Reports from the Economic Front

a blog by Marty Hart-Landsberg

Monthly Archives: July 2011

Explaining Unemployment

The Wall Street Journal recently surveyed more than 50 economists, asking them what they thought was the main reason U.S. firms were not hiring more workers.  Approximately 65% answered that it was a lack of demand, 27% thought it was uncertainty about government policy, and 8% said it was the existence of more “favorable” hiring conditions overseas.  

One might think that with so many economists citing a lack of demand as the primary reason for our continuing high rate of unemployment, the survey would also reveal strong support by economists for the following sorts of policies: a higher minimum wage, new union-friendly labor laws, a single payer health plan, an increase in social security payments, an aggressive industrial policy—but no, these weren’t mentioned. 

In fact, according to the Wall Street Journal, “Despite their forecasts for slow growth and an elevated unemployment rate, the economists aren’t in favor of futher action either by the Fed or the Federal government.”  In other words there was no support for policies (micro or macro) that would dramatically change the economic environment.        

There is good reason for rejecting this preference for the status quo.  Take a look at the chart below which comes from an article in Investor’s Business Daily.  Each point on the chart shows the change in total wages (adjusted for inflation) over the previous ten years. 


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 As the article notes:   

The past decade of wage growth has been one for the record books — but not one to celebrate.

The increase in total private-sector wages, adjusted for inflation, from the start of 2001 has fallen far short of any 10-year period since World War II, according to Commerce Department data. In fact, if the data are to be believed, economy-wide wage gains have even lagged those in the decade of the Great Depression (adjusted for deflation).

Two years into the recovery, and 10 years after the nation fell into a post-dot-com bubble recession, this legacy of near-stagnant wages has helped ground the economy despite unprecedented fiscal and monetary stimulus — and even an impressive bull market.

Over the past decade, real private-sector wage growth has scraped bottom at 4%, just below the 5% increase from 1929 to 1939, government data show.

To put that in perspective, since the Great Depression, 10-year gains in real private wages had always exceeded 25% with one exception: the period ended in 1982-83, when the jobless rate spiked above 10% and wage gains briefly decelerated to 16%.

In other words, we are experiencing a steady and long term decline in total real wages, one that was worsened but not caused by the Great Recession.  Thus, there is little reason to believe that maintaining existing policies will lead to any meaningful increase in wages and, by extension, overall demand and employment. 

How did the economy grow over the last decade despite this decline in wages?  As we known, the answer was a debt-driven housing bubble.  How is the economy growing now that the housing bubble has popped?  Here is the answer given by Investor’s Business Daily:

So how has the economy managed to scale new GDP heights despite sagging real wages? 

Real disposable income is up 3.6% since December 2007, thanks to nearly $1 trillion in government support via higher social benefits (up $583 billion since the recession began); lower tax bills (down $255 billion); and higher government wages and benefits (up about $125 billion). 

Absent those sources of support, real disposable income would still be 5% below its prior peak.

What the article doesn’t mention is that in contrast to the decline in total real wages, corporate profits and stock prices have been soaring.  In fact, the trends are related: the decline in wages is one of the main reasons for the growth in profits and stock prices.  Economists at the Center for Labor Market Studies discuss these trends and their relationship in a recent study, which includes the following table:

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With these trends in mind the professional consensus for the status quo becomes easier to understand.  So does the need to actively oppose it. 

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Austerity Madness

Austerity advocates talk about government spending as if its impact on the economy is marginal.  In their world, we can slash spending with few if any consequences for our roads and bridges; transportation, health care, and educational systems; research and development activity; investment in plant and equipment; employment and wage levels; economic growth . . . the list goes on.

That may be how it looks in their world, but in the real world it is quite different.  Looking just at personal income, for example, the New York Times reports that:  

An extraordinary amount of personal income is coming directly from the government.

Close to $2 of every $10 that went into Americans’ wallets last year [2010] were payments like jobless benefits, food stamps, Social Security and disability, according to an analysis by Moody’s Analytics. In states hit hard by the downturn, like Arizona, Florida, Michigan and Ohio, residents derived even more of their income from the government.

If the austerity advocates have their way, public spending will be cut.  However, as the information in the box below reveals, the consequences will be severe for our entire economy, not just for those individuals directly receiving support.  As the New York Times explains, “Throughout the recession and its aftermath, government benefits have helped keep money in people’s wallets and, in turn, circulating among businesses. Total government payments rose to $2.3 trillion in 2010, from $1.7 trillion in 2007, an increase of about 35 percent.”

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We definitely need to remake our political-economy.  However, it is madness to think that destroying the social infrastructure underpinning current economic activity is a productive way to achieve that goal.  

The Deficit Battle

The tension mounts as President Obama and Speaker of the House Boehner appear locked in a battle over how best to slash the federal deficit.  The Treasury Department is scheduled to run out of borrowing authority on August 2 unless Congress agrees to raise the federal debt ceiling.  No one is sure what will happen if there is no agreement but most analysts claim that the consequences will be severe.  The U.S. government will not have enough money to pay bond holders what they are owed, leading to a downgrading of government debt and significantly higher future borrowing costs.   The possibility of a flight from bonds could compound the problem, with a foreign-led sell off triggering a major dollar collapse.  

Both President Obama and Speaker Boehner agree that Congress needs to see and approve a major deficit reduction plan before it will vote to raise the debt ceiling.  They just cannot agree on a plan to present to Congress.  According to media reports, President Obama has offered two different deficit reduction plans — one designed to achieve a $2-3 trillion reduction over ten years and the other a $4-5 trillion reduction.  

About the only thing we really know about either plan is the relative breakdown between spending cuts and revenue increases.  And in both, most of the deficit reduction is to be secured by cutting spending.  The chart below provides some perspective on how one sided this trade-off between spending cuts and tax increases has become.

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As Ezra Klein explains:

[Under Reagan, Bush, and Clinton] taxes were at least a third of the total, and in Reagan’s case, his massive tax cuts were followed by deficit-reduction deals that actually relied on tax increases. . . .

Bush also included taxes in his deal, and Clinton relied heavily on taxes in his first deficit-reduction bill, which passed without Republican votes. In 1997, when he was working with Republicans, he actually cut taxes slightly while passing spending cuts. But of course the economy was in much better shape then, and Clinton had already increased revenues substantially.

The one-third rule doesn’t break down until you get to the deal Obama reportedly offered Republicans in the first round of debt-ceiling talks: $2 trillion in spending cuts for $400 billion in taxes, or an 83:17 split. And that, if anything, understates how good of a deal Republicans are getting. Tax revenues and rates are much, much lower than they were under Reagan, Bush or Clinton.

The ratio is said to be more balanced in President Obama’s recently proposed $4-5 trillion deficit reduction plan: 75:25.  However, since that plan apparently includes letting the Bush-era tax cuts for the rich expire in January 2013, Republicans have rejected it in favor of continued negotiations over the smaller deficit reduction plan.

Most of those who demand deficit reduction primarily through spending cuts have as their real goal a further weakening of the public sector and our social programs even though they claim that their only motivation is to do what is best for job creation.   If we agree that drastic action must be taken to reduce the deficit (to be discussed more below), we face a basic choice: maintain taxes and cut government spending or maintain spending and raise taxes.  Cutting public spending pulls money out of the economy, costing jobs.  So does raising taxes.  The question is whether we lose more jobs cutting spending or raising taxes.   

The fact is that almost all studies of the economic impact of changes in government spending and taxes on employment find that changes in government spending have a larger impact on jobs than do tax changes.  That means cuts in government spending will cost more jobs than an equivalent increase in taxes.  Therefore, if we really care about jobs, deficit reduction efforts should emphasize tax increases over spending reductions.   Sadly, both sides in the deficit battle are on the same wrong side as far as this choice is concerned.    

More troubling, both sides have also embraced the conventional wisdom that our debt crisis is real and caused by out-of-control spending on social programs.  Therefore, they argue, we have no choice but to take the hard step of cutting spending on those programs.  

It is true that our yearly federal deficits have grown large.  For example, as Figure 1 below shows, the deficit for fiscal year 2009 (October 2008 through September 2009) was $1.4 trillion, equal to 10% of GDP.   However, Figure 1 also makes clear that our future deficits are best explained by three drivers:  the economic crisis, the Bush-era tax cuts, and the wars in Afghanistan and Iraq.  According to the Center on Budget and Policy Priorities, these three drivers “explain virtually the entire federal budget deficit over the next ten years.”  Said differently, our debt problems have little to do with runaway social programs.  Rather they are caused by specific (tax and foreign) policies that can be reversed and an economic crisis that can only be overcome through public spending.  

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While Figure 1 focuses on our projected budget deficits, Figure 2 below offers an important complementary perspective on our projected national debt.   As the Center on Budget and Policy Priorities explains:

[Figure 2] shows that the Bush-era tax cuts and the Iraq and Afghanistan wars—including their associated interest costs—account for almost half of the projected public debt in 2019 if we continue current policies.  Taken together, the economic downturn, the measures enacted to combat it, and the financial rescue legislation play a significant—but considerabley smaller—role in the projected debt increase over the next decade.  Public debt due to all other factors than those specifically indentified in Figure 2 falls from over 30 percent of GDP in 2001 to 20 percent of GDP in 2019.

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Figure 2 also makes clear that the projected total debt burden, measured by the total debt held by the public as a percentage of GDP, remains below 100% over the relevant period (and beyond according to the Congressional Budget Office), the level taken by most economists to indicate a potentially serious debt problem.   In other words we really don’t face an impending debt crisis.

Those who are eager to generate fears of such a crisis normally cite a different debt statistic, gross federal debt as a percentage of GDP.  Gross federal debt is equal to the total federal debt held by the public plus the total federal debt the government owes to itself.  Examples of the latter include Treasury debt held by the Federal Reserve and by the Social Security System.   This gross federal debt figure has little to do with fiscal sustainability.   In the words of the Congressional Budget Office:

Gross federal debt is not a good indicator of the government’s future obligations . . . those securities represent internal transactions of the government and thus have no direct effect on credit markets.

Unfortunately, our national debt ceiling is defined in terms of gross federal debt rather than the more appropriate total debt held by the public.  At the same time, this understanding of the debt problem leads to a relatively simple solution to our current deficit battle.  As Dean Baker describes:

Representative Ron Paul has hit upon a remarkably creative way to deal with the impasse over the debt ceiling: have the Federal Reserve Board destroy the $1.6 trillion in government bonds it now holds. While at first blush this idea may seem crazy, on more careful thought it is actually a very reasonable way to deal with the crisis. Furthermore, it provides a way to have lasting savings to the budget. 

The basic story is that the Fed has bought roughly $1.6 trillion in government bonds through its various quantitative easing programs over the last two and a half years. This money is part of the $14.3 trillion debt that is subject to the debt ceiling. However, the Fed is an agency of the government. Its assets are in fact assets of the government. Each year, the Fed refunds the interest earned on its assets in excess of the money needed to cover its operating expenses. Last year the Fed refunded almost $80 billion to the Treasury. In this sense, the bonds held by the Fed are literally money that the government owes to itself. 

Unlike the debt held by Social Security, the debt held by the Fed is not tied to any specific obligations. The bonds held by the Fed are assets of the Fed. It has no obligations that it must use these assets to meet. There is no one who loses their retirement income if the Fed doesn’t have its bonds. In fact, there is no direct loss of income to anyone associated with the Fed’s destruction of its bonds. This means that if Congress told the Fed to burn the bonds, it would in effect just be destroying a liability that the government had to itself, but it would still reduce the debt subject to the debt ceiling by $1.6 trillion. This would buy the country considerable breathing room before the debt ceiling had to be raised again. President Obama and the Republican congressional leadership could have close to two years to talk about potential spending cuts or tax increases. Maybe they could even talk a little about jobs.

In sum, we are witnessing a deficit battle between two sides, neither of which truly represents the interests of working people.  No wonder, then, that the battle has done little to clarify the drivers of our rising national debt or encourage a productive national debate over appropriate policy responses. 

Happy Anniversary: The Economic Recovery Turns 2

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The charts above deserve a long careful look.  According to the National Bureau of Economic Research, the Great Recession ended June 2009.  Not many working people are celebrating the expansion’s second anniversary.

 As Paul Wiseman, an AP economics writer, notes 

[This economic] recovery has been the weakest and most lopsided of any since the 1930s. 

After previous recessions, people in all income groups tended to benefit. This time, ordinary Americans are struggling with job insecurity, too much debt and pay raises that haven’t kept up with prices at the grocery store and gas station. The economy’s meager gains are going mostly to the wealthiest.

As the top chart shows, labor’s share (including both wages and benefits) now stands at 57.5% of national income.  It has been trending downward for some time, but the decline since 2001 has been truly dramatic. 

In fact, worker compensation has fared far worse than this trend suggests.  The reason is that labor’s share includes executive pay and executives have generally enjoyed huge compensation increases over the last decade.  For example, according to The New York Times:

The final figures show that the median pay for top executives at 200 big companies last year [2010] was $10.8 million. That works out to a 23 percent gain from 2009. . . .

Pay skyrocketed last year because many companies brought back cash bonuses, says Aaron Boyd, head of research at Equilar. Cash bonuses, as opposed to those awarded in stock options, jumped by an astounding 38 percent, the final numbers show.

Granted, many American corporations did well last year. Profits were up substantially. As a result, many companies are sharing the wealth, at least with their executives. “We’re seeing a lot of that reflected in the pay,” Mr. Boyd says.

Profits, as the bottom chart above shows, have indeed been on the rise.  In fact, as Wiseman explains, they “are up by almost half since the recession ended in June 2009.  In the first two years after the recessions of 1991 and 2001, profits rose 11 percent and 28 percent, respectively.”  However, CEO compensation appears largely unrelated to how well corporate shares performed for investors; we are talking about structural power here. 

These positve trends in corporate profitability and CEO compensation stand in sharp contrast to the experience of most workers.  The earnings of the average American worker rose by only 0.5 percent in 2010; adjusted for inflation they actually fell.  In fact, “The average worker’s hourly wages, after accounting for inflation, were 1.6 percent lower in May [2011] than a year earlier.”  Moreover there is little reason to hope that economic dynamics will eventually create a sound foundation for future wage growth. “The jobs that are being created [during this expansion] pay less than the ones that vanished in the recession. Higher-paying jobs in the private sector, the ones that pay roughly $19 to $31 an hour, made up 40 percent of the jobs lost from January 2008 to February 2010 but only 27 percent of the jobs created since then.”

 Not surprisingly, there is a connection between the steady growth in profits and CEO compensation and labor’s deteriorating position. 

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As the chart above shows, productivity (output per worker) has steadily grown while average wages (compensation per worker) have barely budged since 1979.  The difference represents a measure of exploitation, with those running corporate America well placed to enjoy the benefits.  Fear of job loss is one reason for this continuing growth in productivity.  Another, according to Monika Bauerlein and Clara Jeffery, is our demanding work schedule:

Just counting work that’s on the books (never mind those 11 p.m. emails), Americans now put in an average of 122 more hours per year than Brits, and 378 hours (nearly 10 weeks!) more than Germans. The differential isn’t solely accounted for by longer hours, of course—worldwide [as highlighted in the maps below], almost everyone except us has, at least on paper, a right to weekends off, paid vacation time, and paid maternity leave.

 

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Tragically, but predictably, all we hear from our media is the need for austerity, as if somehow government spending or public sector workers are responsible for our current economic problems.  But, slashing spending and weakening unions will only deepen these problems.   

The trends highlighted above are the direct result of a corporate directed transformation of the U.S. economy that began decades ago.  That transformation produced its desired outcome: a weaker labor movement and a wealthier and more powerful finance-oriented corporate sector.  However, it also produced a highly unstable growth process, one built on debt, which culminated in the Great Recession. 

Massive government spending was required to halt the crisis and it continues to sustain the recovery.  While the corporate sector initially supported this spending to stabilize the system, it now finds itself in an uncomfortable position.  The legitimacy of its political project rests on claims of government inefficiency and business leaders fear that if they don’t take firm action to reduce the size and reach of government spending, public policy debates might well galvanize serious efforts to boost tax revenue and reshape government spending priorities as a first step towards a radically new economic system. 

Despite mainstream claims, government spending is not driving us into crisis.  At the same time, sustaining the status quo should not be our goal.  We need to reject austerity policies and intensify our efforts to, as Karl Beitel suggests, “open the political space to pose meaningful questions about the efficiency of markets, the class interests served by present policy initiatives, and the viability of more progressive and egalitarian alternatives.”

The US Labor Market In International Perspective

The chart below provides an interesting perspective on the U.S. labor market and poverty.  It comes from an OECD publication called Society At A Glance 2011 — OECD Social Indicators.  The publication is well worth some study–it offers a wealth of useful comparative information. 

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The chart illustrates the percentage of the average gross wage in each country necessary to bring a family to the poverty line, which is defined as an amount equal to 60 percent of the national median income.  The greater the percentage needed the more difficult it is for a family to climb out of poverty. 

For example, if the percentage was 100%, it would mean that a worker earning the averge gross wage (before taxes) would just reach the poverty level (defined as above in relative national terms).   Such a high percentage implies that many workers would find it very difficult to escape poverty. 

As one can see in the chart above, workers in the United States face far greater obstacles to escaping poverty than do workers in most of the other OECD countries.