Monday, January 13, 2014

2000 to 2014: America's Downward Spiral & Race to the Bottom

(*NOTE: This post is a continuation from an earlier post How Keynesian Economics Won World War II)

After the Powell Memo, by 1979 the middle-class had peaked — then came Reaganomics and the Republican strategy of Starve the Beast (starving government spending) and the long decline in both manufacturing and the middle-class, when "trickle up economics" had created the largest income gap between rich and poor not seen since before the Great Depression.

The North American Free Trade Agreement (NAFTA) came into force on January 1, 1994. China became a member of the World Trade Organization (WTO) on December 11, 2001. U.S. multinational corporations had a great interest in China, because with its huge population base, it was one of the fastest growing emerging markets for goods and services.

The total number of manufacturing jobs in the U.S. had hit its historical high peak in 1979 (when union membership had also peaked), but these numbers have since been in a continuous decline. The last time the U.S. had this few manufacturing jobs was just after WWII, when manufacturing was retooling from military production to consumer production. This one graph below from the St. Louis Fed tells the whole story since 1979.

2014: Josef Joffe is the publisher-editor of the German newspaper Die Zeit. He received a Ph.D in government from Harvard University in 1975 and is currently a Fellow at the conservative "think tank" Hoover Institution.

In a recent op-ed for the New York Times, author Christopher Caldwell examines claims made by Josef Joffe in his new book The Myth of America’s Decline. He points to past predictions of "doom and gloom" for America that never panned out in his attempt to dispel studies showing that the U.S. is losing ground to other nations "with their reliance on peasant migration to factories".

Josef Joffe refers to China, and says demographically, China is at risk of stagnation, with ever more dependent retirees and ever fewer people of working age — ignoring the fact that labor in China (from manufacturing jobs that were offshored by multinationals) are now moving to other lower wage countries like Cambodia and Vietnam.

New York Times: Foreign companies are flocking to Cambodia for a simple reason. They want to limit their overwhelming reliance on factories in China. Problems are multiplying fast for foreign investors in China. Blue-collar wages have surged, quadrupling in the last decade as a factory construction boom has coincided with waning numbers of young people interested in factory jobs. Starting last year, the labor force has actually begun shrinking because of the "one child" policy and an aging population.

Josef Joffe goes on to say, "Nor can China match the United States in education. It can send its promising young scientists to top American universities. But most foreigners who get Ph.D.’s in science and engineering in this country tend to stay at least five years, Joffe says, including 92 percent of Chinese and 81 percent of Indians (a striking statistic that helps explain this book’s strong pro-immigration bias). But Josef Joffe also ignores the fact of how H-1B visas are being used to perpetuate a fraud that is already a debunked myth that Americans lack skills — and guestworkers, who "tend to stay at least five years", are really used to displace American workers with lower wages.

And as Christopher Caldwell also points out in his article, Josef Joffe gives no indication that he thinks the recent economic and political crises require us to re-examine assumptions about America’s position in the world, and says one cause of today’s difficulties "is cyclical, the trillion-dollar toll levied on the economy since the Crash of 2008." (In other words, don't buy his book — it's just more of the same of "trickle up" economics by another conservative who is attempting to protect corporate interests, and not those of average workers.)

And the mainstream media, in their due diligence to seek out the truth (sarcasm) is allowing Josef Joffe to go on national TV to pimp his new book (being interviewed on CNN yesterday while making the usual media rounds when on a book tour).

Jobs, Manufacturing, Outsourcing, Monetary Policy, Housing, Stocks, High School Graduates, Population Growth and Unemployment --- all from 2000 to 2014.

After the onset of the financial crash (in part because of the Gramm-Leach-Bliley Act which deregulated the banks in 1999) and the housing bubble burst (two graphs below), the U.S. bailed out the big banks and big corporations (while allowing many small ones to fail); and has since used quantitative easing to "stimulate" the economy. But while it was great for the banks (who are bigger than ever now) and the stock market (which broke several record highs in 2013), it did little for average American workers and small businesses --- who are still waiting for adequate relief (mortgages, jobs, wages, etc.) after 5 long years.

Housing prices


Because the federal interest rate is already near 0% (graph below) from the Federal Reserve, Democrats believe we should use government borrowing to invest in our infrastructure and raise the minimum wage as a way to stimulate the economy — by using the fabulously successful Keynesian approach that was so significant in, not only winning World War II, but in greatly expanding the middle-class during the 1950s.

Federal Interest Rate

But the GOP has been dead set against those ideas, opting instead, to eliminate the minimum wage entirely, cut government workers (then cut their safety nets) and give more tax breaks to the job creators and lavishing more loopholes upon their corporations ("starving the beast").

Rather than listening to American Democrats, the GOP has instead listened to European conservatives by adopting "austerity" policies, rather than reinvesting in America and the labor force. They have been selling fraudulent markets as "free" markets, and totally rejects the idea that capitalism actually requires "government".

In other words, the GOP has been advocating for everything that is THE EXACT OPPOSITE of the Keynesian theory of economics which had previous heralded in the Golden Age of Capitalism.

Since the 1970s (after the Vietnam War), U.S. companies have always outsourced/offshored jobs — but not on the scale since the deregulation of banks, the tax cuts on capital gains by Clinton (from 28% to 20%) and by Bush (from 20% to 15%), and since the new "free" trade agreements took full effect. Since then, U.S. businesses (aka our job creators) have escalated the offshoring of jobs overseas — and even continued to do so since the onset of the Great recession. And all while hoarding trillions of dollars in untaxed profits overseas.

John Maynard Keynes examined the relationship between unemployment, money and prices back in the 1920s. A central idea of his work was that if the amount of money being saved (hoarded) exceeds the amount being invested (which can happen if interest rates are too high) then unemployment will rise, as it has since 2008. (The current unemployment rate is artificially low because "discouraged workers" are no longer being counted.)

According to the St. Louis Federal Reserve, U.S. corporations are now holding a record-high amount of cash --- $5 trillion! Here's what it might look like:

One standard pallet of $100-dollar-bills stacked 5 feet high is $100 million (pictured below). These pallets stacked 2 high covering an entire football field is $1 trillion. Now multiply that by 5 for $5 trillion — it's utterly incomprehensible that all this financial capital is being hoarded to waste our human capital (and for what, more unused profits?)

$1 trillion in cash

$5 trillion. That's what U.S. multinationals have in hoarded and un-circulated cash, which is NOT stimulating economic activity. Otherwise, every time a dollar is transferred from one party to another (such as food stamps or unemployment benefits), it creates some type of economy activity — a wage is paid, a service is used, a product is sold, and/or a tax is collected. But if $5 trillion is collecting dust in offshore bank accounts, it does no one any good — especially millions of long-term unemployed workers with nothing to do. The Republicans biggest fear is that the American people want to "redistribute" this currency (such as by paying wages or offering government healthcare to the poor and uninsured) — a their reason for repealing Obamacare is to repeal the 3.8% surtax on capital gains to expand Medicaid.

Getting Multinational Corporations to be Patriotic (and Invest in America)

American-based multinationals haven't been reinvesting in America; many aspects of their operations have been leaving America. According to data from the Bureau of Labor Statistics, there were 398,887 private manufacturing establishments of all sizes in the U.S. beginning in 2001 — however, the number of factories have declined to 334,800 by the end of 2012 (a loss of 64,087 manufacturing establishments over 12 years). So it's no coincidence that since that time, both the labor force participation rate and the employment-population ratio peaked in 2000 and are both now at historical lows in 2014.

Manufacturing jobs

The last time the U.S. had this few manufacturing jobs was just before America ramped up for WWII and then for a brief period just after the war needed (graph below).

Rather than reinvesting in America, corporations have been hoarding cash (or when they do invest, it's overseas). The execs manipulate company stock prices and offshore jobs to low-wage countries* to pay themselves obscene salaries. And as U.S. multinationals like Boeing (who offshores to Japan) has shown, they will sell out our nation for executive stock options.

As the Wall Street Journal reported, "Thirty-five big U.S.-based multinational companies added jobs much faster than other U.S. employers in the past two years, but nearly three-fourths of those jobs were overseas."

* What's been helping to drive this mass exodus of U.S. manufacturing overseas are base pointers and monopsonies such as Walmart because of their economy of scale, as Charles Fishman demonstrates in his book The Wal-Mart Effect. Just as Paul Krugman wrote: "The continuing dire state of the labor market enhances the bargaining position of employers, increasing their power. There’s no rule saying that firms have to do worse in a depressed economy; they could actually do better...A slack economy could in effect serve as a coordinating device for firms; one way to think about it is that it keeps firms from competing too hard for workers, enabling them to exert more monopsony power". He also points out that profits and stocks have soared, while unemployment remains high as wages have stayed low.

Our job creators don't need to create jobs (in America) these days, because permanent long-term unemployment has been actually helping to drive stocks higher — because an over-saturated labor market depresses wages, helping to increase corporate earnings, but giving the U.S. secular stagnation and structural unemployment.

An article in the New York Times reveals that Japan has been doing what our Democrats have suggested —  investing in the country and the workforce — and are now doing much better. And unlike U.S. companies, who use stock-buy backs to increase share values, Japanese companies actually reinvests in their companies and employees.

Nearly a quarter-century after the Japanese stock market bubble burst at the end of 1989, the stock market leapt by more than 50 percent in 2013, as the era of deflation appeared to be finally ending [and] it appears the economy grew faster in 2013 than in any year since 1996.

Japan Nikkei Stock index

However, much of the stimulus for the economy has come from the government, rather than the private sector, as Japan's Prime Minister, Shinzo Abe, moved aggressively to apply fiscal stimulus. The central bank (the Bank of Japan) began a program of large purchases of Japanese government bonds and has been buying government bonds faster than the government can issue them.

Public fixed investment in such things as schools and highways in Japan was up 16.1 percent over the last three quarters of 2013, but private fixed investment rose just 2 percent over the same period (and Japan's unemployment rate is also lower than the U.S.)

Japan unemployment rate

For years, some economists, among them Ben Bernanke, have been calling on Japan to stimulate inflation by, in effect, printing money. Buying government bonds is a way to accomplish that, and there are signs that deflation is ending in Japan.

Moreover, the Japanese Prime Minister has also been pushing companies to increase workers' wages. But the GOP will continue to ignore fellow Americans (Democrats) and instead trust the Europeans more. Funny...and the Republicans are always accusing Obama of being too much like Europe.

From an op-ed: Lies, Damned Lies and Rhetoric: "Politicians of all persuasions have long been accused of twisting the facts to suit their arguments, of presenting statistics out of context and of cherry-picking data to both make their case and rubbish that of the opposition. Powerful narratives are driving political and public discussion. Misinformation works well. The false narrative is adopted as fact...A lack of actual information works well too; without specific context, people’s perceptions are driven by their own assumptions...The issues most susceptible to the rhetoric over research approach from politicians and the media -- welfare, immigration, spending --- are likely to be central to elections in both the U.S. and the UK over the next few years."

Unless of course, Americans wised up, and only elected "progressive" Democrats — who advocate for a Deal for All, a Budget for All, a Back to Work Budget or a People's Budget — and not a "grand deal" with the Republicans. Americans have to become more informed, and stop voting against their own best interests — like voting for anti-government Tea Party politicians. Nor should we vote for so-called "centrists" (pro-corporate Democrats like Hillary Clinton) because these so-called "moderate Democrats" will only allow for more trade agreements and the offshoring of jobs.

The Labor Force From April 2000 to January 2014

In April 2000, the U.S. population was 281.4 million. The employment-population ratio and the labor force participation rate had both peaked in April of that year. At that time 69.2 million Americans were not in the labor force. (Since 1948, the U.S. historical high for the employment-population ratio in the U.S. peaked in April 2000.)

As of 2014 (14 years later) the Census reports a growing U.S. population of 317.3 million, but now the U.S. has 91.8 million not in the labor force (a record high) — meaning that just over the last 14 years, the U.S. has had 35.9 million more people — but 22.6 million more people who are not in the labor force.

From 2000 to 2014, the U.S. had 37.6 million high school graduates and 14 million additional retirees and disabled on Social Security.

Now look at the graph below if you still don't believe that offshored jobs (and their multiplier effect) isn't the #1 reason why unemployment has been so high and for so long. Today the employment-population ratio is the lowest it been since 1978.

And no (in case you're wondering), it's already been proven that VERY LITTLE of this has to do with retiring Baby Boomers. It's because of too many "non-starters" in the labor force (because of offshoring), so now there are not enough jobs for everybody in the growing population (creating less demand — and less demand means less supply is needed — meaning less jobs are needed.)

Employment-population ratio - 2000 to 2014

In the graph below, the red line is the U-3 unemployment rate — the share of people who are looking for a job, out of all people in the labor force. The blue line is the employment rate — the share of the population that has a job. For much of the two measures' histories going back to 1948, they have closely mirrored each other: when one goes up, the other goes down.

Employment-population ratio 1948 to 2014

But look at the right end of the graph and you see a new trend emerge: the unemployment rate plummets while the employment rate holds steady — a trend that coincides with the recovery from the Great Recession (as seen in the graph below up closer from 2000 when the population ratio peaked to today).

Employment-population ratio 2000 to 2014

In other words, during the recovery, a smaller share of people have reported being unable to find a job, but the share of people who have a job has not grown much at all.

One reason for this trend is a shrinking labor force. The share of the population in December that was either working or looking for work currently stands at 62.8 percent — tied with October for the lowest rate since 1978.

And new enrollees in college and retiring Baby Boomers only make up a small portion of the decline in the labor force. It's mostly "discouraged workers" who can't find a job, and this includes older workers who were laid off during and since the Great Recession and younger workers who have been attempting to first enter the work force (see all the data and charts here at the Economic Populist showing this).

But for the sake of argument, by eliminating younger and older workers, and just including "prime age" working adults between 25 to 54 (to exclude college enrollees and early retirees), you can see for yourself in the graph below — it's much worse — and hence the downward spiral and race to the bottom.


  1. "Even as Wages Rise, China Exports Grow"

    A result of rising productivity and manufacturing overcapacity is that average prices for American imports from China have actually dropped 0.9 percent in the last year as the renminbi has risen and Chinese wages have soared, according to data from the Bureau of Labor Statistics in Washington. That decline in prices has kept the pressure on Western competitors -- and kept Chinese exports buoyant.

  2. That's why the BLS shows so many people being hired and fired in their JOLTS report (for so few net new jobs being created) because it seems temp jobs (many that are part-time) are the new norm. The temp industry is now one of America's largest job creators, behind the government and Walmart.