This chart comes from the Bureau of Labor Statistics:
[click on the chart for clear view]
Not only is the unemployment rate high, those who are unemployed remain so far longer than before. For example, in October 2009, 35.6% of those unemployed were jobless for 27 weeks or more. As the chart illustrates, this is a record high.
A recent article by economist Rick Wolff highlights one of the many serious challenges facing the country–the growing fiscal crises that are hitting our states and municipalities. He presents the following table from the work of the Center on Budget and Policy Priorities, which shows the gap between the fifty states’ tax revenues and expenditures during the last (2001) and current (2007-?) recessionary periods.
As the chart makes clear, while a recession generates a budgetary shortfall, the shortfall extends for years after the recession is over. In particular, the expected shortfall over the next two years will be very large–some $360 billion. This shortfall will have to be closed through some combination of revenue increases or expenditure cuts.
The CBPP has studied state responses to current budget shortfalls and reports the following:
With fiscal problems set to grow we need bold action. If we do nothing budget cuts will only further weaken our economy (by reducing demand) and worsen living and working conditions for the great majority of citizens.
Oregon is no exception. In fact, according to a story in the Oregonian, a Pew Center on the States report “names Oregon as one of 10 states at greatest peril of following California over a state budget cliff. Even though the national economy has started to rebound, Oregon is likely to have a harder time coming up with enough money to pay for schools and other public services — or finding enough places it can cut back its spending — than it did when patching together a balanced budget for 2009-10 said Susan Urahn, managing director of the Pew Center.”
One part of any rational response to this situation has to be increasing revenue by raising taxes on the wealthy and our large corporations. Oregon is trying to do just that with Measures 66 and 67. These measures–passed by the legislature but put on the January ballot by opponents–deserve our support.
Obviously significant national action is also needed to address what is a major structural problem. One obvious response: cut military spending (which continues to grow) and channel some of the savings to state and local governments.
More generally, we need a government-directed, integrated industrial and employment program. For example, our government owns large holdings in major auto and finance enterprises. Rather than remain passive owners, we should take control over the firms we own and redirect their activity. We should start producing mass transit vehicles and require that the banks direct needed funds at reasonable rates to support that production. And we should direct federal transportation spending to state and local governments so that the new vehicles can be purchased.
We should do the same for the production of needed technology and equipment to develop and expand alternative energy sources like wind and solar power.
At present, federal stimulus money is being used to encourage private firms to retrofit buildings to improve energy efficiency. Instead, we should encourage the establishment of local publicly owned enterprises to carry out this work, with the profit earned from the work redirected back to local government budgets to support desired social programs. And all publicly organized production should guarantee living wages and encourage democratic unionization.
Much more could be done—including the cancellation of so called free trade agreements which encourage capital flight and the pitting of workers in one country against another.
The point is that we need a dramatic rethinking and reorganization of how our economy works. There are plenty of good ideas available—at issue is the political organization and will.
We are in quite the fix. According to some experts the 3.5% growth in GDP last quarter (July-September) is proof that all is now well. Unfortunately most of that growth was driven by very temporary government spending.
For example, key to last quarter’s growth was a 22.4% increase in car sales, a consequence of the government’s temporary Cash for Clunkers program. This increase in car sales accounted for 42.0% of the entire quarter’s growth!
Consumption as a whole (which includes auto sales) grew at a 3.4 percent annual rate. Take out the auto sector and consumption grew at only a 1.0 percent annual rate. For more details see here.
Since the Cash for Clunkers program is now over, and disposable income continues to fall (because of continued job losses and declining wages and hours), next quarter is bound to show quite limited growth at best.
The sad reality is that the government’s response to this crisis has been far from adequate. Most of its direct stimulus spending, hundreds of billions of dollars, has been designed to be short-term in nature. It has spent far more, trillions of dollars in fact, to save the financial system. But again it has made no attempt to ensure that the money would be used to promote a fundamental restructuring of our economy.
It might be comforting to know that Lloyd Blankfein, Goldman Sach’s chairman and chief executive, believes that he is doing “God’s work,” but the fact is that the financial system we saved with our tax dollars continues to refuse to make loans.
Look at the following two tables taken from a blog post on Mish’s Global Economic Trend Analysis. The first table shows that “Total bank credit is in uncharted territory at -5%. The series has never gone below 0 before.”
So what are banks doing with the money? The second table shows that that the money is piling up as excess reserves.
Why aren’t banks lending? Mish’s blog post provides the following four answers:
1) There are no credit-worthy businesses that want to borrow.
2) Consumers are tapped out and do not want to borrow.
3) Banks are scared to death of pending commercial real estate losses, credit card losses, residential real estate losses, home equity lines of credit losses, and losses in general.
4) Asset prices are simply too high (and banks know it) and the securitization market has dried up
While all of the above are probably true, the post concludes that “Number three above is the most critical one.”
The “bottom line” here is that our economy remains weak and far from any serious recovery. And it will remain that way unless we get far more aggressive government action to ensure a meaningful increase in jobs that pay a living wage and produce needed goods and services.
All the talk about the need to restructure our economy and end our dependence on debt financed growth has tended to overlook a critical issue—declining worker earnings. The downward pressure on wages helped to boost profits but only because worker consumption could be sustained by ever greater debt. If we are going to change the way our economy functions we need to address the forces that have been driving down wages.
The blog Angry Bear recently had an interesting post dealing with this issue. Among other things it offered data illustrating the fact that labor’s share of income has been declining for decades. In other words, we are dealing with a long term structural problem. And unless you hear policy makers address this reality you can be pretty sure that what they propose to do will not be of much help to the great majority of working people.
Here is the relevant part of the post:
This shift to an environment of stronger productivity and weaker real growth generated an interesting development that has received little attention among economists or in the business press.
This development was a secular decline in labor’s share of the pie. [See chart below.] Prior to the 1982 recession there was a strong cyclical pattern of labor’s but it was around a long term or secular flat trend. But since the early 1980s labor’s share of the pie has fallen sharply by about ten percentage points. Note that the chart is of labor compensation divided by nominal output indexed to 1992 = 100. That is because the data for each series is reported as an index number at 1992=100 rather than in dollar terms. So the scale is set to 1992 =100 rather than in percentage points. But it still shows that labor payments as a share of nonfarm business total ouput has declined sharply over the last 20 years and prior to the latest cycle we did not even see the normal late cycle uptick in labor’s share.
If this chart gets a lot of attention it will be interesting to see how the libertarian and/or conservative analysts who keep coming up with all types of excuses to explain away the weakness in real labor compensation in recent years explain this away. If you really want to raise a stink you could look at this as a great example of the Marxist immiseration of labor that Marx believed was one of the internal contradictions of capitalism that would eventually lead to its self destruction.
[click on chart for easier viewing]
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]
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:
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.
It is often hard to know how our fellow Oregonians are doing — for a good look check out “Survey shows how recession has hit Oregon households” by Richard Read in The Oregonian, September 17, 2009.
The articles makes clear that there is a lot of suffering going on in Oregon, even more than in the nation as a whole. Some highlights:
City budgets are only now feeling the weight of the recession. Overall city revenues declined in fiscal 2009 for the first time since 2002 (see chart below).
As bad as the last fiscal year was–with overall city revenues down 0.4% while expenses were up 2.5%–the Wall Street Journal reports that “city officials expect steep drops in tax collections in the next two years, making for the worst outlook in the 24 years the [National League of Cities] has been surveying its members. Western cities were particularly downbeat.”
The article goes on to add that “Because employee wages, health care and pensions are a major component of municipal budgets, two-thirds of the cities reported hiring freezes or layoffs.”
It is getting pretty hard to know what policy makers and economists mean when they speak of economic recovery.
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.
