The Recession Analysis I Haven’t Seen, Or Why We May be About to Make Economic History
The media has been brimming with recession analyses, but as far as I’ve seen, it’s all been from the perspective of financial markets. The central question of these articles is what impact a downturn might have on the markets. What’s missing, of course, is an analysis of the impact of recession on those of us who depend on paychecks, not stock portfolios.
That’s a huge oversight, because this may be the first business cycle wherein the typical family’s real income fails to regain its prior peak.First, a little background. While the question of whether a recession will occur—or is already underway—is compelling, it’s important to recognize that from a living standards perspective, there’s not a lot of difference between an economy that’s growing at a 0.5% pace and one that’s contracting at -0.5% (current forecasts for growth this quarter range from about 0.5% to 1.5%). Most commentators will tell you that if 0.5% is the trough, we’ll have dodged a bullet, but it just ain’t so. Recession or not, when the economy grows too slowly, employment growth slows, unemployment rises, and real wages and incomes take a hit.
Here's where we stumble on an extremely telling possibility, one we’ll miss if we focus solely on the Dow: this could be the first recovery on record wherein the real (inflation-adjusted) median family income fails to regain the ground it lost since the last business-cycle peak in 2000.
The chain of events in a slowdown is consumers and/or investors stop spending, the macro-economy slows or contracts, and employers react to the diminished demand for the goods and services they produce by laying workers off, cutting their hours, and shelving hiring plans. The weakening job market will lead to lower wages, true, but the real damage to the income of working families comes from the disappearance of work.
That why median income—the 50th percentile, right in the middle of the income scale—almost always declines in recessions. In the last two downturns, this middle-class metric fell not only in the relatively short recessions, but in the initially weak recoveries that followed. Though the early 1990s recession ended in 1991, it wasn’t until 1996 that the real median family income recovered.
In the second half of the 1990s, it grew solidly, at 2.2% per year, as uniquely tight job markets helped to ensure that the benefits of faster productivity flowed broadly to the middle class. In the current recovery, productivity growth has been even faster, yet real family income fell through 2004, and has since crept along at less than one percent per year.
As of 2006, the most recent data, the typical family’s income remained 1.7%, or about $1,000, below its 2000 peak. We might make that up this year, though the presence of faster inflation and slower job growth as the year winds down make it a tougher call. But in a recovery as productivity rich as this one has been, simply regaining the prior peak is an absurdly low bar.
The fact that real middle-class income may barely make it back to its 2000 peak stands as the strongest indictment against the current American economy. It’s partly due to the fact that this recovery began with the longest jobless period on record, but the forces of inequality are the main driver of this unfortunate outcome. Globalization, YOYO economics, and the absence of worker bargaining power have interacted to steer the lion’s share of the economy’s growth to a narrow sliver at the top of the wealth scale.
Economic elites may scratch their heads over poll results like the fact that almost half of us thought we were already in recession months ago. The business press will continue their vigilant recession watch, scrutinizing forecasts to see where the stock market is headed.
But if we are truly in a slowdown, this may be as good as it gets for middle-class families in the highly-touted, much celebrated business cycle of the 2000s. If so, it will be like the 1990s without the good part—the part where prosperity was broadly shared for a few years before the bubble burst.
This lack of shared prosperity is the signature characteristic of today’s economy. Any politician who isn’t taking about what he or she intends to do about it isn’t worth listening to.
At the risk of being labeled eternaly cynical - this doesn't surprise me a whole lot.
It's as if the class of people to whom you refer do not exist. I think maybe it's a situation where this group of economic outcasts are themselves in denial while being completely ignored by those above this sort of grim economic reality.
I'm reminded a lot recently of the western impression of classical Greece. In most minds ancient Greece was a mystical world of marble statues, glorious temples and the Olympics. A world that brought us Democracy and where everyone was a philosopher. The reality of course is decidedly less romantic. Even in those 'Democracies' the entire economic system was dependent on slavery. All the work was done by slaves because a Greek citizen was above things as menial as work. This fact is very often overlooked entirely. And not only does slavery remind us of an embarassing and still painful scar on our own history but of doesn't fit into our romanticized view of Democracy as a super-form of government that we've bought stock in (no pun intended).
The average citizen in this country reminds me of those Greek slaves. They are only kept around in order to fulfil roles which the 'true citizens' are above. This group is provided just barely enough in order to survive - not out of compassion but simply to ensure that those lowly tasks continue to be performed. And with the collapse of most of our manufacturing (and in turn the middle class) to cheaper foriegn sources, the future of this entire class of Americans is in jeopardy. And the reality of it is that the 'real citizenry' no longer needs as many 'slaves'. They are proving to be too costly for them and so they begin to remove those benefits & services that helped perpetuate this class of laborers. Taking away healthcare, removing retirement packages, etc. All of these sqeeze more out of this class while simultaineously forcing it's numbers to eventually trend downwards.
As has always happened throughout history this entire system of inequality, injustice and exploitation can not be endured indefinitely. It will eventually explode. And when it does it will be bloody. We've been lulled into believing that we're too advanced and too modern for there to be the kinds of bloody social uprisings as there were in centuries past. I utterly disagree. Take a look around the world (or even our own country) today. Take away the gadgets & technology and show me how we're any more civil or advanced. We're not.
It strikes me that above politics, religion or ethnicity that economics has been at the core of the rise & fall of all civilizations. It has been the real glue that holds a society together. It has helped define borders. It has fueled technological advancement. It has had a strong hand in wars. And when it fails or breaks down, inevitably so too will that society. And society includes and needs all parts, not just those sitting at the top ignoring the plight of those with less, in order to endure. This pattern of the top ignoring the whole has occurred many times and has a certain & dismal outcome.
December 2, 2007 6:12 PM | Reply | Permalink
The economic elites, for the most part, are unable to grasp that a well-off working class drives the economy and puts money in every pocket. Greed just gets the best of them. More than you could ever spend just isn't enough.
We, all Americans, are borrowing money from the rest of the world so that the elites can have their tax cuts while working class folks can barely put food on the table. It makes me sick.
December 2, 2007 6:43 PM | Reply | Permalink
In the second half of the 1990s, [real median family income] grew solidly, at 2.2% per year, as uniquely tight job markets helped to ensure that the benefits of faster productivity flowed broadly to the middle class. Jared Bernstein
Does this fact imply that wages increased -- whatever the cause -- or rather, that formerly unemployed married women continued to join the workforce during those years and that now, the economy/society has exhausted that growth factor, has hit the wall?
Now that the economy has turned to finance as its growth engine why would anyone expect the incomes of median households to rise. Not a lot of quants and financial engineers living on middle American main streets, eh?
December 2, 2007 7:01 PM | Reply | Permalink
Re the question you posed re hourly wages versus more work, I examined that in this table from our book State of Working America: http://www.stateofworkingamerica.org/tabfig/01/SWA06_Table1.1.jpg
It shows that for the bottom fifth of families, 1995-2000, more work was a greater contributing factor than higher wages (as you suspected), but for other groups, wage growth dominated.
December 2, 2007 7:29 PM | Reply | Permalink
I hear you, mcboo. Especially the last paragraph. The last time income inequality was as high as it is today was 1929, and that kind of ended badly. We're very unlikely to go there again (Great Depression), because there are too many countervailing mechanisms build into the economy that would stave of such a huge contraction. But the excesses are undeniable...
December 2, 2007 7:34 PM | Reply | Permalink
Exactly. The daily "news" reports the Dow as if it means something to the average family, but it doesn't. There is so much more going on than the profits realized by the aristocrats, which is what the Dow represents, including increased profits from outsourcing, and currently there is real trouble in the real US economy, threats to Europe, and into the fray comes the dragon of the East, China. News reports:
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Cessna Aircraft Co. says the Shenyang Aircraft Corp. will build the company's newest model airplane, the 162 Skycatcher light sport aircraft. Cessna Chairman, President and CEO Jack Pelton says light sport aircraft need the latest avionics, light-weight equipment, must be safe and reliable and be competitively priced. "Our solution is to partner with SAC, a company with excellent facilities, state-of-the-art technologies and a workforce highly experienced in aircraft manufacturing," Pelton says. Cessna is a subsidiary of the Textron Co. (NYSE: TXT). SAC is a subsidiary of China Aviation Industry Corp. 1. It is a government-owned group of aviation manufacturers.
The US housing situation is deteriorating. Credit markets are snarled, as lenders hoard cash. Bank earnings are down some 25%, driven by mortgage and consumer credit-card defaults and late payments, which forced banks to increase their loan loss provisions to the highest level in 20 years. Lay-offs in the construction industry are picking up speed. Consumer confidence is down, partly because oil prices are so high as to be sucking the purchasing power out of the economy; retailers fear that the Grinch has stolen Christmas. The dollar is sinking, driving the euro and the pound to levels that price European and British exports out of many markets; America’s newest export might well be a recession.
Hillary Clinton is expected to call for a 90-day moratorium on home foreclosures and a five-year freeze on adjustable-mortgage rates, in a sign that the housing crunch is resonating on the campaign trail.
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Finally, regarding YOYO (you're on your own) economics, I like to stir folks up by quoting four words from a radical document, the US Constitution: "promote the general welfare". That's one reason we have a government. Not to maximize the Dow and corporate profits, but to promote the general welfare. Radical. By messing with the (semi)free financial markets as HRC proposes? We'll see.
ecotourism
WeGoEco.com
December 2, 2007 8:15 PM | Reply | Permalink
We used to have countervailing mechanisms. Not anymore, Virtually all have been dismantled by the wingers. The safety net is in tatters and the spider's web has been enforced, what with personal bankruptcy laws having been rewritten to force people into peonage. If the abyss opens, not much stands in the way anymore.
December 2, 2007 9:07 PM | Reply | Permalink
As long as easy credit remained available the "median" worker could only concentrate on his role as a consumer. When the credit dries up he will be looking for someone to lash out at, bankers, politicians, Jews? whoever is most convienent.
December 2, 2007 9:43 PM | Reply | Permalink
Re: We used to have countervailing mechanisms. Not anymore, Virtually all have been dismantled by the wingers.
???
The FDIC? Social Security? Unemployment Insurance? It's news to me that these programs have been dismantled. They made an attempt with Social Security but were beaten back.
December 3, 2007 3:25 AM | Reply | Permalink
One of the problems I see is that we don't have a satisfactory measure for economic activity. When the "wealth" of the top rises because of localized inflation it is treated as a sign of an improving GDP. A perfect example is the market for fine art. When someone sells a painting for $10 million that he bought awhile ago for $1 million we see this as adding to his "wealth". The same thing is true in the value of stocks which are in firms which deal in intangibles like financial instruments.
Economists either treat all these increases in price the same or they fail to agree on how to define "value". Much of the growth of US economy has been of the Ponzi type over the past several decades. The real growth in manufacturing or infrastructure or even human capital (like education) has not happened. The result has been that the US has fallen behind in these important areas and we see the results everyday.
The most glaring include the poor health care system, intractable problems in education, decaying civil engineering projects and the increasing use of police state tactics to control the underclass.
When the real cost of important resources goes up, as is happening now with oil, the result is a real economic decline. This is what happened during the oil embargo and it is what is happening now. Couple this with the inflation that is the result of federal deficit financing and you have a "recession".
I don't see any of the candidates for president addressing these issues in a coherent fashion. All we get are platitudes about "growth" and some patchwork suggestions to fix problems affecting certain areas of the public. This month it is mortgages, perhaps next month it will be unaffordable home heating oil.
Until the US adopts the same advice that is given to individuals who are in debt over their head, things will only get worse. The advice is simple, when you are in debt cut back on spending. A good place to start would be the half trillion military sector.
--- Policies not Politics
Daily Landscape
December 3, 2007 6:54 AM | Reply | Permalink
Deposit insurance covers a limited amount, SS is not helpful until retirement, and unemployment insurance has a limited duration. They help instill confidence among consumers, but aren't helpful at high-finance levels.
A bigger problem is the growing lack of liquidity, and the complexity of financial instruments (boy, does that sound familiar). Ben Bernanke needed a face-to-face with hedge fund managers for a refresher course last summer. Henry Paulson commented that innovation had gotten ahead of regulation.
December 3, 2007 7:24 AM | Reply | Permalink
I've been listening to a lot of radio lately--talk shows and such that have been debating the possibility of a recession. At some point in every f-ing show, the host says, "What does all this mean for the average family?"
The response is always, ALWAYS, "Well, we don't know, but the average family or blue collar workers probably already know if there's a recession."
There is precisely no analysis of what a recession means to all those people who don't have stock portfolios. It's just assumed that people who actually work will have their own economic indicators, and that those indicators are not accessible to the economists debating the recession.
It's one of those things where if you didn't laugh, you'd cry.
December 3, 2007 7:50 AM | Reply | Permalink
On a macro-scale greed has shaken the financial scene, and it's largely unregulated.
Hedge Funds: There is a staggering $2 trillion invested in hedge funds worldwide, up nearly tenfold from 1999. Today, there are more than 9,000 hedge funds, 351 of which manage $1 billion or more. They are relatively unregulated, charge very high fees, will not necessarily give you your money back when you want it, and will generally not tell you what they do.
Mortgage-backed securities (MBS) are debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property. Banks have lost count of their reserves because the mortgage derivatives, based in a large part on sub-prime mortgages, are theoretically worthless. Middle Eastern sovereign funds are saving the collapse of Citi Group, the largest US bank. Lenders are struggling to sell loans to investors after losses on debt backed by subprime mortgages to people with poor credit caused financial markets to seize up in July and August.
December 3, 2007 7:51 AM | Reply | Permalink
Jared
I saw you on CNBC a short while ago along with Pat Toomey from the Club For Growth.
Isn't it true that cuts in capital gains tax, and dividend tax cuts?,leads to a surge in tax revenue as people sell items they would otherwise hold but that over time the cut costs a lot of revenues?
I do not understand the Supplysiders. If it was really true that cutting taxes produces more revenue, not less, why not cut taxes to zero and get an infinite amount of tax revenue?
Daniel A. Greenbaum
December 3, 2007 12:03 PM | Reply | Permalink
Allow me another question re: my pet bugaboo -- the "financialization" of the economy and its effect on increased productivity.
Forbes says that economy-wide debt (household, government, and non-financial businesses) has increased from 141% of GDP twenty-five years ago to 217% of GDP, today. While interest rates have gone down over that time frame, the figures suggest that "finance" (interest income, points, commissions, management fees, etc.) has become a much more important component of GDP than it was in the past.
Finance workers are more "productive" than manufacturing and mining or many other services workers. As the more productive components of the economy increase their weightings within the economy, we should expect increased productivity numbers economy-wide.
As a purely economic matter why should the median household which is not responsible for this increased productivity share in the "increased" wealth that productivity generates? Asked differently, when we're dealing with social equity, does it make sense to ground our arguments in productivity numbers?
Note: We've had some experience with this weighting issue. Pre-Y2K there were huge technology investments, and technology manufacturing (a second order effect) showed the greatest productivity gains (more chips from smaller silicon wafers, etc.). The result? The economy "looked" greatly more productive, but it was a small, localized increase in productivity.
December 3, 2007 12:32 PM | Reply | Permalink
Right on! One thing the poor people in this country have plenty of is guns. This seems to be overlooked by almost everyone. Do the elites living in their "gated" communities really believe a rent a cop is going to stop an armed group of starving people? Good luck with that.
December 3, 2007 1:15 PM | Reply | Permalink
I have long said that capitalism cannot exist without slavery, in some form. The poor and middle classes would have risen in economic revolt long ago if not for Wal-Mart. I know and work with many people who simply cannot afford to shop anywhere else - FOR ANYTHING. Most poor people got nothing from the boom of the 90s except Super Wal-Mart, which made their stagnant or dropping wages less noticeable.
But it's all coming home to roost now.
December 3, 2007 1:28 PM | Reply | Permalink
Well before all of us down here get blamed for the recession because we didn't Christmas shop enough, let's point the blame on a more worthy Congress and Bush Administration. They are the one's who have flushed the Treasury down the toilet of war. They have failed to keep the dollar strong, America great, and to make the world a better place with the over 2 trillion dollar budget they had to work with. We get another chance in the election next year to make them pay for this failure, plus another 2 trillion dollars to budget again.
December 3, 2007 1:32 PM | Reply | Permalink
Yes, Daniel, you're right re cap gains. Revenue increases from these tax cuts tend to reflect just shifting investments around to take advantage of the timing, so we're borrowing from the future.
According to the best research I've seen, there is no, none, absolutely no evidence that supply-side cuts pay for themselves--you lose 70-90% of the revenue you would have otherwise collected (see WaPo oped: http://www.washingtonpost.com/wp-dyn/content/article/2007/11/30/AR2007113002190.html
And they screw up the after-tax income distribution in the mean time. And they rob the gov't of needed revenues. Myself and some colleagues are working on a doc to make these arguments more clear, but this supply-side stuff is like a cockroach infestation. You can't kill it.
I tried to make these points on TV today, but I'm not sure they cut through the noise.
December 3, 2007 2:01 PM | Reply | Permalink
A centralized economy always benefits those who control it.
December 3, 2007 3:15 PM | Reply | Permalink
I do in part hope you're right. Although to be honest if it could be done without blood and suffering, I'd love to see the entire system turned on it's ear. That is often what is needed to fix things that are this designed-broken.
But I too am skeptical about just who those mechanisms are designed to protect. I'm just not convinced that they are for the people suffering now. If they were intended for that purpose then they seem rather too little to do the job. It reminds me of the 'high jump into a tea cup" you see in old cartoons. Unfortunately it's not recommended for real recreation or entertainment purposes! ;-)
December 3, 2007 3:29 PM | Reply | Permalink
Re: Deposit insurance covers a limited amount, SS is not helpful until retirement, and unemployment insurance has a limited duration.
The above has always been true but these three programs are cited as the three greatest achievements of the New Deal, and the main stopgaps against a recession growing into a depression.
Whiele the FDIC covers only a limited amount, that amount is fairly substantial: $100,000. Gee, wish I had that in the bank! And that prevents bank runs and bank failures of the sort that tipped America into Depression in 1929.
Social Security means that there's a large segment of the population whose income is recession-proof. No matter what's going on in the economy the seniors will still be spending as they were, and that also prevents the economy fropm tipping too far.
Unemployment insurance may not last forever (but why should it?) but again, it maintains basic economic circulation and prevents the economy from contracting too far.
Re: Do the elites living in their "gated" communities really believe a rent a cop is going to stop an armed group of starving people? Good luck with that.
If it came to that the poor would be robbing their own neighbors, and businesses in their neighborhoods. It's closer and you don't need to put gas in your car. Pretty much what's happened everytime there have been urban riots. Itr's the poor neighborhoods that bear the brunt while the McMansion dwellers in the exurbs read about it in the news.
Re: I have long said that capitalism cannot exist without slavery, in some form.
How to explain Europe then? Not only is there no slavery there in any form, there hasn't been in centuries.
December 3, 2007 3:32 PM | Reply | Permalink
Re: I have long said that capitalism cannot exist without slavery, in some form.
I know you weren't asking ME this but I did have a thought on it. ;-)
There are several key differences between Europe and it's capitalism and the United States. In terms of slavery, we had it as an institution for perhaps 200 years? Europe rose and fell several times with it as an institution over several thousand years. I believe that is why, in general, Europeans seem to "get it" a bit more in terms of work, family and community. Europe has at least one thing on us here in the capital of greatness, experience! They've gotten bloody noses more than we have and seen things go from the best of times to the worst far more than we. And since we don't believe in science or history it seems we may never learn some of those important lessons. I'm in no way saying they're great BTW, they're apparently just less bad than we are! ;-)
But the other side of this capitalism coin is that it's not a closed system. There is still slavery as a component of the European system too but perhaps to a much smaller degree (I'm speculating here as I really have no idea). Simply be trading with someone who does employ these types of economic abuses (perhaps not literal slavery but modern incarnations of it) than it is then a part of the system as a whole. This darned global economy thing seems to have snarled all of us all together into one big dirty snowball that's rolling towards that pristine village in the valley!
December 3, 2007 3:55 PM | Reply | Permalink
Who says that the stock market needs a healthy economy to rise? Doesn't anyone remember the early 90s? The economy tanked, but the market soared. Why? With the economy in the crapper and negative interest rates, there was nothing to invest in. So, people bought stocks.
Also, remember that the real estate bubble burst in 1926, but the Great Depression didn't really start until 1930. It takes a while for all the air to leak out of a big bag.
December 4, 2007 8:23 PM | Reply | Permalink
Absolutely. The stock market can rise on fumes, speculation, or futures markets for Bulgarian yak entrails. Which is why it's wrong to view it as the thermometer for the general economy, or an indicator of living standards for most of us.
December 5, 2007 4:50 AM | Reply | Permalink
You two have hit in something that I worry tremendously about & it's also quite telling in my mind of America itself & it's form of Capitalism - speculation. And I think it's failures go much deeper than simply telling the temperature.
I know it's probably human nature to 'speculate'. I know it's played an intimate & important role in the formation of this nation. I also know that it's in essence not very different than going to Vegas and picking odd or even, red or black. Sure, there's a bit more to it than that. But not too much more. And those subtleties & that innocence which one might argue exist(ed) between the two where lost long ago. If an individual wishes to take his/her paycheck & gamble it away, it his/her right. And it's his/her fault if & when they run out of cash and the casino's coffers get fat (just like the casino knew would happen). But is it wise to let 'gamblers' play with our savings, retirements, insurance policies & emergency funds? This most of all is what I find troubling & makes me a bit angry. It's just not smart. And at the risk of admitting to being self-hating, I hate stupidity.
Speculation. I'm not a fan of putting the future or the funds of society into it's random-at-best/crooked-in-general hands. Not a fan at all. Spend & save wisely. Don't play it sloppy and then hope to hit the lottery in order to pay for things or to make things work... Am I crazy here?
December 5, 2007 7:09 AM | Reply | Permalink