Wednesday, January 1, 2014

The recovery that isn’t

In December, the federal government released information that the gross domestic product was up 4.1% for the third quarter of 2013, and that 203,000 people had been employed, bringing the unemployment rate to 7.0%. Time to pop the champagne corks; it finally appears the recovery is taking hold, right?

Jobs lost, October 2006 – October 2013
Increase in real disposable income, 1979 – 2010.
(Graphic source: Washington Post.)
Somebody forgot to tell the rest of us. While the Bloomberg consumer confidence level is the highest it’s been since August, it’s still not where it was in November 2007. A recent Gallup survey showed that almost twice as many Americans believe the economy is “poor” as believe that it is “excellent” or “good”, and that over half believe it’s getting worse. Over 4 million of the 8.656 million jobs lost from October 2006 to October 2009 are still missing from the economy; many of those who lost jobs left the market and haven’t returned.[1] Congress is shutting off extended unemployment benefits even though the average length of unemployment is still 37.2 weeks, over twice as long as in September 2007 (16.3). ABC News tells us, “While more than 2 million new jobs were created in 2013, a large share of them were low-income retail and restaurant positions.”

If that weren’t enough of a buzz kill: Alan Greenspan reminds us that businesses still aren’t making large investments in fixed assets or long-term Treasury bonds. While consumer spending is up, income isn’t rising to match. In fact, Peter Thiel shows us that the real average income of bachelor’s degree recipients has dropped over the last ten years even as student-loan debt and college tuition increased; and Sen. Chuck Schumer (D-NY) enjoins us to “focus like a laser” on the light blue line of the graphic to your left, which shows that the middle 60% of incomes has not increased as much as even the bottom quintile.

Bloomberg — the same organization that tells us consumer confidence and consumer comfort are at a four-month high — also tells us that people on the bottom are running out of resources. Somebody on the Bloomberg editorial staff forgot to give writers Rich Miller and Michelle Jamrisko the “things are looking up all over” script. Furthermore, in an interview with Scarlet Fu, analyst Joshua Rosner predicted “little to no follow-through” on increased investment in existing home, leading into a further decline in home ownership; new construction simply doesn’t promise to be the driver of a new boom.

The GDP figure is misleading. Think of it like your blood pressure: you can have stage-4 cancer and still have a BP of 121/72. Part of the problem is that a lot of “investing” is simply changing debt instruments from one hand to another; the companies have already gotten all the funds they’re going to get from the loan or the stock offering. Although this activity doesn’t actually do anything for the broader economy, it gets counted in as “investing” for the purposes of the GDP.

Percentage consumer debt owned by the government,
Jan. 2006 – October 2013.
Another problem is that the Fed is buying assets from the banks as part of “quantitative easing” at the very same time that Washington is borrowing money back to fund deficit spending. (Since January 2008 the government has bought just over $603 billion worth of consumer loans, and now holds almost a quarter of our debt — 23.36% as of October). Again, this activity gets reflected in GDP; but while government spending doesn’t disappear into some economic black hole, we have to wonder how much of the GDP boost is simply this double-dipping at the public trough, and whether it’s really helping the economy as a whole rather than just the upper 1%.

Make no mistake: we are recovering. The point is, some things are not recovering as they should if the GDP truly reflected the state of our economic affairs. Moreover, the indicators show that the “wealth gap” defines who’s benefitting from the recovery and who isn’t; if our economy were truly healthy, unemployment would be closer to 3%, not 7%. The only people who have really “recovered” from the recession were the people who were least affected by it. Or, as ABC’s Richard Davies put it, “This year was especially good for the ‘haves,’ but the ‘have-nots’ have yet to see the real gains of the past two years trickle down to them.”

That’s right, folks — “trickle-down” economics works only if money actually trickles down to the bottom.

Per capita consumer debt, in thousands of 2007 dollars.
Over the last thirty years, the rate at which the average American saves has dropped while consumer credit has exploded. Some consumer credit was shucked off in the wake of the recession as people paid off credit card debts, car loans and even mortgages; but per capita consumer credit has climbed back to near its 2008 peak while the savings rate is dropping again. Some choose to see this as an indicator of increasing consumer confidence. However, as real wages have not increased for most of us for the most part, it could also be evidence that the folks on the bottom are turning to debt spending out of necessity rather than confidence in the recovery.

More people are beginning to look at the wealth gap with concern for the long-term functioning of the economy. While the real GDP dollar per employee has increased by 67.88% since 1978, only the income of the top quintile has matched it, with the top 1%’s income almost trebling it. The crux of the issue is that, while consumption drives the economy, savings and investment have traditionally made for wealth; every dollar spent on interest charges is a dollar not invested for the future. Moreover, the very act of financing a purchase, whether through revolving credit or a closed-ended loan, means the final cost to the debt-spending consumer is usually going to be higher than for the cash-paying consumer.

I hold these truths to be self-evident: 1) Employees = consumers; 2) The less employees are paid, the less consumers can consume or save. If your employees aren’t necessarily part of your target market, chances are their purchases pay the wages of someone who is part of your target market. On the other hand, if you’re soliciting your own employees’ business, you can’t very well expect to get much out of a pocket you don’t put much into … even if you offer substantial discounts.

So the first step, of course, is that employers need to stop thinking of “employees” and “customers” as non-intersecting sets, and of “wages” as money that’s never seen again once paid. The economy is very much like our ecosystem — everything’s interconnected; everything affects everything else to varying degrees.

Increase in CEO compensation vs. workers and S&P
500. (Source: Washington Post.)
Second: Instead of worrying about the effect of an increase in the minimum wage, companies should be looking for new ways to share profits with the lower ranks, and Congress should be considering methods of incentivizing conversion to employee ownership. Moreover, it’s long been apparent that current executive compensation is driving the wealth gap; get the average CEO-to-average-employee pay ratio down to a more reasonable 20:1 or less, and that should free up funds for higher wages down below.

A real rising tide lifts all boats equally; it doesn’t leave dinghies stranded on the beach while lifting tankers and carriers to impossible heights.

[1] Unless otherwise noted, the source for economic information is the Economic Research Department of the Federal Bank of St. Louis (