10/17/2012 10:30 PM ET|
Is the economy a lost cause?
To get the middle class thriving, we need more than the Fed or the government can do. We need another economic revolution -- and our best shot might be giving the rich everything they want.
The "recovery" is about to enter its fifth calendar year, and despite consumer optimism and steady -- if slow -- job growth, deeper, structural problems linger. And those problems may not go away anytime soon.
The pace of growth of gross domestic product is slowing to a stall, rising at an annual rate of just 1.3% last quarter. The employment-to-population ratio is mired at early 1980s levels. Business confidence is in the dumps, as are spending and hiring plans. And the Federal Reserve's new "QE3" initiative -- ongoing monthly mortgage purchases of $40 billion to stimulate the economy -- is having a limited impact on borrowing because of the dysfunctional banking system and overly indebted households.
Let's go even deeper. Here are three measures that explain much of the malaise still being felt by average, middle-class Americans:
Because of skills mismatches and other issues, one Fed official believes the "natural unemployment rate" has risen as high as 6%, suggesting additional drops in joblessness will be slow and could encourage painful jumps in inflation.
The economy's potential growth rate or speed limit -- that is, how fast it can grow without causing inflation -- is slowing from above 3% before the recession to around 2% now as businesses withhold new investment -- something that will pressure living standards, should it continue.
The growth rate in labor productivity and GDP per capita has slowed dramatically -- explaining the stagnation in middle-class wages.
New research by economist Robert Gordon at Northwestern University (.pdf file) suggests the sluggishness could be permanent as a lack of meaningful technological innovation is compounded by head winds from demographics, education, economic inequality, environmental concerns, globalization, and the debt/deficit problem. (If he's right, we're destined to return to a pre-industrial revolution rate of growth, which is essentially nil.) So is this economy a lost cause, or can we still turn things around?
Lots of heat but no light
Gordon argues that the per capita economic growth we've seen over the past 200 years -- which transformed Western society from a collection of subsistence peasant farmers -- has been the exception rather than the rule. Throughout most of history, living conditions remained more or less static. Annual growth in real GDP per capita was around 0.2%. Life was essentially as the philosopher Thomas Hobbes described: nasty, brutish and short.
Then came three waves of transformative innovation. The first, between 1750 and 1830, featured steam power and railroads. Between 1870 and 1900 there were huge advances in electricity, industrial engines, indoor plumbing, communications, chemicals and energy. And from 1960 to now, we've had the information technology revolution.
The problem is that much of our modern-day prosperity is tied to the second wave, which featured one-time gains in the speed of travel, life expectancy and urbanization. People went from traveling by horse and wagon to traveling by jumbo jet. But then, things stopped moving faster. The space shuttles and the Concorde are museum pieces now. Mourning the death of the first man to walk on the moon after riding the Saturn V rocket, today we get excited when someone jumps from a hot air balloon at the edge of space.
Thus, per capita growth slowed after 1970. Americans, with the help of policymakers, used asset price inflation and debt accumulation to compensate for the wage stagnation that resulted. That gave us the illusion of maintaining the prior pace of increase in living standards.
That fantasy is now being laid bare.
The problem, according to Gordon, is that productivity gains from the third wave -- which peaked in the late 1990s -- proved fleeting. Since then, the focus of this so-called "new economy" has turned from using technology to enable advances in a wide variety of fields to simply improving entertainment and communications devices. We're seeing intense innovation and investment in a very narrow area of questionable benefit. The voyeurism of Facebook (FB) and the ability to watch snarky YouTube videos on your smartphone pales in comparison to the miracle of human flight.
The growth crash
You can see the result in the chart below, which illustrates the stagnation in GDP per capita.
This one chart shows all that is wrong with the economy and the middle class, and the task that will be faced by either President Barack Obama or Mitt Romney over the next four years.
Americans' idea of what their standard of living should be is based on the growth seen in the years following World War II through the early 1970s; that's the blue line in the chart. If that rate of growth had continued -- it averaged nearly 2.4% a year during that period -- GDP per capita (a proxy for wages) would be $63,500, 32% higher than it is now.
Instead, since 2001, average annual GDP per capita growth -- the red line in the chart -- has clocked in at a measly 0.7%. That returns us to a pace of growth not seen since just after the Civil War. What's worse, because of the impediments to the economy listed above, the growth rate could drop as low as 0.2%, a level last suffered in the 17th century, Gordon says.
For the middle class to prosper again, labor productivity and GDP per capita must reaccelerate.
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There is another cog in this...situation, problem, whatever you want to call it. The world is moving toward a unified global economy, whether we like it or not. And when you start averaging world-wide per capita wealth--we're gonna' be the obvious losers, whether or not there is any sort of new technological revolution. Unless it's big enough to raise the standards for everyone, our living standards are going to go down...a lot.
"and our best shot might be giving the rich everything they want."
Let me guess who paid for this advertisement, disguised as independent economic analysis.
... or we start to scrape back the wealth from the top 1% that they have accumulated by gaming the system (tax cuts, insider trading, etc.). Think about it - per capita GDP growth is nearly stagnant, yet the rich continue to get richer. The rich have been soaking up the gains and leaving the crumbs for everyone else.
Increases in productivity have not been shared equitably with workers since Reagan's time. Tell me how further increases in productivity won't just be consumed in the same way.
As thoughtful as the article is, one important fact cause was omitted. The rise of environmentalists and the leisure class has had a pronounced effect since it's rise in the early 1960's. The leisure class tends to impede growth or progress if it could damage their sense of power or well being. They have employed environmentalists to sue, thwart or misrepresent environmental causes which has fueled a wide variety of environmental regulations which have little if any beneficial impact except to grow their respective bureaucracies.
No wonder Apple, HP, Intel and other high tech firms have outsourced thier production and high paying jobs. It's just too hard to do buisness here relative to other countries. They are becomming shell corporations marketing foreign goods and technology under American sounding tradenames. It's also too easy to substitute entertainment as a diversion for our countires ills.
As the rate of technology increases exponentially, our ability to regain some of what's lost may be too costly for our society to support permanently disenfranchizing larger segments of our society until the social safety net and society disentigrates. That is the lesson history teaches us again and again.
We can't delay, defer or cheat our way out of this any longer. It's everyone's responsibility to promote local growth, education, economy, enterprise, and public safety.
Economically, the middle class has more in common with the poor than they do with the rich.
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