Sunday, October 27, 2013

The U.S. Needs a Brand New Economy

It was government spending that unintentionally pulled us out of the Great Depression by helping us to transform our economy from a nation of farmers into a manufacturing super power as we were gearing up for World War II. But because of technology (automation and robotization) and the offshoring of jobs over the last 40 years, our economy has morphed into a low-paying domestic service industry economy. We need government spending again, not to preserve an old economy, but to focus instead on creating a brand new economy.

But by putting people to work doing what? That is the #1 economic question of the new millennium. The Second Industrial, Digital and Technological revolutions may have increased productivity, but most American workers benefited very little in the way of wages or benefits—it was mostly those at the very top of the income ladder who fared much better. Median wages and household incomes have actually declined in real dollars as the prices of goods and services have risen over the past 40 years.

It's been reported that people are living longer (although, it's primarily the rich who are living longer). But no matter, because what's the point of living longer if people won't have a means of supporting themselves during their increased longevity? As it is now, there are those who are proposing raising the age for Social Security retirement, but what does someone do in the mean time? Say, from 18 years old to 70 years old --- will they have to spend 52 years during their working careers bouncing around from job to job, with weeks (if not months or years) unemployed in between time while searching for another new job?

A recently released a study finds that a staggering 5.8 million young people nationwide (one in seven of those ages 16 to 24) are already "disconnected"— meaning they are not employed or in school...adrift at society's margins. According to the NCES, a research arm of the U.S. Education Department, the U.S. had approximately 18 million high school graduates from 2008 to 2013. We had a record 3.4 million high school graduates this year alone. The Bureau of Labor Statistics reports that only 48.8 percent of the 3.2 million youth who graduated from high school last year were "in the labor force" (either working or looking for work).

Currently, using the broader measure of unemployment (the U-6 or Alt U-6 rate) there is only one job opening for every 6 Americans who are currently unemployed. Counting "discouraged workers", we really have 20 million people who need full-time work. Obviously 20 million working-aged Americans in the U.S. workforce can't all be doctors or bankers—nor do we need 20 million more hamburger-flippers or Walmart greeters. And American-based transnational corporate conglomerates like Nike or Apple aren't going to voluntarily give up their cheap labor overseas—which might be 20 million factory workers. As of 2013 Nike alone has 777 factories in 43 Countries employing 1,009,496 workers

And there's been a lot of discussion about STEM skills and job polarization, but even if all those 20 million unemployed Americans had multiple Ph.Ds, they all wouldn't have a place to work unless there was something for them to do—so education alone isn't the problem either. As it is now, college grads are already working as cab drivers and bartenders. And there are hundreds of thousands of tech workers who have been already displaced by H-1B visas—or as in manufacturing, had their jobs offshored for lower wages.

Maybe in a Utopian world, if there was a fully enforceable international minimum wage, and the cost of living was the same everywhere, maybe only then could innovation, hard work, increased productivity and good government policy make for a better and more level playing field for American workers. But we have "free trade agreements", offshoring, and a bad tax policy that undermines American workers, no matter how hard they try to move up the income ladder.

As Joseph Stiglitz had noted in Vanity Fair:

"It has now been almost five years since the bursting of the housing bubble, and four years since the onset of the Great Recession. There are 6.6 million fewer jobs in the United States than there were four years ago. [Now add all those high school graduates.] Some 23 million Americans who would like to work full-time cannot get a job. Almost half of those who are unemployed have been unemployed long-term. Wages are falling—the real income of a typical American household is now below the level it was in 1997."

(*The following was excerpted and edited for both length and content from Stiglitz's 3-page article): Since the stock market crashed in 2008, the banks got their bailout: some of the money went to bonuses and a little of it went to lending, but the economy didn’t really recover—output is barely greater than it was before the crisis. And the job situation is still very bleak. The jobs, if not offshored, are not all full-time --- many are part-time or temporary and are low-paying. We need jobs that last (remember "job security"?) and jobs that pay—and jobs that stay in America.

The trauma we’re experiencing right now resembles the trauma we experienced 80 years ago during the Great Depression, and it has been brought on by an analogous set of circumstances. Then, as now, we faced a breakdown of the banking system. But then, as now, the breakdown of the banking system was in part a consequence of deeper problems.

Even if we had correctly responded to the trauma—the failures of the financial sector—it will take a decade or longer to achieve a full recovery.

Until now, the Great Depression was the last time in American history that unemployment exceeded 8 percent for four years. And never in the last 60 years has economic output been barely greater for four years after a recession ended, than it was before the recession started. The percentage of the civilian population at work has fallen by twice as much as in any post-World War II downturn. Not surprisingly, economists have begun to reflect on the similarities and differences between our "Long Slump" in the aftermath of our last recession and the Great Depression.

Other than monetary policy, the problem today, as it was then, is the so-called real economy. It’s a problem rooted in the kinds of jobs we have, the kind we need, and the kind we're losing—and rooted as well in the kind of workers we want, and the kind we don’t know what to do with. The real economy has been in a state of wrenching transition for decades, and its dislocations have never been squarely faced. A crisis of the real economy lies behind the Long Slump, just as it lay behind the Great Depression.

By 1931 unemployment was already around 16 percent, and it reached its peak at 23 percent in 1932. Shantytown “Hoovervilles” were springing up everywhere. The underlying cause was a structural change in the real economy: the widespread decline in agricultural prices and incomes, caused by greater productivity.

At the beginning of the Great Depression, more than a fifth of all Americans worked on farms. Between 1929 and 1932 these people saw their incomes cut by somewhere between one-third and two-thirds, compounding problems that farmers had faced for years. Agriculture had been a victim of its own success. In 1900, it took a large portion of the U.S. population to produce enough food for the country as a whole. Then came a revolution in agriculture that would gain pace throughout the century—better seeds, better fertilizer, better farming practices, along with widespread mechanization. (Today, 2 percent of Americans produce more food than we can consume.)

Prior to the Great Depression, because of accelerating productivity, output was increasing faster than demand, and prices fell sharply. It was this, more than anything else, that led to rapidly declining incomes. Farmers then (like workers now) borrowed heavily to sustain living standards and production. Because neither the farmers nor their bankers anticipated the steepness of the price declines, a credit crunch quickly ensued. Farmers simply couldn’t pay back what they owed. The financial sector was swept into the vortex of declining farm incomes.

The cities weren’t spared—far from it. As rural incomes fell, farmers had less and less money to buy goods produced in factories. Manufacturers had to lay off workers, which further diminished demand for agricultural produce, driving down prices even more. Before long, this vicious circle affected the entire national economy.

Given the magnitude of the decline in farm income, just as Obama's stimulus programs, the New Deal programs were too small to bring the country out of crisis, and many were soon abandoned. By 1937 FDR (just like Obama) had given in to the deficit hawks and cut back on stimulus efforts—a disastrous error.

Meanwhile, hard-pressed states and localities were being forced to let employees go, just as they are now. The banking crisis undoubtedly compounded all these problems, and extended and deepened the downturn. But any analysis of financial disruption has to begin with what started off the chain reaction.

It wasn't until government spending soared in preparation for global war did America start to emerge from the Great Depression. It's important to grasp this simple truth: it was government spending—a Keynesian stimulus, not any correction of monetary policy or any revival of the banking system—that brought about recovery.

The long-run prospects for the economy would, of course, have been even better if more of the money had been spent on investments in education, technology, and infrastructure rather than munitions, but even so, the strong public spending more than offset the weaknesses in private spending.

Government spending unintentionally solved the economy’s underlying problem: it completed a necessary structural transformation, moving America, and especially the South, decisively from agriculture to manufacturing. War spending was a policy that permanently changed the nature of the economy. Massive job creation in the urban sector (in manufacturing) succeeded in moving people out of the rural sector (in farming).

The supply of food and the demand for it came into balance again: farm prices started to rise. The new migrants to the cities got training in urban life and factory skills, and after the war the G.I. Bill ensured that returning veterans would be equipped to thrive in a modern industrial society. Meanwhile, the vast pool of labor trapped on farms had all but disappeared. The process had been long and very painful, but the source of economic distress was gone.

The parallels between the story of the origin of the Great Depression and that of our Great Recession are strong. Back then we were moving from agriculture to manufacturing. Today we are moving from manufacturing to a service economy.

The decline in manufacturing jobs has been dramatic—from about a third of the workforce 60 years ago to less than a tenth of it today. The pace has quickened markedly during the past decade. There are two reasons for the decline. One is greater productivity—the same dynamic that revolutionized agriculture and forced a majority of American farmers to look for work elsewhere. The other is globalization, which has sent millions of jobs overseas, to low-wage countries or those that have been investing more in infrastructure or technology. (Most of the job loss in the 1990s was related to productivity increases, not to globalization.)

The inevitable result is precisely the same as it was 80 years ago: a decline in income and jobs. The millions of jobless former factory workers once employed in cities such as Detroit are the modern-day equivalent of the Depression’s doomed farmers.

For a time, the bubbles in the housing and lending markets concealed the problem by creating artificial demand, which in turn created jobs in the financial sector and in construction and elsewhere. The bubble even made workers forget that their incomes were declining. They savored the possibility of wealth beyond their dreams, as the value of their houses soared and the value of their pensions (invested in the stock market) seemed to be doing likewise. But the jobs were temporary, fueled on vapor. And lower wages and incomes reduced demand, weakening the economy further.

Of four major service sectors—finance, real estate, health, and education—the first two were bloated before the current crisis set in. The other two, health and education, have traditionally received heavy government support. But government austerity at every level—the slashing of budgets in the face of recession—has hit education especially hard, just as it has decimated the government sector as a whole.

Nearly 700,000 state- and local-government jobs have disappeared during the past four years, mirroring what happened in the Great Depression. As in 1937, deficit hawks today call for balanced budgets and more and more cutbacks.

Instead of pushing forward a structural transition that is inevitable—instead of investing in the right kinds of human capital, technology, and infrastructure (which will eventually pull us where we need to be), the government is holding back. Current strategies can have only one outcome: they will ensure that the aftermath of the Great Recession will be longer and deeper than it needed to be.

Two conclusions can be drawn from this brief history. The first is that the economy will not bounce back on its own, at least not in a time frame that matters to ordinary people. And Americans will have to adjust to a lower standard of living—not just living within their means but living beneath their means as they struggle to pay off a mountain of debt.

The damage has been enormous. America's conception of itself as a land of opportunity is already badly eroded. Unemployed young people are alienated. It will be harder and harder to get some large proportion of them onto a productive track. They will be scarred for life by what is happening today.

Monetary policy is not going to help us out of this mess. Ben Bernanke has, belatedly, admitted as much. The Fed played an important role in creating the current conditions—by encouraging the bubble that led to unsustainable consumption—but there is now little it can do to mitigate the consequences. Anyone who believes that monetary policy is going to resuscitate the economy will be sorely disappointed. That idea is a distraction, and a dangerous one.

What we need to do instead is embark on a massive investment program—as we did, virtually by accident, 80 years ago—that will increase our productivity for years to come, and will also increase employment now. Public investments could be directed at improving the quality of life and real productivity—unlike the investments in financial innovations, which turned out to be more akin to financial weapons of mass destruction. But can we actually bring ourselves to do this, in the absence of mobilization like we did prior to World War II? Maybe not.

The private sector by itself can’t (and won't) undertake the structural transformation of the magnitude we need. The only way it will happen is through a government stimulus designed, not to preserve the old economy, but to focus instead on creating a new economy. We have to transition out of manufacturing and into services that people want—into productive activities that increase living standards, not those that increase risk and inequality.

There are many high-return investments we can make. Education is a crucial one—a highly educated population is a fundamental driver of economic growth. Support is needed for basic research. Government investment in earlier decades—for instance, to develop the Internet and biotechnology—helped fuel economic growth. Without investment in basic research, what will fuel the next spurt of innovation?

Meanwhile, the states could certainly use federal help in closing budget shortfalls. Long-term economic growth at our current rates of resource consumption is impossible, so funding research, skilled technicians, and initiatives for cleaner and more efficient energy production will not only help us out of the recession but also build a robust economy for decades.

Also, by addressing our decaying infrastructure, from roads and railroads to levees and power plants, is a prime target for profitable investment.

And where do we get the additional revenue for more government spending? From those who can, not only afford to pay more, but who have been paying much less recently than they have compared to 40 years ago. When the Speaker of the House (John Boehner) says "we don't have a revenue problem, we have a spending problem", he is just plain lying. While although we can always do a better job of defining and eradicating waste, fraud and abuse, there's no good reason to cut all spending. Government debt and spending is actually down, but we don't hear much about this in the media --- and with 100 million more people since 40 years ago, we really need more government spending.

Finally, if we expect to maintain any semblance of “normality,” we must fix the financial system. As noted, the implosion of the financial sector may not have been the underlying cause of our current crisis—but it has made it worse, and it’s an obstacle to long-term recovery.

Small and medium-size companies, especially new ones, are disproportionately the source of job creation in any economy, and they have been especially hard-hit. What’s needed is to get banks out of the dangerous business of speculating and back into the boring business of lending (long-term sustainable growth, and not just get-rich schemes for quick short-term growth).

But we have not fixed the financial system, and both Democrats and Republicans have already been busy trying to dismantle and weaken the the Dodd-Frank bill. We have poured money into the banks (bailouts) without restrictions, without conditions, and without a vision of the kind of banking system we want and need. Maybe we'd be better off by nationalizing the bigger banks, and having he Fed loan money to people for the same low interest rate that commercial banks get (close to 0% these days, while you might pay 15% on an auto loan).

Yes, a whole brand new economy is needed...but there are too many at the very top (with their bought and paid for politicians) who like things just as they are...record inequality.

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