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 Journalarticle, 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.
Last week many media outlets were busy celebrating the Dow Jones record high, suggesting that it was indicative of the United States’ recovery from the greatest economic downturn since The Great Depression. The graph below comes from a New York Timesstory with the headline “As Fears Recede, Dow Industrial Hits a Milestone.”
However, another story buried in the Business section of the New York Times, titled “Recovery in U.S. Is Lifting Profits, but Not Adding Jobs,” contains a graph illustrating how the supposed economic recovery is bitter-sweet at best:
The second graph uses data from the Bureau of Economic Analysis to highlight the fact that corporate profits and stock prices are at record highs, but the share of profits workers have taken home has steadily dropped since the early 1980s. Some of the steepest declines have come during the last few years, or during the supposed “recovery.”
These two graphs illustrate that while ”The Market” is probably considered the go-to indicator of economic well-being, stock indexes are not always indicative of the economic reality experienced by non-investors. If businesses and corporations were increasing their stock value by investing to expand productivity, thereby creating good-paying jobs and opportunities for workers, rising markets would be a sign good of economic times for all. But this data suggests that is not what is happening; instead, as the twin charts show, rising corporate profits are at least partly the result of wage suppression.
Jason Eastman is an Assistant Professor of Sociology at Coastal Carolina University who researches how culture and identity influence social inequalities.
The British economy is a disaster. Oddly enough most analysts find it difficult to explain why.
Actually the reason is quite simple. The British government responded to its own Great Recession by cutting spending and raising taxes. The result, which is anything but mysterious, is that the county remains in deep recession.
Matthew O’Brien, writing in The Atlantic, describes the situation as follows:
…public net investment — things like roads and bridges and schools, and everything else the economy needs to grow — has fallen by half the past three years, and is set to fall even further the next two. It’s the economic equivalent of shooting yourself in both feet, just in case shooting yourself in one doesn’t completely cripple you. Austerity has driven down Britain’s borrowing costs even further, but that’s been due to investors losing faith in its recovery, rather than having more faith in its public finances. Indeed, weak growth has kept deficits from coming down all that much, despite the higher taxes and slower spending. In other words, it’s economic pain for no fiscal gain.
Below is a chart taken from The Atlantic article. It shows that:
Britain’s stagnating economy has left it in worse shape at this point of its recovery than it was during the Great Depression. GDP is still more than 3 percent below its 2008 peak, and it hasn’t done anything to catchup in years. At this pace, there will be no recovery in our time, or any other time.
In other words, while the British economy suffered a deeper decline during the Great Depression period of 1930 to 1934 than to this point in the Great Recession which started in 2008, the economy recovered far more quickly then than now. In fact, it doesn’t seem to be recovering now at all.
Perhaps the most surprising thing about the situation is that political leaders appear determined to stay the course.
The Wall Street Journal had an op-ed this week by Donald Boudreaux and Mark Perry claiming that things are great for the middle class. Here’s why:
No single measure of well-being is more informative or important than life expectancy. Happily, an American born today can expect to live approximately 79 years — a full five years longer than in 1980 and more than a decade longer than in 1950.
Yes, but. If life-expectancy is the all-important measure of well-being, then we Americans are less well off than are people in many other countries, including Cuba.
The authors also claim that we’re better off because things are cheaper:
…spending by households on many of modern life’s “basics” — food at home, automobiles, clothing and footwear, household furnishings and equipment, and housing and utilities — fell from 53% of disposable income in 1950 to 44% in 1970 to 32% today.
Globalization probably has much to do with these lower costs. But when I reread the list of “basics,” I noticed that a couple of items were missing, items less likely to be imported or outsourced, like housing and health care. So, we’re spending less on food and clothes, but more on health care and houses. Take housing. The median home values for childless couples increased by 26% between just 1984 and 2001 (inflation-adjusted); for married couples with children, who are competing to get into good school districts, median home value ballooned by 78% (source).
The authors also make the argument that technology reduces the consuming gap between the rich and the middle class. There’s not much difference between the iPhone that I can buy and the one that Mitt Romney has. True, but it says only that products filter down through the economic strata just as they always have. The first ball-point pens cost as much as dinner for two in a fine restaurant. But if we look forward, not back, we know that tomorrow the wealthy will be playing with some new toy most of us cannot afford. Then, in a few years, prices will come down, everyone will have one, and by that time the wealthy will have moved on to something else for us to envy.
The readers and editors of the Wall Street Journal may find comfort in hearing Boudreaux and Perry’s good news about the middle class. Middle-class people themselves, however, may be a bit skeptical on being told that they’ve never had it so good (source).
Some of the people in the Gallup sample are not middle class, and they may contribute disproportionately to the pessimistic side. But Boudreaux and Perry do not specify who they include as middle class. But it’s the trend in the lines that is important. Despite the iPhones, airline tickets, laptops and other consumer goods the authors mention, fewer people feel that they have enough money to live comfortably.
Boudreaux and Perry insist that the middle-class stagnation is a myth, though they also say that
The average hourly wage in real dollars has remained largely unchanged from at least 1964—when the Bureau of Labor Statistics (BLS) started reporting it.
Apparently“largely unchanged” is completely different from “stagnation.” But, as even the mainstream media have reported, some incomes have changed quite a bit (source).
The top 10% and especially the top 1% have done well in this century. The 90%, not so much. You don’t have to be too much of a Marxist to think that maybe the Wall Street Journal crowd has some ulterior motive in telling the middle class that all is well and getting better all the time.
The media continues to direct our attention to deficits and debt as our main problems. Yet, it does little to really highlight the causes of these deficits and debts.
The following two figures from the Center on Budget and Policy Priorities help to clarify the causes. It is important to note that the projections underlying both figures were made before the recent vote making permanent most of the Bush-era tax cuts.
Figure 1 shows the main drivers of our large national deficits: the Bush-era tax cuts, the wars in Iraq and Afghanistan, and our economic crisis and responses to it. Without those drivers our national deficits would have remained quite small.
Figure 2 shows the main drivers of our national debt. Not surprisingly they are the same as the drivers of our deficits.
Significantly, the same political leaders that scream the loudest about our deficits and debt have little to say about stopping the wars or reducing military spending and are the most adamant about maintaining the Bush-era tax cuts. That is because, at root, their interest is in reducing spending on non-security programs rather than reducing the deficit or debt.
Some of these leaders argue that the tax cuts will help correct our economic problems and thereby help reduce the deficit and debt. However, multiple studies have shown that tax cuts are among the least effective ways to stimulate employment and growth. In contrast, the most effective are sustained and targeted government efforts to refashion economic activity by spending on green conversion, infrastructure, health care, education and the like.
While Republicans and Democrats debate the extent to which taxes should be raised, both sides appear to agree on the need to rein in federal government spending in order to achieve deficit reduction. In fact, federal government spending has been declining both absolutely and, as the following figure from the St. Louis Federal Reserve shows, as a share of GDP.
In reality, our main challenge is not reducing our deficit or debt but rather strengthening our economy, and cutting government spending is not going to help us overcome that challenge. As Peter Coy, writing in BusinessWeek explains:
It pains deficit hawks to hear this, but ever since the 2008 financial crisis, government red ink has been an elixir for the U.S. economy. After the crisis, households strove to pay down debt and businesses hoarded profits while skimping on investment. If the federal government had tried to run balanced budgets, there would have been an enormous economy wide deficit of demand and the economic slump would have been far worse. In 2009 fiscal policy added about 2.7 percentage points to what the economy’s growth rate would have been, according to calculations by Mark Zandi of Moody’s Analytics. But since then the U.S. has underutilized fiscal policy as a recession-fighting tool. The economic boost dropped to just half a percentage point in 2010. Fiscal policy subtracted from growth in 2011 and 2012 and will do so again in 2013, to the tune of about 1 percentage point, Zandi estimates.
If we were serious about tackling our economic problems we would raise tax rates and close tax loopholes on the wealthy and corporations and reduce military spending, and then use a significant portion of the revenue generated to fund a meaningful government stimulus program. That would be a win-win proposition as far as the economy and budget is concerned.
Many expected that the severity of the Great Recession, a recognition that prior expansion was largely based on unsustainable “bubbles,” and an anemic post-crisis recovery, would lead to serious discussion about the need to transform our economy. Yet, it hasn’t happened.
One important reason is that not everyone has experienced the Great Recession and its aftermath the same. Jordan Weissmann, writing in the Atlantic, published a figure from the work of Edward Wolff. The charts shows the rise and fall of median and mean net worth among Americans: how much one owns (e.g., savings, investments, and property) minus how much one owes (e.g., credit card debt and outstanding loans).
Both the mean and the median are interesting because, while they’re both measures of central tendency, one is more sensitive to extremes than the other. The mean is the statistical average (literally, all the numbers added up and divided by the number of numbers), so it is influenced by very low and very high numbers. The median, in contrast is, literally, the number in the middle of the sample of numbers. So, if there are very high or low numbers, their status as outliers doesn’t shape the measure.
Back to the figure: as of 2010, median household net worth (dark purple) had fallen back to levels last seen in the early 1960s. In contrast, mean household net worth (light purple) had only retreated to the 2000s. This shows that a small number of outliers — the very, very rich — have weathered the Great Recession much better than the rest of us.
The great disparity between median and mean wealth declines is a reflection of the ability of those at the top of the wealth distribution to maintain most of their past gains. And the lack of discussion about the need for change in our economic system is largely a reflection of the ability of those very same people to influence our political leaders and shape our policy choices.
…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.
I was finishing up my dissertation in 2006. The Great Recession was still two years away. Nevertheless, there was talk about it being a tough job market for newly-minted sociologists and, like most everybody in my shoes, I was scared sh*tless about getting a job.
It’s obvious now that I was extremely lucky to get out of grad school when I did. A few years later the American Sociological Association (ASA) would report that the number of jobs for new PhDs fell 40% from ’06/’07 to ’08/’09 (sociologists have a job “season” that straddles the New Year).
Neal Caren, a (gloriously employed) sociologist at UNC Chapel Hill, has been tracking the job market himself ever since. His data, posted at Scatterplot, shows that the discipline has yet to recover from the Great Recession (if that’s the sole cause of the decline in job openings). The yellow and green line represent the drop captured in the ASA report. The purple line represents the devastating next year and the two blue-ish lines represent a slight recovery.
This year, however, the thick orange line, reveals that this year’s market is not signalling a recovery to the job market of my own debut. It’s up 5% from last year, Caren explains, 15% from 2010, and “a whopping 73% from 2009.” Extrapolating from the ASA data, we’re still down 33% from ’06/’07.