Our Future is CallingPosted: December 29, 2011
The massive loss of economic value that has occurred so far this century should give us pause when we hear about both austerity agendas and slightly improved conditions. Economist Dean Baker reminds us that we’re not looking at clear steering ahead even if we slowly mend. Here are some things to consider. The incredible loss of wealth on the kinds of investments made by average Americans and from the collapse of the housing market has severely weakened millions of Americans and decreased their net worth. Statistics like these are likely to keep older workers on the jobs far past their prime. Baker responds to Daily Beast writer Zachary Karabell.
The unemployment rate for the year is likely to average above 9.0 percent. The number of people who are involuntarily underemployed has generally been 8.5 and 9.0 million, close to double the pre-recession level. Millions more have given up looking for work altogether. Real wages have been stagnant or falling for the last 4 years, with little prospect of turning around any time soon as the high rate of unemployment continues to depress wages.
In addition, tens of millions of baby boomers are approaching retirement with almost nothing to support themselves other than their Social Security. According to a recent study by the Pew Research Center, the median older baby boomer (ages 55-64) had just $162,000 in wealth. This is roughly enough to buy the median home. This means that if this household took all of their wealth, they can pay off their mortgage. They would then be completely dependent on their Social Security to support them in retirement. And, half of older baby boomers have less wealth than this.
In short, most of the country is looking at a situation where they are desperate for work or fearful about losing their job. Older workers are looking at a retirement where they are not far above the poverty level, even after spending a life working in middle class jobs. The bad attitudes toward this situation are not the result of “groupthink” as the column asserts, they are the conclusion of people better able to understand the economy than Karabell.
For extra credit in the acting up department Karabell throws in a few broad assertions that are simply wrong. For example he tells us that:
“Overall growth for the next year is shaping up to be 2 percent, give or take. That is pretty lame compared to the heady days of the 1990s or even the mid-2000s. But those seemingly halcyon periods benefited from bubbles, whether the stock market and telecom spending in the 1990s or the housing and debt-inflated growth of the mid-2000s. So while activity now doesn’t look so good by those comparisons, it is actual economic activity undistorted by bubbles. It’s as if the economy of the past 20 years was wearing platform shoes (“Wow, she’s like 6 feet tall”); it looked a lot bigger than it was.”
Actually 2.0 percent annual growth would look bad compared to the 80s, the 70s, the 60s, and the 50s. It is simply a very bad growth rate. Trend productivity growth in the U.S. is between 2.0 and 2.5 percent. Labor force growth is averaging around 0.7 percent. This means that we need growth of around 2.5 -3.0 percent just to keep even with the growth of the labor force. At a 2.0 percent growth rate unemployment will be rising, not falling. This has nothing to with platform shoes, it’s arithmetic.
Furthermore, given the severity of the downturn we should be seeing growth in a 5-8 percent range to get the economy back to its potential level of output. People should be outraged at the thought that the economy might only grow at a 2.0 percent rate.
Lengthened work lives and growth too small to replace jobs lost over the last five years is likely to keep pressure on younger workers. Even younger workers that are well educated and should have decent job skills are not able to find decent, well-paying jobs in this economy. They also have made huge investments in their educations and are carrying high levels of student loan debt. The Atlantic Wire says that we may have a ‘lost generation’ in the making.
During the last decade, the unemployment rate for young people spiked to the highest levels since World War II–only 55 percent of Americans aged 16 to 29 have jobs, a 12 percent drop from the employment rate in 2000. Faced with a grim outlook, many young people aren’t leaving home until their 30s–the number of Americans aged 25 to 34 living with their parents jumped 25 percent during the recession. Last month, The New York Timescalled the collective youth “Generation Limbo,” but after seeing the new census data, Harvard economist Richard Freeman takes it a stage further. “These people will be scarred, and they will be called the ‘lost generation’–in that their careers would not be the same way if we had avoided this economic disaster,” Freeman told The Associated Press. The world has seen a number of lost generations in the past century. Gertrude Stein first coined the term in 1920s in reference to the Europeans who grew up during World War I, but it’s most recently referred to Japanese youth who grew up during that country’s recession in the 1990s. In Japan, the lost youth are referred to as the hikikomori, and the decade of widespread unemployment meant that many of them never had the chance to start careers. In the 10 years of recession in Japan the number of young people working temporary or contract jobs doubled, and the collective hopelessness lead to a sky-rocketing suicide rate.
A country with an economy that relies heavily on household spending cannot thrive and grow under these scenarios. It is well known in macroeconomic research that high, sustained levels of unemployment have a multiplying impact on the rate of economic growth. An economic forecast prepared by Goldman Sachs considers government policy an “impediment to growth”. Fiscal tightening on both the state and national level will make things much worse.
Given the fiscal outlook remains difficult, we believe we’re unlikely to get further stimulus, and that government will continue to be a modest drag on growth. We believe we will see an increase in the rate of fiscal tightening at the federal level over the next couple of years. Fiscal policy was a boost in 2009, roughly neutral in 2010, and in 2011, roughly a 1 percentage point drag. In 2012, the impact depends on upcoming policy decisions. At best from a short-term perspective, if the Obama administration’s package passed, which seems quite unlikely, fiscal drag would be neutralized; at worst, if all temporary stimulus expires, we’d expect a fiscal drag of more than 1 1/2 percentage points of growth in early 2012. The more likely, middle ground outcome: the administration and Congress agree on tax-related proposals and probably extend the one-year payroll tax cut for one more year. There will be a bigger problem in 2013 with the expiration of the Bush tax cuts, as well as any fiscal stimulus measures.
I think it’s rather telling to characterize our government as a drag on economic growth. It’s clear that partisan politics have put elections and ideology ahead of any concern for the future of our country. Nothing we’re talking about here is something that shouldn’t be known by folks who had an introductory university economics courses. We’re unfortunately captured by a group of people in power that have no concern for the good of the country as a whole.
Paul Krugman put up this graph showing the level of Gross Investment by State and Local Governments. This would be the kinds of infrastructure that support modern life as we know it and include things like roads, bridges, new school buildings, sewers, airports, and other things that also drive local business growth. As you can see, there is a serious lack of infrastructure investments by state and local governments this century. Since interest rates are cheap, now is a good time to do these kinds of long term projects that would provide jobs and incentives for local businesses to expand. The majority of our states have balanced budget amendments which disallow deficit spending and in some cases, borrowing. Long term investment is nearly impossible in many states. Krugman argues that the timing is right to invest in roads, bridges, airports, and other important public projects. It’s a perfect time to look at an Infrastructure Bank which had broad bipartisan support during the Bush/Cheney years. President Obama has proposed such an institution.
The proposal, modeled after a bipartisan bill in the Senate, would take $10 billion in start-up money and identify transportation, water or energy projects that lack funding. Eligible projects would need to be worth at least $100 million and provide “a clear public benefit.” The bank would then work with private investors to finance the project through cheap long-term loans or loan guarantees, with the government picking up no more than half the tab — ideally, much less — for any given project.
There is still this insane argument out there that the US is going broke and can’t afford to spend any money. This confuses the institution of government with households and businesses. A government has the ability tax and the national government has the ability to print money and borrow in perpetuity. This country spent far more of its future output during the Great Depression and World War 2 and the results speak for themselves. We’ve had most of this decade’s fiscal policy using taxes to encourage gambling for paper profits, not actual production of goods and services. Europe’s policy makers are stuck in the same mindset. You would think that the experiences between the two world wars would’ve made an impression on them. We’ve spent trillions of dollars propping up the world’s gambling houses without telling them they must lend for productive purposes as a condition of those bailouts. I have no idea how many more years that economists will have to scream that it’s the aggregate demand stupid at policy makers, but I have a feeling we won’t be stopping any time soon.