Thursday, May 2, 2013
The Economy Is Not Advancing --- It's Going Backward
The Obama administration is more inclined to PR than hard-headed pragmatism in dealing with unemployment.
By Mort Zuckerman
Which way are we going? The stock market has revived, though it still is off a high in real terms. There's suddenly good news about housing demand, which is showing signs of life after six years of stagnation. Yet Federal Reserve Chairman Ben Bernanke warns that the package of fiscal cutbacks – the fiscal cliff, sequester, and other cuts – is set to reduce growth by 1.5 percentage points. He calls that "very significant" and adds that "job creation is slower than it would be otherwise." This is the key to where we are. New research from the Brookings Institution concludes that rising inequality in the United States is not something that will vanish with a real recovery. It is here to stay, a reflection of an increasingly calcified society and a whole crisis in itself.
The present phase of our Great Recession might be called the Grand Illusion, because all the happy talk and statistics that go with it, especially on the key indicator of jobs, give a rosier picture than the facts justify. We are not really advancing. We are, by comparison with earlier recessions, going backward. We have a $1.3 trillion budget deficit. And despite the most stimulative fiscal policy in our history and the most stimulative monetary policy, with a trillion-dollar expansion to our money supply, our economy over the last three years has been declining or stagnant. From growth in annual GDP of 2.4 percent 2010, we bumped down to only 1.8 percent in 2011 and were still down at 2.2 percent in 2012. The cumulative growth for the last 12 quarters was just 6.2 percent, less than half the 15.2 percent average after previous recessions over a similar period of time. It is the slowest growth rate of all the 11 post-World War II recessions. (This is due to the ridiculous tax penalties laid on corporations who invest in America)
What has gone wrong? There seems to be a weakness in the investment of private capital. Today, corporate spending on investments is the weakest it has been in six decades. The billions invested in the Internet, spreading its application and comingling the technology with labor, boosted multifactor productivity but, as David Rosenberg of wealth-management firm Gluskin Sheff points out, most of that occurred several years ago. As he has written, a capex-led business recovery that breeds sustained productivity growth and decent job creation is what underscores the best and longest economic expansions since the end of WWII.
Anemic growth looks likely to continue because of various downers implicit in Bernanke's caution. Sequestration will take $600 billion of government expenditures out of the economy over the next 10 years. Payroll taxes up 2 percent hit about 160 million workers and will drain $110 billion in aggregate demand. The Obama health care tax will be a $30 billion-plus drag. The surge in gasoline prices by some 50 cents recently may be temporary, as Bernanke suggests, but meanwhile represents another $65 billion of consumer cash flow. Conservatively, these nasties add up to roughly a 2 percent hit to baseline GDP growth when we are barely able to muster 2 percent growth.
Then there's housing. Yes, it is nice to see a surge in some areas. But millions of homes are owned by banks or are in the foreclosure process. The New York Times noted last week that the home where Bernanke was raised, in a small town in South Carolina whose unemployment rate was recently 15 percent, had just been foreclosed upon the last time he visited, and one of his relatives was unemployed. Talk about symbolism. Single-family home sales and starts are barely off their depressed levels, and have only recouped 17 percent of recession losses. The housing market is mostly driven by investor-based, rental-related, multifamily buying activity, reflected in the fact that multiple housing units have reversed more than 70 percent of the damage they sustained from the recession.
Our economy's most important player, the consumer, offers no relief from this cascade of downers. About 70 percent of national expenditures come from consumers, but their confidence level has dropped to only 58.6 percent. Restaurant traffic, one of the most reliable trend indicators, has slipped to a three-year low. In fact, the only reason that real consumer spending is not shown as contracting is because personal savings rates since November 2007 have declined from 6.4 percent to around 2.5 percent of incomes.
Still, can't we take comfort in headlines celebrating the decline in unemployment to 7.7 percent? Not really. If you add in all the unique categories of people not included in that number, such as "discouraged workers" no longer looking for a job, involuntary part-time workers, and others who are "marginally attached" to the labor force, the real unemployment rate is somewhere between 14 and 15 percent. No wonder it has been harder to find work during this recession than in previous downturns.
Though last month we theoretically added 236,000 jobs, these numbers are misleading, too, because so many of the jobs are in the part-time, low-wage category. So the backdrop to the most recent job numbers is the fact that multiple job-holders are up by 340,000 to 7.26 million. In essence then, all of the "new" positions are going to people who already are working, mostly part time. It is clearly more important to create jobs for people who aren't. Other aspects of the jobs picture deteriorated, too. The pool of people unemployed for six months or longer went up by 89,000 to a total of 4.8 million, and the average duration of unemployment rose to 36.9 weeks, up from 35.3 weeks.
Moreover, the decline in the unemployment rate to 7.7 percent is shaky. It reflects the departure from the workforce of some 130,000 individuals. A change in the denominator makes the unemployment numbers look better than they are. The labor force participation rate, which measures the number of people in the workforce, also dropped to around 63.5 percent, the lowest in more than 30 years. The workweek remains short at 34.5 hours. Quite simply, employers are shortening the workweek or asking employees to take unpaid leave in unprecedented numbers, and these people are not included in the unemployment numbers.
Clearly, the rate of job recovery has slowed drastically. Typically it takes 25 months to reach a new post-recession peak in employment, but today we are over 60 months away from that previous high, and we are still down 3.2 million jobs. We need between 1.8 million and 3 million new jobs every year just to absorb the labor force's new entrants. At the current rate, we will have to wait seven years to restore the jobs lost in the Great Recession, and we will need 300,000 or more hires every month to recover substantially above the current levels. The prospects for that are gloomy, since employers now feel they can do with fewer workers. Over 20 percent of companies say that employment in their firms will not return to pre-recession levels.
In the face of these figures, the government is just whistling in the dark. The programs it has announced are sensible, but don't do anywhere near enough to plug the gap in workers needed with skills in science, technology, engineering and mathematics – the best way to deal with the threat of a big permanent underclass. Nor is there any sense of a vigorous follow-through on multiple well-intentioned programs. We are told we live in an accelerated world, and so we do in communications. But when will we see reform of a patent system that imposes long delays on innovators and inventors and entrepreneurs seeking approvals? It often takes two years to obtain the environmental health and safety permits to build a modern electronic plant, a lifetime in the tech world.
A dramatic consequence of the inertia is that our trade in high-tech products has gone from a $29 billion surplus to a $60 billion-plus deficit.
When employers can't expand or develop new lines because of the shortage of certain skills, the employment opportunities for the less skilled are restricted. Government must restore and multiply funds for training programs, especially vocational training and postsecondary education. And it must support every program to strengthen science, technology, engineering and math in high schools and at the university level, as well as broadening access to computer science. Until we get such programs properly underway, we should increase the number of annual visas for foreigners skilled in science and technology. They are not job destroyers, as nativist sentiment suggests. They are job creators, and not only that. They are job multipliers. Barring their entry or residence means they will compete against us in the industries that are both growing and competitive. It is astounding that we attract the brightest and the best brains to our universities, the world's best, and then send them packing. We must re-conceptualize immigration as a recruiting tool and open the door to the skilled and the educated. It is disappointing that so soon in a new administration, decisively elected, both party leaderships seem still stuck in a campaigning mode. It isn't just that agricultural companies lack the labor to pick crops of citrus fruits and onions, but that we are stupidly cutting off one of the great sources of innovation. About half the companies in the Fortune 500 owe their origins to the ideas and enterprise of immigrants. Diversity breeds ideas. Look at the history of America.
What we get from the administration instead of pragmatism is politics; instead of constructive strategies shed of ideology, we get steady attacks demonizing the wealth creators and discrediting the private sector, along with rhetoric that seeks to exploit divisions by blaming the rich and positioning them against the rest, as if government is not part of the problem.
No wonder Fox News found earlier this year that 48 percent of us believe America is weaker than it was five years ago, while just 24 percent think the nation is stronger. Have we really so lost our mojo? Have we lost our way? As 18th-century economist and writer Adam Smith once observed, "there is a great deal of ruin in a nation." Indeed there is. One serious recession does not mean the beginning of the end of a great power. But the risks will multiply so long as we remain locked in a rancorous political culture, and have a leadership more inclined to public relations than hard-headed pragmatic recognition of what must be done to restore America's classic vitality.
Mort Zuckerman's article was originally published in Jewish World Review