Why is the economic recovery so weak?

Source: Sentier Research

Why is the current economic recovery so much weaker than in the previous two recoveries?

I don’t claim a profound knowledge of economics, but here’s what I think.

During the time of peak prosperity, the American economy was based on a benign cycle—high wages supported a mass consumer market, which supported high employment.

Since the 1980s, American wages have been stagnant or falling, and Americans maintained their purchasing power by means of borrowing.  But since the 2008 recession, they have reached the limits of their power to borrow and spend.

Big financial institutions and holders of financial assets are investing more in debt instruments or in production overseas than in job-creating enterprises in the United States.  At the same time government at all levels has responded to hard times by cutting spending and employment.

Both the public and private sector are dis-investing in education and training, in scientific research and in the infrastructure necessary to a productive economy.

Barring a change of direction, I expect things to continue to worsen.

How can we the people turn things around?  Being honest about the situation would be the first step.  Government could stop doing harmful things, such as the no-strings bank bailout and pro-corporate trade agreements.  Corrente’s 12-Point Platform is the kind of thing we should be thinking about.

The U.S. jobless rate is falling [Update: Maybe]

Via MarketWatch.

It’s interesting that the report of gains in jobs and a drop in unemployment was followed by a drop in stock prices.

Conceivably this could be been due to the improvement being less than expected, but analysts quoted in my morning newspaper said investors fear that the apparent recovery will cause the Federal Reserve Board to stop holding down interest rates in order to stimulate the economy.

A certain number of people can be expected take their money out of the stock market and put it in savings accounts in banks, or in bonds, because they would getting actual interest income again.

In other words, stock prices reflect an unsustainable government policy, and not the real health of the economy.

Via TownHall.com.

Still, it’s good news that the unemployment rate is falling, and is falling by every measure.

Fed official says low unemployment is dangerous

Richard Fisher, president of the Federal Reserve Bank of Dallas, said it may be necessary to raise interest rates if the unemployment rate falls below 6.1 percent because low unemployment could lead to higher wages.

Fisher pointed out that in Texas, wages are rising faster than the rate of inflation.

To me, that is a good thing, not a bad thing.  Why interfere with the law of supply and demand?  The only reason that I can think of is that it might decrease the market value of financial assets.

I am reminded of Karl Marx’s claim that “a reserve army of the unemployed” is necessary to the functioning of capitalism.

I believe in the value of self-discipline, education and the willingness to work.  But anybody who preaches these values ought to be able to show that there is a payoff, and that the payoff is available to everyone, not just the exceptionally talented and the exceptionally lucky.

If the economic system is set up so that at least 6.1 percent of the work force is unemployed at all times, then there is no way to rise out of that 6.1 percent without knocking somebody else down into it.

LINKS

Fed’s Fisher: wages rise when joblessness falls below 6.1 percent by Reuters (via Tom the Dancing Bug).

‘Poor people don’t plan long term.  We’ll just get our hearts broken’ by Linda Tirado for The Guardian.  Somewhat long, but well worth reading.

Obama’s Long Battle to Cut Social Security Benefits by Eric Zuesse for Washington’s Blog (via Mike the Mad Biologist).  The President’s goals are not what his supporters think they are.

How to keep unemployment low

Click on The New Sick-onomy: a look at the U.S. employment situation by Dan Alpert on his Two Cents web log for a good explanation of the facts behind the unemployment figures.

Click on Summary of U.S. Real Unemployment – June 2013 for an alternative figure by Leo Hindery Jr.  [Added 7/27/13]

Click on Deception in Counting the Unemployed for a profile of Leo Hindery and his ideas by Steve Clemons for The Atlantic.  [Added 7/27/13]

Click on Leftycartoons for more Barry Deutsch cartoons.

Why you should believe the BLS jobs figures

General Electric’s ex-CEO Jack Welch can’t believe that the U.S. unemployment rate actually fell to 7.8 percent in September.  He thinks the Bureau of Labor Statistics is manipulating the data.  It is understandable that he should think that way.  GE was fined by the Securities and Exchange Commission for manipulating its earnings data during Welch’s watch.

When I reported on business for the Rochester Democrat and Chronicle some 20 and 30 years ago, I had dealings with statisticians and analysts for the New York Labor Department and the U.S. Bureau of Labor Statistics.  They were thorough professionals.  They were like scientists and engineers.  They didn’t care what I wrote so long as I understood the figures and wrote about them correctly.

The monthly jobs figures are come from two sources, a household survey and an employer survey.  The household survey is based on asking a cross-section of the population whether they are employed and, if not, whether they have looked for work during the previous month.  These two figures are used to generate the monthly unemployment rate.

The employer survey is based on interviewing a cross-section of employers as to whether they have hired or laid off employees during the previous month.  Based on these results, the BLS adds to or subtracts from a benchmark figure of the number of jobs.

The benchmark figure is based on an actual count of the number of people paying workers’ compensation taxes.  It is the most accurate and meaningful figure, but it is always at least six months out of date because it takes time to add up all these figures.

The unemployment rate number probably is an undercount.  It does not include “discouraged workers” who’ve stopped looking for jobs, or part-time workers who’d like to work full-time.  The jobs number also is often an undercount.  It does not include the number of jobs created by formation of new businesses.  The BLS only catches up with those jobs when it does a new benchmark, which is what happened in September.

Both figures over time are accurate indicators of the trend.  If you always conduct a survey in the same way, then, even if it is flawed, it will always be flawed in the same way.   It’s not unlikely that the unemployment rate is exactly 7.8 percent, but it is certain that it is lower than it was at the beginning of the year when it was reported at 9 percent.

Reports of earnings by corporations such as General Electric, in contrast, allow a lot of discretion in how things are reported. By timing transactions on which a company takes a profit or a loss, the earnings can be made to appear much more stable than they otherwise would be.  This is not uncommon and, in and of itself, it is not necessarily dishonest.  It has to do with the timing of what is reported, not the content.   A company that is really unprofitable could not smooth its earnings that way.  But in Welch’s case, GE did overstep the bounds and had to pay a fine to the SEC.

As to the significance of the figures, it is still true that the current economic recovery is weaker than any U.S. recovery since the Great Depression.   I don’t think this is President Obama’s fault.   It is the result of decades of a hollowing out of the U.S. economy and the substitution of debt for income.  I think the Obama stimulus did as much as can reasonably be expected, and the Republican leadership was and is opposed to the President doing anything more.  My criticism of Barack Obama is on other grounds—that he is anti-labor, pro-Wall Street and indifferent to the plight of foreclosure victims, and that he opposes the necessary steps to prevent another financial bubble and crash.

The economic recovery is sputtering

Click on Fears and Failure for Paul Krugman’s perspective.

Click on Good job growth in a bad economy for Ezra Klein’s perspective.

Click on Why Washington Should Pay Attention to the Economy Here and Now for Robert Reich’s perspective.