Bears of the Apocalypse II (LT Econ): Who's Fault is this Mess ?
If the last post didn't convince you that you care about long-term economic performance perhaps
this will add some fuel to the fire. Or not - in which please feel free to browse the archives :). In one of those strange little pieces of serendipity that happen from time to time a couple of Dallas Fed economists recently published a piece on the long-term improvements in our wealth and well-being and were immediately taken to task by one of our favorite major bloggers Barry Ritholz of BigPicture. Who called them hackonomicists for their pollyanish views. Where Barry failed to uphold his usual high standards of data verification and analysis is where is own ox got gored - their conclusions didn't agree with his so obviously it was without merit. We'll leave you read both pieces but will suggest that both sides of the argument have merit, neither is completely right and in the sturm und drang the critical question is left drowned in the noise. First off the Dallas boys re right - we have had quite an uppath in this century. But Barry has a point of what have you done for us lately ? The question that should be on the table is how did we get here, can we keep on this path, and if not, how do we fix it ?
LT Economic Performance
Which are, in fact, the questions we suggested in the last post are important and which we want to start on here. Just to set the record straight you'll notice that GDP since the '50s has grown from $2T to almost $12T in real terms while population has shown an equally astonishing growth from 150mil to over 300mil. In other words US population doubled in about sixty years - and if you think that was all native US population "organic" growth think again and check your math. Immigration has been a recent major factor in our prosperity as much as it ever was in history. Just to put a point on things the second sub-chart shows GDP, Population and GDP/Capita normalized to 1952, i.e. set to the same scale, so you can get a sense of what's done well. GDP/Capita has tripled in these decades - a truly astonishing performance.
The fundamental questions we should be asking are:
1) what are the sources of our prosperities ?
2) what are their likely futures and ?
3) how do we make sure that we get the right things things in place to improve our chances ?
BtW - just for fun here's four links to the Dallas boys piece, Paul Krugman on '90s policy failures (whose diagnosis we think flawed but worthy), Barry's polemic and a great little piece on human capital breakdowns:There's a Price to Economic Pessimism, Behind the Bush Economic Bust, Hackononics, Part II, America's Human Capital Is Tested
Growth Rates
After a rise post-WW2 to around 1.3% population growth began slowing in the mid-60s to less than 1% and in the last several decades has been close to .7% annually pretty consistently. Which btw puts more of a premium on continued immigration to sustain US economic growth. Fascinating isn't it - just to pay our our SocSecur and related bills we need to have all those recent immigrants move up into the middle class. Let alone what we need to grow the pie for us all. Real economic growth/capita appears to have been running around climbed above 2% post-war and then ran around 2% for decades but has been declining in this century. What's going on ? Well for one thing the '50s were indeed a "golden age" where new industries, newly educated veterans, new investment, etc. etc. really kick-started the economy. And we coasted along for a long-time fat, dumb, and happy. But it looks like things are worsening up a bit.
Economic Structure
Let's take a look at the structure of national income distribution, bearing in mind we're a mature economy where growth results from the sum of productivity and population growth in the long-run. And in the intermediate-run, over the course of the business cycle, it results from increases in consumption demand generating an investment kicker leading to more jobs and demand growth. The great wheel of life. Which this chart shows working out over time with the shares of national income going to profits, wages and capex. The '50s to mid-'60s were indeed the golden age with high wages and high profits. It looks to me as if the energy shocks of the '70s combined with regulatory changes caused a shift upward in capital spending (& perhaps there was some labor subsitution as well with technology/capital displacing unskilled labor ?) impacting both negatively. But even more interestingly Wages began a decade long downtrend, briefly interrupted in the Tech Boom but now continuing that longer-term deterioration. Meanwhile Profits have jumped to an out-of-pattern and historically aberrational high in this century while Capex continues at a steady-state level. That may have been good for earnings but is it good for the long-term health of the economy ?
Employment Trends
Now remember growth in the economy depends fundamentally on growth in jobs. In other words if we'd all like to get a share in a bigger pie we need jobs - otherwise we can spend our time fighting over the size of our slice in a shrinking pie. Let's us this composite chart to take a look at some of the recent performance. The top should put to bed some of the mis-perceptions about some common measures of employment. It shows YoY% changes in Employment, the Hours Worked Index and Unemployment (reversed scale). In the short-run hours and unemployment tend to change more rapidly but over the long-haul they all move together. And as you can see from the middle chart Employment and the Economy move together as well. The Circle of Ecolife is the Circle...period...end of story. The last sub-chart is the really interesting one where we look at net new job creation using 150K jobs/month as our breakeven point. That is where job creation just compensates for the sum of population and productivity growth; in other words the point where per capita income would tend to not grow ! By this time most of us are familiar with the meme that this has been the weakest post-war recovery, particularly for job creation, we've had. Well that shows up pretty clearly in a statistic we call Aggregate New Jobs - that is the running total. Judging from that particular indicator, if there's any merit to our analysis, a declining wage share and dropping per capita income is a reflection of low aggregate job creation.
Trade
Now a certain level of populism would place all this decline on the shoulders of trade but we took a shot at disabusing ourselves at that mis-perception in another post. (Boys, Wolves, Broken Records II: Re-coupling, Inflation, Breakdowns ?) We won't repeat all of that discussion but will repeat the chart that went with it. The top sub-chart shows the overall Import/Export balance - notice that our participation in world trade grew enormously during the '90s but we didn't really run into deficit problems until this decade. The middle chart shows Imports and contrary to rumor Oil ain't swampin everything else. Which gets even more interesting when you look at the balances by major category in the third sub-chart. Interestingly we've done worst in Consumer goods but have held our own in sophisticated manufacturing. Now we could go into Trade Theory and discuss why that makes sense but will defer it. Notice that Autos and Oil have been equally "damaging" however. Not only is our lack of a national energy policy a security threat and damaging our economy but Detroit's Fading Three have been as dangerous to our well being ! (Once More Into the Breech: 3 Decades of Auto (Industry) Delusions)
So, coming full-circle, who's fault ? On the whole we've done well not just since the 1870s but since the 1950s by any standard. On the other hand that performance has been gradually slipping in the last couple of decades and appears to be slowing even more rapidly recently. This doesn't strike me so much as any single leader or causal factor being to blame. Instead it strikes me as a systemic problem that's been sneaking up on us while we partied. The question would seem to be how do we get back to the "golden age" of the '50s and early '60s then ? Or, put another way, what was it about those years that created such rapid growth and laid the foundations for the subsequent four+ decades of sustained prosperity ? And what do we need to do to recover them.