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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Thanks to Obama ( spent more than all other Presidents put together) this country is bancrupt. For anyone that can't get this ... you are dumber than dirt! No budget, over-spending, printing money that we don't have, has sent the economy into a downward spin that will end up in a horrible recession. You can't spend more than you have .... for everyone that has gone through this personally, you know that when you spend more than you have ... it ends up in you going bancrupt. Inflation is hitting us hard, so your expenses are going up and your money coming in is going down. The S&P can't lower rates anymore to stimulate the economy ... so they will have to raise rates to try to generate income. This will lead to radical inflation and a terrible recession. The economists call it the "fiscal cliff" Obama has put us in this position ... maybe on purpose. I don't think anyone could actually be this stupid ... it must be on purpose. He is a sleezy fraud. And soon enough the people of this country will find out!!! Good luck .... my money is offshore!!
The United States of America has repeatedly tried supporting an economy with just the rich, and each time it has failed. With the whole country made up of the poor, the rich have stood out like a symbol of greed and avarice they are, unable to hide among the multitudes. A symbol becomes a target.
Secondly, you cannot support an economy with only 1-percent of the population. You don't need to produce that many toasters, or cars, or houses, or refrigerators in order to satiisfy the 1-percent. You wouldn't even have conversations about such things as balance of trade because such low demand wouldn't even provide the stirrings of production, not for a stealth production of goods.
And services that support any economy, how well would that work with the professional services, like health care, trying to make their own kind of living from a handful of patients. The 1-percent better be pretty good at breeding doctors, and surgeons, and lawyers, and bankers, and scientists, and pilots, and astronauts, and educators, and soldiers. You probably forgot about the soldiers. Get the drift.
The population of the United States of America was only 120 million in 1930, and the degree of suffering faced by the population was so great that the rich were fleeing the United States because they thought the country wasy going to fall. In 2012, the population is three times what it was in 1930. And you want to test your utopian theories again? Are you crazy?
The people in charge better fix this economy. We have lived like this for over 5-years. How long before time runs out for the rich folk?
The scary part is what Bernanke said, just 3 months ago that:
"Economics isn’t just about money and material benefits, he said; it is also about promoting ‘‘the enhancement of well-being.’’
Could it be that the re-education of the middle class is around the corner?
When completed, our happiness will bubble up, in proportion to the wealth trickling down!
Don't worry, Obama says there are still checks in the checkbook, so we have plenty of money to spend.
Economically, the middle class has more in common with the poor than they do with the rich.
I see some truth to this argument, however in the early 20th century the increase in productivity and transportation resulted in an expanded customer base. If you were to look at the cost of an automobile prior to improvements in m****duction by individuals like Henry Ford, it was simply too high for the average American to afford. When production levels increased the unit cost of cars lowered and it made the retail cost of a car something your average American could afford, making what started out as a small industry into what is now a huge part of our economy and way of life. Improvements in productivity are important but there are also other factors that contribute to GDP growth. Production is irrelevant unless you have a customer base to sell those products to and those "other factors" play a role in the size of that customer base. Balance between investment in technology/production and people are what keep this economic ship floating. Right now that balance is off and our economic ship is slowly sinking.
This article is what our leaders dont understand, there is no next big boom like there was years ago. We are also now in a global economy which doesn't have a level playing field. Unions have fought to keep wages high for American manufacturers but unfortunately that just sent jobs out of the country. The middle class has been forced to carry the burden and now if they are calling middle class 250,000.00 a year then guess what everyone is dropping a few rungs on the ladder. Wake up America most of us keep putting in and when we think it is enough we are asked to give more. How many Federal and State employees do you know that have missed out on a raise ? Look at your tax bill, you cant afford to fund your own retirement savings but look and see how many you are paying into for everyone else. I don't know about you but I am not guaranteed a raise every year and in fact for the last 5 years I have lost money. Where was it stated or who decided that the taxpayers should provide better benefits for Federal and state employees than they can afford for themselves. On top of that now all you hear is how the money was misused.
And if you think that the human race is not growing too fast, take a look at this statistic: In 1925, the world population was 1 billion. It took thousands of years to reach that point. In the short 87 years since, the world's population has grown over 6 billion. 6 billion in less than a century. Still think that there will be plenty of food and energy sources soon? Numbers don't lie!!!!
The first part of this Idea I think is good , but to think that the rich will bail us out is well you know BS. The green economy or innovation in energy and transport , this is what we should be encouraging
As long as we have two imbeciles running the economy like Bernache and Obama, we are in deep trouble. 6 trillion in new debt, 56% more printed money (M2) in under 4 years, far more unemployed, and the democrats trying to tax, spend, borrow and print our way to prosperity... This will not end well. We cannot have 47% leeching off the rest of us.
6 trillion in new Obama debt is about 75,000 per family. I can see supporting Obama if you got that much. If however, your children and grand children will be asked to pay for his spending, you would have to be insane, stupid or a Marxist to vote for him...
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