10 Reasons the US Economy Appears to be Stuck in Close to Neutral

 

 

The following article appeared about 4 months ago in The Guardian but it is as relevant today as it was then. Obviously such a daunting list of issues is not easy to deal with. Comments that do not reflect a thorough reading of the article will not get credit for posting.

 

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More than five years after the great recession hit, the US economy is still sputtering. The government revised GDP growth figures down last month to a meager 1.8% for the first quarter of this year. It doesn't take a PhD in economics to understand why: we have a demand problem. And we have a demand problem because the vast majority of consumers – aka workers – are not earning enough to pay for healthcare, education and retirement, let alone all the other stuff stores and service providers have to sell.
The reality is that we're hollowing out the middle class by wiping out well-paid jobs with benefits and replacing them with low-wage ones that often lack them. That's damaging not only to people who are living on smaller paychecks – or who are indeed unemployed – but also to the health and viability of the overall economy.
No matter what New York Times columnist Thomas Friedman and his followers say, we are not living in a "sharing economy". We are living in a zero-sum economy – in which a handful of investors and owners win at everyone else's expense.
But ultimately, it will catch up with investors, too. The US economy is engaged in a vicious cycle in which low-wage jobs and under-employment stimulate little demand, giving companies little reason to hire workers. Would-be workers then get discouraged and drop out of the workforce. They lack money to buy things, so consumer spending sags and companies don't hire or offer raises to workers they know they can keep. Repeat.
So, sorry Friedman et al: you can strain your brains for as many offbeat ideas and back-of-taxicab discoveries as you like, but the only way to break the cycle is to ensure everyone can work – and that those workers get more of the fruits of their labor. Until we address the following 10 problems head-on, the idea that the economy is truly recovering will remain a fantasy.

Problem 1: wages are falling

The recession caused a giant drop in consumer demand, but the culprit wasn't just a loss of housing wealth. Wages for most workers are either stagnating or declining. In fact, real median wages fell by about 2.8% between 2009 and 2012. That's bad for workers and bad for the economy. It's also insulting because the drop happened even as productivity increased 4.5%. So much for the sharing economy.
What's worse, lower-wage workers – who are already struggling to keep up – saw bigger declines than those in the middle and higher end. Those earning between $10.61 and $14.21 per hour saw real wages drop by 4.1% on average.
As Reuters' Felix Salmon points out in his crafty analysis of the data, hairstylists and cosmetologists earned $12 an hour on average in 2009. But by 2012, they earned just $10.91 an hour – a drop of more than 9%. Restaurant cooks lost 7.1% over the same period.

Problem 2: the middle class is losing ground and getting hollowed out

The most recent census data shows that while a small group of rich people are getting richer, the middle class is taking a serious beating. US median income fell to $50,054 in 2011, the most recent full year in which that data is available. That's down 8.1% since 2007, just before the great recession started. Overall, median income has fallen 8.9% from its peak in 1999. Meanwhile, the middle class is shrinking, as many Americans slide down the economic ladder – the very inverse of the American dream of economic mobility.

Problem 3: McJobs are taking over

The economy is shedding good jobs, which are increasingly replaced with low-wage, often part-time jobs. During the recovery, job gains have been concentrated in lower-wage occupations, which grew nearly three times as quickly as middle- and higher-wage occupations. State and federal governments, for example, have cut 835,000 jobs over the past four years – many of them middle-income positions.
Job growth projections show that this trend will continue. The healthcare, social assistance and retail sectors are among areas expected to add the most jobs by 2020 – all industries notorious for jobs with meager pay and poor working conditions. A lot of these positions will pay the federal minimum wage ($7.25 an hour) – the inflation-adjusted value of which has declined by more than 30% since the 1960s. That's not going to help the approximately 100 million Americans – one in three – either living in poverty or in "the fretful zone just above it", as the New York Times put it.

Problem 4: capital is hammering labor

Again, so much for the sharing economy. Workers' wages as a percentage of the economy just hit another all-time low. In other words, corporations are now paying employees less than they ever have done, as a share of GDP.

At least in the short term, less for workers means more for corporations: corporate profits as a percentage of GDP are now at an all-time high. Big companies are hoarding cash at historically high levels – not using it for investment, hiring, pay raises or even to reward shareholders. Last time I checked, hoarding is the opposite of sharing. Again, it's a zero-sum economy, and workers are losing. Badly.

Problem 5: unemployment is twice what they say

Our official 7.6% unemployment rate is bad enough, but the real number is actually about twice that. Buried in the monthly jobs report, you'll find what's called the U-6 figure, which includes the unemployed, plus those "marginally attached" to the labor force (that is, they want a job but have largely given up looking), plus those working part-time but who want a full-time job. The U-6 number for June 2013 was an astonishing 14.3%, up half a percentage point from May.

Problem 6: America is going part-time – and not for fun

In staggering numbers, more Americans are working part-time – but not because they want to. These involuntary part-timers now number more than 8.2 million – an increase of 322,000 workers from May and almost double the number this time five years ago. It's the highest it's been all year, and the trend line is going in the wrong direction.

Problem 7: workers aren't working

Here's another way of looking at under-employment: fewer working-age Americans are working than at any time in the past three decades. That is, the employment-to-population ratio has collapsed. In June, the ratio was 58.7% – a drop from 63% five years ago, before the recession hit. Of course, workers sitting on the sidelines aren't collecting paychecks, meaning they have much less to spend.

Problem 8: union wages are harder to come by. Much

There is power in a union. There's also a higher wage. In 2012, the median salary for a unionized worker was about $49,000, as opposed to about $39,000 for their non-union counterparts. But fewer and fewer workers are earning union salaries. Thirty years ago, one in five US workers were union members; now, it's about one in 10.

Problem 9: the cost of college is skyrocketing

Higher education in the US is becoming an unaffordable luxury. By conservative estimates, the cost of a college education is now 50% higher than it was 30 years ago. Public colleges and universities are cheaper, but not cheap enough. As states cut funding, the cost of attending a four-year public institution has risen by 5.2% each year of the last decade. Student loan debt in this country now exceeds $1tr.
Upon graduation, debt-saddled young people face a fierce job market; youth unemployment has hovered around 16% for the last year and a half. The conundrum is that, although college degrees are exorbitantly expensive, they're increasingly necessary to even get in the door for a decent job.

Problem 10: inequality is getting worse

It's well-known that the US ranks near the top of most unequal countries in the developed world – and that income inequality here has reached its highest levels since the great depression. A few statistics fill out the bleak picture: the top 1% of earners took 93% (pdf) of the income gains in the first full year of the recovery. The poorest 50% of Americans now collectively own just 2.5% of the nation's wealth.
What level of inequality is healthy for a society may be debatable, but an increasing number of economists and regulators – including those at the IMF and Federal Reserve – are recognizing that US-style inequality is bad for business, and the economy as a whole.
As these experts are starting to realize, the recovery will only come when workers get their due. Until then, American corporations are sowing the seeds of their own destruction – and taking the rest of us down with them.

Premature Deindustrialization

11 October 2013

PRINCETON – Most of today’s advanced economies became what they are by traveling the well-worn path of industrialization. A progression of manufacturing industries – textiles, steel, automobiles – emerged from the ashes of the traditional craft and guild systems, transforming agrarian societies into urban ones. Peasants became factory workers, a process that underpinned not only an unprecedented rise in economic productivity, but also a wholesale revolution in social and political organization. The labor movement led to mass politics, and ultimately to political democracy.

Over time, manufacturing ceded its place to services. In Britain, the birthplace of the Industrial Revolution, manufacturing’s share of employment peaked at around 45% before World War I and then fell to just above 30%, where it hovered until the early 1970’s, when it began a precipitous decline. Manufacturing now accounts for slightly less than 10% of the workforce.

All other rich economies have gone through a similar cycle of industrialization followed by deindustrialization. In the United States, manufacturing employed less than 3% of the labor force in the early nineteenth century. After reaching 25-27% in the middle third of the twentieth century, deindustrialization set in, with manufacturing absorbing less than 10% of the labor force in recent years.

In Sweden, employment in manufacturing peaked at 33% in the mid-1960’s, before falling to the low teens. Even in Germany, often regarded as the strongest manufacturing economy in the developed world, manufacturing employment peaked around 1970, at close to 40%, and has been steadily declining ever since. As Harvard University’s Robert Lawrence has argued, deindustrialization is common and predates the recent wave of economic globalization.

Only a few developing countries, typically in East Asia, have been able to emulate this pattern. Thanks to export markets, South Korea industrialized exceptionally rapidly. With manufacturing’s share of employment rising from the low single digits in the 1950’s to a high of 28% in 1989 (it has since fallen by ten percentage points), South Korea underwent in three decades a transformation that took a century or longer in the early industrializers.

But the developing world’s pattern of industrialization has been different. Not only has the process been slow, but deindustrialization has begun to set in much sooner.

Consider Brazil and India, two emerging economies that have done comparatively well in the last decade or so. In Brazil, manufacturing’s share of employment barely budged from 1950 to 1980, rising from 12% to 15%. Since the late 1980’s, Brazil has begun to deindustrialize, a process which recent growth has done little to stop or reverse. India presents an even more striking case: Manufacturing employment there peaked at a meager 13% in 2002, and has since trended down.

It is not clear why developing countries are deindustrializing so early in their growth trajectories. One obvious culprit may be globalization and economic openness, which have made it difficult for countries like Brazil and India to compete with East Asia’s manufacturing superstars. But global competition cannot be the main story. Indeed, what is striking is that even East Asian countries are subject to early-onset deindustrialization.

Consider China. In view of its status as the world’s manufacturing powerhouse, it is surprising to discover that manufacturing’s share of employment is not only low, but seems to have been declining for some time. While Chinese statistics are problematic, it appears that manufacturing employment peaked at around 15% in the mid-1990’s, generally remaining below that level since.

China is a very large country, of course, with much of its workforce still in rural areas. But most migrant workers now find jobs in services rather than in factories. Similarly, it is extremely unlikely that the new crop of manufacturing exporters, such as Vietnam and Cambodia, will ever reach the levels of industrialization attained by the early industrializers, such as Britain and Germany.

An immediate consequence is that developing countries are turning into service economies at substantially lower levels of income. When the US, Britain, Germany, and Sweden began to deindustrialize, their per capita incomes had reached $9,000-11,000 (at 1990 prices). In developing countries, by contrast, manufacturing has begun to shrink while per capita incomes have been a fraction of that level: Brazil’s deindustrialization began at $5,000, China’s at $3,000, and India’s at $2,000.

The economic, social, and political consequences of premature deindustrialization have yet to be analyzed in full. On the economic front, it is clear that early deindustrialization impedes growth and delays convergence with the advanced economies. Manufacturing industries are what I have called “escalator industries”: labor productivity in manufacturing has a tendency to converge to the frontier, even in economies where policies, institutions, and geography conspire to retard progress in other sectors of the economy.

That is why rapid growth historically has always been associated with industrialization (except for a handful of small countries with large natural-resource endowments). Less room for industrialization will almost certainly mean fewer growth miracles in the future.

The social and political consequences are less fathomable, but could be equally momentous. Some of the building blocks of durable democracy have been byproducts of sustained industrialization: an organized labor movement, disciplined political parties, and political competition organized around a right-left axis.

The habits of compromise and moderation have grown out of a history of workplace struggles between labor and capital – struggles that played out largely on the manufacturing shop floor. Given premature deindustrialization, today’s developing countries will have to travel different, as yet unknown, and possibly bumpier paths to democracy and good governance.( By Dani Rodik, Princeton University)

Wealth Gap : Empathy Gap?

(A great article about some potential implications from the wealth gap)

Turning a blind eye. Giving someone the cold shoulder. Looking down on people. Seeing right through them.
These metaphors for condescending or dismissive behavior are more than just descriptive. They suggest, to a surprisingly accurate extent, the social distance between those with greater power and those with less — a distance that goes beyond the realm of interpersonal interactions and may exacerbate the soaring inequality in the United States.
A growing body of recent research shows that people with the most social power pay scant attention to those with little such power. This tuning out has been observed, for instance, with strangers in a mere five-minute get-acquainted session, where the more powerful person shows fewer signals of paying attention, like nodding or laughing. Higher-status people are also more likely to express disregard, through facial expressions, and are more likely to take over the conversation and interrupt or look past the other speaker.
Bringing the micropolitics of interpersonal attention to the understanding of social power, researchers are suggesting, has implications for public policy.
Of course, in any society, social power is relative; any of us may be higher or lower in a given interaction, and the research shows the effect still prevails. Though the more powerful pay less attention to us than we do to them, in other situations we are relatively higher on the totem pole of status — and we, too, tend to pay less attention to those a rung or two down.
A prerequisite to empathy is simply paying attention to the person in pain. In 2008, social psychologists from the University of Amsterdam and the University of California, Berkeley, studied pairs of strangers telling one another about difficulties they had been through, like a divorce or death of a loved one. The researchers found that the differential expressed itself in the playing down of suffering. The more powerful were less compassionate toward the hardships described by the less powerful.
Dacher Keltner, a professor of psychology at Berkeley, and Michael W. Kraus, an assistant professor of psychology at the University of Illinois, Urbana-Champaign, have done much of the research on social power and the attention deficit.
Mr. Keltner suggests that, in general, we focus the most on those we value most. While the wealthy can hire help, those with few material assets are more likely to value their social assets: like the neighbor who will keep an eye on your child from the time she gets home from school until the time you get home from work. The financial difference ends up creating a behavioral difference. Poor people are better attuned to interpersonal relations — with those of the same strata, and the more powerful — than the rich are, because they have to be.
While Mr. Keltner’s research finds that the poor, compared with the wealthy, have keenly attuned interpersonal attention in all directions, in general, those with the most power in society seem to pay particularly little attention to those with the least power. To be sure, high-status people do attend to those of equal rank — but not as well as those low of status do.
This has profound implications for societal behavior and government policy. Tuning in to the needs and feelings of another person is a prerequisite to empathy, which in turn can lead to understanding, concern and, if the circumstances are right, compassionate action.
In politics, readily dismissing inconvenient people can easily extend to dismissing inconvenient truths about them. The insistence by some House Republicans in Congress on cutting financing for food stamps and impeding the implementation of Obamacare, which would allow patients, including those with pre-existing health conditions, to obtain and pay for insurance coverage, may stem in part from the empathy gap. As political scientists have noted, redistricting and gerrymandering have led to the creation of more and more safe districts, in which elected officials don’t even have to encounter many voters from the rival party, much less empathize with them.
Social distance makes it all the easier to focus on small differences between groups and to put a negative spin on the ways of others and a positive spin on our own.
Freud called this “the narcissism of minor differences,” a theme repeated by Vamik D. Volkan, an emeritus professor of psychiatry at the University of Virginia, who was born in Cyprus to Turkish parents. Dr. Volkan remembers hearing as a small boy awful things about the hated Greek Cypriots — who, he points out, actually share many similarities with Turkish Cypriots. Yet for decades their modest-size island has been politically divided, which exacerbates the problem by letting prejudicial myths flourish.
In contrast, extensive interpersonal contact counteracts biases by letting people from hostile groups get to know one another as individuals and even friends. Thomas F. Pettigrew, a research professor of social psychology at the University of California, Santa Cruz, analyzed more than 500 studies on intergroup contact. Mr. Pettigrew, who was born in Virginia in 1931 and lived there until going to Harvard for graduate school, told me in an e-mail that it was the “the rampant racism in the Virginia of my childhood” that led him to study prejudice.
In his research, he found that even in areas where ethnic groups were in conflict and viewed one another through lenses of negative stereotypes, individuals who had close friends within the other group exhibited little or no such prejudice. They seemed to realize the many ways those demonized “others” were “just like me.” Whether such friendly social contact would overcome the divide between those with more and less social and economic power was not studied, but I suspect it would help.
Since the 1970s, the gap between the rich and everyone else has skyrocketed. Income inequality is at its highest level in a century. This widening gulf between the haves and have-less troubles me, but not for the obvious reasons. Apart from the financial inequities, I fear the expansion of an entirely different gap, caused by the inability to see oneself in a less advantaged person’s shoes. Reducing the economic gap may be impossible without also addressing the gap in empathy.

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Daniel Goleman, a psychologist, is the author of “Emotional Intelligence” and, most recently, “Focus: The Hidden Driver of Excellence.”