country. But if it got the government borrowing money and giving it to people who would spend it, then hey, great.

Right. Congress could choose how big a benefit they wanted to make, but in theory, you could greatly help out small businesses this way. To limit the cost you could cap the benefit to 100 employee's per company.

I'd doubt very big corporations will move on employment until they see a substantial increase in orders or production forecasts.

Relating to our prior discussion on Boom and Bust cycles...

"Though disputed, Austrian scholars assert that the boom then, is actually a period of wasteful malinvestment, a "false boom" where the particular kinds of investments undertaken during the period of fiat money expansion are revealed to lead nowhere but to insolvency and unsustainability. It is the time when errors are made, when speculative borrowing has driven up prices for assets and capital to unsustainable levels, due to low interest rates "artificially" increasing the money supply and triggering an unsustainable injection of fiat money "funds" available for investment into the system, thereby tampering with the complex pricing mechanism of the free market. "Real" savings would have required higher interest rates to encourage depositors to save their money in term deposits to invest in longer term projects under a stable money supply. According to von Mises's work, the artificial stimulus caused by bank-created credit causes a generalized speculative investment bubble, not justified by the long-term structure of the market." -- Wikipedia

Wouldn't you consider it possible that sub-prime lending, NINJA loans, and easy credit accelerated speculative borrowing in housing causing the price to bubble? People paid more than they should have, and lenders gave credit to those they shouldn't have. Couple that with the malinvestment of CDS of Mortgage backed securities with risk affixed one time at the time of purchase. The rapidly rising price of homes inspired a construction boom, creating thousands of jobs and economic activity surrounding the bubble. If you are a follower of this theory then, you'd believe that the current vast manipulation of the market will result in another bubble, and subsequent bust once this false economic activity concludes. If we are going to have a free market, then it will need to find its own equilibrium at a slower speed.

"The financial crisis of 2007-2010 has resulted in a revival of interest in the Austrian business cycle theory [30], but has also resulted in a revival of interest of theories more critical of Austrian theory, such as Keynesianism and Post-Keynesian economics.[31] After the United States housing bubble began its decline in 2006, Peter Schiff, a supporter of the Austrian school, made some predictions[32] regarding a housing crash in the US, though (as of early 2009) Schiff's investment firm had not been able to profit from strategies based on his predictions.[33][34] Ron Paul also spoke about the Austrian business cycle repeatedly throughout his 2008 presidential campaign." -- Wikipedia

I was thinking specifically of something I read from Hayek (another hero of mine). I need to read Friedman's critique, but I sense there is something he missed. My experiences with systems analysis tend to favor the “inchworm” effect for the causes of many systemic failures. During boom periods, economic success feeds attitudes of continued success resulting in increased production. More production occurs, resulting in more activity, and more success. This feedback accelerates throughout the system until any defect occurs destabilizing the system. Often the destabilization in the system can be absorbed, but sometimes it leads to further perturbations and errors, which cause a cascade of failure.

This happens in data flows, traffic flows, and the flow of commerce. As it turns out, it also happens in nature. I might have mentioned this before, but I once resolved an issue with train derailments due to a computerized grain hopper. Every train car was filled to exactly equal weight which after the train gained speed resulted in a harmonic wave in the cars, and they'd eventually jump off the tracks. We had to add code into the hopper programming to vary the weight to prevent harmonic motion.

Consider this article in the NYT on econophysics... Then there is the budding field of Financial Seismology...