“It was the best of times, it was the worst of times,” when the annual unemployment rate in the state of Nevada dropped from 14.9% in 2010 to the current 9.5% rate finalized by the BLS as of August 2013. Recalling that employment is a lagging indicator, the Housing Bubble which saw top home prices in Nevada in 2005 blew the bottom of the hiring line when the Bubble burst began in 2007 and headed downward until the NBER declared the official end of the Recession as of June 2009.
We should also recall that housing is a “midstream” sector, as explained by the EPI:
“Housing is a “mid-stream” sector of the economy, meaning that many other industries, both upstream and downstream, are affected by the health of the housing market. For example, the demand for building materials increases in a booming housing market, as does the demand for appliances and furnishings. Even more important in terms of dollars pumped into the economy, is appreciated home values, which have been an important source of stimulus over the past few years.”
In short, if one were to pick a sector which could create the most overall damage to the national — an by extension the state — economy, it would be difficult to find one more crucially situated than the housing sector. We know things “blew up” but, why has Nevada’s unemployment rate stayed among the higher levels in the nation since the official end of the Recession as of June 2009?
Speaking in Generalities
There are some general reasons for the slow recovery. First, the Federal Reserve wasn’t in much of a position to stimulate the U.S. economy. The rates were already low at the beginning of the recovery, and therefore there wasn’t room to manipulate the economy via monetary policy. When things fell to pieces in late 2008 the FED primary discount rate was 0.50, with a federal funds rate of 0.00 to 0.25 [NYFed] The federal funds rate is the important one to watch for our purposes because it’s the one which most often serves as the base rate for all other interest rates charged by lenders. You can’t go much lower than 0.00 and thus the federal funds rate wasn’t all that useful in providing economic stimulus.
Secondly, consumers were “deleveraging.” Consumer debt had been dropping since the fourth quarter of 2008, and didn’t pick up again until the fourth quarter of 2012. [NYFed] As of January 2011, the San Francisco Fed reported their findings on the “slow recovery,” and linked the issue to the deleveraging of non-housing consumer debt:
“Overall, the county evidence strongly suggests that credit demand is weak because of an overleveraged household sector. This view is supported by survey evidence that the main worry of businesses is sales, not financing. The October 2010 National Federation of Independent Business survey (Dunkelberg and Wade 2010) shows that almost no small businesses viewed credit availability as their primary problem. In fact, the NFIB has reported that weak sales were the top problem facing small businesses throughout the recession. Weak consumer demand also helps explain the enormous cash balances currently held by U.S. corporations (see Lahart 2010). These results have important policy implications. If the main problems facing businesses relate to depressed consumer demand due to a household sector weighed down by debt, investment tax subsidies and lower interest rates may have a limited effect on business investment and employment growth.” (emphasis added)
What was the reason small and independent businesses weren’t recovering? Weak demand. Nevada’s economy, dependent as it is on tourism, requires a population ready and willing to part with their earnings, confident that the money they leave in Las Vegas (or Reno, or wherever) can stay there.
Third, we need to look at the overall slowing down of our economy, and for this perspective we should consider our “potential.” Without diving too far down into the weeds, our GDP has “potential” and this “potential” is slowing down. (1) In the 1960’s we could observe a decline in our total factor productivity (TFP) a rather amorphous measurement of our use of labor and capital; (2) Then in the mid 1970’s we could discern a reduction in our potential employment. Translation: The work force was getting older, and the number of women entering the work force has leveled out. In the 1950’s only about 1 in 3 women were working in the U.S., by 2010 women comprised approximately 47% of the total U.S. employment. [BLS] (3) Long term unemployment, associated with this prolonged recovery, means that skills and knowledge levels erode further exacerbating the employment situation. [CBO pdf]
Fourth, there’s the old stickler — You can’t spend much more than you have. Otherwise known as wage stagnation:
“Between 2002 and 2012, wages were stagnant or declined for the entire bottom 70 percent of the wage distribution. In other words, the vast majority of wage earners have already experienced a lost decade, one where real wages were either flat or in decline.
This lost decade for wages comes on the heels of decades of inadequate wage growth. For virtually the entire period since 1979 (with the one exception being the strong wage growth of the late 1990s), wage growth for most workers has been weak. The median worker saw an increase of just 5 percent between 1979 and 2012, despite productivity growth of 74.5 percent — while the 20th percentile worker saw wage erosion of 0.4 percent and the 80th percentile worker saw wage growth of just 17.5 percent.” [NYT]
Now, consider a situation in which a monetary policy solution is questionable because the (a) Fed can’t lower its rates much further to stimulate economic growth, (b) consumer demand drops off as families try to paid down household debt, (c) we’ve just about incorporated everyone we can into the labor force without resorting to child labor and the exploitation of the elderly, and (d) there’s been a lost decade in terms of wage growth already, and things aren’t looking up in that department. This is hardly a formula for encouraging vacationers to leave it in Las Vegas.
The hard and unavoidable conclusion is that Nevada desperately needs more people willing to spend more money on good old fashioned fun and games. The UNLV Center for Business and Economic Research (pdf) puts this statement far more elegantly.
Here are some possibilities to consider: (1) Forget trying to tinker with the Federal Funds Rate and concentrate instead on a manufacturing policy. We don’t have to be “protectionist” or “isolationists” to consider the possibility that it would enhance our overall economy if we made stuff. We don’t necessarily have to recoup our manufacturing of frying pans if we’d concentrate on manufacturing better and more energy efficient stoves.
(2) Increase the minimum wage. But, how the so-called representatives of ‘small business’ (like the U.S. Chamber of Commerce?) will bellow about this one — It’s a job killer? Remember what the Number One issue was for small business during the last recession? Demand! It wasn’t tax policy, monetary policy, or stringent lending, it was good old fashioned demand. People with more money in their bank accounts want more and spend more — and that’s the very definition of demand. And, as a side benefit, if we want to reduce the number of American families who require public assistance to meet their daily needs for food and housing — how about making it a living wage?
(3) Empower the labor force. This doesn’t necessarily mean making organizing more convenient, although that would serve to increase earnings. It can also mean supporting those who wish to improve their skills or learn new ones in educational institutions or technical training. How might we all benefit if student loans were even more affordable? If apprenticeship and other training programs were subsidized? If community college associate degree programs were adequately funded? If we invested in our own work force?
In short, we can settle for the slow growth economic predictions informed by stagnating wages, increasing income inequality gaps, debilitating student indebtedness, the marginalization of our manufacturing sector, and the altogether too common fear of long term unemployment — OR we can DO something about it. Now, can we talk about passing JOBS bills?