Once again austerity proponents tell it like it isn’t

There appears to be growing consensus among economists and policy makers that inflation is now the main threat to the US economy and the Federal Reserve Board needs to start ratcheting up interest rates to slow down economic activity.  While these so-called inflation-hawks are quick to highlight the cost of higher prices, they rarely, if ever, mention the costs associated with the higher interest rate policy they recommend, costs that include higher unemployment and lower wages for working people. 

The call for tightening monetary policy is often buttressed by claims that labor markets have now tightened to such an extent that continued expansion could set off a wage-price spiral.  However, the rapid decline in the unemployment rate to historically low levels, a development often cited in support of this call for austerity, is far from the best indicator of labor market conditions.  In fact, even leaving aside issues of job quality, the US employment situation, as we see below, remains problematic.  In short: the US economy continues to operate in ways that fall far short of what workers need. 

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Economic inequality means retirement insecurity for most US households

This is far from a “hot take”: financial wealth in the United States is highly concentrated, with most households, especially Black and Hispanic households, owning few financial assets.  One consequence is that many Americans are likely to face a very challenging retirement.  Sadly, if economic and social conditions remain as they are, we can expect to see an ever-growing number turn to for-profit crowdfunding platforms, like GoFundMe, for help in meeting expenses. 

The study

A recently published study by the National Institute on Retirement Security, a non-profit research and education organization, using data from the Federal Reserve’s Survey of Consumer Finances, paints a disturbing picture of the distribution of financial assets by generation, net worth and race. 

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Pandemic economic woes continue, but so do deep structural problems, especially the long-term growth in the share of low wage jobs

Many are understandably alarmed about what the September 4th termination of several special federal pandemic unemployment insurance programs will mean for millions of workers.  Twenty-five states ended their programs months earlier, with government and business leaders claiming that their termination would spur employment and economic activity.  However, several studies have disproved their claims.

One study, based on the experience of 19 of these states, found that for every 8 workers that lost benefits, only one found a new job.  Consumer spending in those states fell by $2 billion, with every lost $1 of benefits leading to a fall in spending of 52 cents.   It is hard to see how anything good can come from the federal government’s willingness to allow these programs to expire nationwide. 

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COVID-19 Economic Crisis Snapshot

 Workers in the United States are in the midst of a punishing COVID-19 economic crisis.  Unfortunately, while a new fiscal spending package and an effective vaccine can bring needed relief, a meaningful sustained economic recovery will require significant structural changes in the operation and orientation of the economy.

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The pandemic, technology, and remote work: the corporate push for greater control over workers’ lives

The U.S. economy is undergoing a major transformation largely driven by the coronavirus pandemic.  One hallmark of that transformation is the explosion in what is called “remote” work.

In 2017, according to a Census Bureau study, only 3 percent of full-time workers in the United States reported that they primarily worked from home.  Today, in response to the pandemic, some 42 percent of the U.S. labor force is working from home—with only 26 percent still working on-site.

Corporate leaders appear to have embraced this shift to at-home work and are pursing the use of new technologies designed to increase managerial control over the remote work process. The response of workers to these changes is still evolving.

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The economy: we are still in big trouble

The announcement by the Bureau of Labor Statistics that the federal unemployment rate declined to 13.3 percent in May, from 14.7 percent in April, took most analysts by surprise.  The economy added 2.5 million jobs in May, the first increase in employment since February.  Most economists had predicted further job losses and a rise in the unemployment rate to as high as 20 percent.

This employment gain has encouraged some analysts, especially those close to the Trump administration, to proclaim that their predicted V-shaped economic recovery had begun.  But there are strong reasons to believe that the US economy is far from recovery.

Long term trends and the coronavirus

Predictions for a V-shaped recovery rest to a considerable degree on the belief that our current economic collapse was caused by state mandated business closures to battle the coronavirus which unsurprisingly choked off our long expansion.  Now that a growing number of states are ending their forced lockdowns it is only natural that the economy would resume growing.  Certainly, the stock market’s recent rise suggests that many investors agree. 

However, there are many reasons to challenge this upbeat story of impending recovery.  One of the most important is that the pre-coronavirus period of expansion (June 2009 to February 2020), although the longest on record, was also one of the weakest. It was marked by slow growth, weak job creation, deteriorating job quality, declining investment, rising debt, declining life expectancy, and narrowing corporate profit margins. In other words, the economy was heading toward recession even before the start of state mandated lockdowns.  For example, the manufacturing sector spent much of 2019 in recession.   

Another reason is that the downturn in economic activity that marks the start of our current recession predates lockdown orders.  It was driven by health concerns.  As Emily Badger and Alicia Parlapiano explain in their New York Times article, and as illustrated in the following graphic taken from the article:

In the weeks before states around the country issued lockdown orders this spring, Americans were already hunkering down. They were spending less, traveling less, dining out less. Small businesses were already cutting employment. Some were even closing shop.

People were behaving this way — effectively winding down the economy — before the government told them to. And that pattern, apparent in a range of data looking back over the past two months, suggests in the weeks ahead that official pronouncements will have limited power to open the economy back up.

In some states that have already begun that process, like Georgia, South Carolina, Oklahoma and Alaska, the same daily economic data shows only meager signs so far that businesses, workers and consumers have returned to their old routines.

Thus, while some rebound in economic growth is to be expected given the severity of the downturn to this point, it is unlikely that the May employment jump signals the start of a powerful economic recovery.  Weak underlying economic conditions and health worries remain significant obstacles.

In fact, even the optimistic US Congressional Budget Office predicts at best a long, slow recovery.  As Michael Roberts describes:

It now expects US nominal GDP to fall 14.2% in the first half of 2020, from the trend it forecast in January before the COVID-19 pandemic broke. Then it expects the various fiscal and monetary injections by the authorities and the end of the lockdowns to reduce this loss from the January figure to 9.4% by end 2020. The CBO still expects a sort of V-shaped recovery in US GDP in 2021 but does not expect the pre-pandemic crisis trend in US economic growth (already reduced in the Long Depression since 2009) to be reached until 2029 and may not even return to the previous trend growth forecast until after 2030! So there will be a permanent loss of 5.3% in nominal GDP compared to pre-COVID forecasts – $16trn in value lost forever. In real GDP terms, the loss will be about 3% cumulatively, or $8trn in 2019 money.  And this assumes no second wave in the pandemic and no financial collapse as companies go bust.

Depression level unemployment

Although President Trump has celebrated the May employment gains, the fact is we continue to suffer depression level unemployment.  The following figure from the Washington Post provides some historical perspective.  The current official unemployment rate of 13.3 percent is more than a third higher than the highest level of unemployment reached during the Great Recession. 

But even the Bureau of Labor Statistics acknowledges that because of the unique nature of the current crisis the official announced unemployment rate for each of the last three months is flawed.  The unemployment rate is based on household surveys.  For the past three months, in an attempt to better understand the impact of the coronavirus, interviewers were supposed to classify people not working because of the virus as “unemployed on temporary layoff.” However, as the Bureau of Labor Statistics acknowledges, many of those people were incorrectly classified as “employed but absent at work,” which is the classification used when a person isn’t coming to work because of vacation, illness, bad weather, a labor dispute, or other reasons.  People in this latter category are not counted as unemployed.

The BLS has determined that correcting the classification error would boost the official April unemployment rate to 19.7 percent and the May rate to 16.3 percent.  And, it is important to note that this unemployment rate does not include those workers who have stopped looking for work and those who are involuntarily working part-time.  Including them would push the May rate close to 25 percent.  

Stephen Moore, an economic adviser to President Trump, has stated that the May job numbers take “a lot of the wind out of the sails of any phase 4 [stimulus bill] — we don’t need it now. There’s no reason to have a major spending bill. The sense of urgent crisis is very greatly dissipated by the report.”  This is crazy.

Danger signs ahead

There are three reasons to fear that without substantial new federal action May employment gains will be short-lived. 

First, it has been relatively low-wage production and nonsupervisory workers who have suffered the greatest number of job losses.  That has left many businesses relatively top-heavy with managers and high-income professionals. A number of business analysts are now predicting a new wave of layoffs or firings of higher-income and management personal to bring staffing levels back into pre-coronavirus balance.

The following figure shows that almost 90 percent of the jobs lost from mid-February to mid-April were in the six lowest paid supersectors as defined by the Bureau of Labor Statistics. The May employment gains were also in these six sectors.

Economists with Bloomberg Economics are now warning of a second wave of job losses that will include “higher-paid supervisors in sectors where frontline workers were hit first, such as restaurants and hotels. It also includes the knock on-effects to connected industries such as professional services, finance and real estate.”

As Bloomberg explains:

The pandemic isn’t finished with the U.S. labor market, threatening a second wave of job cuts—this time among white-collar workers. . . .

For the analysis, [Bloomberg Economics economists] looked at job losses by sector in March and April—with affected industries dominated by blue-collar, hospitality and production workers—and determined how those layoffs would move to supervisory positions, since management cuts tend to lag the frontline workers.

The economists then took government data on relations between industries to compute the ones most reliant on demand from the most-affected sectors. Combining that information with the hit to employment in the most affected sectors they extrapolated to other jobs at risk, most of which were higher-skilled, white-collar roles.

The second reason to downplay the significance of the May employment gains is that critically important stimulus measures–in particular the one-time grant of $1200 for individuals and the $600 a week additional unemployment benefit (which expires at the end of July)–appear unlikely to be renewed.  If that boost to earnings is withdrawn, economic demand and employment will likely fall again.

As Ben Casselman, writing in the New York Times, points out:

Research routinely finds that unemployment insurance is one of the most effective parts of the safety net, both in cushioning the effects of job loss on families and in lifting the economy. In economists’ parlance, the program is “well targeted” — it goes to people who need the money and who will spend it. Various studies have found that in the last recession, the system helped prevent 1.4 million foreclosures, saved two million jobs and kept five million people out of poverty.

The impact could be greater in this crisis because the program is reaching more people and giving them more money. The government paid $48 billion in benefits in April and has reached $86 billion in May, according to the Treasury Department.

As the following figure shows, almost all workers have suffered significant declines in employment income with low income workers taking the biggest hit.

Yet, the increase in food insecurity has been relatively small, especially for low income workers.

It is, as highlighted in the next figure, the massive individual benefit boosts included in the March stimulus package that has so far kept the decline in employment income from translating into dramatic spikes in food insecurity. If Congress refuses to pass a new stimulus that includes direct aid to the unemployed, the odds are great that the economic recovery will stall and unemployment will grow again.

The last reason for pessimism is the likely further contraction in state and local government spending and, by extension, employment and services, as a result of declining revenue.  State and local government employment fell by 1 million from February to April, and by an additional 600 million in May.  Looking just at state budgets, the Center for Budget and Policy Priorities estimates a shortfall in state budgets of $765 billion over fiscal years 2020-22, “much deeper than in the Great Recession of about a decade ago” (see the figure below).

And unfortunately, as the Center for Budget and Policy Priorities also notes, the federal government has, up to now, been unwilling to do much to help state governments manage their ballooning deficits:

Federal aid that policymakers provided in earlier COVID-19 packages isn’t nearly enough. Only about $65 billion is readily available to narrow state budget shortfalls. Treasury Department guidance now says that states may use some of the aid in the CARES Act of March to cover payroll costs for public safety and public health workers, but it’s unclear how much of state shortfalls that might cover; existing aid likely won’t cover much more than $100 billion of state shortfalls, leaving nearly $665 billion unaddressed. States hold $75 billion in their rainy-day funds, a historically high amount but far too little to meet the unprecedented challenge they face. And, even if states use all of it to cover their shortfalls, that still leaves them about $600 billion short.

States must balance their budgets every year, even in recessions. Without substantial federal help during this crisis, they very likely will deeply cut areas such as education and health care, lay off teachers and other workers in large numbers, and cancel contracts with many businesses. . . . That would worsen the recession, delay the recovery, and further harm families and communities.

Without a new stimulus measure that also includes support for state and local governments, their forced reduction in spending and cuts in employment can only add to the existing pressures working against recovery.

In sum, the crisis is real.  A new stimulus that included a renewal of special unemployment payments as well as direct support for state and local governments and other critical services like the postal service could help stabilize the economy.  But real progress will require a major effort on the part of the federal government to ensure adequate production of COVID-19 test kits and PPE as well as nationwide testing and contact tracing programs and then, most importantly, a fundamental reorganization of our economy.

The 1930s and Now: Looking Back to Move Forward

My article What the New Deal Can Teach Us About Winning a Green New Deal is in the latest issue of the journal Class, Race and Corporate Power.  As I say in the abstract,

While there are great differences between the crises and political movements and possibilities of the 1930s and now, there are also important lessons that can be learned from the efforts of activists to build mass movements for social transformation during the Great Depression. My aim in this paper is to illuminate the challenges faced and choices made by these activists and draw out some of the relevant lessons for contemporary activists seeking to advance a Green New Deal.

Advocates of a Green New Deal often point to the New Deal and its government programs to demonstrate the possibility of a progressive state-directed process of economic change.  I wrote my article to show that the New Deal was a response to growing mass activity that threatened the legitimacy and stability of the existing economic and political order rather than elite good-will, and to examine the movement building process that generated that activity.

Depression-era activists were forced to organize in a period of economic crisis, mass unemployment and desperation, and state intransigence. While they fell short of achieving their goal of social transformation, they did build a movement of the unemployed and spark a wave of militant labor activism that was powerful enough to force state policy-makers to embrace significant, although limited, social reforms, including the creation of programs of public employment and systems of social security and unemployment insurance.

Differences between that time period and this one are shrinking and the lessons we can learn from studying the organizing strategies and tactics of those activists are becoming ever more relevant.  The US economy is now in a deep recession, one that will be more devastating than the Great Recession.  US GDP shrank at a 4.8 percent annualized rate in the first quarter of this year and will likely contract at a far greater 25 percent annualized rate in the second quarter.  While most analysts believe the economy will begin growing again in the third quarter, their predictions are for an overall yearly decline in the 6-8 percent range.   As for the years ahead—no one can really say.  The Economist, for example, is talking about a 90 percent economy for years after the current lockdown ends.  In other words, life will remain hard for most working people for some time.

Not surprisingly, given the size of the economic contraction, unemployment has also exploded. According to the Economic Policy Institute, “In the past six weeks, nearly 28 million, or one in six, workers applied for unemployment insurance benefits across the country.”  More than a quarter of the workforce in the following states have filed for benefits: Hawaii, Kentucky, Georgia, Rhode Island, Michigan, and Nevada.  And tragically, millions of other workers have been prevented from applying because of outdated state computer systems and punitive regulations as well as overworked employment department staff.  Even at its best, the US unemployment system, established in 1935 as part of the New Deal reforms, was problematic, paying too little, for too short a time period, and with too many eligibility restrictions.  Now, it is collapsing under the weight of the crisis.

Yet, at the same time, worker organizing and militancy is growing. Payday Report has a strike tracker that has already identified over 150 strikes, walkouts, and sickouts since early March across a range of sectors and industries, including retail, fast food, food processing, warehousing, manufacturing, public sector, health care, and the gig economy.  As an Associated Press story points out:

Across the country, the unexpected front-line workers of the pandemic — grocery store workers, Instacart shoppers and Uber drivers, among them — are taking action to protect themselves. Rolling job actions have raced through what’s left of the economy, including Pittsburgh sanitation workers who walked off their jobs in the first weeks of lockdown and dozens of fast-food workers in California who left restaurants last week to perform socially distant protests in their cars.

Rather than defending workers, governments are now becoming directly involved in suppressing their struggles. For example, after meatpacker walkouts closed at least 22 meat plans and threatened the operation of many others, triggered by an alarming rise in the number of workers testing positive for the virus, President Trump signed an executive order requiring companies to remain open and fully staffed. It remains to be seen how workers will respond.  In Pennsylvania, the Governor responded to nurse walkouts at nursing homes and long-term care facilities to protest a lack of protective equipment by sending national guard members to replace them.

Activists throughout the country are now creatively exploring ways to support those struggling to survive the loss of employment and those engaged in workplace actions to defend their health and well-being.  Many are also seeking ways to weave the many struggles and current expressions of social solidarity together into a mass movement for radical transformation.  Despite important differences in political and economic conditions, activists today are increasingly confronting challenges that are similar to ones faced by activists in the 1930s and there is much we can learn from a critical examination of their efforts.  My article highlights what I believe are some of the most important lessons.

The Harsh Reality of Job Growth in America

The current US economic expansion, which began a little over a decade ago, is now the longest in US history.  But while commentators celebrate the slow but steady growth in economic activity, and the wealthy toast continuing strong corporate profits, lowered taxes, and record highs in the stock market, things are not so bright for the majority of workers, despite record low levels of unemployment.

The fact is, despite the long expansion, the share of workers in low-wage jobs remains substantial. To make matters worse, the share of low-quality jobs in total employment seems likely to keep growing. And, although US workers are not unique in facing hard times, the downward press on worker well-being in the US has been more punishing than in many other advanced capitalist countries, leaving the average US worker absolutely poorer than the average worker in several of them.

The low wage reality

According to a recent Bookings report by Martha Ross and Nicole Bateman, titled Meet the Low-wage Workforce,

Low-wage workers comprise a substantial share of the workforce.  More than 53 million people, or 44 percent of all workers ages 18 to 64 in the United States, earn low hourly wages. More than half (56 percent) are in their prime working years of 25-50, and this age group is also the most likely to be raising children (43 percent).

Ross and Bateman draw upon the Census Bureau’s 2012-2016 American Community Survey 5-year Public Use Microdata Sample to identify low-wage workers.  Although their work does not incorporate the small increase in wages between 2017-2019, they are confident that doing so would not significantly change their findings.

Their workforce definition started with all civilian, non-institutionalized individuals, 18 to 64 years of age, who worked at some point in the previous year (during the survey period) and remained in the labor force (either employed or unemployed).  They then removed graduate and professional students and traditional high school and college students, as well as those who reported being self-employed or earning self-employment income and those who worked without pay in a family business or farm.  This left them with a total of 122 million workers.

Their definition of a low-wage worker started with the “often-employed threshold” of two-thirds the median hourly wage of a full-time/full year worker, with one major modification. They used the male wage because they wanted to establish a threshold that was not affected by gender inequality.  They identified anyone earning a lower hourly wage as a low-wage worker.

The average national threshold across their five years of data, in 2016 real dollars, was $16.03.  They then adjusted this value, using the Bureau of Economic Analysis’s Regional Price Parities, to take into account variations in the cost of living in individual metropolitan areas.  The adjusted thresholds ranged from $12.54 in Beckley, West Virginia to $20.02 in San Jose, California.  Using these thresholds, the authors found that 44 percent of the workforce, some 53 million workers, were low-wage workers.

These low-wage workers were a racially diverse group.  Fifty-two percent were white, 25 percent Latinx, 15 percent Black, and 5 percent Asian American. Both Latinx and Black workers were over-represented relative to their share of the total workforce.

Strikingly, 57 percent of low-wage workers worked full time year-round.  And half of all low-wage workers “are primary earners or contribute substantially to family living expenses. Twenty-six percent of low-wage workers are the sole earners in their families, with median family earnings of $20,400.”

Finally, as the authors also note, the economic mobility of low wage workers appears quite limited. They cite one study that “found that, within a 12-month period, 70 percent of low-wage workers stayed in the same job, 6 percent switched to a different low-wage job, and just 5 percent found a better job.”

The growing share of low-wage jobs

The downward movement in a new monthly index, the job quality index (JQI), makes clear that economic growth alone will not solve the problem of too many workers employed in low-wage work.  The index measures the ratio of high-quality jobs (those that pay more than the average weekly income) to low quality jobs (those that pay less than the average weekly income).  The index steadily declined over the past three decades, during periods of expansion as well as recession, from a ratio of 94.9 in 1990 to a ratio of 79.0 as of July 2019 (as illustrated below).

The process of creating the index and its usefulness is described in a recent paper authored by Daniel Alpert, Jeffrey Ferry, Robert C. Hockett, Amir Khaleghi.  The index itself is maintained by a group of researchers from Cornell University Law School, the Coalition for a Prosperous America, the University of Missouri-Kansas City, and the Global Institute for Sustainable Prosperity.  As the authors note, the most prominent factor underlying the three decade fall in the ratio is the “relative devaluation” of US labor.

The index tracks private sector jobs provided by third party employers, which excludes self-employed workers, and, for now, covers only production and nonsupervisory (P&NS) positions, which account for approximately 82 percent of total private sector jobs in the country.

The index draws on the BLS’s Current Employment Statistics which provides average weekly hours, average hourly wages, and total employment for 180 distinct job categories organized in industry groups.  As the authors explain:

JQI itself is a fairly simple measure. The index divides all categories of jobs in the US into high and low quality by calculating the mean weekly income (hourly wages multiplied by hours worked) of all P&NS jobs and then calculates the number of P&NS jobs that are above or below that mean. An index reading of 100 would indicate an even distribution, as between high- and low-quality jobs. Readings below 100 indicate a greater concentration in lower quality (those below the mean) positions, and a reading above 100 would greater concentration in high quality (above the mean) positions.

Recognizing that some groups are quite large and include a wide range of jobs hovering around the mean, the JQI is further adjusted by disaggregating those particular groups into subgroups. The average income of each of those subgroups is then compared with the mean weekly income derived from the entire sample to determine whether the positions should be classified as high or low quality jobs.

As noted above, the JQI fell from 94.9 in 1990 to 79.0 as of July 2019.  As for the significance of this decline:

The decline confirms sustained and steadily mounting dependence of the U.S. employment situation on private P&NS jobs that are below the mean level of weekly wages. . . .

Notably, movements in the JQI are not particularly correlated with recession; it is important to note that the first big decline occurred during the expansion of the late 1990s. The index was steady during the 2001 recession, and its second big decline occurred during and after the Great Recession. There is admittedly some cyclical patterning evidenced in the JQI output, but this is overwhelmed by a larger secular phenomenon.

Losing ground

Not only are US workers facing a labor market increasingly oriented towards low-wage employment, the resulting downward pressure on wages appears to be proceeding at a more rapid pace in the US than in other countries.  As a consequence, a majority of US workers are now poorer, in real terms, than many of their counterparts in other countries.

For example, in a study comparing income inequality in France and the US, the economists Thomas Piketty, Emmanuel Saez, and Gabriel Zucman found that the average pre-tax national income of adults in the bottom 50 percent of the income distribution is now greater in France than in the United States.  “While the bottom 50 percent of incomes were 11 percent lower in France than in the US in 1980, they are now 16 percent higher.”  Moreover,

The bottom 50 percent of income earners makes more in France than in the US even though average income per adult is still 35 percent lower in France than in the US (partly due to differences in standard working hours in the two countries). Since the welfare state is more generous in France, the gap between the bottom 50 percent of income earners in France and the US would be even greater after taxes and transfers.

A recent study by the Center for the Study of Living Standards finds that growing numbers of US workers are also falling behind their Canadian counterparts.  More specifically, “the study compares incomes in every percentile of the income distribution, and finds that up through the 56th percentile Canadians are better off than their U.S. counterparts.”

The study’s author, Simon Lapointe, in words that echo the comments of Piketty, Saez, and Zucman, adds:

Our income estimates may actually underestimate the economic well-being of Canadians relative to Americans. Indeed, Canadians usually receive more in-kind benefits from their governments, including notably in health care. Had these benefits been included in the estimates, the median augmented household income in Canada would likely surpass the American median by a greater margin. While these benefits also come with higher taxes, the progressivity of the income tax system is such that the median household is most likely a net beneficiary.

The takeaway

There are many reasons for those at the top of the US income distribution to celebrate the performance of the US economy and tout the superiority of current US economic and political institutions and policies.  Unfortunately, there is a strong connection between the continuing gains for those at the top and the steadily deteriorating employment conditions experienced by growing numbers of workers.  Hopefully, this economic reality will become far better understood, leading to a more widespread recognition of the need for collective action to transform the US economy in ways that are responsive to majority interests.

Portrait of the 2009-2019 US expansion

June 2019 marks the 10th anniversary of the current US economic expansion.  If it makes it through July it will surpass the 1991-2001 expansion as the longest on record.  But while expansions are to be preferred over recessions, there are many reasons to view this record-breaking expansion critically.  In fact, the nature of this expansion, hopefully captured in the following portrait, highlights the growing inability of the US economic system, even when performing “well,” to meet majority needs.

Weak Growth

This has been a weak expansion in terms of growth.  By way of comparison, GDP grew by 43 percent over the first 39 quarters of the 1991-2001 expansion (which was the previous record holder).   In the first 39 quarters of this expansion, through March 2019, GDP grew by only 22 percent.

At its current pace, the current expansion would have to run six more years to equal the aggregate growth of the 1991-2001 expansion, and nine more years to match the 54 percent aggregate GDP growth recorded over the 1961-69 expansion.  The figure below illustrates the relative weakness of the current expansion in terms of growth.

Strong corporate profits

At the same time, weak growth did little to dampen corporate earnings.  As we can see in the following figure, corporate earnings have been on the rise since 2001, reaching their maximum in 2015.  While pre-tax profits have leveled off, after tax profits, thanks to the recent Trump tax cut, have resumed their upward march.

We see a similar trend in the figure below which shows corporate profits as a share of GDP.

After-tax corporate profits will likely turn down again soon, as the effects of the tax cut are already weakening, indicating the end to this expansion is not far off.

Weak wage growth

The suppression of wages is one of the main reasons that corporations were able to enjoy such strong profits despite weak growth.  The figure below shows the collapse of labor’s share of corporate income.  The trend began during the 2001-2009 expansion but accelerated during this expansion.  Even more striking, the share has remained low despite the many years of expansion.

The wage stagnation underlying this trend is illustrated more directly in the next figure.

As we can see, there have been only two recent periods when workers (outside those in the 95th percentile) enjoyed real gains: 1997-2001 and 2015-2017.  Both periods were marked by very low rates of unemployment and followed long periods of expansion during which wages remained largely unchanged.  It is worth noting that both periods were also marked by a decline in corporate profits, suggesting that corporations cannot long tolerate any kind of upward movement in majority earnings.

For reasons that remain unclear, wage growth in 2019 has slowed.  The Federal Reserve Board, always keen to make sure that wages remain low to ensure profitability, began pushing up interest rates in late 2015 in response to the rising wage levels noted above.  The recent wage slowdown has, at least temporarily, caused the Fed to halt its interest rate hikes, which will likely help extend the expansion.

Employment struggles

The dramatic decline in unemployment is perhaps the most celebrated achievement of this expansion.  As we can see in the figure below, the unemployment rate steadily fell over the expansion, from a high of 10 percent down to a low of 3.6 percent as of May 2019.  Such a low level suggests a very tight labor market, which makes the wage stagnation difficult to explain.  The likely answer is that the current low level of unemployment is a poor measure of labor tightness.

A better measure appears to be the labor force participation rate, which is calculated as the civilian labor force (i.e., those employed and those unemployed and actively looking for work) divided by the civilian noninstitutional population (i.e., those not in the military or institutionalized). The figure below also shows the labor force participation rate for those 16 years and older.

As we can see, the current labor force participation rate of 62.8 percent remains significantly below its 2008 peak and even further below the even higher peak reached at the turn of the century.  The decline in the labor force participation rate means that millions of workers have yet to return to the labor force, either to hold a job or to look for one.

The seriousness of this problem is highlighted by the labor force participation rate of the prime age cohort, those 25-54 years of age.  Their core status stems from the fact that, as Jill Mislinski explains,

This cohort leaves out the employment volatility of the high-school and college years, the lower employment of the retirement years and also the age 55-64 decade when many in the workforce begin transitioning to retirement … for example, two-income households that downsize into one-income households.

In the figure below we can see that the labor force participation rate of the prime age cohort remains significantly below its two previous peaks.  The fact that millions of prime age workers have yet to return to the labor market is a strong indicator that labor market conditions remain far from ideal despite years of economic expansion.

Weak Investment

One reason for the slow growth and associated weak job creation is that business has been reluctant to invest.  Instead, they have been content to use a growing share of their earnings to fund dividend payments and stock buybacks.  The following chart, taken from a Federal Reserve Board study of the relationship between corporate capital investment and net stock buybacks, shows a post-2000 downward trend in business investment as a share of GDP and a rise in the value of dividend payments and stock buybacks as a share of GDP.

While the Federal Reserve study concludes that it is difficult to determine whether “corporations are actively reducing investment in order to finance share repurchases and dividend payments . . . [or] pessimism about future demand and economic growth is leading corporations to defer capital spending, and companies are simply returning cash to their shareholders for want of attractive investment opportunities,” there can be no question that there has been a noticeable change in business behavior.

For example, as can see below, whereas in the past nonfinancial corporations invested up to 40 percent of their cash flow back into their business, that share has fallen below 20 percent for most of the current expansion.  In other words, the lack of investment has nothing to do with a shortage of funds.

As the Federal Reserve study points out, business has been funneling ever more of its earnings, through dividends and stock buybacks, to its top managers and stockholders.  According to the New York Times, “From 2008 to 2017, 466 S.&P. 500 companies distributed $4 trillion to shareholders as buybacks, equal to 53 percent of profits, along with $3.1 trillion as dividends.”  Beyond slowing growth and job creation, such a policy has helped to drive income and wealth inequality to record levels, ensuring that those at the top remain content with the economy’s performance despite the problems faced by most working people.

The following figure, from another Federal Reserve Board study, this one titled A Wealthless Recovery?, highlights the extremely uneven distribution of rewards during this expansion.  The authors of the report grouped working-age households into four different groups according to their reported “usual income.”  As we can see from the blue bars, the Great Recession left all groups with substantially less wealth.  However, as we can see from the green bars, which extend the period under analysis to 2016,  (which includes many years of expansion), only the top income group enjoys a gain in wealth.  In other words, the expansion has done little to help the bottom 90 percent of working-age households recover the wealth they lost during the Great Recession.

Austerity

Sustained fiscal austerity is another reason for the slow growth during this expansion. The figure below shows the cumulative growth in per capita spending by federal, state, and local governments following the troughs of the 11 recessions since World War II.  As Josh Bivens explains:

Astoundingly, per capita government spending in the first quarter of 2016—twenty-seven quarters into the recovery—was nearly 4.9 percent lower than at the trough of the Great Recession. By contrast, 27 quarters into the early 1990s recovery, per capita government spending was 3.6 percent higher than at the trough; 24 quarters after the early 2000s recession (a shorter recovery that did not last a full 27 quarters), it was almost 10 percent higher; and 27 quarters into the early 1980s recovery, it was more than 17 percent higher.

If government spending in this expansion had followed the pattern of previous recoveries, public spending would have been far greater, not only boosting demand and employment but ensuring provision of needed public services.  As Bivens points out,

If government spending following the Great Recession’s end had tracked the spending that followed the early 1980s recession—the only other postwar recession of similar magnitude—governments in 2016 would have been spending almost a trillion dollars more in that year alone.

State and local governments are primarily responsible for this austerity.  In many cases, their actions were the result of tax cuts enacted to benefit the wealthy and leading corporations that left state and local governments short of revenue.  Limited by balanced budget requirements, most ended up slashing spending on social services.  As a consequence, the brunt of austerity has been borne by working people.

Summing up 

This is far from a complete portrait of the current expansion.  Yet, it still clearly reveals how the logic of capitalism works against the interests of the great majority of working people, even during a long period of profitable economic activity.  A recession awaits, and then our troubles will intensify.  Key to our ability to build a popular democratic response in defense of majority interests may well be how people evaluate the benefits of remaining committed to an economic system that that undermines their well-being in multiple ways even when it is functioning well.

They’re at it again: Selling the US-Mexico-Canada Agreement

The headlines once again misrepresent the aims and consequences of a US free trade agreement, in this case repeating the International Trade Commission’s claim that President Trump’s US-Mexico-Canada agreement (USMCA) will boost US growth and employment.

The International Trade Commission is required by law to evaluate the economic consequences of the USMCA, which is supposed to replace the North American Free Trade Agreement (NAFTA), before Congress can debate whether to approve it.  According to its report, which was released on April 18, 2019, the agreement can be expected to “raise U.S. real GDP by $68.2 billion (0.35 percent) and U.S. employment by 176,000 jobs (0.12 percent)” and “would likely have a positive impact on U.S. trade, both with USMCA partners and with the rest of the world.”

While supporters of the agreement happily repeat the Committee’s conclusion “that, if fully implemented and enforced, USMCA would have a positive impact on U.S. real GDP and employment,” the fact is that the predicted gains are miniscule.  Moreover, given the flaws in the Commission’s admittedly sophisticated modeling, there is no reason to take the results seriously.  Finally, a careful examination of the many chapters in the proposed agreement makes clear that its real aim is to strengthen contemporary globalization dynamics, enhancing corporate power and profits at the expense of majority living and working conditions in all three countries.

Putting the projected “gains” in perspective

The Commission assumed that the US economy’s complete adjustment to the agreement would take six years.  It then used a computable general equilibrium model to simulate how the terms of the agreement would change US markets and compared the “equilibrium” outcome at the end of the adjustment period with baseline results that assumed no significant change in US economic policies or global agreements over the same period.

On the basis of such modeling, the Commission concluded that six years after the implementation of the agreement, the US economy would be $68.2 billion bigger than if the agreement had not been approved.  That is, as the Commission acknowledges, a one-time gain of 35/100 of one percent in real GDP.  Current US GDP is over $21 trillion; $68 billion is a rounding error in an economy of that size.

As for the projected growth in employment, the one-time gain of 176,000 jobs relative to the base line forecast translates into an increase in employment after six years of 12/100 of one percent.  That gain in employment is roughly equal to the number of new jobs added in a month of moderate economic growth.  The Commission’s model produced similar miniscule gains for other variables, including US wages.

In short, if we take these predictions seriously, the obvious conclusion is that there is little to gain from approving this agreement.  Of course, that is not the Commission’s position.  However, there is little reason to take these results seriously.

Dodgy methodology

It took a lot for the Commission to produce even these minimal games.  More specifically, it took a dodgy methodology that is biased towards policies that promote globalization.

The Commission organized its work as follows: it first sought to model the economic consequences of “eight groups of USMCA provisions: agriculture, automobiles, intellectual property rights (IPRs), e-commerce, labor, international data transfer, cross-border services, and investment.” Then, it took the provision specific results of each group and used them as modeling inputs for the economy-wide computable general equilibrium model it used to produce the overall estimates cited above.

Since not all the provisions changed current policies, the Commission divided the eight groups into two categories.  The first included the “set of provisions that would alter current policies or set new standards within the three member countries, and that would therefore be expected to modify current conditions after USMCA enters into effect.” This included provisions affecting agriculture, automobiles, IPRs, e-commerce, labor, and investment decisions related to the investor-state dispute settlement mechanism.

The second category included provisions that “would reduce policy uncertainty. These commitments would primarily serve to deter future trade and investment barriers, thus offering firms some assurance that current regulations and standards, which may or may not be expressly governed by current policies, will not become more restrictive.” Included in this category are provisions that would affect international data transfer, cross-border services trade, and investment decisions related to market access and nonconforming measures.

Significantly, it was the Commission’s determination of the gains from those provisions that would reduce policy uncertainty, by restricting the possibility for future government regulation of corporate activity, that proved decisive.  As a Public Citizen Eyes on Trade blog post pointed out,

Most of the [overall gains reported by the Commission] are derived from a highly dubious new research methodology, which assigns an invented positive economic value to terms that reduce “policy uncertainty” by freezing in place environmental, consumer protection, financial and other safeguards. If the ITC had not done this, the report would have projected a negative outcome. All $68.2 billion of the deal’s supposed economic gains arise from simulating the impact of removing trade barriers that do not exist. In other words, the gains are generated not through the removal of trade barriers directly, but through the elimination of the possibility of new future regulatory policies, which are deemed to be potential trade barriers. Absent this fabrication, the revised NAFTA would have been projected to lower the United States’ GDP by $22.6 billion and reduce the number of jobs by 53,900.

The problems only multiply when these separate results are used as inputs in the Commission’s economy-wide model.  This model, as noted above, is a computable general equilibrium model.  As such, it seeks to process all the ways the changes generated by the agreement interact to change market behavior before eventually producing – over a six-year period in this case — a new equilibrium outcome for the economy.  As one might imagine, this kind of modeling is quite complex and to ensure a result it requires some very significant assumptions.  Among them are:

  • The assumption that product markets are “perfectly competitive (implying zero economic profit for the firm).”
  • The assumption that there is “full capacity utilization of capital.”
  • The assumption that there is no unemployment.
  • The assumption that “global trade balances remain constant.”

In other words, while we may want the Commission to investigate whether a new trade agreement might cause a worsening of trade balances, or unemployment, or deindustrialization, or monopolization, the Commission’s model, by assumption, asserts that these are non-problems.  As a result, the model has a clear pro-trade agreement bias.

Thanks to these assumptions, if a country drops its trade restrictions, market forces will quickly and effortlessly lead capital and labor to shift into new, more productive uses.  It is no wonder that mainstream economic studies, which rely on computable general equilibrium modeling, always produce results supporting ratification of free trade agreements.  In light of this, it is striking how small the estimated gains were for this trade agreement.

The real winners

So, one might ask, what is really going on here?  Well, the agreement enjoys strong corporate support precisely because a number of its chapters include provisions responsive to the interests of leading US multinational corporations.  What follows are just a few examples drawn from the report.

The agreement includes provisions that require harmonization and thus a reduction in food safety standards, force governments to negotiate new standards with industry representatives, set deadlines for import checks, require that new standards be based on scientific principles, and that safety standards be applied “only to the extent necessary to achieve the appropriate level of protection” and “not [be] more trade restrictive than required.”

The agreement also includes a number of market access provisions to promote cross-border trade in services and financial services.  More specifically, the agreement’s market access provisions “are aimed at removing quotas and other barriers that impede the entry of services suppliers into foreign markets.” The Commission believes that “the broadcasting, telecommunications, and courier services sectors in the United States are estimated to gain the most, followed by the commercial banking sector in all three countries.”

The agreement also includes provisions “which would strengthen protections in major IPR categories such as trade secrets, regulatory data protection, patents, trademarks, copyrights, and civil, criminal, and administrative enforcement.”  The pharmaceutical industry will be one of the biggest beneficiaries.  For example, the agreement includes a “patent resolution mechanism that requires notice to patent holders, and an opportunity for relief, when a generic manufacturer seeks to rely on an originator’s test data for marketing approval without the patent holder’s consent.”

The USMCA would be the first U.S. free trade agreement with a chapter on digital trade.  Among other things, it would prevent governments “from restricting cross-border flows of financial data, which would require data to be stored or processed locally” and would “forbid them to adopt restrictive data measures in the future.”  This provision would be especially valuable to U.S. computer services and digital platform services firms. “Other key Digital Trade chapter provisions include a ban on import duties or other discriminatory customs measures on digital products (e.g., e-books, videos, music, software, and games), and prohibition of legal discrimination against digital products produced or created in other signatory countries.”

The agreement also includes a chapter that restricts the ability of governments to use state-owned enterprises to meet public needs by requiring that they be “regulated impartially, and do not benefit from special treatment and unfairly infringe upon the activities of private firms.”

The list goes on.  No wonder that major business associations are expressing strong support for the agreement. As the New York Times reports:

Industry groups called for the pact’s quick passage into law. Linda Dempsey, the vice president for international economic affairs at the National Association of Manufacturers, said that the deal was “a win for manufacturers.”

Jordan Haas, the director of trade policy at the Internet Association, said the report underlined that the deal’s digital trade provisions were “critical to America’s future economic success” and “mean jobs and opportunities in every state.”

There is a lot at stake in this struggle.  We need to stop calling for progressive reform of the agreement, a call that only leads to popular confusion about what drives US government policy.  Instead we need to build a movement that simply says no to NAFTA in any form.