Sunday, October 2, 2011

The Unwinding

One of the issues we have discussed is that the growth in the U.S. economy has come in areas that are generally less amenable to the productivity growth seen in private sector areas of the economy.   Health care, Education, and Government have become a larger portion of our economy.
There have been some other trends at the same time.  What growth we have had in manufacturing has often been in the Southern United States: the New South.  However, the productivety gains in manufacturing, that lead to a new loss in manufacturing world wide was not shared with the employees.
It was a time the middle class was beginning to fall apart.  It was kept together for a while by the easy lending environment of the 1990s and early 2000s, but eventually generated a lot of scary statistics:
Heather Digby Parton, Aljazeera, 26 September 2011
Here are just a few random statistics compiled by businessinsider.com:
- 61 per cent of Americans "always or usually" live paycheck to paycheck, which was up from 49 per cent in 2008 and 43 percent in 2007
- 66 per cent of the income growth between 2001 and 2007 went to the top 1 per cent of Americans
- 43 per cent of Americans have less than $10,000 saved for retirement
- 24 per cent of American workers say that they have postponed their planned retirement age
- Only the top 5 per cent of US households earned enough to match the rise in housing costs since 1975
- In 1950, the ratio of the average executive's paycheck to the average worker's paycheck was about 30 to 1; since the year 2000, that ratio has exploded to between 300 and 500 to 1
- The bottom 50 per cent of income earners in the US now collectively own less than 1 per cent of the nation's wealth
- More than 40 per cent of Americans who are actually employed are now working in service jobs, which are often low paying.
So it was a period of anemic growth at best.  The one area that was clearly expanding, even if some of it was a net zero for the country as a whole was the South.
But it turns out that the South is recovering from the downturn more slowly than the rest of the country.
Michael Cooper, New York Times, 26 September 2011 (ht: NC)
The once-booming South, which entered the recession with the lowest unemployment rate in the nation, is now struggling with some of the highest rates, recent data from the Bureau of Labor Statistics show.
Several Southern states — including South Carolina, whose 11.1 percent unemployment rate is the fourth highest in the nation — have higher unemployment rates than they did a year ago. Unemployment in the South is now higher than it is in the Northeast and the Midwest, which include Rust Belt states that were struggling even before the recession.
The explanation for the why some areas are doing better is given within the following report:
Howard Wial and Richard Shearer, Brookings Institute, September 2011.
Nearly all the metropolitan areas whose economies suffered the least since the start of the Great Recession rely substantially on government, education, or energy production and had increases in government employment since the start of the recession. Washington and several state capitals were among the 20 strongest performers since the start of the recession, as were such educational centers as Boston and Pittsburgh and the oil and gas production centers of Dallas, Houston, and Oklahoma City. Meanwhile, nearly all the metropolitan areas that suffered the most since the beginning of the recession either experienced a large house price boom and bust or (in the case of Detroit) depend heavily on auto and auto parts manufacturing.
In addition, nearly all the strongest-performing metropolitan areas had increases in government employment, while most of those that suffered the most lost government jobs. Sixteen of the 20 metropolitan areas that have had the strongest overall economic performance since the start of the recession (all except Albany, Boston, Buffalo, and Rochester) gained government jobs since their periods of peak total employment. Seventeen of the 20 that had the weakest overall performance (all except
And why is the South being hit so hard?  From the NYT piece above:
So what happened in South Carolina? Richard Kaglic, a regional economist at the Federal Reserve Bank of Richmond, Va., said the state’s lingering troubles reflect what happened when its construction and manufacturing industries were hit hard by the recession. Mr. Kaglic, who is also a pilot, used an aviation metaphor to explain what he meant.
“If your nose is high, if you’re climbing faster and your engine cuts out, you fall farther and it takes you a longer time to recover,” he said. “The conditions we experienced in late 2008, 2009, are as close as you come to an engine-out situation in the economy.”
Well I find it a little disconcerting that you get more honest economic reporting from left-wing bloggers writing Op-eds in Aljazeera and Glenn Beck, than our mainstream media.  But if you put the problems of media capture aside, what is all this telling us.
·         What little growth we have had has come from shifting existing businesses from one portion to the country to another.  This has tended to make the new South relatively heavy in construction and manufacturing.
·         Once individuals and business (the private sector) stopped borrowing to spend, the economy collapsed.  The reason they stopped borrowing was because it was obvious that they could not pay back what they owed; in other words they were insolvent.  If you borrow against future earnings and you have no or little real (non inflationary) growth, insolvency is exactly what you would expect.
·         The areas that have been relatively prosperous, health, government, and education, are the areas that have low productivity gains.  With low productivity gains, they will not be able to grow their way out of dept.
·         Health, government, and education are all very heavily dependent on government spending.  The Federal Government is one area of our economy that is still either borrowing money, or guaranteeing what loans (Fannie May, and Freddie Mac) are being made out there.
·         The effect of trying to keep interest rates low, which helps to limit the cost of government borrowing, and potentially would fuel business growth, is to ensure that we hurt people’s ability to save and live off their retirement at time when a disproportionate number of people will not be working.
What counterbalances our problems in immediate terms is that China is in a runaway real estate bubble and has not shown that it will land softly, and the European Union is (amazingly) in worse condition then we are:  in part because of the structural arrangement of the Union.
We are back to path dependence.  We took the first steps down the road of loose money under Carter.  Although in fairness to President Carter, the handling of the Vietnam War debt by inflating it away is arguably the real first cause.  I think the primary problem is that liaise faire lending should only be allowed when the lender is working with their own money:  banks and the government are not using their own money.
Regardless, at this point we have walked off the cliff and are windmilling our arms around like Wiley Coyote trying to get traction on air.  If we stop windmilling the government portion of spending in the way that Tea Party proscribes, we will likely have a complete collapse.  It likely will be a big deflationary bust.  Another option is to windmill as best you can and hope that economic-technical progress eventually picks back up again.  Obviously given my many posts on world population overruns, and resource depletion, I am skeptical of this solution, but will grant that it has been the story of the industrial revolution of which we may be on the tail end of.
So I have no ideal solutions, only bad choices.  To the extent we have a free choice, I would put a hammer lock back on the financial sector.  Unless you are willing to get rid of the limited liability of corporations, and bankruptcy laws, it is ridiculous to say that they operate in a liaise faire market.  Since I am not an anarchist-communist, it strikes me as much easier to simply heavily regulate financial behavior. This will at least keep the majority of the rewards (25% of our economy) from being siphoned off by the non-producing portion of the capitalist system (the bankers) and a handful of CEOs.

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