Recent U.S. economic news has been disappointing. GDP may be growing but it is growing very slowly. Job creation is even more sluggish. The civilian labor force participation rate, i.e., the percentage of civilian population employed used to stand above 66% before the recession. This statistic has experienced a steady decline since the recession hit in 2008 so that it has fallen to 63.5% and it shows no sign of increasing. That’s a significant block of Americans no longer in the work force.
In addition, we have an increasing number of Americans who have remained unemployed for a very long time, and younger Americans have had a difficult time entering the workforce at all. 5.6% of the workforce is unwillingly part-time.
Over a year ago in 2012, the Atlantic offered up a number of charts comparing the recovery from this recession to other recessions in the past. That news is not so good either:
- GDP is growing more slowly than in recoveries past. Almost half as slowly.
- Housing prices, which represent Americans’ wealth, have recovered somewhat, but they were continuing to dip in 2012. On average, recoveries have seen increases sooner.
- Non-farm payrolls are increasing very slowly. A number of observers have pointed out that the stock market and corporate profits generally are doing quite well, but payrolls have not returned to pre-recession levels.
- Curiously and maybe even counter-intuitively, industrial production has been tracking close the average recovery, but there has been so little investment that capacity has shrunk whereas in other recoveries it grows.
- A final curious statistic: miles traveled has been almost unchanged since the start of the recession.
So the economy has been improving certainly, but it has been improving very slowly. Why?
Causes of our weak recovery
At a speech this February, Janet Yellen lays out why. The economy suffered a large banking crisis followed by an unprecedented bursting of a housing bubble. “Businesses slashed capital spending and payrolls… GDP contracted by 4.7%.” It was also a long recession lasting almost twice as long as the post-war average.
Causes:
- Weak fiscal response. Initially, the Obama Administration asked for too small a stimulus package. Then, it bargained that down smaller and also bargained some of the stimulus into less effective tax cuts rather than into outright spending.
- Offsetting the stimulus was the severe contraction of state and municipal budgets leading to large lay-off of teachers, police, firemen, and other state and municipal workers. After losing the House and any possibility of overcoming filibusters in the Senate, Democrats were no longer able to pass further stimulus spending after 2010. Even in 2009, stimulus spending was a hard sell to the more conservative parts of the Democratic Congressional caucus. In addition, state governments, which cannot deficit-spend, often raised taxes during this period contributing to the resistance recovery has to overcome.
- Housing investment has not picked up. With House Republicans eager to dismantle Freddie and Fannie, the mortgage market may soon experience steep increases in interest rates which will further hammer housing investment.
- The drop in housing prices also causes a large drop in household wealth, thus diminished spending, and diminished economic activity.
- Expectations of the economy have also remained uncharacteristically low. Lack of “faith in Washington” has an effect on how much people are willing to spend.
- The crisis in Europe, where one currency but many countries, has meant that problems that federal government patches up with Florida threaten to sink Spain. This has had a depressing effect on our economy.
- Not pointed out by Yellen is also the slowing down that the Chinese economy is experiencing.
Political causes of our weak recovery
- The stimulus in 2009 was far too small. The Obama Administration never advocated for an adequate one and never once complained that the 2009 stimulus had been too small, or needed to be supplemented given experience.
- Democrats were not fully united in 2009 behind a fiscal response to the recession. This gave enough room for Republicans to limit and then prevent stimulus spending.
- The popular base of the Republican Party has been encouraged to leave the orbit of reality and drift off into crazy conspiracy theories, non-arithmetic economics, and libertarian fantasy. This has made it impossible for Republican office holders to act responsibly in matters fiscal or fiduciary.
We have, until recently, lived in and thrived as a consumer economy. The macro-economic engine is fueled by the continuing flow of cash from the wallets and bank accounts of consumers into the wallets and bank accounts of companies, banks, and producers, and then back into the wallets and bank accounts of consumers (as salary, profit, and revenue).
Led by the GOP (and with substantial help from influential Democrats), we have disabled that economic engine by starving it for fuel — the upper one or even one-half percent has taken so much wealth out of the economy that, like a pump sucking at an empty reservoir, the economic engine is sputtering and shaking.
If we don’t somehow solve it, the engine will shake itself to pieces and fail altogether.
Elizabeth Warren is the ONLY elected official who I see taking a responsible leadership position on this issue. The items listed in the thread-starter are all true. Too many of them are, in my view, symptoms rather than causes.
People are not spending money because they have no money to spend. Profits and balance sheets of the top 1% look fine, and so there is little or no political will to change anything. Barack Obama is primarily responsible to his largest funders, and those individuals are doing just fine. The rest of us can pound sand, as far as Washington (with the exception of Elizabeth Warren) is concerned.
There will be no recovery until we find the courage and the means to recapture enough wealth from those who are hoarding it to get our economic engine running again. Neither the Tea Party, the GOP, nor the Obama administration show any signs of either.
I agree with your analysis, but I have specific solution in mind.
The path that you describe is classic, but historical. That path of consumer to producers back to consumers is no longer primarily contained in the USA. The path goes through other countries, and in the process, that is where the wealth is being siphoned off by the upper class. We have traded a lot of middle-class jobs for a small number of upper-class jobs and a large number of lower-class jobs.
If we simply pump more money into our current economy (like with a stimulus), it isn’t going to help the larger and larger percentage of the people in this country who no longer work in the consumer product economy, who now work in the low-paid “service” economy. The money will largely bypass them. Yes, Wal-Mart may hire a few more “associates” – at 28 hours per week, minimum wage – but simply pumping more money into the chain will likely just increase the disparity even further because the system is set up to funnel money to the top.
We have to change the system.
I think we simply need to penalize high incomes with punitive levels of taxation above a certain threshold. I’ll throw out a number: $3 million per year. Above that, taxes shoot up to Eisenhower-era levels of 92%.
Let’s basically go back to the 1960’s level of both taxes and deductions as a starting point, with maybe a few minor tweaks (but nothing major).
What do you think will happen? Will the CEO of Bank of America really collect his $12 million in salary only to pay 92% of the final $9 million in taxes? No way. You’ll see his salary get lowered. He will look for compensation in other ways.
The key will be to allow for tax deductions for expenses that will help the everyday economy and prevent tax deductions that allow someone to accumulate power and wealth. In that way, business actually becomes a source of stimulus because they have no incentives to become “efficient” – which means “do the same thing with fewer/cheaper employees”. They’ll spend like drunken sailors to avoid giving money to the government. Magazines for the lobby? Sure, give me a dozen each month! Gym memberships for all employees? Sure, tax deductible! Support the local little-league? Absolutely, better than helping those welfare cheats in California!
Efficiency is what is killing us. We pursue the cheap labor, we pursue doing “more with less”, A company with millions in annual profit has no problem throwing 100 people out of work at a local plant to save yet another $1m/year because that $1m is mostly theirs. Imagine if 92% of that $1m was going to go to the government? They wouldn’t bother trying to squeeze it from the company.
…both on the merits and the politics. I’d like to see a minimum wage double what it currently is and some legal formula whereby the CEO cannot make more than, say, 100x what the lowest paid employee makes in that company. That provides incentive for growth while requiring that wealth be shared among all the people who made that happen. So BOA’s CEO can collect $12 million IFF no teller makes less than $120,000 if working full time (~$60 per hour if working part time). Both of these would be inherently stimulative as there will be more discretionary spending available.
the tax rate approach, hard as it will be politically, will still be easier than any kind of cap on private sector compensation. I’m all for doubling the mininum wage, restoring labor’s ability to organize, and creating tax incentives for creating high-wage jobs here and tax penalties for shipping work abroad.
…I am not advocating a cap on compensation, only that the rising tide of a businesses success lift the boats of all of that business’s employees.
CEO compensation and the compensation of the upper stratum of management generally has somehow been cut loose from normal market forces. CEOs whose companies don’t so well should not be receiving the rewards they are receiving. Moreover, there is little evidence that management now is operating in a so much more difficult environment than they were fifty years ago that a rational distribution of rewards merits their receiving multiples more than their predecessors.
What seems to have gone wrong is that boards and compensation committees have lost their independence from those they are theoretically overseeing. A return to the sort of transparency and freedom of information that makes markets actually work would cause extreme upper incomes to recede to become more in line with the actual value they generate.
1. Stimulus money is not just a gift. The idea is that it causes economic activity.
2. Neo-Keynesian economists study “multipliers” a lot. How much economic activity does $1 spent on a public works project cause? Is it more or less than a $1 tax cut? There hasn’t been any study I’ve seen that indicates fiscal stimulus is in danger of being vacuumed up by the 0.5%.
3. Capitalist economies aim precisely for efficiency. In a liberal system, the harsh edges that that brings about are supposed to be softened by a robust welfare system. And, in fact, a robust welfare system should make it easier, not harder, for entrepreneurs to take risks and for innovation to flourish.
Imagine my surprise that somebody vaguely political decides to write about an issue that concerns me, such as why this economy is so fucked up and it’s wrecking our country.
But if the housing bust cut wealth effect spending, why hasn’t spending come back now that we’re back in a new bubble? Just one part of an incoherent explanation designed to deflect all blame and responsibility.
Please stop writing until you can find time to go to a quiet place and do some honest accounting of yourself.
We are not in a housing bubble right now. There is not a lot of wild new construction taking place. Most communities are not seeing prices in the same range as 2003-2008. Long-time renters are not buying houses for the first time.
I’m not sure how, I suppose taxation is one way, but it seems to me that both part time and temp jobs are really making things difficult for people to bounce back. They lost their full time job, and they end up taking a part time job which maybe doesn’t have a minimum number of hours, maybe requires such a flexible schedule that a second part time job is impossible to schedule, maybe precludes the employee from non-salary benefits. We’ve also got oodles of temp jobs now, so the formerly unemployed get jobs with no security, little benefits, depressed salaries, and no sense of commitment from their workplace nor their employer (who are now two different organizations).
People need steady work and steady incomes. They need security that their job and their paycheck is reliable. I’m not suggesting that they need lifelong assurance, but when you don’t know what your paycheck will look like two weeks from now, you can’t make low cost plans because low cost plans require more money up front or a commitment of money over a period of time.
Employment stability would go a long way for so many people who are now on the rough edge of employment.
That is what I am reading here.
When I was working at a technology company in the 90’s:
Every VP had to have an admin. By the early 00’s there was one admin for six VP’s as MS-Office and dozen of other productivity enhancements allowed the VP’s to do most things themselves. Now apparently there are no admins.
The company was loaded with IT support personnel. Everyone’s PCs always were malfunctioning and you needed a person to add a printer or otherwise get updates. Now this is all done by users or automatically.
There used to be 50 people in the warehouse to ship technical manuals and media to load the software. Now this is all done online (or by sending CD’s for the docs) and there’s now 3 people.
They did end up offshoring some R&D. Why? Because they could get a better and more flexible workforce. You hire US software developers and before you know it you’ve got a department of 50 year old guys, many with out of date skills, when what you need is a blend of experienced and junior.
In my own current company, a manufacturer, we automate as much as possible to lower costs and make doing business with us easier and better for the customer. If we’re not cost competitive and delivering the service they want (for example they order electronically and we bill electronically) the customer is going to go elsewhere, which could include other countries.
When I was in Mexico in the 70’s I drove by a construction site with 50 guys with shovels and wheelbarrows. I asked about it and someone told me that there were (at the time) prohibitions against using excavation equipment in order to increase employment. Is that what you propose?
This has got to be one of the craziest threads yet. Yellen may be smart, but so was Greenspan. I think her view about only may be right. For example, home ownership had always been around 58%. Loose lending and bubble hysteria drove it up to 62%. I believe it’s now back to where it’s traditionally been. Is that bad? Just one counter point. I have read about a thousand article on the economy over the last five years and there are hundreds of opinions on what went wrong and what we need to do to generate growth.
I don’t have an answer to the question “what are people supposed to do for work?” but blaming business for using technology, a process that that has been underway for at least 250 years, does not make a good starting point for discussion.
Note: Sorry if there are any typos. My preview button has disappeared.
Strawmen.
To what part of kbusch’s post are you responding? I can’t read anything in the initial diary which leads to your rhetorical question, a question for which you waste little time and many words responding.
and neither the initial poster nor any of the respondents (including you) comes close to either the what or the why, or for that matter what to do about it.
Greater government spending in down times is meant to replace lower business investment and consumer spending, so I don’t think that’s the problem here. We can make government spending a larger part of the economy but unlikely that thought will make everything better.
What is happening in the current environment is that business investment is resulting in reduction of jobs, and consumer spending (including home buying) is probably not returning to it’s earlier crazed levels. No one has openly discussed how to move forward, and that includes the President. For example:
caused by deleveraging in the private sector, i.e. consumers are busy spending their money paying down their debts and they aren’t buying enough to heat up the economy.
There are historical and political reasons for our current situation, but I don’t think that businesses don’t need to invest when there’s limited demand. I’m critical of business influence on our society, but I think it’s impractical to expect business, voluntarily or not, to all of a sudden start concerning itself with something other than the bottom line.
Yellen is not really pointing out reasons for slow growth so much as she is pointing out failed solutions to the problem. My preferred solution would be massive investment in infrastructure. But in our global economy improving the domestic economy that may not be enough. We depend on other countries to buy our stuff.