Archive for the ‘Recession’ Category
In a fancy bit of marketing U.S. capitalists have been reborn as “job creators.” As such, they were rewarded with lower taxes, weaker labor laws, and relaxed government regulation. However, despite record profits, their job creation performance leaves a lot to be desired.
According to the official data the last U.S. recession began in December 2007 and ended in June 2009. Thus, we have officially been in economic expansion for almost five years.
It is a given that we will experience another recession; the business cycle comes with capitalism. Since times will always be tough for the majority during a recession (by definition), we have a right to expect that things will go well for the majority during the expansion that follows. More precisely, we should expect that the gains from the expansion will be strong and broad based enough to ensure real progress for the majority over the course of the business cycle.
If that doesn’t happen, it is sign that we need a change in our basic economic structure. In other words, it would be foolish to work to sustain an economic structure that was incapable of satisfying majority needs even when it was performing well according to its own logic.
A recent study by the National Employment Law Project titled The Low-Wage Recovery: Industry Employment and Wages Four Years Into the Recovery provides one indicator that it is time for us to pursue a change in the U.S. economic structure. As it shows, the current economic expansion continues the U.S. transition into a low wage economy.
In net terms, the U.S. economy lost private sector jobs every month from January 2008 to February 2010. The private sector posted positive net employment gains every month from March 2010 to March 2014 (the last month considered by the study). Coincidentally, total private sector employment finally recovered its pre-crisis January 2008 peak in March 2014.
Figure 1 from the National Employment Law Project study shows the net private sector job loss by industries classified according to their medium wage from January 2008 to February 2010 and the net private sector job gain using the same classification from March 2010 to March 2014. As we can see, the net job loss in the first period was greatest in high wage industries and the net job creation in the second period was greatest in low wage industries.
Figure 4 presents a visual picture of job growth by industry over the period February 2010 to March 2014.
As the study explains:
The food services and drinking places, administrative and support services (includes temporary help), and retail trade industries are leading private sector job growth during the recent recovery phase. These industries, which pay relatively low wages, accounted for 39 percent of the private sector employment increase over the past four years.
While the study focused on private sector job creation, Figure 4 also shows one consequence of the continuing attack on the public sector: all levels of government have been forced to dramatically slash their employment.
In short, if the hard times of recession disproportionately eliminate high wage jobs and the “so called” good times of recovery bring primarily low wage jobs, it is time to move beyond our current focus on the business cycle and initiate a critical assessment of the way our economy operates and in whose interest.
Floyd Norris, writing in the New York Times, summarizes key economic trends as follows:
Corporate profits are at their highest level in at least 85 years. Employee compensation is at the lowest level in 65 years.
The Commerce Department last week estimated that corporations earned $2.1 trillion during 2013, and paid $419 billion in corporate taxes. The after-tax profit of $1.7 trillion amounted to 10 percent of gross domestic product during the year, the first full year it has been that high. In 2012, it was 9.7 percent, itself a record….
Before taxes, corporate profits accounted for 12.5 percent of the total economy, tying the previous record that was set in 1942, when World War II pushed up profits for many companies. But in 1942, most of those profits were taxed away. The effective corporate tax rate was nearly 55 percent, in sharp contrast to last year’s figure of under 20 percent.
The Commerce Department also said total wages and salaries last year amounted to $7.1 trillion, or 42.5 percent of the entire economy. That was down from 42.6 percent in 2012 and was lower than in any year previously measured.
Including the cost of employer-paid benefits, like health insurance and pensions, as well as the employer’s share of Social Security and Medicare contributions, the total cost of compensation was $8.9 trillion, or 52.7 percent of G.D.P., down from 53 percent in 2012 and the lowest level since 1948.
Benefits were a steadily rising cost for employers for many decades, but that trend seems to have ended. In 2013, the figure was 10.2 percent, the lowest since 2000.
Norris’s article also includes the following chart which presents after-tax corporate profits, effective corporate tax rates, employee compensation, and changes in the S&P index by presidential term.
Two things are worth highlighting.
First, the steady climb in the ratio of after-tax corporate profits to GDP over the Clinton, Bush, and Obama administrations. The ratio is now at a record high.
Second, the decline in employee compensation as a share of GDP. This ratio has tumbled to a post-Truman low.
These pre-and after-tax profit and compensation trends are no accident. They are the result of economic policies which had as their primary goal the enhancement of corporate profitability. These policies include:
- Corporate tax cuts
- Free Trade Agreements designed to promote the globalization of production and finance
- Financial sector liberalization
- Labor law reforms designed to weaken worker organizing and collective action
- Privatization of government services
- Cuts in and the tightening of eligibility standards for social programs
- Public sector bailouts and subsidization of private sector activities.
Unfortunately, while these policies succeeded brilliantly in achieving their goal, success has come at high social cost. They have worsened living and working conditions for growing numbers of people as well as the overall health of the economy.
The following four charts, published by Doug Henwood on his Left Business Observer blog, offer one window on the weakened state of our economy. The charts show the real movement of GDP, Consumption, Investment, and Government Spending through the end of 2013 relative to their respective long term trends (1970-2007).
Note how things fell off a cliff in the recession. GDP, consumption, and government spending are all about 15% below where they’d be had they continued to grow in line with their long-term trend. (The hysteria over out-of-control government spending looks ludicrous in the light of this graph.) Investment is about 25% below where it “should” be thanks largely to the housing collapse, though it’s staging something of a recovery. The other components have yet to begin closing the gap, because the recovery’s been so weak.
The economy’s weak five year expansion has existed comfortably with record profits (and a growing concentration of income and wealth) because the policies which helped to secure the latter tend, by their nature, to weaken economic fundamentals. Think tax cuts, bailouts, free trade agreements, privatization, and the like.
In short, as long as both political parties prioritize corporate profits, we can expect bipartisan support for current policies and thus a continuation of socially negative trends. There is no way forward for the majority of Americans without a fundamental shift in priority and policies.
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 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.
Despite the declining rate of unemployment—-it fell to 7.4% in July, the lowest level since December 2008—it is clear that economic trends, especially the rate and nature of job creation, are far from desirable.
As the Wall Street Journal explains:
The U.S. labor market’s long, slow recovery slowed further in July—and many of the jobs that were created were in low-wage industries.
Employers added a seasonally adjusted 162,000 jobs in July, the fewest since March, the Labor Department said Friday, and hiring was also weaker in May and June than initially reported. Moreover, more than half the job gains were in the restaurant and retail sectors, both of which pay well under $20 an hour on average. . . .
The falling jobless rate reflects to some degree a pace of hiring that, though slow, has remained steady over the past year even as the broader economy has grown in fits and starts. The U.S. has added an average of 192,000 nonfarm jobs per month so far this year, hardly a robust pace but more than enough to keep up with population growth.
But the drop in the unemployment rate is also the result of a job market that remains too weak to draw back workers who have dropped out of the labor force. Some 6.6 million workers say they want a job but don’t count as unemployed because they aren’t actively looking, a number that has barely budged in the past year. The number of Americans working or looking for work fell by 37,000 in July; as a share of the population, the labor force remains near a three-decade low. . . .
President Barack Obama has stressed the need for good jobs, including during a visit this past week to an Amazon.com Inc. facility in Chattanooga, Tenn., where he called for “a better bargain for the middle class.”
The day before the president’s visit, the Internet retail giant said it was adding more than 5,000 full-time jobs in its distribution centers across the country. Many of the jobs pay $11 an hour or less, although the company said workers will qualify for health insurance and other benefits, including stock grants and tuition subsidies.
“In our viewpoint these are great jobs,” Amazon spokeswoman Kelly Cheeseman said.
But the proliferation of low-wage jobs is leading to anemic growth in incomes. Average hourly wages were up by less than 2% in July from a year earlier, continuing a pattern of weak wage growth in the recovery. A broader measure of income released by the Commerce Department on Friday showed that inflation-adjusted incomes actually fell slightly in June.
The following chart, from a Washington Post article, helps highlight the problematic nature of U.S. job growth. By far the greatest number of jobs lost during the recession were mid-wage jobs. And by far the greatest number of jobs created during the recovery have been low-wage jobs.
Even worse, almost all the jobs created over the last six months have been part-time. According to a McClatchy report:
The unemployment rate is measured by the separate Household Survey, and it fell two-tenths of a percentage point to 7.4 percent, its lowest level since December 2008. That’s due in part to slow growth in the labor force. The jobless rate is based on a sample of self-reporting from ordinary people across the nation, and it’s the Labor Department measure that shows a very troubling trend in hiring.
“Over the last six months, of the net job creation, 97 percent of that is part-time work,” said Keith Hall, a senior researcher at George Mason University’s Mercatus Center. “That is really remarkable.”
Hall is no ordinary academic. He ran the Bureau of Labor Statistics, the agency that puts out the monthly jobs report, from 2008 to 2012. Over the past six months, he said, the Household Survey shows 963,000 more people reporting that they were employed, and 936,000 of them reported they’re in part-time jobs.
“That is a really high number for a six-month period,” Hall said. “I’m not sure that has ever happened over six months before.”
No wonder workers are struggling to make ends meet—job creation is weak and most of the jobs being created are low paying and part time. But it is not like corporations don’t care. For example, McDonald’s Corporation teamed with Visa to offer its workers a helping hand: a web page with advice about how to budget better. This must be a great help to workers that earn on average about $8.25 an hour.
The McDonald’s working budget, shown below, is a bit hard to interpret. What is clear however is that the company expects workers to have two jobs, pay $20 a month for health care, nothing for heat, $600 a month for rent, and . . .
For insight into what it is like to live on a McDonald’s wage, check out the Bloomberg story on Tyree Johnson, a 20 year employee still making minimum wage. Corporations like McDonalds don’t pay these low wages because they are hurting but rather because they help their bottom line, as the following graphic from the Bloomberg story shows.
Corporate apologists often argue that these jobs are just “starter” jobs for high school students seeking to earn money for some extra like a smart phone. But as the New York Times notes, only 14% of those earning between the minimum wage and $10 an hour are less than 20 years old.
As Steven Greenhouse reports, fast food and other low wage workers have begun organizing and striking to improve their working conditions; they are demanding a $15 hourly wage:
In recent weeks, workers from McDonald’s, Taco Bell and other fast-food restaurants — many of them part-time employees — have staged one-day walkouts in New York, Chicago, Detroit and Seattle to protest their earnings, typically just $150 to $350 a week, often too little to support themselves and their families. More walkouts are expected at fast-food restaurants in seven cities on Monday. Earlier this month hundreds of low-wage employees working for federal contractors in Washington walked out and picketed along Pennsylvania Avenue to urge President Obama to press their employers to raise wages.
These workers are taking real risks and if successful their gains would likely boost living and working conditions for most U.S. workers. They deserve our strong support.
Media and policy-makers seem anxious to convince us that the economy is in strong recovery mode. Therefore no further significant policy interventions are needed.
Their optimism appears to rest heavily on the recent acceleration in consumer spending. After all, there are strong reasons for concern with the other major sources of growth: government spending on all levels is being cut, exports face a weakening world economy, and business investment remains largely stagnate.
But there are also strong reasons to challenge this optimistic view of consumer spending as a growth engine. The charts below, from a Wall Street Journal article, highlight some of the most important.
As we see below, while consumption spending is indeed accelerating, after tax personal income is falling. In other words, there appears little reason to believe that there is a solid foundation for sustaining this trend.
Additionally, after four years of recovery we still have 2.4 million fewer jobs than we had at the start of the recession. Moreover, as we see below, there has been no real wage growth. In fact, real average wages have fallen for most of the so-called expansionary period.
Yes, housing values are finally starting to rise and household debt payments as a share of after-tax income are declining. But to a large extent the new burst in consumption spending has more to do with renewed borrowing than solid gains in job creation and income.
Unfortunately, there is little reason for us to have confidence that the economy is gathering strength in ways that will be sustainable or benefit the great majority of working people.
One of the subthemes of current discussions about how best to reduce our national debt is that we must reign in out-of-control spending on federal safety net programs. The reality is quite different.
The chart below shows spending trends in terms of GDP for the ten major needs-tested benefit programs that make-up our federal social safety net. The programs, in the order listed on the chart, are:
- The refundable portion of the health insurance tax credit enacted in the 2010 health care reform law
- Medicaid and the Children’s Health Insurance Program (CHIP)
- The Supplemental Nutrition Assistance Program (SNAP)
- Financial assistance for post-secondary students (Pell Grants)
- Compensatory Education Grants to school districts
- Assisted Housing
- The Earned Income Tax Credit (EITC)
- The Additional Child Tax Credit (ACTC)
- Supplemental Security Income (SSI)
- Family Support Payments
As Jared Bernstein explains:
for all the popular wisdom that programs to help low-income people are swallowing the economy, the truth is that like so much else that plagues our fiscal future, it’s all about health care spending. The figure shows that as a share of GDP, prior to the Great Recession, non-health care spending was cruising along at around 1.5% for decades. It was Medicaid/CHIP (Medicaid expansion for kids) that did most of the growing.
Regardless, the recent explosion in the ratio of Medicare/CHIP spending to GDP is largely due to the severity of the Great Recession, not the generosity of the programs. The recession increased poverty and thus eligibility for the programs, thereby pushing up the numerator, while simultaneously lowering GDP, the denominator. Moreover, spending on all non-health care safety net programs is on course to dramatically decline as a share of GDP. Even Medicare/Chip spending is projected to stabilize as a share of GDP.
These programs are essential given the poor performance of the economy and in most cases poorly funded. Cutting their budgets will not only deny people access to health care, housing, education, and food, it will also further weaken the economy, in both the short and long run.
There is growing talk that the economy is finally on its way to recovery—“A Steady, Slo-Mo Recovery”—in the words of Businessweek.
Here is how Peter Coy, writing in Businessweek, explains the growing consensus:
Job growth is poised to continue increasing tax revenue, which will make it easier to shrink the budget deficit while keeping taxes low and preserving essential spending. All this will occur without any magic emanating from the Oval Office. It would have occurred if Mitt Romney had been elected president. “The economy’s operating well below potential, and there’s a lot of room for growth” regardless of who’s in office, says Mark Zandi, chief economist of forecaster Moody’s Analytics.
Something could still go wrong, but the median prediction of 37 economists surveyed by Blue Chip Economic Indicators is that during the next four years, economic growth will gather momentum as jobless people go back to work and unused machinery is put back into service. “The self-correcting forces in the economy will prevail,” predicts Ben Herzon, senior economist at Macroeconomic Advisers, a forecasting firm in St. Louis.
Before we get lulled to sleep, we need some perspective about the challenges ahead. How about this: we face a 9 million jobs gap, and this doesn’t even address the low quality of the jobs being created.
The chart below, taken from an Economic Policy Institute blog post, illustrates the gap.
As Heidi Shierholz, the author of the post, explains:
The labor market has added nearly 5 million jobs since the post-Great Recession low in Feb. 2010. Because of the historic job loss of the Great Recession, however, the labor market still has 3.8 million fewer jobs than it had before the recession began in Dec. 2007. Furthermore, because the potential labor force grows as the population expands, in the nearly five years since the recession started we should have added 5.2 million jobs just to keep the unemployment rate stable. Putting these numbers together means the current gap in the labor market is 9.0 million jobs. To put that number in context: filling the 9 million jobs gap in three years—by fall 2015—while still keeping up with the growth in the potential labor force, would require adding around 330,000 jobs every single month between now and then.
Unfortunately, our “job creators” only created 171,000 net jobs in October. And that was considered a relatively good month. The chart below, from the Center on Budget and Policy Priorities, gives a sense of what we are up against.
Of course, weak job growth in the past doesn’t mean that we cannot have strong job growth in the future. On the other hand, such a change would require consensus on radically different policies than those currently being discussed and debated by those in power.
Politicians always seem to be talking about the middle class. They need some new focus groups. According to the Pew Research Center, over the past four years the percentage of adult Americans that say they are in the lower class has risen significantly, from a quarter to almost one-third (see chart below).
Pew also found that the demographic profile of the self-defined lower class has also changed. Young people, according to Pew, “are disproportionately swelling the ranks of the self-defined lower classes.” More specifically some 40% of those between 18 to 29 years of age now identify as being in the lower classs compared to only 25% in 2008.
Strikingly the percentage of whites and blacks that see themselves in the lower class is now basically equal. The percentage of whites who consider themselves in the lower class rose from less than a quarter in 2008 to 31% in 2012. This brought them in line with blacks, whose percentage remained at a third. The percentage of Latinos describing themselves as lower class rose to 40%, a ten percentage point increase from 2008.
And not surprisingly, as the chart below shows, many who self-identify as being in the lower class are experiencing great hardships. In fact, one in three faced four or all five of the problem addressed in the survey.
In short, there is a lot of hurting in our economy.