By now it should be relatively obvious to anyone with a modicum of economic literacy that we are experiencing two almost entirely different Recessions. There is the official recession that lasted from December 2007 to June 2009 as defined by the Business Cycle Dating Committee of the National Bureau of Economic Research. [NBER] The NBER verbiage is as follows:
The committee concluded that the behavior of the quarterly series for real GDP and GDI indicates that the trough occurred in mid-2009. Real GDP reached its low point in the second quarter of 2009, while the value of real GDI was essentially identical in the second and third quarters of 2009. The average of real GDP and real GDI reached its low point in the second quarter of 2009. The committee concluded that strong growth in both real GDP and real GDI in the fourth quarter of 2009 ruled out the possibility that the trough occurred later than the third quarter.
Shorter version: The numbers (average of real GDP and real GDI) showed a “recovery” as of June 2009, and any new dips and dives were not to be considered a continuation of the 2007-2009 Recession. Unless, of course, you happened to be one of those unfortunate enough to be caught in the waves of home mortgage fiascoes and layoffs. If we measure a recovery by employment growth and increased personal wealth then lots of people have been in their own private recessions for some time, and political platitudes, palaver, and ideological incantations aren’t going to solve their problems.
There are two major trends that have eroded the American capacity to recover from economic downturns. Systemic problems and immediate issues.
Systemic Problem Number One: The American economy has shifted from one which relied on manufacturing to one in which the service and retail sectors have been carrying the load. The reality is that 2/3rds of our economy is driven by retail sales. We are a nation of consumers not manufacturers. Consider the following graph:
While there has been an increase in manufacturing since 1980, there are some indicators we should not ignore. “The proportion of manufacturing output by the USA (for the top 14 manufacturers) has declined from 31% in 1980, 28% in 1990, 32% in 2000 to 24% in 2008. The proportion of USA manufacturing has declined from 33% in 1980, 29% in 1990, 36% in 2000 to 30% in 2008. While manufacturing output has grown in the USA it has done so more slowly than the economy overall.” [CCBlog]
Manufacturing jobs tend to have better pay than service sector employment, and the trend away from manufacturing has an obvious impact on other factors related to keeping a consumer based economy on an even keel.
Systemic Problem Number Two: There are factors which impinge on our aggregate demand for goods and services. Robert Reich summarized this succinctly: “Repeat after me: Workers are consumers. Consumers are workers.” Reich’s point being that if there are continual pressures to reduce or restrain wages then there will be a diminished market for the goods and services in our consumer based economy. And, the data on median wages isn’t particularly encouraging. Median income earners in the United States of America are earning less than they did 10 years ago if we adjust for inflation.
Given the information on the charts above it’s little wonder that the majority of worker/consumers aren’t in a position to purchase goods and services at their current prices, which is what aggregate demand is all about. Or, to put it more bluntly — if 80% of the potential consumers are experiencing declining income then it’s utterly unrealistic to expect that they will “spend us out” of the current doldrums.
Regular readers of this blog may now take a brief recess, while it’s repeated for the umpteenth time in as many posts that what drives a consumer economy is aggregate demand. If there are factors, such as increasing income inequality and declining median incomes, which impede consumer spending then it’s also utterly unrealistic to propose that tangential considerations like tax breaks for corporations and reduced regulations are going to have any significant effect on aggregate demand and consumer spending.
Systemic Problem Number Three: Capitalism works — if only we would let it. The whole idea underpinning capitalism is that private investment in economic activities yields economic expansion and employment growth. However, there is a catch. The economic investment must be in sectors and activities which sustain continued employment. Without this important caveat the savings capacity of individuals is impaired and if the savings capacity is impaired then there is a reduced amount of capital available for investment.
Now we’ve arrived at the tax policy portion of any economic discussion. If there is a reward to be gained by investing in the short term greater than that to be had by investing in long term activities, then we ought not be surprised that the financial markets will emphasis profitability over stability. One of the subordinate issues is one raised previously, while we do give greater tax breaks to those who invest in longer term securities these do not balance out with the gains to be made by playing in the Wall Street Casino. Worse still, we do not effectively differentiate between entrepreneurial investments (venture capital) and good old fashioned pure speculation. As long as speculation is more remunerative than entrepreneurial investment it’s again utterly unrealistic to suppose that Wall Street bank holding companies and hedge funds will suddenly “get religion” and start investing in start up businesses.
Let’s haul out this graph for one more run as a illustration that we are obviously NOT seeing increased investment in startup businesses:
Not to put too fine a point to it, but we’ve neglected our manufacturing sector, watched as income inequalities and declining median incomes impede the growth of aggregate demand, and rewarded short term volatility over long term economic investment and stable growth. What could possibly go wrong?
The Immediate Issues
Long term unemployment: “No recession in modern times has left so many people out of work for so long as the one that continues to plague us. Among the nearly 14 million Americans officially counted as unemployed by the Bureau of Labor Statistics, almost one-third have been out of work for a year or more.” [Slate June 2011] There isn’t a faster way to but the brakes on increasing aggregate demand than to have an excessive number of people/consumers without a regular source of income. People moving back in with their parents aren’t likely to be purchasing washing machines, new clothes, or living room furniture. Individuals going back to school are less likely to make major purchases than those who have found steady employment. This chart from the Economic Policy Institute is revealing:
When there are at least 4.8 unemployed workers for every job available in the nation it’s apparent that there’s a significant glitch in the system. The worst case scenario is that continued high levels of unemployment drive wages and incomes still lower, which in turn puts deflationary pressure on the overall economy.
Insufficient emphasis on automatic stablizers: At the risk of redundancy, an automatic stabilizer is a government program like unemployment benefit insurance which serves to mitigate the impact of economic downturns. When there are high levels of long term unemployment it does not do to infer that those collecting benefits are somehow “on the dole.” Since there are multiple job seekers looking for a single position, it’s readily apparent that we are not being inundated by a tsunami of suddenly “lax and lazy” individuals, but that we are seeing the impact of “deleveraging” (such a polite word for slash and cut) in our overall economic activities.
Inappropriate financial sector activities: We have somehow managed to get ourselves into an economic roller coaster which pitches and rolls every 90 days. And, frankly speaking, as long as we continue to condone financial sector practices and corporate policies which reward speculation and volatility that is what we will get — speculation and volatility. For example, as long as CEO compensation packages are tied to stock prices the obvious emphasis from the top floor corner office will be on those policies and practices which increase the immediate stock value and not necessarily on those which create long term corporate health. As long as it is more profitable, and less risky, for a bank holding company to engage in proprietary trading in derivatives than it is for the institution to invest in startup firms — we’ll get more proprietary trading and less investment in entrepreneurial ventures.
These two examples illustrate the need for more, not less, oversight of corporate governance and banking investment strategies.
The bottom line on our national economic balance sheet shows at least three systemic and three immediate issue that will not be rectified by incantations of “no new taxes,” and “no new regulations.” Rather, we need to take a hard and very realistic look at the problems in our national economic strategy and the related tactical issues regarding how we manage our financial affairs. The Lone Ranger was a fictional character, and his “silver bullets” were the stuff of childrens’ imaginations, which should not be confused with serious proposals for economic rejuvenation.