Stagnation Abounds

Yes, I know. The latest spin being presented by those who led us into this malaise is that the recent spate of weak news is only a “transition”. Things, they tell us, are about to get going again. Perk up everyone, these doldrums are entirely in your mind.

How seasonal. Bernanke and his ilk must be avid gardeners: they see green shoots and signs of growth every spring and early summer.

It’s the winters that they ignore.

There are, indeed, many oddities in the recent data that suggest the tawdry pace of the early part of this year will not continue. Bad weather, storms, earthquakes and all sorts of uprisings in very sensitive parts of the world have conspired to mask the longer term trend. We have been buffeted by spikes in prices and declines in employment, lost supplies of oil, and a severe outbreak of austerity fanaticism.

OK this latter one is unlikely to go away, but the others are legitimate sources of noise in the system.

I could go along with this narrative were there a steady stream of upbeat data as well.

There isn’t.

Let me spell out a few of our problems:

1. Tim Geithner. He is the last remaining member of the gang that brought us inadequate stimulus. Unfortunately he is also one of the strongest opponents of more stimulus. The recent departure of Austan Goolsbee, from Washington back to the University of Chicago, leaves Geithner as the longest serving economics advisor to Obama. This is not good. He is far too close to the banks to serve us well, and is truly awful at broader policy.
2. Unemployment. No one cares anymore. It’s all too difficult. Judging by today’s report that new claims for unemployment assistance rose by a small amount – by 1,000, to 427,000 – the labor market is firmly stuck. But the ease with which that news has been shrugged off is extraordinary. As I said: no one cares. Solutions to the unemployment problem require political initiative. Jobs programs and the like. These things cost money. That would require debt. Hence no action. Plus our nonstop election campaigning is now such a burden on politician’s time that they have no time left for government. They have abandoned the economy to its own devices.
3. This is an added problem since the business cycle is far from recovered. If we focus on the income side of our national accounts, rather than on the spending side, we see a very different picture of the recovery. In fact there really isn’t one. The two sides – income and spending – should equal each other of course, since one person’s spending is another person’s income. But they usually don’t. There are discrepancies between the two that derive from the variety of sources the government uses to compile the data. When you read about GDP in the press you are reading about the spending side. But the income side is also reported, buried in the fine print. This is traditional and has been the way the data is reported for decades. Here’s the problem: if we look at the income data the crisis began earlier, fell deeper, and is still lagging well behind its most recent high water mark. Is this important? Yes. Studies show that the income side is more accurate. Using this as our basis we would be talking about our being stuck already in five years of stagnation with no end in sight.
4. Reports of rising household wealth are meaningless. The biggest cause of the recent, and not very strong, increase has been the rise in stock prices. But the vast majority of households own no stocks. So while in aggregate things look better, most people won’t feel any change.
5. On the contrary, they will feel worse. Why? Because the one asset found in average households is a home, and home prices are going nowhere but down.
6. Wages are flat. Need I say more?
7. Profits are good, for now. Especially on foreign operations. Need I say more?
8. Our financial system is still rotten and full of government supported banks that are too large to fail. This is not going to be fixed, because the banks have too much political clout, and our regulators are either too timid to face the banks down, confused about the facts as to the causes of the crisis – i.e. they don’t see the cause and effect of bank deregulation – or in the pocket of the banks. [See problem #1].
9. The stimulus is now having a negative effect as it winds down; and state and local governments are in deep retrenchment mode which will create fiscal drag throughout the next few quarters.
10. And we are caught in the downdraft of an ideologically motivated shift in policy emphasis – to the extent there is policy – from defending the average household, towards defending the rentier class. This entails protecting against inflation even if there isn’t any; and shifting resources from building new things towards propping up old things. They call it austerity. In actuality its a redistribution of resources from the middle and lower end of income earners upwards to the top.
11. Lastly, the world’s banks [see #1 above] are being protected from taking losses on their poor risk judgements of the past. This is an adjunct to #10; but is specific to a special portion of the rentier class.

None of these is particularly controversial, in that they are occurring continuously, and on a large scale. None are transitory. All imply slower GDP growth, especially on the income side.

So, while the elite narrative is being shaped to lull us into believing all will return to normal soon, and of its own accord, I see significant roadblocks, and a more likely narrative leading towards stagnation.

If the income side of the GDP data is correct, and the analysis suggests it is, then we are well on our way down the Japanese lost decade road. Except the American voter is typically less compliant and more excitable than his or her Japanese peer. So our politics will get more restless and extreme, while our economy wallows in the twilight.

Can we fix this?

Of course.

Will we?

I doubt it.