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Business and Labor

Hysteresis and the Self-fulfilling Prophecy of Limiting Horizons

"Rusty Nail at Gartlmühle in Gresten, Lower Austria" by Herzi Pinki, licensed under CC BY-SA 3.0.

“Rusty Nail at Gartlmühle in Gresten, Lower Austria” by Herzi Pinki, licensed under CC BY-SA 3.0.

(Analysis) There is a danger that when markets cannot employ labor and capital fully, that these factors of production will deteriorate through disuse. Economists have studied this phenomenon as “hysteresis”, and it leads to a permanent limiting of potential for an economy that is positively related to the time factors of production lie fallow. Thinking only in terms of labor’s human capital, a newly minted college graduate who works as a barista will see his/her skills rapidly deteriorate through disuse. This scenario is now being played out a million-plus times across the US, as the economy grows employment in low-skilled (and low-paying) industries for even our college graduates.

A scenario in which hysteresis comes to fruition is likelier when more people than not begin to limit their expectations for the future. When greater numbers of people accept a temporary condition of poor performance  – like a low point in a business cycle – as permanent, to a certain degree this becomes a self-fulfilling prophecy. Fewer people will try to improve their conditions, instead accepting them as a new “normal”, offering perhaps the observation: “Well, it is what it is…”

This negative sentiment is worryingly becoming commonplace in the US, even among our so-called leaders. When elected officials and business leaders openly recommend less higher education for today’s youth – instead suggesting more trade-specific education – what are they really telling the next generation? Don’t pursue a higher education because the economy cannot fully employ these skills and knowledge? This is not leadership, and it will harm the long-run prospects for our economy. Today’s leaders need to prove themselves equal to current challenges, or get out of the way and make room for those who will at least try. Limiting the horizons of our youth is limiting the future of this country, and it should not be tolerated in our leaders.

Current claims that there are jobs going unfilled is another example of economic defeatism. The US workforce is the most educated ever, so any talk of skills “mismatch” is just selling labor short in order to make an excuse for the private sector’s inability to provide full employment.

This is a time for bold ideas executed courageously. Anything less at this point will lead to permanent damage to our economy. But instead of bold action from our “leaders” in Washington, state capitals, and in business, all we get is more fiddling while the economy burns – almost an acceptance of failure. Whereas there is now a real existential crisis for what we know as the American lifestyle, our leaders are too focused on their particular ideologies to accomplish anything of importance.

We are quickly running out of time. We will not be so “lucky” as in 1941 to be forced into a situation that requires bold and decisive action (thus ending the depression of the 1930s). Circumstances today require that we take bold action of our own volition, leaving a real possibility that we will not choose to do so. We are currently: (1), procrastinating; (2), putting at real risk a chance to quickly return to fully employing the factors of production lying underutilized; and (3), failing to do what’s right by today’s youth.



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