Our economy is deeply distressed and won’t get better soon because our problems are systemic and will not respond to any of the policies recommended by either party.
The trigger for this blog is last Thursday night’s debate of Republican candidates, who seemed secure in the truth that untaxed businesses and their untaxed executives create jobs and wealth. This is not unconvincing in two senses: it reflects the myth of American experience, and it reflects the logic that when the economy is suffering from lack of liquidity you do not take money out of the system by taxation.
It seems, however, that on analysis of facts, the problem is more complex and, regrettably, more fundamental. (I do not fault the Republicans; the Democrats too seem to ignore the controlling facts I cite below. I am not taking sides here as I find both parties are not so much wrong as they are discussing the wrong things.)
Fact: the gross national debt as a percentage of our gross domestic product has increased in thirty years from about 30% to almost 100%. (source: OMB 6-30-11) (The only President who reduced it was Clinton, and likely for reasons of happenstance; but my inquiry is not concerned with who did it, but rather with what it is.)
Fact: The economic gains from our accelerating productivity have flowed to corporations and the rich and not to the workers. (source: Conference Board, US Census, Bureau of Labor Statistics)
Fact: Real average hour wage from 1970 to today has declined, notwithstanding improved productivity. (source: OECD Main Economic Indicators, IMF International Financial Statistics)
Fact: From 1985 to now, employment as a percentage of our work-aged population has fallen from 77% to about 74%, and from a couple of intervening peaks of over 80%.
Fact: from 1950 to the end of 2009, the share of total income earned in the US by the top 1% of earners has increased from about 11% (which in 1950 was within three points of the same statistic for Japan, France and Sweden) to about 18% (which is 2-3 times the percentage in those three countries). (source: World Top Incomes Database). Put another way, the disparity in earnings between the richest and poorest earners in the US has increased by over 50% and is disproportionate also on a world-wide basis.
What do these facts suggest?
*As observed by Jeremy Grantham in his GMO quarterly newsletter (August 2011), for 30 years before 2000, consumers compensated for flat hourly wages by working harder and longer and workers constituted a higher percentage of the total labor-eligible force; but in the last decade the hours worked have flattened (hitting a natural maximum perhaps?), the percentage of eligible workers actually employed has fallen, and so sustained middle class spending in that decade was supported not by earnings but by borrowing and the perceived “income” from rising housing values.
*Putting aside the risk of social unrest over time that comes from great economic disparities, since workers cannot work harder and since they are earning less and since they cannot borrow, there is no way they can purchase goods.
*But two thirds of GDP in the US has been domestic consumption.
*US companies, notwithstanding Romney’s assertion that corporations are people, are gaining profit by cost savings, including driving down wages; but that kind of cost savings cannot be sustained as we are running out of runway on cost-cutting, and greater squeeze on labor is likely to be counter-productive when viewed from a consumer consumption vantage point.
* How do you get more money into the economy without printing it? You increase labor costs (as many countries including China are), driving a revitalization of the middle class as originally fostered in the United States by Henry Ford (see the blog Naked Capitalism by Yves Smith, as of last February the fourth most visited business blog, and by no means a bastion of liberal knee-jerk rhetoric).
*You lower the actual income of, and increase the taxes on, business and the upper reaches of US earners (again, see Grantham’s GMO quarterly for August 2011). We could for example engineer ourselves down to the level of income disparity obtaining in the Eisenhower years, half the disparity of today during a period of sustained economic growth in the ‘50s (carried into the ‘60s).
*When you take cash out of the system by taxation, does it in fact reduce job creation? Corporations are sitting on vast cash reserves. The very wealthy the same. But we do not now have job growth today, we have increasing profits based on cost squeezes. How do you re-circulate those funds? They are not trickling down. The statistics tell us that fact. If one were to have government undertake major projects that would create liquidity in the middle class, with funds obtained from a rationalized tax structure (see George McGovern’s open letter to Obama in the August issue of Harpers), the economy would unfreeze significantly.
Parenthetically, Warren Buffett’s suggestion, reported today, that it is appropriate and necessary to increase taxes on the wealthy is not the whole answer. That alone does not create enough economic activity even if pumped back into the economy through government programs, whether works or entitlements. To fund the middle class buying machine requires altering the relative pre-tax incomes of corporations/high earners compared to middle class earners. You need not only to tax the top, you need to raise up the middle.
Think about the trickle down approach. Pass over the statistics we have been discussing until now that suggest that there isn’t any trickle. Let’s look at WalMart, a company that drives down labor costs. This reduces the pay of its employees and reduces the cost of the goods WalMart sells. The system should and likely does allow the families to pay less for WalMart goods. But where does the pay of the WalMart family (and other squeezed families) get applied? To underwater mortgages which are not cheaper. For gasoline and food that are priced based on a different economic model. For products generally not purchased at WalMart (or from many of the other companies that operate on the same model).
It is a heresy for a business lawyer with entrepreneurial and banking clients and a proclivity for free markets to suggest that labor needs a bigger share. But we expect labor to pay down mortgages and not default, to reduce household debt, to survive pressure on social programs, to handle abandonment of old-fashioned pension funds that often sustained retirements with defined benefits – putting aside one’s social views or economic philosophy, it is just hard to understand how the US is going to pull this rabbit out of a hat without pumping actual dollars into the middle of the US economic engine.
Returning one last time to Grantham’s report, and I quote:
“The average worker, with flat wages for decades and with 16% to 18% of the workforce out of work (9%), discouraged to look for work (4%), or forced to work only part-time (5%), must feel as if he (or she) is in a depression. … Corporations are spending on capital equipment but are doing little in the way of domestic recruiting. Profit margins in the financial system were protected, along with bonuses, which in some cases set records last year despite the undeniable fact that these were the guys who helped bring the Western world to its knees.”
These are not the view of a wild radical Democrat, or a dogmatic Republican. These are the perceptions of someone who runs a significant investment fund.
And I do not think that Washington, the debating Republicans or the Democrats in the White House, are thinking this way.