Reports from the Economic Front

a blog by Marty Hart-Landsberg

Monthly Archives: July 2013

A Bleak Future

Any improvement in living and working conditions in the United States is going to require far more than tinkering at the margins.  The fact is that U.S. economic dynamics have undergone a major transformation.

As Figure 1, taken from a Dollars and Sense article by Gerald Friedman, shows, profits and investment are no longer positively related.  Since the early 2000s, profits have soared as a percent of GDP and net private investment has plummeted.  Even during the 1990s, when high-technology was celebrated as the engine of never-ending growth, net investment as a share of GDP remained below 1970s and 1980s highs.

Figure 1: Net Private Investment and Profits, 1970-2011

Our leading companies, the ones that shape government policy, are now able to make healthy profits without spending on plant and equipment much beyond replacement.  Their profits are now largely secured by globalizing manufacturing production, financialization, intensification of work, wage suppression, and government tax-breaks and subsidies.  Of course, that means that their quest for profits will continue to lead to policies likely to undermine progress in reversing negative trends in majority living and working conditions.

A case in point is their aggressive push, supported by the Obama administration, for new free trade agreements—the Trans-Pacific Partnership Free Trade Agreement and the Trans-Atlantic Free Trade Agreement. President Obama took the lead in securing passage of the Korea-U.S. Free Trade Agreement, arguing that it would improve our trade balance with Korea and by extension U.S. jobs.  Well, the returns are in, and in line with the record of past agreements, the outcome is the exact opposite.

The Eyes on Trade blog offers the following summary:

April [2013] was another record-breaking month for U.S. trade with Korea under the U.S.-Korea Free Trade Agreement (FTA).  The monthly U.S. trade deficit with Korea soared to its highest point in history, topping $2.5 billion for the month of April alone.

According to a ratio used by the Obama administration, the unprecedented deficit surge implies 13,500 U.S. jobs lost to trade with Korea in just thirty days.  April’s trade deficit with Korea was 30% higher than in April 2012 — the first full month of FTA implementation — and 90% higher than in April 2011, before the FTA took effect.

The deficit increase owes largely to a dramatic drop in U.S. exports to Korea since enactment of the FTA.  U.S. exports to Korea in April once again fell below the levels seen in any given month in the year before the FTA took effect.  The sorry track record defies the promise (FTA = more exports) that the Obama administration used to pass the FTA.  Undeterred by the facts, today the administration is using the same worn-out promise to sell the Trans-Pacific Partnership.

April 2013

 

Unwilling to pursue policies that directly threaten corporate interests, the Obama administration has relied on monetary policy, or more specifically lower interest rates, to boost investment and employment.  As Figure 2 from the Dollars and Sense article makes clear, while lower rates generally boost investment, data points for 2009, 2010, and 2011 strongly suggest that monetary policy has lost its effectiveness.

Figure 2: Net Private Investment and Interest Rates, 1946-2011

President Obama can talk all he wants about the need for more investment and better jobs, but unless he is pushed to pursue dramatically different policies, it is hard to see any real gains for working people over the next decades.

 

The Unknown World

Paraphrasing Donald Rumsfeld, there are things we know and things we don’t know, and things we know we don’t know and things we don’t know we don’t know.

One thing many working people in American don’t know that they don’t know is how poor our social benefits are compare with those enjoyed by workers in other countries.  No doubt one reason is the general media blackout about worker experiences in other countries.  A case in point: vacation benefits.

The Center for Economic and Policy Research recently completed a study of vacation benefits in advanced capitalist economies.  Here is what the authors found (see Figure 1 below):

The United States is the only advanced economy in the world that does not guarantee its workers paid vacation. European countries establish legal rights to at least 20 days of paid vacation per year, with legal requirements of 25 and even 30 or more days in some countries. Australia and New Zealand both require employers to grant at least 20 vacation days per year; Canada and Japan mandate at least 10 paid days off. The gap between paid time off in the United States and the rest of the world is even larger if we include legally mandated paid holidays, where the United States offers none, but most of the rest of the world’s rich countries offer at least six paid holidays per year.

vacations

Even though paid vacations and holidays are not legally required in the United States, some employers do provide them to their workers. The table below shows the paid vacations and paid holidays offered in the U.S. private sector based on data from the 2012 National Compensation Survey.

US data

The first two columns of the table show the percentage of private sector workers that receive paid leave, vacation and holidays.  The next two columns show the average number of paid vacation and paid holidays provided to those employees that receive the relevant benefit.  The last two columns show the average number of paid vacation and paid holidays for all private sector workers, meaning those that receive and those that do not receive the relevant benefits.

Thus, on average, private-sector workers in the United States receive ten days of paid vacation per year and six paid holidays.  This total still leaves U.S. workers last in the rankings even when compared with the legal minimums highlighted above.  And many employers in these other countries also offer more paid leave than legally required.

Moreover, several countries require additional paid leave for younger and older workers, additions that are also not included in the legal minimums highlighted above.  For example, “in Switzerland, workers under the age of 30 who do volunteer work with young people are entitled to an additional five days of annual leave. Norway offers an additional week of vacation to workers over the age of 60.”

And some countries provide additional leave for workers with difficult schedules.  For example, “Australia offers some shift workers an additional work week of leave. Austria offers workers with ‘heavy night work’ two to three extra days of leave, depending on how frequently they do this shift work, and an additional four days of leave after five years of shift work.”

Several countries offer additional paid leave for jury service, moving, getting married, or community or union work.  For example, “French law guarantees unpaid leave for community work, including nine work days for representing an association and six months for projects of ‘international solidarity’ abroad and leave with partial salary for ‘individual training’ that is less than one year. Sweden requires employers to provide paid leave for workers fulfilling union duties.”

Austria, Belgium, Denmark, Greece, and Sweden even require employers to pay workers at a premium rate while they are on vacation.

There is more to say, but the point should be clear.  Ignorance of experiences elsewhere has narrowed our own sense of possibilities.

The Wealth of Nations

Wealth data is not easy to get.  Still for three years now, Credit Suisse Research Institute has published an annual Global Wealth Databook which attempts to estimate global wealth holdings.  The most recent issue includes data covering 2012.  According to Credit Suisse, “The aim of the Credit Suisse Global Wealth project is to provide the best available estimates of the wealth holdings of households around the world for the period since the year 2000.”

According to the publication, global household wealth was $222.7 trillion in mid-2012, equal to $48,500 for each of the 4.6 billion adults in the world.  Wealth is “defined as the marketable value of financial assets plus non-financial assets (principally housing and land) less debts.”

Not surprisingly, as the figure below shows, average global wealth varies considerably across countries and regions.

picture wealth

Also significant are the values of mean and median wealth in each of the countries.  Mean or average wealth is calculated by dividing the total wealth of a country by its adult population.   Median wealth is the wealth holdings of the adult in the middle of the wealth distribution.

The median figure is generally considered a far more reliable indicator of representative wealth because it is less sensitive to extremes at the top or bottom of the wealth distribution.  The greater the divergence of mean and median wealth, the greater is the wealth inequality.

The table below, Table 7.1 in the study, provides mean and median wealth estimates for those countries with generally reliable data. As you can see, the U.S. ranks high in terms of mean wealth, trailing only 5 countries.  Things are quite different when it comes to median wealth; the U.S. trails 26 countries!  The U.S. is number 1 when it comes to the mean/median wealth ratio.

global wealth

We clearly dominate in the number of millionaires and the upper global wealth categories.  Are we a wealthy country? Definitely.  Is that wealth concentrated in relatively few hands?  Definitely.

 

The Student Debt Explosion

We celebrate education as the answer to almost all our economic problems.  At the same time we largely ignore the enormous debt students are forced to acquire gaining a college degree and the great difficulties they face in landing a job that makes it possible for them to pay off that debt.

The Student Debt Problem

Student debt, as the Bloomberg Businessweek figure below highlights, is big and fast growing.

BW27_correlations_605a

As the figure shows, the share of Americans that have graduated college has steadily grown to a current high of 32%.  And, student debt has exploded.  It now stands at approximately $1 trillion, significantly higher than credit card debt and home equity loans (which are loans secured by a second mortgage).  Student debt is now second only to housing debt.

And, as Businessweek also points out, the share of young graduates suffering from debt is also on the rise.  In 2003, only 25% of 25 year old graduates had student loans.  In 2012, it was 43%.  Moreover, “Over half of all student debt is held by households whose net worth is under $8500.”

The Employment Problem

Of course, debt is only one side of the problem.  Lack of good employment is the other.  As an Economic Policy Institute (EPI) report explains:

The Great Recession that began in December 2007 was so long and severe, and the government response so inadequate, that the crater it left in the labor market continues to be devastating for workers of all ages. . . . The weak labor market has been, and continues to be, very tough on young workers: At 16.2%, the March 2013 unemployment rate of workers under age 25 was slightly over twice as high as the national average. Though the labor market is now headed in the right direction, it is improving very slowly, and the prospects for young high school and college graduates remain dim.

The figure below, taken from the EPI report, highlights just how bad the labor market is for recent college graduates.  It shows that the underemployment rate for college graduates that are 21-24 years old and not pursuing additional education is still over 18%.

employment

The underemployment measure used includes those officially listed as unemployed as well as those “that either have a job but cannot attain the hours they need, or want a job but have given up looking for work.” This measure does not “include ‘skills/education–based’ underemployment (e.g., the young college graduate working as a barista).”  The report cites one study that estimates that in 2000, 40% of employed college graduates under the age of 25 worked at jobs that did not require a college degree.  That rose to 47% in 2007 and 53% in 2012.

earnings

The table above, also from the EPI report, gives some sense of the wage pressure that young college graduates face.  It shows that their real hourly wages have significantly declined since 2000.

The Economic Consequences

If you think rising debt and poor employment opportunities cannot end well for graduates and the economy, you are right.  A post from the Naked Capitalism blog makes that clear:

Now that student loans are undeniably in bubble territory, the officialdom is starting to wake up and take notice. Evidence that students were taking on so much debt as a group that it was undermining their ability to be Good American Consumers wasn’t enough. . . .Student debt is senior to all other consumer debt; unlike, say, credit card balances, Social Security payments can be garnished to pay delinquencies. As a result, it has contributed to the fall in the home ownership rate, since many young people who want to buy a house can’t because their level of student debt prevents them from getting a mortgage.

Student loan delinquencies are getting into nosebleed territory. The Wall Street Journal, citing New York Fed data, tells us that student debt outstanding increased 4.6% in the last quarter [third quarter 2012]. Repeat: in the last quarter. Annualized, that’s a 19.7% rate of increase during a period when other consumer borrowings were on the decline. And this growth is taking place while borrower distress is becoming acute. 11% of the loans were 90+ days delinquent, up from 8.9% at the close of last quarter. The underlying credit picture is certain to be worse, since many borrowers aren’t even required to service loans (as in they are still in school or have gotten a postponement, which is available to the unemployed for a short period). And it was the only type of consumer debt to show rising delinquency rates.

This is the new subprime: escalating borrowing taking place as loan quality is lousy and getting worse.

The following chart, from the Wall Street Journal, illustrates the trends noted above.

Falling Behind

If the situation wasn’t serious enough, because of a lack of Congressional action, the interest rate on new, subsidized Stafford loans—the loans that the federal government gives to college and university students with financial need—doubled on July 1, from 3.4% to 6.8%.  These loans account for more than a quarter of all new federal student loans.

It sure seems like we need to stop stressing individualistic solutions to our economic problems and start talking about making broader structural changes to our economic system.