Reports from the Economic Front

The 2007–2009 recession has been an employment disaster.  In the twenty months from December 2007 (the start of the recession) to August 2009, we have lost more than 7.0 million private-sector jobs.

What makes this even more serious (suggesting deep structural problems) is that this recession follows an economic expansion (November 2001–December 2007) that was one of the weakest in terms of private sector job creation; annual average private sector employment grew by approximately 1 million jobs a year.  By comparison, annual average private sector employment grew by 2.4 million jobs a year during the 1982-1990 expansion and by 2.2 million a year during the 1991-2001 expansion.

As a consequence we are set to experience what economists are calling a lost employment decade.  “As of August 2009, the nation had 1.3 million (1,256,000) fewer private sector jobs than in December 1999. This is the first time since the Great Depression of the 1930s that America will have an absolute loss of jobs over the course of a decade.”

While the media and the government talk about economic recovery because the stock market and profits are up—the employment crisis continues and can be expected to continue for years.  And of course these statistics do not take into account the worsening of employment conditions (including the growing number of part-time and temporary positions, intensity of work, and employment insecurity).  Real recovery is going to require real structural change and so far that remains off the mainstream political agenda.

At one time economists argued that our shift to a service oriented economy would encourage employment stability.  The argument was that since firms could not build up a big inventory of services (like they could with parts and components), private sector service employment could be expected to be relatively recession proof. Well that seems to be changing.

The table below shows “the total private-sector employment loss in each of the last four recessions, the decline in jobs in the goods-producing and in the private service-providing sectors, and the share of each in the total loss.”  In contrast to past recessions, service sector employment has taken a big hit this recession; in fact this sector accounts for more than fifty percent of total private sector job losses.

Is it safe anywhere?

[Click on table for easier view]

It may seem puzzling—the stock market and profits are recovering while living and working conditions for the majority continue to decline.  Well, it is not so puzzling. In fact, worker losses are an important reason (along with government bailouts) for capitalist gains.  Yes, it is that kind of world.

Here is what a Business Week article had to say:

The signs [for corporate earnings] look good, and last month’s employment data are part of the reason. Through the third quarter, businesses continued to slash labor costs at rates not usually seen even in past severe recessions. In fact, for the past six quarters, companies have cut employees’ overall hours worked by far more than they have pared output. The result: a striking 2.8% annual rate of growth in productivity, a rare pace during a recession. Productivity gains averaged only 0.8% annually during the previous nine downturns. . . .

The September payroll numbers showed that overall hours worked in the third quarter fell at a 3% annual rate from the second quarter. If economists are correct in expecting about 3% growth in real gross domestic product for the quarter, then productivity may well post its second consecutive quarterly advance of about 6%. That would mean unit labor costs, or pay adjusted for productivity, are set to plunge for the third quarter in a row. In fact, unit labor costs, which are a key factor in determining profit margins, appear to have posted the largest three-quarter decline since quarterly data began in 1947 [see chart below].

Said differently, businesses have been able to boost profits in the face of poor demand conditions by slashing labor costs.  The profit rise was weak in the first and second quarters of this year because sales actually fell in both quarters.

The third quarter (July-September) was different.  Overall demand rose (thanks in large part to the stimulus) while labor costs continued to fall (which means fewer people worked harder for less).  The result: significant gains for business and a stock market rally.

However, as Business Week also noted: “Of course, these are not long-run productivity gains: Businesses cannot slash and burn their way to prosperity.”

One wonders if they have a different long term plan?  And if not, whether workers do?

The G-20 meeting was marked by self satisfaction—the world’s leaders took turns congratulating themselves for having averted a global collapse.  Apparently there is now no need for new major structural reforms.

Big business, rejoicing in this outcome (which means that it has successfully blunted any popular efforts to transform the economic system), understands well the consequences of its victory: a future of poverty, insecurity, and homelessness for many.  And it is well prepared for it:

American Girl, best known for their high quality, ethnically diverse dolls representing various periods in American history, has just introduced a “limited edition” doll representing the plight of the homeless. The back story of the “Gwen Thompson” doll is that she lives in a car with her mother; the actual doll with the accompanying paperback book retails for $95, accessories not included.

One can only wonder what accessories will be available for purchase.  One doesnt have to wonder about the kind of class society big business is counting on.

There are danger signs pointing to the real possibility of a double dip recession—a short “recovery” followed by another recession.  One of the most important is the terrible labor market conditions (little job creation and short hours and low pay for those with jobs).  Unfortunately, while public employment had helped to offset the collapse in private hiring, a crisis in state government financing is forcing major cutbacks in the public sector as well.

Facing huge budget deficits, states are laying off growing numbers of workers and furloughing even more. This not only makes it difficult for people to get needed services, it also threatens to undermine any (stimulus driven) recovery impulses—you know those famous green shoots.

As the Wall Street Journal reports:

The furloughs, which basically act as salary cuts for state workers, are the latest response to plunges in tax revenue because of the recession. State legislatures have struggled to cover shortfalls that have ballooned to $168 billion, or 24% of their general-fund budgets, for the current fiscal year, which for most began July 1, according to a report released Thursday by the left-leaning Center on Budget Policy Priorities.

State governments have cut some 33,000 jobs over the last year with more to come.  Furloughs, where workers are told to stay home for several days a month without pay—resulting in significant wage cuts—are growing even faster.  Hundreds of thousands of workers are currently affected, more than 200,000 in California alone.  Slashing the public sector may help balance the budget in the short run, but such a strategy only intensifies our long term economic and social problems.

The chart below (taken from the above cited WSJ story) highlights the size of the problem.

It is easy to be confused about the state of the economy.  However, if we stop trying to figure out turning points, when a recession ends and an expansion begins, and start thinking about longer terms trends, things become a bit clearer.

Consumption accounts for about two-thirds of U.S. Gross Domestic Product (GDP).  What kept GDP growing over the last expansion (2001-2007) was rising consumption, and what kept consumption growing was debt.  The result was an ever shakier foundation that has now collapsed.   The reason the expansion was built on debt was that despite the growth in GDP, real wages and household income trended downward.  If we are going to have a healthy economic future we must ensure that structures are in place to reverse that trend.

The following chart, taken from the blog Mish’s Global Economic Trend Analysis shows just how critical consumption gains have been to economic recovery.

So, where are we today?  The answer is not very promising.  According to Bloomberg News:

Wages and salaries, which drive recoveries in spending, fell 4.7 percent in the 12 months through June, the biggest drop since records began in 1960, according to Commerce Department figures released yesterday. The Obama administration’s tax cuts, extended jobless benefits and a one-time Social Security bonus have helped mask the damage done by the worst employment slump since the Great Depression.  Personal incomes, which include interest income, dividends, rents and other payments as well as wages, tumbled 1.3 percent in June, more than forecast and the biggest drop in four years, yesterday’s Commerce report showed.

Without higher wages and income there won’t be any sustained increase in consumption, which means business investment will remain weak, and . . . well, you probably get the picture, no meaningful economic recovery.

Of course employment is also important (individual wages might not go up significantly but an increase in total employment could still generate an increase in total spending), but the news is no better on this front.  In a previous post I highlighted (check out the chart) the fact that the private sector has almost stopped creating jobs.   I quoted the business analyst Michael Mandel as follows:

Between May 1999 and May 2009, employment in the private sector only rose by 1.1%, by far the lowest 10-year increase in the post-depression period. It’s impossible to overstate how bad this is. Basically speaking, the private sector job machine has almost completely stalled over the past ten years.

And of course this doesn’t even speak to the quality of the jobs; for example, involuntary part-time employment has soared.

Sadly, there is very little reason to expect any significant near term decline in unemployment.  In fact, as a recent post at Mish’s Global Economic Trend Analysis noted: “If [past business cycle patterns] hold, unemployment will rise until 2011 or beyond. . . . Odds of a double dip recession similar to 1980-1982 are high after whatever inventory rebuilding and bottom fishing in housing ends.” [Check out the chart below from the same source–it shows how the past two expansions, unlike the previous seven, are marked by continuing increases in the unemployment rate.]

So—don’t confuse stabilization with recovery, and keep your eye on real fundamentals—majority living and working conditions.

There is a new attack on social security.  As you may remember, before the recent collapse of the economy, conservative forces claimed that the social security system was headed for crisis and offered privatization as the solution.

The truth was that there was never a real crisis; it was manufactured.  The health of social security is determined using models to predict economic trends over the next 75 years.  The social security crisis was the result of the assumptions used in the modeling—these assumptions assumed rates of growth that were lower than during the 1930s.  If one made growth assumptions that were more in keeping with historical trends, there was no crisis.  The aim of the conservatives was to push money into the stock market where private interests could make millions managing it.  Thank goodness this privatization push was resisted.

But the same forces are hard at work again.  The Associated Press recently ran a story calling social security a “giant federal Ponzi scheme” that will soon collapse because of a lack of money.  The Washington Post recently warned us that social security is one of “the primary drivers . . . of the nation’s financial problems.”

This is all silly.  Social Security is still running surpluses.  Moreover, even using its conservative assumptions, the social security administration is forced to admit that the current system will have plenty of money to meet all its obligations through 2037.  The Congressional Budget Office puts the date at 2043.

Would you give up a program working as intended because of predictions that SOME 30 YEARS FROM NOW it might not have sufficient money to cover all its promises?

Actually, even if the social security administration’s prediction is accurate, we still don’t face a crisis.   Right now social security taxes are paid on all labor income up to $106,800.  Earnings above that ceiling are not taxed.   Why is this important?  As the Wall Street Journal explained in a recent article titled “Pay of Top Earners Erodes Social Security”:

The data suggest that the payroll tax ceiling hasn’t kept up with the growth in executive pay. As executive pay has increased, the percentage of wages subject to payroll taxes has shrunk, to 83% from 90% in 1982. Compensation that isn’t subject to the portion of payroll tax that funds old-age benefits now represents foregone revenue of $115 billion a year. . . .

Lifting the earnings ceiling could result in higher Social Security benefits payments to higher-income individuals, since benefits are based on a worker’s highest 35 years of earnings. But the additional tax revenue would have decades to earn a return, thus offsetting the cost of the additional payments.

Social Security Administration actuaries estimate removing the earnings ceiling could eliminate the trust fund’s deficit altogether for the next 75 years, or nearly eliminate it if credit toward benefits was provided for the additional taxable earnings.

You are reading that right—even using the most conservative estimates about future economic trends, the social security system would remain fully operational if we just removed the earnings ceiling on the wealthy.

So, what is class power?  One measure of class power is the ability to shape public discussions in such a way that attention is focused on what you want to talk about and away from what you don’t want to talk about.  The rich want social security privatized, not saved.  So the media obligingly give us story after story about the crisis in social security and the need to drastically change the system.

The rich don’t want to talk about the growth in inequality and its negative social consequences.  Thus, simple reforms that would strengthen the system are never discussed (except by publications like the Wall Street Journal which are largely read by an audience that fully understands its class interests).

When will we recognize and promote our own class interest?

On Monday (August 10), Labor Radio–a weekly program that airs on KBOO radio (90.7 FM)–played an interview of me by hosts Deborah Schwartz and Al Bradbury.  We discussed a variety of topics, including the effectiveness of the stimulus, the outlook for the economy, the alleged social security crisis, and the need for structural change in our economy.

You can hear the interview (followed by another that was done by the hosts with Henry Huerta, Campaign Director of the CLEAN Car Wash Campaign, about the unionization efforts of more than ten thousand Los Angeles car washers) at:  http://kboo.fm/node/15826

You can hear an extended (and unaired) version of my interview at: http://kboo.fm/node/15788

The newspapers are full of reports suggesting that the worse may be over—perhaps they are right, but I put little store in reports that rely on economic projections made by the same people that denied we had a bubble economy right up to the moment it popped, and then have been busy ever since telling us that things aren’t too bad.

There is no doubt that the US economy came very close to a complete melt down and that government action has helped break and cushion the fall.  But here is the key point—our economy was not working well for the great majority even during the debt-driven speculative years before the collapse.  With speculative forces now spent and the economic structure unchanged the odds are great that conditions will continue to deteriorate even after our economy does stabilize.

What we have seen so far in terms of economic trends is a slowing of the decline, not a recovery.   We need a new round of stimulus spending to hurry along the recovery.  But even more we need real structural changes—we need changes that will promote livable wages, workplace democracy, full employment, well funded and accountable social programs, and a sustainable and responsive use of our productive resources to satisfy domestic needs not profits.

To appreciate how important the need for structural change is, consider the quality of our last expansion.   The Economic Policy Institute provides some good data for doing this in a very useful report,  “A Feeble Recovery, The Fundamental Economic Weaknesses of the 2001-07 Expansion.”  As the chart below (taken from the report) shows, the last expansion (and full business cycle) ranks among the weakest on almost all counts (the lower the number the better) except one: profits.  And that is why business is not eager to make any real changes.  But remember, our next expansion will not have the “benefit” of the stock and housing bubbles that underpinned our last expansion.   Is a future of worsening economic outcomes really the best we can do?

It is getting harder to sell the “recovery right around the corner” story.  I have been stressing the structural nature of current problems because there is a lot riding on our understanding of what is happening.  If we remain passive, hoping that existing policy is sufficient to nurture the alleged “green shoots” of recovery, we are likely to end up with an economy largely unchanged from the past.  That outcome, while attractive to the few with power and wealth, largely guarantees a future of steadily worsening living and working conditions for the great majority.

So, how bad are things?  As the Financial Post describes:

The U.S. economy has lost the equivalent of every job created in the past nine years.  All job growth since the final year of the dot-com bubble, its recovery from the bust, and the ensuing six years of consumer-driven boom is now gone, leading some economists to fear an outright decline in wages will be next. Others believe the United States is on track for a painful “jobless recovery.”

“This is the only recession since the Great Depression to wipe out all jobs growth from the previous business cycle, a testament both to the enormity of the current crisis and to the extreme weakness of jobs growth over the business cycle from 2000 to 2007,” said Heidi Shierholz, an economist at Washington-based think tank The Economic Policy Institute. . . .

Since the recession began in December 2007, the jobs market has shrunk by 6.5 million positions, pushing the unemployment rate up 4.6 percentage points to 9.5% — the highest rate since 1981. Nine million part-time workers are in want of full-time jobs, and a record 29% of unemployed have been jobless for more than six months. . . .

The employment market’s problems do not end at job losses. Earnings are under pressure. Average hourly earnings rose an annualized 0.7% in the past three months — the smallest gain since records began in 1964. The annual change in hourly earnings slipped to a rise of 2.7% from 3% the previous month.  “Wages will soon be falling outright, a classic deflation signal,” said Ian Shepherdson, the chief U.S. economist at High Frequency Economics.

Compounding problems, average hours worked fell further in June to be down 0.8% to a cyclical low of 33 hours a week. The average workweek has shrunk 8.2% since the start of the recession, placing added pressure on household cash flows. It also means employers will be slow to hire because there is ample room to increase work hours.

The administration needs to be pushed to take much stronger action—its modest stimulus program is not enough to reverse downward pressures and, once its effects dissipate, those pressures are likely to intensify—this could be 1937 all over again.

We need real structural change—in how work is organized and compensated, in how social programs are financed and delivered, and in how the economy is organized and directed.