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What’s holding back the US economy?


The headline figures say that real gross domestic (GDP) product grew at an annualized rate of 2.8% in the fourth quarter of 2011 (October through December).  This is good news.  Growth in the third quarter was only 1.8%.

So is the recovery finally here?

Hardly.  Read past the headlines and the figures start to look pretty glum.

For example, final sales in the US economy — defined as GDP less change in private inventories — increased at a rate of only 0.8% in the fourth quarter.  In the third quarter, final sales were rising at a 3.2% annual rate.

In other words, out of the 2.8% growth in the US economy in the fourth quarter of 2011, 2.0% came from businesses building inventory.  Only 0.8% came from actual sales of goods and services.

What does that mean?  As with most economic statistics, there are two possible interpretations.

The optimistic interpretation is that businesses were building up inventories in late 2011 because they are expecting high sales in 2012.

The pessimistic interpretation is that inventories rose because businesses just couldn’t sell stuff.

Unfortunately, there’s strong circumstantial evidence for the pessimistic interpretation.

When measured in actual dollars, without adjusting for inflation, GDP rose at an annual rate of 3.2% annual rate in the fourth quarter, compared with a 4.4% rate in the third.

The only reason real GDP — adjusted for inflation — rose faster in the fourth quarter was that inflation declined from 2% to under 1%.

So GDP growth actually slowed in the fourth quarter of 2011, but inflation slowed as well, resulting in a net increase in GDP growth.

When do prices go down?  When stores can’t sell stuff.  That’s why the pessimistic interpretation of the inventory buildup is probably the right one.  Inventory up, prices down … that’s great for consumers, but terrible for GDP.

Looking at the full year 2011, real GDP increased just 1.7%, compared with 3.0% in 2010.  Factor in 1% annual population growth and GDP per capita hardly increased at all in 2011.

Why is the economy at a standstill and teetering on the edge of a new downturn?

In two words: government spending.

Though you wouldn’t know it from the rhetoric coming out of Washington, both federal and local government spending fell in 2011.  With the decline in spending has come declining employment.  US governments at all levels are cutting us back into recession.

The government simply has to start spending.  Not on corporate subsidies and tax incentives in the Plutonomy, but on the things people need here and now in America’s Realonomy.  Schools, hospitals, libraries, and public services of all kinds should be hiring, not firing.

We are cutting our way from a recession into a depression.  Now is the time for government action.  The economy can’t wait until after the elections.  Americans need jobs now, not in 2013.

We need 15 million new jobs — now.  If the government created just 5 million, the multiplier effect of those 5 million people spending their paychecks would do the rest.  Governments at all levels should be hiring, hiring, hiring.  The time to prevent a depression is yesterday.  For too many people, it’s already be too late.

Good news and bad news about GDP growth


The U.S. economy grew at an annualized rate of 2.8 percent in the fourth quarter of 2011, the Bureau of Economic Analysis reported.

With Europe in crisis and the world teetering on the brink of a new global recession, that quarterly growth figure is a welcome ray of sunshine in an otherwise bleak outlook. The nation accounts for 23 percent of total world GDP.

The 2.8 percent headline figure represents the real (adjusted for inflation) growth in gross domestic product (GDP) between the third and fourth quarters of 2011, adjusted to account for ordinary seasonal variability and converted to an annual growth rate.

It compares favorably with both the 1.8 percent figure for the third quarter and the economy’s long-term average annual growth rate of 2.5 percent over the past two decades.

Unfortunately for the United States and its trading partners, the news isn’t as good as it seems.

Final sales — defined as GDP less change in private inventories — increased at a rate of only 0.8 percent in the fourth quarter.

In other words, only 0.8 percent of the fourth quarter’s growth came from actual sales of goods and services. The other 2 percent came from businesses building up their inventories.

What does that mean? Here are two possible interpretations.

The optimistic interpretation is that businesses were accumulating inventory in late 2011 in anticipation of high sales figures in 2012. Seen in this light, inventories can be a leading economic indicator. They suggest stronger economic growth in 2012.

The pessimistic interpretation is that inventories rose in the fourth quarter of 2011 because businesses couldn’t sell their goods. With sales slowing, inventories pile up. This view doesn’t bode well for 2012.

While either interpretation could be correct, there’s strong circumstantial evidence for the pessimistic interpretation.

When measured in actual dollars, without adjusting for inflation, nominal GDP rose at an annual rate of 3.2 percent annual rate in the fourth quarter, compared with a 4.4 percent rate in the third.

The only reason that real GDP (which is adjusted for inflation) rose faster in the fourth quarter was that inflation declined from 2 percent to less than 1 percent.

This means that GDP growth actually slowed in the fourth quarter of 2011, but inflation slowed even more, resulting in a net increase in real GDP growth.

Strong demand causes inflation to rise; weak demand causes inflation to fall. Falling inflation indicates that demand is weak. This suggests that the pessimistic interpretation of rising inventories is probably the right one.

The 27 January fourth quarter GDP figures are only “advance” estimates, not final results. Revised figures will be released on Feb. 29 and final figures on March 29.

GDP figures are often revised downward after the initial estimates have been published. Inventory statistics in particular have been a source of error.

The U.S. economy has shed more than 6 million jobs since the beginning of the recession in December 2007.

Due to a rise in part-time employment, the number of Americans employed in full-time jobs is down more than 8 million.

According to the Bureau of Labor Statistics, the economy is currently creating about 150,000 net new jobs per month. Even accounting for retirees, that barely keeps pace with the rate of new graduates entering the labor market each year.

There is little relief in sight. At the Fed’s latest Federal Open Market Committee (FOMC) meeting January 24-25, expectations were muted.

The FOMC said in its official statement that it “currently anticipates that economic conditions — including low rates of resource utilization and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

In promising to keep interest rates “exceptionally low” the FOMC indicates that it expects the US economy to remain sluggish for at least the next three years.

Officially, the economy entered recession in December 2007 and emerged into recovery in July 2009. The recovery, however, has been slow and relatively jobless.

In the experience of most ordinary Americans, the recession that started at the end of 2007 is not yet over. If the FOMC expects current economic conditions to continue through the end of 2014, that suggests a grand total of seven years of slow going.

This raises the question: when does a recession become a depression? There’s no “official” definition of a depression used by U.S. or international authorities, but the current experience must come close.

Full-year 2011 real GDP growth for the United States stood at 1.7 percent. Factoring in population growth, real GDP-per-capita was roughly the same last year as it was in 2005.

It’s certainly good news that the U.S. economy is growing again, but if the Federal Reserve forecasts are right it will be a long time before Americans have anything much to cheer about. Depression or no depression, Americans are in for a long, hard slog.

When does a recession become a depression?


The US economy officially went into recession in December 2007.  The recession supposedly lasted eighteen months.  By July 2009 the economy was growing again.

Well, at least the Plutonomy was growing again.

Over the past two and a half years executive pay has powered ahead.  According to corporate governance monitors GMI executive pay was up 36% in 2010, and though the data are not yet in no one thinks the pace slowed down in 2011.

Luxury goods sales hit record levels in 2011.  Tiffany’s took a stock market beating because Tiffany’s 2011 sales growth was “only” 4% in the Americas, versus 9% in 2010.

Corporate profits are at record levels, estimated to have risen “only” 6% in 2011 after larger increases in 2010 and 2009.  Companies like Apple, Google, Microsoft, and even Cisco Systems are sitting on literally tens of billions of dollars in uninvested cash.

Meanwhile in the Realonomy where the Other 99% live things aren’t so rosy.

The US economy employs 5 million fewer people than it did in 2007.  Many of those still employed have been forced to switch from full-time to part-time jobs.  The number of Americans employed full-time is down 8 million from 2007.

Meanwhile the working-age population has increased by 7 million people, giving a total employment deficit of 15 million jobs.

So corporations are hoarding record profits while unemployment stands at record levels.  That’s not a recession.  That’s daylight robbery.

When will it end?  The answer seems to be: no time soon.

The Federal Reserve Board’s Federal Open Market Committee (FOMC) met Tuesday and Wednesday January 24-25 to consider the future of the American economy and the Fed’s policy options.

In their official statement, the FOMC said that it “currently anticipates that economic conditions — including low rates of resource utilization and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

In other words, we’re screwed.

The Great Depression wasn’t one long recession.  Officially, the National Bureau of Economic Research (NBER) recorded a first recession in 1929-1933 and a second recession in 1937-1938.  But you wouldn’t have known it if you were looking for work.

The reality is that the Realonomy has been in recession since the beginning of 2008.  The FOMC doesn’t expect any real improvement until the end of 2014 at the earliest.  That’s at least seven years of bad stuff going down in the Realonomy.

And maybe more.

Whether the NBER ultimately divides the period 2008-2014 into one recession, two recession, or many recessions, it’s starting to look like one big thing: a second Great Depression.

Recession or Depression — call it what you want.  We need 15 million new full-time jobs to catch up to where we were before we even think about moving ahead.  We’re currently creating fewer than 2 million jobs a year, many of them part-time.  And the whole while the population is growing.

On the math, it’s a Depression.  Calling it a Depression won’t change it, but it might change how government goes about fixing it.  We need jobs — millions of jobs — today.  The private sector isn’t producing them.  Someone has to.

America’s incredible shrinking government


We hear all the time about America’s bloated federal government and how it’s grown like a kind of bureaucratic kudzu to smoother and strangle our otherwise dynamic economy. Now that federal spending accounts for over 25% of America’s gross domestic product this seems more true than ever.

Throw in state and local spending and it turns out that total government spending accounts for over 35% of US national income. That’s over 5 trillion dollars of government spending each year. That sure sounds like socialism.

If only.

In fact, it’s completely ridiculous to measure the size of government in terms of spending. Most government “spending” is just money that passes through government hands on the way from one person to another.

The biggest example of this is Social Security. The government doesn’t spend money on Social Security any more than a bank spends money when you make a withdrawal. Social Security is a transfer program, not a spending program.

Ditto Medicare, TANF, and Food Stamps.

A better way to measure the size of the government than by the size of its budget is by the size of its payroll. How many people does it employ?

In terms of employment, the size of government hit a high point in 1976 and has been declining every since. State and local figures are difficult to verify, but the statistics for federal employment are clear. It has dropped from 1.34% of all American workers to just under 1%.

That’s a proportional decline of 1/4 over the past 35 years — it’s America’s incredible shrinking government.

State and local governments add a further 10-15% of the civilian workforce, depending how you count government-related institutions like county hospitals. State and local government employment also maxed out in the 1970s and has declined by about a quarter since then.

The simple fact is that American government is small and shrinking. Maybe our problem is small government. It certainly isn’t big government.

The realonomy explained


In 2005 Citigroup stock analysts Ajay Capur, Niall Macleod, and Narendra Singh had an incredible insight.

Once upon a time GDP growth meant that the whole economy improved.  But in an age of rapidly rising inequality, it could just as well mean that a few people got much better off while everyone else stagnated.

It goes like this.  Imagine an economy with 300 million people.  All of them get a 2% raise every year.  Overall GDP per capita rises at a 2% annual rate.

Now imagine another economy with 300 million people.  The richest 3 million get 10%, 20%, or 30% raises every year.  The rest get nothing.  Overall GDP per capita rises at a 2% annual rate

In the first economy, the benefits of growth are widely shared.  In the second, the benefits are all garnered by an aggressive ruling clique.

Either way, annual GDP growth is 2%, but that 2% growth figure means very different things in the two different economies.  In the second economy, only the rich matter.  The other 297 million people can all go to hell.

Capur, Macleod, and Singh’s insight led them to coin a new word for this brave new economy, the “Plutonomy.”  They said the US, UK, and Canada were all Plutonomies.  Anyone seeking to sell in a Plutonomy should focus on the richest 1% of the population.  The rest be damned.

Investors who followed Capur, Macleod, and Singh’s advice have made a killing over the past six years.  Despite global recession, luxury goods sales have been growing by double digits every year.  Rolls Royce and super-yacht sales are at all-time highs.

Leaving aside the Plutonomy, the rest of the economy where the “other 99%” of the population live is the Realonomy.  The Realonomy is the Plutonomy as experienced by the other 99% who are not mass-affluent, near-wealthy, wealthy, or super-wealthy.  The Realonomy is our economy.

The Plutonomy and the Realonomy are flip-sides of the same coin.

On the Plutonomy side of the coin, rich (or even just comfortable) Americans, Canadians, and Britons are doing better every year.  The recession was scary only when stock markets were tanking.  After the 2008 bank bailout, life went back to normal and things have been looking up ever since.

On the Realonomy side of the coin, the recession is now entering its fifth year.  Jobs are uncertain.  Unemployment is a real and constant worry.  Government services are being rolled back, and retirement savings are at risk.  Austerity looms large as a threat to middle class ways of life that once seemed secure and unquestionable.

The Plutonomy could not exist without the Realonomy.  Real economic growth hasn’t increased or decreased.  It’s been about 2% per year since the 1950s.  What’s changed is who gets the extra income generated by that 2% growth.

The economy isn’t in recession.  The economy has been growing again since July, 2009.  The problem isn’t the economy.

The problem is that for the past decade, nearly all of America’s economic growth has gone to the top 1% — to the Plutonomy.  The Realonomy has been stagnant since the turn of the millennium.

The economy isn’t in depression.  It’s just you.  It’s the Realonomy.

The biggest tax cut of all


Between the 1950s and the 2000s marginal taxes on the wealthiest Americans have fallen from 90% to 35%. As late as 1982 the top marginal tax rate was still 50%, a rate that seems unimaginable today.  What a difference 30 years can make.

But as large as these tax cuts have been, the real cuts have been even bigger.  Many wealthy Americans simply don’t bother to declare their full incomes.  They can do this safe in the knowledge that IRS audits these days are as rare as hens’ teeth.

The reason is that Congress has cut IRS staffing so much over the past two decades that there’s simply no one left to do the audits.  Claim what you want.  If your taxes are complicated enough, no one will bother to audit you.  No one will ever know.

Since 1990 IRS staffing has been cut by 1/3 in real terms, despite the increasing number of individuals and companies filing taxes and the increasing complexity of the tax code.

For ordinary wage-earners down in the realonomy, this makes no difference.  Your wages are reported by your employer directly to the IRS on your W-2 forms, and it’s up to you to document why you should get any of it back as a refund.  It’s almost impossible for wage-earners in the Realonomy to cheat on their taxes.

For people with very high incomes, however, most of their income never gets reported on a W-2 form.  It comes in the form of stock options, deferred compensation, wages disguised as investment income, business profits, and the like.  Many of these forms of income are taxed at much less than the top 35% marginal tax rate.  Plus there are a myriad of targeted deductions that the wealthy can use to help minimize their tax bills.

The only way to make sure the truly wealthy pay the taxes they owe is through tax audits.  Since Congress has cut the IRS auditing budget down to almost nothing, very few tax returns are audited these days.  The IRS reports that it audits just 1.66% of the tax returns of high-income individuals.

In other words, the wealthy can report whatever they want with less than a 1 in 50 chance that anyone will even look at their returns.  Audit rates are even lower in the Realonomy, but most of us have little choice but to pay our taxes.  For the rich, taxes are increasingly optional.  No one knows how much income goes unreported, but the defunding of the IRS may just be the biggest tax cut of all.

Europe doesn’t have to lose its future to emigration


As everyone knows, Europe is in crisis.

The crisis is not economic.  Eurostat estimates that the 27 European Union countries grew at a collective rate of 1.6% in 2011.  Only two EU countries — Greece and Portugal — had negative real growth rates.

Even these negative growth rates are more the result of the austerity policies put in place after the global recession than the result of the recession itself.

The crisis is not political.  At December’s Brussels summit an overwhelming majority of EU countries agreed to work together for closer European integration.  Only the UK — never an enthusiastic EU member — stood out in the cold.

No, the real European crisis is human.  New graduates can’t find jobs.  Qualified young professionals are working in bars and restaurants.  And many of Europe’s most capable, most entrepreneurial youth are simply moving overseas in search of better opportunities.

Europe is losing its future to emigration.

The first country hit was Latvia.  When the global financial crisis hit in 2008, Latvia had two choices: float the Lats or deflate the economy.  Floating the Lats would have meant massive losses for foreign investors.  Latvia chose deflation.

Latvia’s self-imposed austerity budgets in 2009-2010 destroyed the economy and pushed thousands of young, energetic Latvians into seeking careers abroad.  Since they left young, many of them will marry and start families abroad, never to return.

They may maintain linguistic and cultural links to their home country, but their productivity will benefit mainly their destination countries.  Latvian nurses and architects serve as extraordinarily over-qualified nannies and construction workers in Germany, and the UK.

The maintenance of Latvia’s Euro link was a test run for keeping Ireland, Greece, and now Portugal in the Euro through the imposition of similar extreme austerity budgets.

Young people are emigrating from all of these austerity countries.  Young Irish and Greeks are now pouring into Australia, where they join large existing diaspora communities.  Portuguese graduates look instead toward rapidly-growing Brazil.

The problem is worst on the periphery, but even Germany and France are losing top graduates to overseas destinations.  Germany especially has had stagnant wages for a dozen years or more.  As a result, the rest of the world has been flooded by highly capable young German graduates.

In the great migrations of the nineteenth and twentieth centuries it was mainly poor, uneducated Europeans who left for new worlds overseas.  While it may have been heart-breaking for individuals and families to see their loved ones depart, it probably did their countries little harm.

In fact, many of the most successful emigrants returned from overseas rich in skills and money to make bigger contributions than they ever could have as penniless peasants.  Andrew Carnegie, for example, left Scotland an uneducated poor youth and returned from America to build libraries across his native land.

Today, however, it is the best-qualified, best-educated, most energetic Europeans who are leaving.  That is a great boon to Australia, Brazil, and Canada, but a tragic loss for Europe.  For the first time Europe is experiencing the kind of brain drain that used to be associated only with the world’s poorest countries.

Sadly, there’s a certain ironic justice in this.

For decades Europe and the west have imposed pro-business, small-government policies on developing countries through aid conditionality and structural adjustment programs.  And for decades young professionals left these countries for better opportunities in Europe.

Now Europe is imposing pro-business, small-government policies on itself.  And young Europeans professionals are responding just like young African, Latin American, and Middle Eastern professionals before them.  They are leaving.

If Europe wants to keep its new graduates, it must give them opportunities for personal and professional growth.

In a post-industrial economy, that can only be done by expanding the civil service.  European countries should be hiring more city planners and social workers.  They should be reducing class sizes by hiring more teachers and aides.  They should be expanding, not reducing, state health insurance coverage.

Of course, all this costs money.  Europe’s wealthiest will have to pay a little more in taxes.  Europe’s bondholders will have to accept lower interest rates.  Europe’s investors will have to keep their money in registered accounts, not shadowy tax jurisdictions.  Europe’s bankers will have to live with smaller bonuses.

Europe’s shipyards will have to build fewer yachts and more fishing boats and ferries.

The reward for all this sacrifice on the part of comfortable classes will be a healthier future for their children, their neighbors’ children, their countries, and their continent.  A few supremely comfortable people will have to sacrifice to make society a better place for all.

Patriots across Europe who want to see their countries and their cultures flourish should focus on improving the lives of ordinary people, not on creating profits for their wealthiest citizens.

Professionals especially are the backbone of the economy, the culture, and ultimately the state.  What’s more, most professionals aren’t looking for outsized pay packages.  They just want the opportunity to serve with pride and dignity.

Most professionals work (directly or indirectly) for government, while most taxes are paid (directly or indirectly) by businessmen.

Profits for businessmen or pay for professionals.  Ultimately that’s the choice to be made.  Europe has the financial resources it needs.  The problem is not the amount or money, but its distribution.

When it comes to policies to prevent emigration, it may be hard for people to do the right thing, but it’s not hard to see what is the right thing to do.

Job churning, job creation, and the reregulation of America’s realonomy


Where do jobs come from?  Pro-business groups regularly repeat the mantra that jobs are created by entrepreneurs, strong-charging world-changers who fight endless government interference to build businesses from scratch.  But entrepreneurs don’t create jobs out of thin air.

Down in the realonomy, where most Americans live and work, entrepreneurs mainly “create” jobs by destroying them somewhere else.  Some people call this “creative destruction.”  I call it “job churning.”

For example, when Wal-Mart outsources its store cleaning to small local firms, poorly-paid jobs with high-pressure working conditions in a large corporation are turned into terribly-paid jobs with horrendous working conditions in small companies.  There’s no net job creation.  There’s just job churning.

Similarly, when people work at a local McDonald’s franchise, they are working for a small firm.  The nameplates on their shirts may portray the golden arches or a waving Ronald McDonald, but their paychecks are signed by local franchisees.  When local diners close and their employees go to work at fast food chains, that’s churning.

Job churning isn’t restricted to the lowest rungs on the job ladder.  Over the past thirty years major airlines have outsourced thousands of pilot jobs to upstart regional airlines.  The same plane type is flying the same route, but instead of a 30-year veteran a newly-qualified pilot is at the controls.  Is that job creation?

Almost by definition most jobs are created in small firms, since when you start with zero employees there’s nowhere to go but up.  But though our mental image of a small startup is a tech firm in Silicon Valley, statistically it’s much more likely to be a contract cleaning firm outsourcing unionized school janitors’ jobs.  Small firms tend to pay worse and offer fewer benefits than large firms.

In rough numbers, there are about 120 million private sector jobs in America.  Half of them are at firms of fewer than 500 employees and half of them are at firms of 500 or more employees.  The smaller firms pay an average of $39,000 per year while the larger firms pay an average of $49,000 per year.

In addition to the 120 million private sector jobs, there are about 20 million government workers and 20 million unemployed.  The government workers earn an average of $47,000 per year, similar to workers in large firms.  The unemployed, of course, are paid very little.

In short, America’s labor force breaks down roughly 60-60-20-20 into large firms, small firms, government workers, and the unemployed.  These 160 million people are the backbone of America’s realonomy — the real economy that pays the bills for the vast majority of Americans who are not senior managers or corporate CEOs.  Of course, this is a simplification, but it does put things in perspective.  Some obvious policy implications pop out.

We have to find jobs for 20 million people.  In order to do this, we have to encourage big firms to hire more people.  Small firms will continue to hire in an endless process of job churning.  A few successful small firms will hire until they become big firms.  But most of the good jobs will come in big firms.

How do we get big firms to hire?  We regulate them.  Americans used to take it for granted that big firms should be regulated, just as they now take it for granted that big firms should be left alone.  As surely as deregulation has destroyed jobs, reregulation would restore them.

Large firms should be forced to comply with health and safety regulations.  Truck drivers shouldn’t drive 20 hours in a day.  Pilots should sleep in beds, not on airport benches.  Meat processing plants shouldn’t be run on such tight staffing that workers end up routinely injured.

Examples like these can be found in every sector of the economy.  Deregulation has made American businesses more profitable, since deregulated businesses can do the same work with fewer employees.  But what good does that do us?

The “other 99%” of Americans who aren’t senior managers or corporate CEOs would be better off if workplaces were healthier, safer, and lower-pressure.  Imagine if all American workers received mandated vacation time like they do in every other developed country.  Imagine if Americans could stay home with pay when they catch cold.  Half of all American workers can’t.

Government employment must also be part of the solution.  Governments at all levels currently employ just 20 million people.  There’s plenty of scope to increase this.  We could immediately put millions of people to work as teachers’ aides, social work assistants, and home healthcare helpers.

Over the longer term there are roads to pave and parks to improve.  Our air traffic control system is dangerously understaffed.  We even need more tax collectors.  Government has been starved for too long.  An expansion of government employment by 5 million over five years is entirely within our reach.

I know that the prescriptions laid out here are considered outrageous in today’s America.  That’s just sad.  It means that something is wrong in today’s America.

When good jobs with paid vacations are considered outrageous, something is wrong.  When hiring more teachers’ aides and air traffic controllers is considered outrageous, something is wrong.  When the idea that the driver behind the controls of a 40 ton 18-wheeler should be well-rested is considered outrageous, something is wrong.

America’s realonomy has taken a beating in the three decades of deregulation that started in 1981.  Like it or not, reregulation is the key.  Americans must see the anti-regulation rhetoric of big business for the self-serving slop that it is.  We’ve tried deregulation.  It’s failed.  Let’s stop failing in 2012.  Let’s reregulate the realonomy.