Tuesday, September 10, 2013

Reasons for the Crappy Economic Recovery

Many factors are cited for the slow recovery, some real and some bogus. Let’s begin with the real reasons for the slow recovery and examine the bogus reasons that have been used to support ideological goals.

Technological changes: The recovery of GDP has been slow, but the recovery of labor has been even slower. One of the reasons for this is that employers lay off workers in recessions, and then replace them with machines, computers, and robots when things improve.

The Distribution of Income: Corporations are sitting on piles of cash, and they are reluctant to use the money for new investment because they aren’t sure they will pan out when the demand for goods and services is so low. However, if a substantial fraction of that cash had been paid to workers as wages instead of being misdirected to owners as profits, the demand for goods and services would be much higher and the outlook would be much brighter. There are many claims has to what has slowed the recovery, but they appear to be mostly driven by ideological goals, such as smaller government, the elimination of social insurance programs such as Social Security, Medicare, Obamacare, and lower taxes on the wealthy.

Base Erosion and Profit Shifting - Taxation is at the core of every country's sovereignty, but in recent years, multinational companies have avoided taxation in their home countries by pushing activities abroad to low or no tax jurisdictions. The G20 asked the OECD to address this growing problem by creating an action plan to address base erosion and profit shifting.

The Center for Public Integrity has written a whole series of articles about how offshore banking has been abused by both individuals and corporations using shell and dummy companies to avoid taxes in offshore tax havens.

Fox News' owner Rupert Murdoch also owns the Wall Street Journal, the newspaper that recently bashed the OECD action plan to more fairly tax corporations. The Wall Street Journal reported that U.S. companies keep overseas profits overseas to avoid paying America's 35% corporate rate --- even though the actual average "effective" tax rate that these corporations really pay has usually been much lower for decades. The Wall Street Journal called the OECD's action plan "a global revenue grab".

In a recent post Jared Bernstein noted profits as a share of income are at or near record highs, while the compensation share is around a 50-year low.

The Economic Policy Institute notes that for decades following World War II, wages across the board closely tracked productivity. In recent decades, however, while average wages (almost) track productivity growth, wages for the vast majority of Americans have not --- although CEO pay has skyrocketed, while their capital gains tax rate is only half of what it should be (which is just 20%, whereas the top marginal tax rate is 39.6%).

People are too lazy to work, they would rather rely on social programs: This objection is common, but it is off the mark. First, while it’s true that we can find people who abuse any program, social insurance plays an important role as an automatic stabilizer. When the good part of these programs – stabilization – is stacked up against the relatively small amount of abuse, it’s clear that they are highly beneficial on net. Second, this criticism assumes that there are jobs for anyone who really wants to work, but that is simply not the case. The number of people seeking work has far exceeded the number of available jobs and no amount of desire to work can overcome that hurdle.

From Robert Oak at the Economic Populist: If one takes the official broader definition of unemployment, or the U-6 unemployment rate, there are 6 unemployed people per each listed job opening. (A job opening could literally be for someone to take out the trash twice a week.)

The July U-6 unemployment rate was 14%. But even still, there are millions more that are no longer counted as part of the labor force ("discouraged workers" who "dropped out"). The media usually reports the much lower U-3 rate, which currently stands at 7.4%.

While layoffs have declined to pre-recession levels, there are still not enough job openings for the unemployed. Anyone who claims a labor shortage can easily be disproved according to this post (with charts) at the Economic Populist. A labor shortage would imply more job openings than unemployed available to fill them...but that is not the case.

Obamacare: The claim here is that uncertainty over Obamacare is constraining hiring, and leading to more part-time work as employers attempt to evade the new health care law. However, neither claim is supported. Surveys of firms do not indicate that Obamacare is a problem for hiring, and the rise in part-time work is due to other factors.

From Robert Oak at the Economic Populist: The percentage of part-time jobs in 2012 was 19.4% and has ballooned since 2008. One is not seeing a reaction to Obamacare with this spike up. Instead, employers are only offering part-time work because they can. Unemployment is so great, there is a huge oversupply of labor and still a weak economic demand.

The Center for Public Integrity has recently reported that the GOP's anti-Obamacare advertising has been misleading, and in many cases downright false. Also, a new study debunks the myth of doctors fleeing Medicare.

Uncertainty over regulation and future taxes: We are told that uncertainty over financial regulation, health care regulation, and future taxes is constraining business activity, but when businesses are surveyed about this these items are not very high on the list. Instead, lack of demand is cited as the main factor constraining business investment and hiring.

Small Businesses Hit Hard by Weak Job Gains - "Small businesses have historically contributed more than their share to overall employment growth in the United States. But during the recent recession, the rate of net employment losses of small businesses exceeded that of larger businesses." (Editor's Note: If people don't have money to spend, there's no demand. No demand means no supply is needed, and therefore no jobs are needed to do the supplying.)

Failure to coddle the wealthy: If only the taxes on the wealthy were lower, these “job creators” could turn “takers” into “makers”. But this is nothing more than the trickle down theory that failed during the Bush years – the evidence is quite unfavorable to this idea – and there’s no reason to think this time is different.

Job Polarization and Jobless Recoveries (A 36 page study)

Abstract: "Job polarization refers to the recent disappearance of employment in occupations in the middle of the skill distribution. Jobless recoveries refers to the slow rebound in aggregate employment following recent recessions, despite recoveries in aggregate output. We show how these two phenomena are related. First, job polarization is not a gradual process; essentially all of the job loss in middle-skill occupations occurs in economic downturns. Second, jobless recoveries in the aggregate are accounted for by jobless recoveries in the middle-skill occupations that are disappearing."

(* This post was partially edited and excerpted from 10 Real and Bogus Reasons for the Slow Recovery, where the other reasons given for a slow recovery were: household balance sheets, poor fiscal policy, monetary policy and the debt.)


  1. Technological progress has been at the heart of economic growth for two centuries. Some authors, however, have suggested that product and process innovation are running out of steam, and that the low-hanging fruits that have improved our lives so much in the 20th century have all been picked. They say we should be ready for a more stagnant world in which living standards rise little, if at all. Whenever a technological solution is found for some human need, it always creates a new problem. But perhaps the biggest bite-back is, what happens to human labor? If technology replaces workers, what will the role of people become? Some say there will be disruption and pain, but that the new technology will also create a new demand for workers, to perform tasks that a new technology creates. (But I'm very skeptical, as we've recently seen the high unemployment numbers for the past 5 years --- and the offshoring of domestic jobs to low-paying countries for decades.

  2. The 1 percent have captured about 95 percent of the income gains since the recession ended.


  3. Top 1% incomes grew by 31.4% while bottom 99% incomes grew only by 0.4% from 2009 to 2012.


  4. Ex-Wall Street chieftains living large in post-meltdown world.