As discussed in Part 1, a major part of ancient Egypt’s economy revolved around building pyramids. Had it been calculated, Egypt would have had the largest GDP in the world. That would have delighted ancient macroeconomists, had they existed, but just like now, most citizens would not have been happy. Very little of that bustling activity produced goods or services that were desired by anyone other than the theocratic Pharaoh clique that ruled the country.
All countries today have their own “pyramid workers” who are well paid in spite of not producing anything that people want. Because we’ve been taught to care mainly about GDP, we don’t see pyramid workers for what they really are. Activity of any kind makes GDP go up, even if that activity adds nothing to living standards. Economically useless activity must still be paid for, and the the process of doing so, whether by taxes, or taxes and money printing which morph into price inflation, reduces the living standards of anyone on a tight budget.
Types of Pyramid Work: Pyramid work jobs today can be divided into those that the government produces, and those that it induces.
The former include most people who work for the government and people who sell whatever the government is buying. I won’t waste your time with examples. Articles that cover the incompetence and waste of governments are easy to find. Governments are pretty much terrible at everything they try or do, with rare exceptions, for two reasons.
First, in the free market there are ways to compare alternatives based on expected return on investment relative to risk. Governments can’t do that. Decisions hinge on the political power of the competing advocates, with no reason to think that those with more power have better ideas.
Second, the incentives misguide. Politicians and administrators want to stay in power and advance their careers, so they naturally support the agendas of whoever best helps them do that. Moreover, they have no skin in the game. It isn’t their money they are investing with a risk of losing it all, so they don’t focus or care about the outcome the way a business or investor does.
As much as the government itself produces wasteful activity, the amount of pyramid work it induces in the private sector may be greater. We all have innate wants and needs that we solve in the marketplace. We buy food, clothing, shelter, etc., and would need to do so even if the government didn’t exist. But we also pay for a lot of pyramid work when we need help solving problems that would not exist if the government had not created them.
For example, the excessively complex tax code forces people and businesses to hire accountants and lawyers to avoid getting into trouble, and the rising government demands for companies’ data force businesses to hire administrators that add to costs without producing any sellable output. These get counted as private sector spending, but meet nobody’s innate needs, they just forestall predation by the government.
By far the biggest inducement to people to become pyramid workers in the private sector is how the government and the Fed for several decades have been enthusiastically creating asset price bubbles. The Fed has imposed a combination of easy money policies and artificially low interest rates most of the time since the 1980s. The government’s specific policies that push prices up are focused on housing, where it stimulates demand while allowing local governments and NIMBYs to restrict supply in areas where jobs openings are high.
Also helping the bubbles is the inflation generated by the massive deficit spending for almost every year this century, which makes people to want to protect against it by trading in their excess dollars for assets that the Fed can’t print, like houses, stocks, classic cars, art, etc.
The government and Fed love asset price bubbles because they do generate a lot of economic activity. People want to participate in bubbles because the pay is usually much better than non-bubble jobs at the time. If you can buy an expensive asset going up ten percent a year and finance it at a rate less than that, your equity growth in the asset will put even your high salary to shame. When the bubble is bubbling away, you feel like a chump if you don’t speculate too.
The payoff of being involved in bubble activities is so great that it diverts people away from non-bubble jobs. Millions of people rushed into housing related jobs earlier in the century, and again in the more recent pandemic housing bubble.
Many of the top engineers and scientists graduating from our best STEM schools today have been gravitating toward jobs in “quant” hedge funds. They aren’t trying to do the important job of predicting where capital can best be deployed to provide more supply where future demand will be strong. Instead, they are trying to predict and take advantage of tiny, short term fluctuations in stock prices.
For society, this is a waste of their brains, which could be at work on all kinds of real and innate technology problems that would benefit people were they solved, rather than what they are doing—being hedge fund quants—where the main benefit is slightly better liquidity in the markets. That’s not worth nothing, but isn’t worth much compared to what they could be doing if bad government/Fed policies hadn’t made it pay much better to do that instead.
The problem with asset price bubbles is that they are unsustainable. On the way up there is a self-reinforcing effect of people buying, which encourages more people to buy, and makes it seem safe to maximize gains by borrowing money to buy even more. At some point prices get too high to be afforded by speculators who are already fully invested, and too high relative to the rent (if real estate) or dividends (if stock) for income-oriented buyers. Prices drop, but the financing debt remains, wiping out equity and encouraging more sales by those trying save what they have left.
The bubble ends, the pyramid workers lose their jobs, and there aren’t many non-bubble jobs to keep them employed. After the housing bubble collapsed fifteen years ago there were many openings at manufacturing companies for welders, but few welders available because many who could have had a welding career went into the housing trades instead. Savings that, absent the government/Fed sponsored bubble, would have gone into non-housing companies, got diverted from productive investment into asset speculation.
If/when the current stock market bubble collapses, along with financial industry profits and liquidity, all those recent graduate engineers will have to start at the bottom in a real company.
The root problem is not the stock market itself, which is a great mechanism to crowd source information about the areas of the economy with the best prospects, but the money printing, deficit spending, excessively easy credit, and Fed-dictated low interest rates that created the asset price inflation that makes so many feel they must participate.
Asset price bubbles are our pyramids, and all the work that goes into them has the same negative effect on people’s living standards as ancient Egypt’s pyramids did.