Archive for the ‘Structural Crisis’ Category
Our current economic expansion is now past the five year mark and the gains for most working people are hard to find. Media attention has largely focused on the weak record of job creation. Less attention has been given to the lack of growth in wages and benefits.
As Bloomberg News explains:
Meager improvements since 2009 have barely kept up with a similarly tepid pace of inflation, raising the real value of compensation per hour by only 0.5 percent. That marks the weakest growth since World War II, with increases averaging 9.2 percent at a similar point in past expansions, according to Bureau of Labor Statistics data compiled by Bloomberg.
The chart below looks at the inflation adjusted growth in hourly compensation (wages and benefits) for 11 different economic expansions. The gains are for the first five years for those expansions that lasted longer. Full business cycle dating can be found here.
Clearly, business feels no pressure to boost compensation—and it is worth underlining that we are talking about wages and benefits—despite the severity of the past recession and the growing length of the current recovery. It is no wonder that many workers are even reluctant to believe we are in recovery.
To make matters worse, economists Martin Feldstein and Robert Rubin are now calling on the Federal Reserve to slow growth. In a Wall Street Journal op-ed they expressed their fear that new asset bubbles are growing dangerously large. However, as Dean Baker points out:
Given their enormous stature, Feldstein and Rubin undoubtedly expected their joint bubble warning to have considerable weight in economic policy circles. Of course this raises the obvious question, why couldn’t Feldstein and Rubin have joined hands to issue this sort of bubble warning ten years ago in 2004 about the housing bubble? If they used their influence to get a column about the dangers of the housing bubble in The Wall Street Journal in the summer of 2004 it might have saved the country and the world an enormous amount of pain. . . .
It would have been great if Feldstein and Rubin had used their stature to warn of the dangers of the housing bubble in 2004, but they were otherwise occupied. Feldstein was on the board of AIG (yes, that AIG), where he was pocketing several hundred thousand dollars a year for his services. Rubin was a top executive at Citigroup, which was one of the biggest actors in the securitization of subprime mortgages. He walked away with over one hundred million dollars for his work. So it was easy to see why Feldstein and Rubin could not have been bothered a decade ago to warn about the housing bubble.
Making matter worse, their current warnings are completely misplaced. The Fed has to concentrate on trying to promote growth and getting people back to work. The risk from the inflated asset prices that they identify are primarily a risk that some hedge funds and other investors may take a bath when asset prices (like junk bonds) move to levels that are more consistent with the fundamentals. . . .
So there you have it: two extremely prominent political figures who got rich off the housing bubble, now taking time from their busy schedule to call on the Fed to raise interest rates and destroy millions of jobs. In the “show no shame” contest, this looks like a real winner.
To this point, Janet Yellen, the head of the Federal Reserve Board, has wisely resisted their advice. But the problem is that the status quo is far from satisfactory.
If the well-being of our children is an indicator of the health of our society we definitely should be concerned. Almost one-fourth of all children in the U.S. live in poverty.
The Annie E. Casey Foundation publishes an annual data book on the status of American children. Here are a few key quotes from the 2014 edition (all data refer to children 18 and under, unless otherwise specified):
- Nationally, 23 percent of children (16.4 million) lived in poor families in 2012, up from 19 percent in 2005 (13.4 million), representing an increase of 3 million more children in poverty.
- In 2012, three in 10 children (23.1 million) lived in families where no parent had full-time, year-round employment. Since 2008, the number of such children climbed by 2.9 million.
- Across the nation, 38 percent of children (27.8 million) lived in households with a high housing cost burden in 2012, compared with 37 percent in 2005 (27.4 million). The rate of families with disproportionately high housing costs has increased dramatically since 1990 and peaked in 2010 at the height of the recent housing crisis when 41 percent of children lived in families with a high housing cost burden.
As alarming as these statistics are, they hide the terrible and continuing weight of racism. Emily Badger, writing in the Washington Post, produced the following charts based on tables from the data book.
Children live in poverty because they live in families in poverty. Sadly, despite the fact that we have been in a so-called economic expansion since 2009, most working people continue to struggle. The Los Angeles Times reported that “four out of 10 American households were straining financially five years after the Great Recession — many struggling with tight credit, education debt and retirement issues, according to a new Federal Reserve survey of consumers.”
Economists continue to celebrate the free movement of goods, services, and capital. However, faced with slowing economic conditions in core countries, it is now third world growth that is highlighted as proof of the gains from unregulated globalization.
As the United Nations Conference on Trade and Development points out:
The crisis and its fallout have accelerated the trend towards a greater role of developing countries in the world economy. Between 2006 and 2012, 74 per cent of world GDP growth was generated in developing countries and only 22 per cent in developed countries. This is in sharp contrast to their respective contributions to global growth in previous decades: developed countries accounted for 75 per cent of global growth in the 1980s and 1990s, but this fell to a little over 50 per cent between 2000 and 2006.
Africa, in particular, has become the new toast of investors. A 2011 African Development Bank report celebrating the rise of the African middle class offers the following reason:
Strong economic growth in Africa over the past two decades has been accompanied by the emergence of a sizeable middle class and a significant reduction in poverty. Also rising strongly has been a robust growth in consumption expenditures as a result of this growing middle class.
The report estimates that Africa’s middle class reached “nearly 350 million people” in 2010. And, as Jacques Enaudeau comments:
Since then the estimated number of middle class Africans has been arbitrarily set at 350 million, sometimes delivered as the more dramatic sound bite “one in three Africans”. The African Development Bank goes on to explain that, given their higher revenues from salaried jobs or small business ownership, and the ensuing economic security, “Africa’s emerging consumers are likely to assume the traditional role of the US and European middle classes as global consumers”.
Marketing is everything, well almost everything. There are two big problems with this growing celebration of African progress and the free trade process said to be responsible.
The first problem concerns the African Development Bank’s definition of middle class. The Bank defines the middle class as those with a daily consumption of between $2 and $20 in 2005 PPP (purchasing power parity) dollars. At the lower end we are talking about a U.S. life style based on a yearly expenditure of $730! It takes quite a stretch of imagination to see that as a middle class life style.
It turns out, according to Bank statistics, that 61% of Africans still live below the $2 a day poverty line. Approximately 21% more live just above that amount, between $2 and $4 a day. The Bank, while including them in the middle class, also calls them a “floating class.” If we are being honest we would have to acknowledge that after decades of growth, more than 80% of Africa’s population still struggles with poverty.
Moreover, as Enaudeau also points out:
Also sobering is the geographical dispersion of the African Development Bank’s middle class: most of the African upper middle class (spending $10-$20 per day) lives in North Africa, which does not bode well with all the talk of frontier markets stimulated by a new white collar generation south of the Sahara.
The second problem concerns the forces driving Africa’s recent growth. Africa remains highly dependent on the export of primary commodities. China’s massive drive to export manufacturers has turned the country into a major consumer of primary commodities, pushing up their prices and serving as Africa’s main source of growth. As the Asian Development Bank explains:
Developing Asia became a major commodity-consuming region during the last decade, turning the region into a net commodity importer. Its relative importance has increased even more since the 2008–2009 global financial crisis started, as the economies of the major industrial countries slowed significantly. . . .
The PRC [People’s Republic of China] is Asia’s largest commodity consumer by far. It even overtook the US in the consumption of major metals and agricultural commodities in the late 2000s, making it the world’s largest consumer of many commodities. The PRC consumed in 2011 about 20% of nonrenewable energy resources, 23% of major agricultural crops, and 40% of base metals.
The PRC’s share of consumption of agricultural products, such as oilseed soybeans, doubled over the past decade, driven by a change in diet to foods richer in oil.
Unfortunately, growth based on the export of primary commodities tends to create few jobs. Take Nigeria as an example. As Jumoke explains:
While the last decade was marked by higher economic growth, the unemployment rate actually increased from 5.8% in December 2006 to 23.9% in January 2012. Note that this number measures the percentage of workers actively looking for work, and does not include the rate of the chronically unemployed who have stopped looking, and the underemployed working poor. Tellingly, the poverty rate actually doubled over the last five years and now affects 112 million Nigerians, meaning that 112 million Nigerians are consistently without food, clean water, sanitation, clothing, shelter, healthcare and education.
Moreover, the steady decline in U.S. growth has meant a decline in Chinese exports to the United States and a fall in key commodity prices (see chart below). Thus, Africa’s boom, such as it was, appears nearing the end.
Relying on market forces is not going to do it for Africa, or for that matter Latin America, whose growth was also fueled by primary commodity exports to Asia and is now declining, quickly undermining the economic gains of the past decade. As the Wall Street Journal reports:
A decade long commodity boom in Latin America that lifted millions out of poverty is showing signs of fatigue, as fading demand in China hits consumers and corporate earnings from Bogotá to Brasilia.
If economists are looking to the third world to lead the way growth-wise, we are all going to be disappointed.
We have the money and the know how to tackle most of our social problems. Certainly unemployment, houselessness, and poverty. So, why don’t we?
In large part it is because our socially created wealth remains outside social control. Critical economic decisions are driven by private interests not the public good. One result is hipster economics.
If you are not familiar with hipster economics, I recommend Sarah Kendzior’s The Perils of Hipster Economics. Here is the first part:
The Perils of Hipster Economics
On May 16, an artist, a railway service and a government agency spent $291,978 to block poverty from the public eye.
Called psychylustro, German artist Katharina Grosse’s project is a large-scale work designed to distract Amtrak train riders from the dilapidated buildings and fallen factories of north Philadelphia. The city has a 28 percent poverty rate – the highest of any major US city – with much of it concentrated in the north. In some north Philadelphia elementary schools, nearly every child is living below the poverty line.
Grosse partnered with the National Endowment of the Arts and Amtrak to mask North Philadelphia’s hardship with a delightful view. The Wall Street Journal calls this “Fighting Urban Blight With Art”. Liz Thomas, the curator of the project, calls it “an experience that asks people to think about this space that they hurtle through every day”.
The project is not actually fighting blight, of course – only the ability of Amtrak customers to see it.
“I need the brilliance of colour to get close to people, to stir up a sense of life experience and heighten their sense of presence,” Grosse proclaims.
“People”, in Grosse and Thomas’s formulation, are not those who actually live in north Philadelphia and bear the brunt of its burdens. “People” are those who can afford to view poverty through the lens of aesthetics as they pass it by.
Urban decay becomes a set piece to be remodeled or romanticised. This is hipster economics.
The rest of the article is here.
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 conventional explanation for our economic problems seems to be that our businesses are strapped for funds. Greater business earnings, it is said, will translate into needed investment, employment, consumption and, finally, sustained economic recovery. Thus, the preferred policy response: provide business with greater regulatory freedom and relief from high taxes and wages.
It is this view that underpins current business and government support for new corporate tax cuts and trade agreements designed to reduce government regulation of business activity, attacks on unions, and opposition to extending unemployment benefits and increasing the minimum wage.
One problem with this story is that businesses are already swimming in money and they haven’t shown the slightest inclination to use their funds for investment or employment.
The first chart below highlights the trend in free cash flow as a percentage of GDP. Free cash flow is one way to represent business profits. More specifically, it is a pretax measure of the money firms have after spending on wages and salaries, depreciation charges, amortization of past loans, and new investment. As you can see that ratio remains at historic highs. In short, business is certainly not short of money.
So what are businesses doing with their funds? The second chart looks at the ratio of net private nonresidential fixed investment to net domestic product. I use “net” rather than “gross” variables in order to focus on investment that goes beyond simply replacing worn out plant and equipment. The ratio makes clear that one reason for the large cash flow is that businesses are not committed to new investment. Indeed quite the opposite is true.
Rather than invest in plant and equipment, businesses are primarily using their funds to repurchase their own stocks in order to boost management earnings and ward off hostile take-overs, pay dividends to stockholders, and accumulate large cash and bond holdings.
Cutting taxes, deregulation, attacking unions and slashing social programs will only intensify these very trends. Time for a new understanding of our problems and a very new response to them.
Officially our most recent recession began December 2007 and ended June 2009. The following chart provides an important perspective on the recovery period.
Stocks and profits have enjoyed a remarkable recovery. While income is slightly up over the period, it is critical to remember that this is average income and the increase largely reflects gains for those at the very top of the income distribution. Jobs and housing have yet to recover.
So, with returns to capital booming, it is easy to understand why business leaders are relatively content with current policies and, by extension, political leaders are reluctant to rock the boat.
Unfortunately, current policies are unlikely to do much to improve the job prospects or income of most workers. In fact, the rise in business profits owes much to our depressed labor conditions. Unless something dramatic happens, we can expect the next few years to look very much like the past few years.
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 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.