Reports from the Economic Front

a blog by Marty Hart-Landsberg

Monthly Archives: November 2009

Jobs and Military Spending

Everyone is talking about jobs, and the reason is because it has become apparent that, at best, we are facing a jobless recovery.  In fact, one has to wonder what it means to speak of recovery if large numbers of people remain un- or under-employed.

So, how should we start thinking about developing a desirable jobs program? Probably one of the best places to start is with military spending and the gains (which are many) from shifting spending from the military to more socially beneficial uses.

In a 2009 update of an earlier study, economists Robert Pollin and Heidi Garrett-Peltier use the Department of Commerce’s input-output table of the U.S. economy to determine the employment effects of “spending $1 billion on alternative sectors within the U.S. economy, including military spending, clean energy, health care, and education.”  To be complete, they also examine the employment effects of an equivalent tax cut.

The job outcomes for each sector combine three different employment effects:

  • Direct effects, which include the jobs created by producing the specific goods and services in the targeted sector.
  • Indirect effects, which include the jobs created in other sectors to produce the goods and services needed to support the production activities in the targeted sector.
  • Induced effects, which include the jobs created by the spending of workers who gain employment through the above direct and indirect effects.

The outcomes differ between sectors because the sectors differ in their labor intensity, domestic content, and compensation per worker.

And now for the results.  As Figure 1 (taken from the study) shows, spending on the military produces the fewest jobs.

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Of course compensation levels in each sector are different. Military jobs are the highest paying, but the overall compensation differences between the various alternatives narrow when we include the jobs created by indirect and induced effects.

The authors try to highlight the trade-offs between job creation and compensation by dividing the jobs created by each spending alternative into three separate pay categories: jobs that pay less than $32,000 a year, jobs that pay between $32,000-$64,000, and jobs that pay over $64,000.

As Figure 2 shows, “for the most part, spending on clean energy, health care, and education generates more jobs of all kinds—low, mid-range, and high-paying.”

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In short, spending on the military or cutting taxes is just not a very effective way to generate jobs.  And when one considers the social benefits from education, health care, a more sustainable economy (and a more peaceful world), the policy conclusion becomes even clearer: we need to begin restructuring our spending priorities, and fast.

Makes you wonder why military spending (in real terms) keeps rising.  In fact, it rose (in real terms) at an average rate of 8.1 percent a year from 2001-2008; the economy, by comparison, only grew at the average annual rate of 2.4 percent over the same period.

Unemployment: It Is Lasting A Lot Longer

This chart comes from the Bureau of Labor Statistics:

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[click on the chart for clearer view]

Not only is the unemployment rate high, those who are unemployed remain so far longer than before.  For example, in October 2009, 35.6% of those unemployed were jobless for 27 weeks or more.  As the chart illustrates, this is a record high.

Disappearing Good Jobs

The following is an Economic Policy Institute [EPI] “snapshot” written by Algernon Austin:

Many of the 8.1 million jobs lost during the current recession, have been good jobs. EPI defines a good job as one that pays at least 60% of the median household income and also provides health care and retirement benefits. By that measure, American men are losing ground. The figure shows that the share of male workers employed in good jobs dropped from 46.5% in 1979 to 31.3% in 2008. Of the major racial and ethnic groups, Hispanic men experienced the largest percentage-point decline although in 1979, they already had the lowest rate of employment in good jobs. In 1979, 30.8% of Hispanic men were employed in a good job. By 2008, only 15.3% were in good jobs.

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As policymakers consider ways to create more jobs to reverse the longstanding rise in unemployment, which stands at 10.2% nationwide, they should also focus on creating the kinds of jobs that pay more than poverty level wages. The federal minimum wage is currently $7.25 per hour and pays $15,080 annually, based on a 2,080-hour work year. That wage is below the poverty level for a family of four. By contrast, the 2008 “good job” wage was $14.51 per hour, or $30,180 a year – twice as much.  Without a national agenda to create good jobs, more fulltime workers will struggle to pay for basic necessities.

The State Fiscal Crisis–Responses Needed

A recent article by economist Rick Wolff highlights one of the many serious challenges facing the country–the growing fiscal crises that are hitting our states and municipalities.  He presents the following table from the work of the Center on Budget and Policy Priorities, which shows the gap between the fifty states’ tax revenues and expenditures during the last (2001) and current (2007-?) recessionary periods.

As the chart makes clear, while a recession generates a budgetary shortfall, the shortfall extends for years after the recession is over.   In particular, the expected shortfall over the next two years will be very large–some $360 billion.   This shortfall will have to be closed through some combination of revenue increases or expenditure cuts.

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The CBPP has studied state responses to current budget shortfalls and reports the following:

  • 27 states have reduced health benefits for low-income children and families
  • 25 states are cutting aid to K-12 schools and other educational programs
  • 34 states have cut assistance to state colleges and universities
  • 26 states have instituted hiring freezes
  • 13 states have announced layoffs
  • 22 states have reduced state workers’ wages

With fiscal problems set to grow we need bold action.   If we do nothing budget cuts will only further weaken our economy (by reducing demand)  and worsen living and working conditions for the great majority of citizens.

Oregon is no exception.  In fact, according to a story in the Oregonian, a Pew Center on the States report “names Oregon as one of 10 states at greatest peril of following California over a state budget cliff.  Even though the national economy has started to rebound, Oregon is likely to have a harder time coming up with enough money to pay for schools and other public services — or finding enough places it can cut back its spending — than it did when patching together a balanced budget for 2009-10 said Susan Urahn, managing director of the Pew Center.”

One part of any rational response to this situation has to be increasing revenue by raising taxes on the wealthy and our large corporations.  Oregon is trying to do just that with Measures 66 and 67.  These measures–passed by the legislature but put on the January ballot by opponents–deserve our support.

Obviously significant national action is also needed to address what is a major structural problem.  One obvious response: cut military spending (which continues to grow) and channel some of the savings to state and local governments.

More generally, we need a government-directed, integrated industrial and employment program.  For example, our government owns large holdings in major auto and finance enterprises.  Rather than remain passive owners, we should take control over the firms we own and redirect their activity.  We should start producing mass transit vehicles and require that the banks direct needed funds at reasonable rates to support that production.  And we should direct federal transportation spending to state and local governments so that the new vehicles can be purchased.

We should do the same for the production of needed technology and equipment to develop and expand alternative energy sources like wind and solar power.

At present, federal stimulus money is being used to encourage private firms to retrofit buildings to improve energy efficiency.  Instead, we should encourage the establishment of local publicly owned enterprises to carry out this work, with the profit earned from the work redirected back to local government budgets to support desired social programs.  And all publicly organized production should guarantee living wages and encourage democratic unionization.

Much more could be done—including the cancellation of so called free trade agreements which encourage capital flight and the pitting of workers in one country against another.

The point is that we need a dramatic rethinking and reorganization of how our economy works.  There are plenty of good ideas available—at issue is the political organization and will.

No Real Recovery In Sight

We are in quite the fix.  According to some experts the 3.5% growth in GDP last quarter (July-September) is proof that all is now well.  Unfortunately most of that growth was driven by very temporary government spending.

For example, key to last quarter’s growth was a 22.4% increase in car sales, a consequence of the government’s temporary Cash for Clunkers program.  This increase in car sales accounted for 42.0% of the entire quarter’s growth!

Consumption as a whole (which includes auto sales) grew at a 3.4 percent annual rate.  Take out the auto sector and consumption grew at only a 1.0 percent annual rate.  For more details see here.

Since the Cash for Clunkers program is now over, and disposable income continues to fall (because of continued job losses and declining wages and hours), next quarter is bound to show quite limited growth at best.

The sad reality is that the government’s response to this crisis has been far from adequate.  Most of its direct stimulus spending, hundreds of billions of dollars,  has been designed to be short-term in nature.  It has spent far more, trillions of dollars in fact, to save the financial system.  But again it has made no attempt to ensure that the money would be used to promote a fundamental restructuring of our economy.

It might be comforting to know that Lloyd Blankfein, Goldman Sach’s chairman and chief executive, believes that he is doing “God’s work,” but the fact is that the financial system we saved with our tax dollars continues to refuse to make loans.

Look at the following two tables taken from a blog post on Mish’s Global Economic Trend Analysis.  The first table shows that “Total bank credit is in uncharted territory at -5%. The series has never gone below 0 before.”

So what are banks doing with the money?  The second table shows that that the money is piling up as excess reserves.

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Why aren’t banks lending?  Mish’s blog post provides the following four answers:

1) There are no credit-worthy businesses that want to borrow.

2) Consumers are tapped out and do not want to borrow.

3) Banks are scared to death of pending commercial real estate losses, credit card losses, residential real estate losses, home equity lines of credit losses, and losses in general.

4) Asset prices are simply too high (and banks know it) and the securitization market has dried up

While all of the above are probably true, the post concludes that “Number three above is the most critical one.”

The “bottom line” here is that our economy remains weak and far from any serious recovery.  And it will remain that way unless we get far more aggressive government action to ensure a meaningful increase in jobs that pay a living wage and produce needed goods and services.

How Long Would You Have to Work To Earn As Much As A Top CEO

The chart below comes from “The full extent of executive pay” by Daniel Christopher Jones, Business Management US, September 15, 2009.  It shows how many years it would take a minimum wage worker, an average worker, or the president of the United States to make the same amount that top CEOs make in a year.  [Click on the article link for a bigger and clearer view of the chart.]

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Thinking In Class Terms Again

All the talk about the need to restructure our economy and end our dependence on debt financed growth has tended to overlook a critical issue—declining worker earnings.  The downward pressure on wages helped to boost profits but only because worker consumption could be sustained by ever greater debt.  If we are going to change the way our economy functions we need to address the forces that have been driving down wages.

The blog Angry Bear recently had an interesting post dealing with this issue.  Among other things it offered data illustrating the fact that labor’s share of income has been declining for decades.  In other words, we are dealing with a long term structural problem.  And unless you hear policy makers address this reality you can be pretty sure that what they propose to do will not be of much help to the great majority of working people.

Here is the relevant part of the post:

This shift to an environment of stronger productivity and weaker real growth generated an interesting development that has received little attention among economists or in the business press.

This development was a secular decline in labor’s share of the pie. [See chart below.] Prior to the 1982 recession there was a strong cyclical pattern of labor’s but it was around a long term or secular flat trend. But since the early 1980s labor’s share of the pie has fallen sharply by about ten percentage points. Note that the chart is of labor compensation divided by nominal output indexed to 1992 = 100. That is because the data for each series is reported as an index number at 1992=100 rather than in dollar terms. So the scale is set to 1992 =100 rather than in percentage points. But it still shows that labor payments as a share of nonfarm business total ouput has declined sharply over the last 20 years and prior to the latest cycle we did not even see the normal late cycle uptick in labor’s share.

If this chart gets a lot of attention it will be interesting to see how the libertarian and/or conservative analysts who keep coming up with all types of excuses to explain away the weakness in real labor compensation in recent years explain this away. If you really want to raise a stink you could look at this as a great example of the Marxist immiseration of labor that Marx believed was one of the internal contradictions of capitalism that would eventually lead to its self destruction.

[click on chart for easier viewing]

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