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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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...
the most "equitable" nation on Earth in terms of the income equality ratio; is NORTH KOREA.
yea let's be more like them!
The wealthiest 25% of US households owning 87% of the wealth in the United States. And .6% of the world population holding 39% of the world wealth. With apx 18 million soon to be millionares on the way. And the suggestion of the article is to cater to this growing population. Are you mad?!?
1. The trickle down effect does not give proportionally but is the seepage from overabundance.
2. Fiat money is just paper backed by nothing but debt.
3. Every dollar you have is still owed.
here is a great example of the new tea bagger, Romoney, republican math:
Bobster writes: "Then lower small business taxes to 0. Yes, to 0. I would hire 15 more employees tomorrow. I would also pay more taxes myself since I'd make more money."
how in the hell will you pay more taxes if your tax rate is reduced to zero?
who is this, Romoney's binders-full-of-taxes speech writer? what a joke ....
The capitalist system in America depends on one thing, exponential growth. We have come to the point where all the cheap staples of our society are coming to an end, especially energy. Two dollar a gallon gasoline and oil at $50 per barrell will never been seen again. Have you noticed that diesel fuel is more expensive than premium gasoline. What's another problem, water. We are running out. The large aquifers in the Midwest and West are about dry. Our food supply is in doubt and the cost is going through the roof. Can prices continue to rise and wage continue to flat line or decline and still have a vibrant economy? I am just saying that the resources need to continue the growth are dwindling. Oh, the high paying industrial jobs that went to Asia, Africa and other places are not coming back. How long will we be able to pay for those $215 basketball shoes manufactured by $1/hour workers in China? How long, not long.
Lester Thurow said pretty much the same thing over twenty years ago. Lestor's book "Head to Head' covered the same ground.
Looking at what is making money and who is making money and how wealth is created these days points to a world wide problem. We have enjoyed unbelievable growth in America because we started out with many resources and cheap labor. As the standard of living and the expectations of a better standard of living grew, the costs associated with the creation of wealth have increased dramatically.
Today, business goes for less labor, more efficiency and rely on capital to generate wealth. The vast majority of the workers are not in the game of increasing wealth and wealth has become concentrated with a few. The few do not spend enough to support the many.
It is not Obama or Bush that has been the problem but changes that over the years have accumulated because everyone has been blinded by the expectations that growth would always continue unabated but like a Ponzi scheme, there is a limit to how long the game can go on.
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