Category Archives: American Economy

Annals of the Great Recession X.

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Jeff Madrick, once a New York Times economics columnist, argues that America’s economic decline can be traced to the 1970s.[1] Beginning with the Great Depression, governments had imposed tight controls on American financial markets. These controls had made banking boring. That was a good thing for anyone who had ever lived through a financial panic (or watched that scene in “It’s a Wonderful Life” where Jimmy Stewart abandons his honey-moon to save the savings-and-loan when the town bank collapses. However, it also restricted the opportunities for profit in one sector of the economy. Economists at the University of Chicago, inspired by the writings of Milton Friedman, pushed an “extreme free-market ideology.” Embraced by greedy financial industry leaders, then by the Republican Party in the era of Ronald Reagan and later by Democrats as well, these ideas led to the de-regulation of the American financial industry. “And Hell followed with him.”[2]

Reckless lending became progressively ever more deeply entrenched among bankers. Successive crises of ever greater severity sprang from these practices: wild real estate speculation in the 1980s; the Latin American lending binge; the “dot.com” bubble; and then the nightmarishly complicated real estate investments that ended in the financial crisis of 2007-2008. The government repeatedly had to step in to bail-out reckless bankers in order to avert an even worse disaster for the whole economy. Thus, profits were privatized while losses were socialized. Not exactly what Milton Friedman had in mind.

To a historian, some of Madrick’s argument appears kind of rickety. He, among others, appears to believe that the American prosperity and global economic domination of the period from 1945 to 1975 was somehow “normal.” However, it is at least equally possible to regard this situation as “abnormal” and bound to end. The financial industry (or just “greed”) can hardly be blamed alone for the complex changes that have undermined America’s position.

Then, for purposes of analysis and argument, he separates out free-market thinkers and financial industry leaders. However, in real life they existed within and responded to an evolving context of beliefs and influences. Thus, the inflation of the Vietnam years intersected with government regulations on the interest banks could pay depositors. People wouldn’t keep money in banks unless they could get a higher rate of interest. So, the interest rate regulations had to be relaxed.

Then, he appears to believe that “greed” drives the elite, but that the same behaviors by people lower on the income pyramid are unexceptionable. In 1970, 381 major strikes hit American companies as workers drove for higher pay and benefits at a time when foreign competition had begun to exert heavy pressure.[3] Why is one act greed, the other not?

Then, a lot of the American economy was deregulated from the 1970s on. Takes airlines as an example. Between 1980 and 2009, inflation-adjusted air fares fell by fifty percent.[4] Air travel increased, but crashes did not increase. (I’ll grant you that the air travel experience now reminds of a trip I once took on a Mexican bus.)

So, the part is not the whole. Blanket statements about regulation don’t get us very far.

[1] Jeff Madrick, Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present (New York: Alfred A. Knopf, 2011).

[2] Revelation, 6:8.

[3] See: “American union, stay away from me uh.” March 2015.

[4] See: http://www.theatlantic.com/business/archive/2013/02/how-airline-ticket-prices-fell-50-in-30-years-and-why-nobody-noticed/273506/

Inequality 6.

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Does economic inequality matter? Citing Thomas Piketty’s book Capital in the Twenty-First Century, Neil Irwin argues that there is a “deepening consensus…that rising inequality of income and wealth is an important trend over the last two or three decades.”[1] Eduardo Porter regards these social ills as “an existential threat to the nation’s future.”[2] NB: Is he correct? However, a “trend” isn’t either a problem or a solution. It is just an observed movement. People assign meaning to trends. The meaning assigned reflects the ambitions, fears, and beliefs of the people doing the assignment.

What has caused the stagnation in most incomes? Since 1973 productivity growth in the American economy has slowed dramatically.[3] That is the principal cause of the stagnation in most incomes. According to the most-recent Economic Report of the President, the failure to maintain the productivity-growth of the pre-1973 period means that the average American family now earns $30,000 a year less than it would have earned. In contrast, the increase in income inequality over the same period accounts for $9,000 a year for the same family.[4]

Regardless of the causes of rising inequality, liberals see a correlation between rising inequality and social problems. The teen-age birth-rate in the United States is about seven times as high as in France. More than one in four children lives with a single parent. More than twenty percent of Americans live in poverty. Seven out of every thousand adults is in prison.[5] A child born to a white, college-educated, married woman has the same chance of survival as does a child born to a similarly-circumstanced woman in Europe. However, children born to non-white, poor, single women have a much greater chance of dying young. Mental illness is more common among poor people than among wealthy people. Between 2009 and 2013, 9 percent of people with incomes below the poverty level reported “serious psychological distress,” while only 1.2 percent of people earning more than $80,000 so reported.[6] NB: Hard to get ahead if you’re mentally ill. On the other hand, 91 percent of people below the poverty level did not report “serious psychological distress.” Why not? Shouldn’t you be all wrought-up over your miserable situation? “People in low-income households don’t live as long [as people in high income households].”[7] By one measure, where there is a great disparity in income, upper income people live almost two days longer for every one-point increase in income disparity. In places with high inequality, you can live eleven days less than in places with low economic inequality. “But what causes the drop in life expectancy is debatable.”

Why this social disaster in the midst of so much other success? The conservative argument offered by Charles Murray and others is that the welfare state itself undermined the character of its beneficiaries. The liberal argument offered by Eduardo Porter is that Americans have been guided by a shared disdain for collective solutions and the privileging of individual responsibility. Therefore, America had relied on continuing prosperity instead of a welfare state. When long-term economic troubles hit, many Americans plunged through the cob-web of a “safety net.”

[1] Neil Irwin, “Things Bernanke Should Blog About,” NYT, 31 March 2015.

[2] Eduardo Porter, “Income Inequality Is Costing The Nation on Social Issues,” NYT, 29 April 2015.

[3] Tyler Cowen, “It’s Not the Inequality; It’s the Immobility,” NYT, 5 April 2015.

[4] This suggests that the policy prescriptions of Bernie Sanders target the smaller source of Americans’ discontent.

[5] That is three times the rate of 1975.

[6] “Noted,” The Week, 12 June 2015, p. 16.

[7] Margot Sanger-Katz, “How Income Inequality Can Be Bad for Your Health,” NYT, 31 March 2015.

Annals of the Great Recession IX.

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In the first five years after the “Great Recession” (i.e. 2008-2013), 60 percent of the new jobs that were created in the “recovering” American economy were low-wage jobs. By early 2013, a quarter of jobs paid less than $10 an hour. At the same time, from 2006 to 2012 the top 50 companies that relied on of low-cost labor paid $175 billion in dividends to stock holders. That is, middle and upper-income group stock portfolios rebounded from the recession while lower-income group earnings were held down. This created the much debated problems of the “working poor” and the legal minimum wage.[1]

Who are the “working poor”? The answer depends on your definition. One definition is people living in families in which at least one member is working but earns under the government-defined poverty line: $11,702 for an individual and $23,021 for a family of four. By this count, there are 46.2 million “working poor” in the United States. A broader definition, favored by activists, is anyone working who cannot afford the basics: food, clothing, housing, transportation, child-care, and health-care.

Who falls into this group? About 10 percent are white, mostly living in the South and Southwest. More than 25 percent each are African-American or Latino, distributed much more evenly around the country. Big business chains (Walmart, Target, fast-food chains like McDonald’s and Pizza Hut) that base their strategy on low-cost labor employ a lot of these people. Broadly, poor people come from poor families. Men from poor communities tend to have little education when the modern economy puts a premium on education; they have lousy jobs and are frequently unemployed; often they don’t get married or get divorced; lots of kids grow up in single-parent homes and go to the same lousy schools as did their parents. All this raises the prospect that we have created a hereditary under-class that amounts to a huge waste of human potential.

The federal minimum wage is $7.25 an hour. It hasn’t budged since 2009. Between 2009 and 2012, inflation raised the cost of living by 7 percent. This knocked the real minimum wage down to $6.75. Raising the minimum wage would lift many of these people a little further up the ranks of the poor. Critics warn that this would just lead to job losses through automation. (Some economists argue that these low-wage jobs can’t be automated. This is undoubtedly true of some low-wage jobs, but the self-check-out lines that are already common at grocery stores and hardware stores could easily spread to fast-food chains.)

Lots of employers appear to have privatized profit while socializing costs. Low wages and no health-benefits are possible—in part—because a lot of working people earning the minimum wage have to rely upon food stamps and other forms of public assistance. An estimated 3.5 million people—minimum wage workers and their dependents—depend on food stamps to feed themselves. The cost shifted from employers to tax payers is estimated at $4.6 billion. Raising the minimum wage to just over $10 an hour would move these people off the welfare rolls.[2]

Unionization is another possible response. This would allow workers to bargain more effectively for higher wages. Only 11.3 percent of American workers belong to unions, about half of them to public-sector unions. One barrier here is that 24 states have “right to work” laws that obstruct unionization.

Then, perversely, the federal government offers incentives to the working poor to not make more money. The Earned Income Tax Credit (i.e. transfer payment from higher income groups) falls as the recipient earns more money. In one case, each additional dollar earned reduces the EITC by 88 cents. Working more hours or getting a slightly better paying job doesn’t make any sense.

In short, the problem of the “working poor” involves a lot of difficult problems that have deep roots and have been building up for a long time. That doesn’t mean that we should just throw up our hands in despair. Simple and obvious solutions, however, may have unforeseen effects or even none at all.

[1] “Working, but still poor,” The Week, 8 February 2013, p. 11.

[2] “Noted,” The Week, 21 March 2014, p. 16.

Education as an Investment.

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The median survival rate for metastatic breast cancer is three years from time of diagnosis. However, as any recently-diagnosed patient—or their desperate SO—will tell you, statistics are agglomerations of individual cases. They don’t tell you YOUR fate. It’s the same with college degrees. On average, over a lifetime people with college degrees earn a lot more than do people without college degrees. That doesn’t mean that all college graduates earn more than all non-graduates. That also doesn’t mean that the extra income earned is worth the cost of getting the degree.[1] Peter Cappelli, who teaches at the University of Pennsylvania’s Wharton School, elaborates on a theme he first sketched out in a WSJ Op-Ed in November 2013.[2] Cappelli’s deeply-researched book addresses a raft of issues of the day.

The “Great Recession” is but the latest shock to the American economy (and the “American Dream” come to that). It led students to focus on career-oriented majors as defined by Labor Department projections, rather than a broad liberal arts education; their parents usually resolutely back them up in this choice. This has been very distressing to broad liberal arts educators and to the skinny ones as well. Cappelli warns that many of these majors are so knowledge-specific and so likely to be drowned in new graduates that students are actually doing themselves long-term harm. For example, 30 percent of recent engineering graduates couldn’t get jobs in engineering. Capelli argues that liberal arts degrees often are actually a better preparation for adapting to unexpected developments than are the loud-mouthed “career” majors.

American students (and their families in equal measure) pay about four times as much for a college degree as do students in other Western industrial countries. A lot of this is financed through debt, rather than from savings. Senator Bernie Sanders has floated the idea of a free college education at America’s public colleges. Both those who graduate and those who fail to graduate can find themselves burdened by a lot of debt. Naturally, consumers have become enraged at the sellers. Conservatives have argued that the expansion of financial aid and borrowing by students has just allowed colleges to raise their tuition. Critics rightly point out that the administrative component of college staffs have grown 50 percent faster than have instructional staff. As presented to the public this fact conjures visions of Rolex-adorned Assistant Vice Deans for Something-or-Other. In fact, most of the growth is in support staff dealing with the reality that Johnny can’t read, claims he will go to pieces under the pressure of college, and only came here to play baseball anyway.[3]

One of the reasons that college educated people do better than the others is employer-bias in hiring. Currently, at least 40 percent of graduates end up in jobs that don’t require a degree. Employers still preferred them to people without degrees. (Nearly 60 percent of parking lot attendants have some college.[4]) What happened to the other job applicants? They got shoved farther down the income ladder, displacing teen-agers just trying to get some work experience and pocket money. This displacement may be part of the explanation for the mounting drive for a higher minimum wage.

Above all, there is an evident mismatch between American education and the economy.

[1] Peter Cappelli, Will College Pay Off? A Guide to the Most Important Financial Decision You will Ever Make (PublicAffairs, 2015).

[2] See “Major Uncertainty,” November 2013.

[3] See the Cardale Jones Twitter mishagosh for an extreme example of the latter. https://en.wikipedia.org/wiki/Cardale_Jones#Twitter_controversy

[4] They can’t all be living hand-to-mouth while they write the Great American Novel.

Against a Balanced Budget Amendment.

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Some Republicans argue that the current deficit is the product of legislative indiscipline. From time to time, they have proposed a “Balanced Budget Amendment” to the Constitution as the cure for this indiscipline. Sort of like fiscal gastric by-pass surgery.[1] Allow me to disagree.

First, the whole economic history of the Twentieth Century argues against the sanctity of balanced budgets. An obsession with balanced budgets made the Great Depression of the 1930s much worse than it need have been. “Hoovervilles” were the packing-box shanty towns named after the budget-balancing president of the United States in the early Depression. Massive deficit spending—which would be outlawed by a balanced budget amendment—got the Imperial Japan, Nazi Germany, and the United States out of that Depression. You don’t have to like the company we kept to recognize what worked. Since the Second World War all countries have used deficit spending to counter down-turns in the economy. It has turned out to be a crude tool, but it has been effective. Our current problems exist because the Democrats flinched before the cost of getting us out of the mess created by the housing bubble. The stimulus package needed to be twice as big and front-loaded into the first year. Then Republicans imposed the “sequester” that further reduced government spending.

Second, a balanced budget amendment will do nothing to resolve the fundamental disputes between Democrats and Republicans which stands at the center of our current dead-lock. Republicans rightly complain that the Democrats will not address the exploding cost of entitlement programs, which cannot be supported by any model of economic growth or taxation of the rich.[2] Democrats rightly complain that they cannot sell austerity to their constituents without some tax scalps from the rich to brandish. How will a balanced budget amendment solve this basic dead-lock? Making the budget an issue subject to judicial review merely passes the buck from the legislature to the courts. If you think abortion or gun-control are subjects best avoided at the Thanksgiving dinner table, just wait until taxes and spending get on the docket!

Third, about 22 percent of federal spending goes to defense, about 22 percent goes to Social Security; and about 22 percent goes to Medicare/Medicaid. That’s two-thirds of federal spending. About 7 percent goes to debt-service. Everything else that government does is crammed into the remaining 25+ percent of federal spending. What do people want to cut? Social Security? Medicare? Defense? I would bet not. OK, we could do without the Department of Education and the DEA. What about other things? Air traffic controllers? Paving the highways? The federal courts? The Coast Guard air-lifting injured commercial fishermen off heaving decks at night in the Bering Sea? Cuts to welfare won’t do it.[3]

If the vast majority of legislators do not want to make these cuts, then the only solution that would be imposed by a Balanced Budget Amendment would be big tax increases on a very wide basis. Basically it would involve undoing the George W. Bush Administration’s tax cuts.[4] Republicans should be careful about the things for which they wish. A balanced budget amendment has a snowball’s chance in Hell of solving those problems.

[1] For a recent example, see: http://www.fredericksburg.com/news/politics/brat-pushes-for-balanced-budget/article_c82422c9-e21a-586e-b1d4-eca59612c277.html

[2] Republicans conveniently fail to provide any detailed plans on how they would contain entitlement spending. There are a bunch of ways of doing it, but not without somebody’s ox getting gored.

[3] In fiscal 2014, SNAP added $74 billion to a$3.5 trillion budget. I can’t even calculate that small a percentage.

[4] They should best be called the Bush-Obama Tax Cuts because President Obama fought hard to have 98 percent of them made permanent. According to the NYT, two-thirds of the federal revenue lost from those cuts came from people who make less than $250,000 a year.

White Flight from Baltimore.

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Racism is widely deprecated. People of virtually all political stripes decry racism. Some Democrats deploy accusations of racism against their opponents in the sort of public shaming campaigns that other Democrats deplore when applied to other cases. However, one truth not much acknowledged in politics, the media, or scholarship is that—under most circumstances—racism isn’t illegal.[1]

The city of Baltimore offers an example of this inconvenient truth. After the Second World War, the other City by the Bay lost population, jobs, and the economic base needed to make the place run effectively. One important part of the problem arose from accelerating “white flight” from the city to the suburbs. Between 1950 and 1960, Baltimore’s population fell from 950,000 people to 939,000 people. From 1960 to 1970, Baltimore’s population fell from 939,000 people to 906,000 people. So, from 1950 to 1970 Baltimore lost 4.6 percent of its population.

Then came the riots of April 1968. Over a thousand businesses were looted, damaged, or burned down. The damage totaled about $79 million in today’s dollars. Virtually all of the businesses were owned by whites. One activist later reflected that “the riots really weren’t personal: They were against the system, not individual white people. There was only property loss.” However, property belongs to individuals. White flight accelerated, businessmen took their insurance money and moved to suburban locations, and landlords backed even farther off from maintaining property in a city where two-thirds of African-Americans rent their homes.

To make matters worse, Baltimore’s economic base declined. The Bethlehem Steel Company’s Sparrows Point complex of steel mill and shipyard provided high-wage jobs to a huge number of people in the area. During the 1970s and 1980s, Bethlehem Steel encountered all sorts of problems that it failed to master. Repeated rounds of retrenchment led to huge losses of jobs. Moreover, both the steel mill and the shipyard formed the center of networks of local suppliers of goods and services. Job losses at Sparrows Point rippled outward through the community. The decline of Sparrows Point and the attendant job loss cost the city an ever-growing amount of revenue.[2] From 1970 to 1980, Baltimore’s population fell from 906,000 people to 787,000 people. Decline continued until it reached 651,000 people in 2000. All told, Baltimore’s population fell by 28 percent between 1970 and 2000. Most the emigrants were whites. As a result, the “non-white” population in Baltimore rose from 24 percent in 1950 to 44 percent in 1970 to 65 percent by 2000.[3]

If 76 percent of the Baltimore’s population was white in 1950, that would mean that about 725,000 white people lived in the city. By 2000, whites constituted 35 percent of the population. That would amount to about 228,000 people. Almost half a million whites left the city. Property taxes pay for schools; business and operations taxes and licensing fees pay for city government functions like police and fire departments, and trash collection.

If the population was 950,000 in 1950 and half a million people left, then the city’s population should be about 450,000 people. However, the city’s 2000 population was actually 651,000 people. In all likelihood, the extra 200,000 people were African-Americans from farther South who moved North in hopes of finding greater opportunity. Need grew as resources shrank. Bitter must be their tears.

[1] Some racist actions are illegal. Racist belief, however, is not illegal and many racist actions are not illegal.

[2] See Mark Reutter, Making Steel: Sparrows Point and the Rise and Ruin of American Industrial Might (2005).

[3] http://www.baltimoremagazine.net/2007/5/1/100-years-the-riots-of-1968?p=2007/5/100-years-the-riots-of-1968

Disruption.

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Clayton Christenson, the Harvard Business School professor whose theory of “disruption” is all the rage, once used the decline of the American steel industry as an example.[1] Leaders obsessed with profit ratios surrendered the less profitable segments of their businesses to alligators willing to accept a smaller profit in order to take over that segment. The newcomers then expanded their profit margins by investing in modern technology and pursuing efficiencies. Eventually, Big Steel found itself devoured by the alligators. From 2000 to 2013, Dan DiMicco ran Nucor Steel, one of the alligators and now the second largest steel-maker in the United States. Since leaving Nucor, DiMicco has been pondering the state of the American economy—and of the society that the economy supports. What has he concluded?[2]

First of all, he thinks that the federal government botched the 2009 stimulus bill. He thinks that the almost $800 billion stimulus could have revived the economy if it hadn’t been piddled away on subsidies to “green technology” companies, grants to limit the lay-offs caused by balanced-budget requirements of states squeezed by falling revenues, and tax cuts.[3] The failed stimulus and the obsession about cutting the deficit among Republicans have left the economy laboring along in first gear, if not in neutral.

Second, he thinks that the United States needs to create an awful lot of jobs in a Hell of a big hurry. On the one hand, there is the normal population growth that pumps out new would-be workers onto the labor market. On the other hand, the Great Recession has left a lot of people working part-time or out of the labor market entirely. He figures that the economy will have to add at least 30 million new jobs over the next decade to soak up those who want to work. The post-Great Recession economy doesn’t seem up to this task. Instead, DiMicco argues for heavy investment in a ten year plan for infrastructure as part of the basis for reviving industry.

Third, he thinks that capital-intensive manufacturing jobs are better than labor-intensive service jobs. Capital makes for high productivity; high productivity allows both high wages and high profits. In contrast, labor-intensive jobs require employers to hold down wages in order to make even a razor-thin profit. We’re never going to get strong consumer demand from an overwhelmingly service-based economy. Nucor invests in training workers for their jobs (rather than shoving the task off on colleges), so it never suffered from a supposed “skills gap.”

Fourth, he thinks that Americans—leaders and followers alike—are living in La-La Land about America’s place in the world economy. The Second World War developed the American economy while devastating those of every other country. For thirty years, American business and labor faced no serious challenge from foreign competition. At the same time, the United States promoted an open world economy because that would benefit the American economy of the Forties through the Sixties. The trouble was that the American economy did not stay “lean and mean,” while the reviving economies of Germany and Japan, and more recently China, became highly competitive. Moreover, the governments of those countries depreciated their currencies to make their countries’ more competitive with American ones. Free Trade has become a loser’s game for the United States.

There’s a lot to like in DiMicco’s bracing book.

[1] See: Larissa MacFarquahar, “When Giants Fail,” New Yorker, 14 May 2012.

[2] Dan DiMicco, American Made: Why Making Things Will Return Us to Greatness (Palgrave Macmillan, 2015).

[3] Here DiMicco is to some extent at odds with Paul Krugman. The Princeton economist wanted a stimulus bill that was twice as big, although he too derided the impact of the tax cuts.