Talk of economic recovery distracts attention from the fact that this recovery largely remains a jobless one.
The chart below, taken from Catherine Rampell’s New York Times blog, shows the number of months it has taken for the US economy to restore its pre-recession number of nonfarm payroll jobs in our six most recent economic recoveries.
As Rampell explains:
The chart above shows economic job changes in this last recession and recovery compared with other recent ones; the red line represents the current cycle. Since the downturn began in December 2007, the economy has had a net decline of about 1.1 percent in its nonfarm payroll jobs. And that does not account for the fact that the working-age population has continued to grow, meaning that if the economy were healthy there should be more jobs today than there were before the recession.
Current economic dynamics make clear that it is time to stop waiting for market forces to create a jobs recovery. We need a real jobs program, one that will not just generate jobs, but living wage jobs that involve the production of needed goods and services. That, not deficit reduction, is what should be at the top of our political agenda.
As the following chart from the Financial Times shows, public sector gross capital investment–which includes government spending on infrastructure, scientific research, education, and other long-term priorities–is now at its lowest level since 1950 as a percent of GDP.
Perhaps even more worrying, net government investment, which takes depreciation into account, is heading towards zero.
Removing spending on defense from the total leaves an even more depressing picture. The Financial Times evaluated all the major budget proposals currently being considered by Congress, and finds, as illustrated in the next chart, that all of them involve significant reductions in non-defense public investment over the next decade.
Slashing public investment is not the way to a healthy economy.
The Wall Street Journal had an interesting article about income inequality.
What follows is a chart from the article which shows that average income for the bottom 90% of families actually fell by over 10% from 2002-2012 while the average income for families in all the top income groups grew. The top 0.01% of families actually saw their average yearly income grow from a bit over $12 million to over $21 million over the same period. And that is adjusted for inflation and without including capital gains.
What was most interesting about the article was its discussion of the dangers of this trend and the costs of reversing it. In brief, the article noted that many financial analysts now worry that inequality has gotten big enough to threaten the future economic and political stability of the country. At the same time, it also pointed out that doing anything about it will likely threaten profits. As the article notes:
But if inequality has risen to a point in which investors need to be worried, any reversal might also hurt.
One reason U.S. corporate profit margins are at records is the share of revenue going to wages is so low. Another is companies are paying a smaller share of profits on taxes. An economy where income and wealth disparities are smaller might be healthier. It would also leave less money flowing to the bottom line, something that will grab fund managers’ attention.
Any bets how those in the financial community will evaluate future policy choices?
The current economic recovery officially began June 2009 and is one of the weakest in the post-World War II period by almost every indicator except growth in profits.
One reason it has offered working people so little is the contraction of government spending and employment. This may sound strange given the steady drumbeat of articles and speeches demanding a further retrenchment of government involvement in the economy, but the fact is that this drumbeat is masking the reality of the situation.
The figure below shows the growth in real spending by federal, state and local governments in the years before and after recessions. The black line shows the average change in public spending over the six business cycles between 1948 and 1980. Each blue line shows government spending for a different recent business cycle and the red line does the same for our current cycle. As you can see, this expansionary period stands out for having the slowest growth in public spending. In fact, in contrast to other recovery periods, public spending is actually declining.
According to Josh Bivens:
public spending following the Great Recession is the slowest on record, and as of the second quarter of 2013 stood roughly 15 percent below what it would have been had it simply matched historical averages. . . . if public spending since 2009 had matched typical business cycles, this spending would be roughly $550 billion higher today, and more than 5 million additional people would have jobs (and most of these would be in the private sector).
The basic stagnation in government spending has actually translated into a significant contraction in public employment. The figure below highlights just how serious the trend is by comparing public sector job growth in the current recovery to the three prior recovery periods.
As Josh Bivens and Heidi Shierholz explain:
the public sector has shed 737,000 jobs since June 2009. However, this raw job-loss figure radically understates the drag of public-sector employment relative to how this sector has normally performed during economic recoveries . . . . (P)ublic-sector employment should naturally grow as the overall population grows. Between 1989 and 2007, for example, the ratio of public employment to overall population was remarkably stable at roughly 7.3 public sector workers for each 100 members of the population. Today’s ratio is 6.9, and if it stood at the historic average of 7.3 instead, we would have 1.3 million more public sector jobs today.
In short, the challenge we face is not deciding between alternative ways to further shrink the public sector but rather of designing and building support for well financed public programs to restructure our economy and generate living wage jobs.
The dominant firms in the U.S. and other major capitalist counties are happily making profits. They just aren’t interested in investing them in new plant and equipment. Rather they prefer to use their earnings to acquire other firms, reward their managers and shareholders, or increase their holdings of cash and other financial assets.
The chart below, taken from a Michael Burke blog post in the Irish Left Review, shows trends in both U.S profits (defined by Gross Operating Surplus which is calculated by subtracting the value of intermediate inputs, employee compensation, and taxes on production from earnings) and investment (defined by Gross Fixed Capital Formation).
As you can see the increase in profits (in orange) has swamped the increase in investment (in blue) over the relevant time period; in fact investment in current dollars has actually been falling.
Looking at the ratio between these two variables helps us see even more clearly the growth in firm reluctance to channel profits into investment. The investment ratio (investment/profits) was 62% in 1971, peaked at 69% in 1979, fell to 61% in 2000 and 56% in 2008, and dropped to an even lower 46% in 2012.
According to Burke, “If US firms investment ratio were simply to return to its level of 1979 the nominal increase in investment compared to 2012 levels would be over US$1.5 trillion, approaching 10% of GDP.”
The same dynamic is observable in the other main capitalist economies:
In 1995 the investment ratio in the Euro Area was 51.7% and by 2008 it was 53.2%. It fell to 47.1% in 2012. In Britain the investment ratio peaked at 76% in 1975 but by 2008 had fallen to 53%. In 2012 it was just 42.9% (OECD data).
So what are firms doing with their money? As Burke explains:
The uninvested portion of firms’ surplus essentially has only two destinations, either as a return to the holders of capital (both bondholders and shareholders), or is hoarded in the form of financial assets. In the case of the US and other leading capitalist economies both phenomena have been observed. The nominal returns to capital have risen (even while the investment ratio has fallen) and financial assets including cash balances have also risen.
So, with firms seeing no privately profitable productive outlet for their funds, despite great societal needs, their owners appear content to reward themselves and sock away the rest in the financial system. In many ways this turns out to be a self-reinforcing dynamic. No wonder things are so bad for so many.
The Federal Reserve Bank has said it will maintain its stimulus policy as long as the economy remains weak. One of its key indicators for the strength of the economy is the unemployment rate.
The unemployment rate has been steadily falling for several years, from 10% in October 2009 to 7.3% in August 2013. However, this decline in the official unemployment rate gives a misleading picture of economic conditions, at least as far as the labor market is concerned.
The reason, as the Economy Policy Institute explains, is because of the large number of “missing workers”. These missing workers are:
potential workers who, because of weak job opportunities, are neither employed nor actively seeking a job. In other words, these are people who would be either working or looking for work if job opportunities were significantly stronger. Because jobless workers are only counted as unemployed if they are actively seeking work, these “missing workers” are not reflected in the unemployment rate.
The chart below shows the Economic Policy Institute estimate for the number of missing workers.
The next chart compares the estimated unemployment rate including missing workers (in orange) with the official unemployment rate (in blue).
As you can see, while the official unemployment rate continues to decline, the corrected unemployment rate remains stuck at a rate above 10%. In other words labor market conditions remain dismal. And here we are only talking about employment. If we consider the quality of the jobs being created, things are even worse.
The following post by the economist Michael Taft appeared in the Irish Left Review. Although Taft is addressing an Irish audience, I think his discussion of Swiss initiatives against inequality should be of interest to many Americans as well.
As the [Irish] Government does its post-mortem on the Seanad referendum [to abolish the upper house of the Irish parliament], Switzerland is gearing up for a vote in November on a referendum that is truly reforming. It’s called the 1:12 initiative. It proposes that monthly senior executive salaries cannot exceed 12 times the pay of the lowest paid in a firm. And it proposes that this be put into law. This is pretty heavy in a country which is home to major financial institutions and multinationals.
Imagine the impact here. In the Bank of Ireland, the CEO Richie Boucher has a salary of €843,000 (no, that’s not a typo). A bank clerk on starting pay is approximately €22,000. Under this law one of two things would have to happen: either Richie’s salary would have to fall by three-quarters – to €264,000 a year. Or the starting pay would have to rise to €70,250. I leave you to decide which is more likely to happen, if either.
But there is more going on in Switzerland than just a pay ratio debate. Earlier this year, the people voted on a referendum that put controls on executive pay and gave shareholders’ more rights over executive compensation. There has been growing anger over excessive salaries and the bonus culture among Swiss companies. The referendum passed overwhelmingly despite the fact that opposing business lobbies outspent the ‘yes’ side by 40-1.
Now there are three more referenda coming down the line. First, there is a proposal to increase the minimum wage to approximately €18 per hour. Even in an economy with high living costs this is a hefty rise. Proportionately, for Ireland, this would amount to somewhere between €11 and €12 per hour (using the median wage as the comparison).
There is a referendum on a basic income – guaranteeing every adult a basic income of €24,500 a year. Again, even factoring in living standard difference, this is hefty sum, designed to ensure a safety net for everyone.
And then there’s that 1:12 initiative – designed to do two things: put upward pressure on low-pay and downward pressure on excessive pay. As you can imagine, the business lobbies and the Government are predicting all manner of plagues and pestilence if this referendum succeeds. First off, there is the claim that businesses will leave Switzerland if this is passed. There is something in that. Multi-national capital can be relatively mobile and many companies can punish a people for taking democratic decisions that companies don’t like. This is not the case for all companies, though but the blackmail threat permeates the body politic.
A second argument put forward by the business lobbies is that they will just avoid the law by breaking up their companies into smaller units. In this scenario, all the low-paid will be put into one sub-company and the high-paid into another. This will mean that each sub-company can maintain the 1:12 ratio. There is no doubting that companies get up to all sorts of activities to avoid democratic interventions (the ever-vigilant WorldbyStorm highlight Ryanair’s byzantine employment contracts to prevent employees from collective bargaining). However, this threat could be easily dealt with by legislation that treats sub-companies that sell exclusively into a main company as part of the main company itself.
Could such an initiative work here? Eventually, but as always we must treat all such initiatives as part of a process that must be rooted in today’s reality. We have an extremely poor indigenous sector and an over-reliance on foreign capital for value-added employment and participation in the global market. A 1:12 initiative would immediately become hostage to multinational blackmail (this will cost jobs, etc.) and with the economy still in a domestic-demand recession such an initiative would understandably raise fears.
However, this is not to say we put this on some shelf to be dealt with sometime in some future (like Seanad reform). A first step would be to require all companies to publish their company accounts – profits, executive pay, etc. Publicly-listed companies are already required to do this but many private unlimited companies (Dunnes Stores) and foreign branches (Tesco) don’t have to. There is no rationale why some companies are required to publish and others are not. Freedom of economic information would be a first step in creating a more informed public and efficient market relationships.
Second, we could take up the idea put forward by ICTU sometime ago – that wages that exceed a certain ratio should not be deductible for income tax purposes. If, for instance, there was a 1:12 pay ratio in a company, then the company would have to pay corporate tax on incomes that exceed the upper threshold. Taking the Richie Boucher example, Bank of Ireland would have to pay tax on that portion of his salary that exceeded €264,000. We may not be in a position now to stop excessive pay, but we certainly don’t have to subsidise it with taxpayer money.
So we could take positive concrete steps. However, let’s not lose the overall sight of what’s happening in Switzerland. There is a democratic revolt against high pay and low pay: limitations on executive pay, increased minimum wage, and a basic income. There is a lively debate about equality and inequality. There are concrete proposals and there will be votes. But even if the 1:12 initiative fails, that’s not the end of it.
Of the many issues that we will need to address on the other side of austerity (and there are many: employment, investment, indigenous enterprise development, universal public services, social protection, etc.) there is the issue of reducing inequality, creating strong social protection floors and raising income floors.
What the Swiss are debating is how to raise that floor while toppling a few golden towers. This is what we should start debating. And the sooner the better.
Interesting Note: Despite all the blackmail threats and warnings of doom about the 1:12 initiative, recent polls show it is too close to call: 36% for yes, 38% for no, with the rest undecided.
Profits are definitely up. In fact, as Doug Henwood reports in a post on his Left Business Observer blog, corporations are “flush with cash”:
At last count, U.S. nonfinancial corporations had nearly $16 trillion in financial assets on their balance sheets, almost as much as they have in tangible assets. The gap between internal funds available for investment and actual capital expenditures—what’s called free cash flow—is very wide at around 2% of GDP. That’s down from the high of 3% set a couple of years ago, but sill higher than at any point before 2005.
So, what are corporations doing with all their cash? Well, definitely not investing in new plant or equipment.
Quoting Henwood again:
What matters for the accumulation of real capital is net investment—the gross amount invested every year less the depreciation of the existing capital stock. We’ve just gotten numbers for 2012, and they’re remarkably low. Private sector net nonresidential fixed investment (as a percent of net domestic product, or NDP) fell below 1% in 2009. It’s recovered some, to just over 2% last year, but that’s half the 1950-2000 average, and lower than any year between 1945 and 2009. We won’t have 2013 numbers until August of next year, but it looks like they’ll stay in this depressed neighborhood.
Instead of investing, “corporations are shoveling cash out to their shareholders. Through takeovers, buybacks, and traditional dividends, nonfinancial corporations are transferring an amount equal to 5% of GDP to their shareholders these days—again, down some from recent highs, but very high by historical standards.”
These trends help explain how the top 1% of income earners were able to capture 95% of all the income gains over the period 2009 to 2012. They also help explain why continued stagnation appears the most likely outcome for the years ahead.
The following table reveals much about the way our economic system operates. It shows that the top 1% captured 68% of all the new income generated over the period 1993 to 2012.
Now that is a long time period, one that includes several recessions and expansions.
Looking just at our current expansion, from 2009 to 2012, we see that the top 1% captured 95% of all the real income growth. The great majority of Americans might find this expansion disappointing, but not the top earners. The current dominance of the top 1% is striking. The top 1% only captured 45% of the income growth during the Clinton expansion and 68% during the Bush expansion.
the top 10% of earners took more than half of the country’s total income in 2012, the highest level recorded since the government began collecting the relevant data a century ago . . . The top 1% took more than one-fifth of the income earned by Americans, one of the highest levels on record since 1913 when the government instituted an income tax.
We have a big economy. Slow growth isn’t such a big deal if you are in the top 1% and 22.5% of the total national income is yours and you can capture 95% of any increase. As for the rest of us . . .
One question rarely raised by those reporting on income trends: What policies are responsible for these trends?
The government announced that the unemployment rate fell in August, down to 7.3 percent from 7.4 percent in July. But there is little reason for cheer. As Business Week explained:
The worrisome part is why the rate fell. The size of the workforce declined by about 300,000 and the participation rate fell to 63.2 percent from 63.4 percent—the lowest since August 1978. The participation rate is the number of people either working or actively searching for work as a share of the working-age population. It rose steadily over the years as more women entered the workforce before falling sharply in the 2007-09 recession, and it hasn’t recovered since.
In other words, the unemployment rate continues to fall only because people continue to lose hope of finding a job. The chart below shows the trend in the U.S. labor force participation rate.
The following chart highlights one reason for our dismal employment record. In contrast to previous recoveries, state and local government spending has been slashed, resulting in an ongoing contraction in state and local employment, with negative consequences for private sector employment as well.
And, it is worth emphasizing, this shrinking labor force participation rate, which represents a clear failure on the part of our economic system to create jobs, is taking place during a period of economic expansion. One can only shudder at what lies ahead for working people when this expansion finally ends in a new recession.