Slowing Down Part 2

Not to pile it on, but the data being released at the moment is not very good. The economy is clearly settling down to a lower level of activity. I have, for a long time, argued that the risks to US growth are mainly on the downside. So those who projected GDP growth of over 3% for this year, and there were many, were all hoping that nothing would go wrong. They were ignoring the ineffective nature of our policies, the utter uselessness of our leadership, and the likelihood of negative impact rolling in from Europe. Plus they were sublimely ignorant of the nature of post-financially induced recessions. You must have read it a thousand times by now, and hopefully it will have sunk in: recoveries following a recession that begins in a banking or debt related crisis are always slow, tedious, fraught with problems, and expose the deep divisions in society. Especially the divide between creditors and debtors. Those who have, and those who aspire to have see the crisis through very different prisms. To amend Hobbes slightly: such recoveries are nasty, brutish, and long. Very long.

So the flow of recent data merely confirms all this. We are mired in depression. And we seem intent on staying there.

Today’s report on new applications for unemployment assistance is typical of the recent trend. At 374,000 it looks like a slight improvement. But it remains a hopeless number. At this point in a more ‘normal’ recovery – is there such a thing anymore? – we would be seeing numbers far lower than that and talking about a tightening labor market. Instead we are repeating the same conversation we have had for many, many months: the economy is not producing jobs sufficient to make a dent in our long term unemployment level.

Some of you will, no doubt, jump on the bandwagon bound to be created by the news that the private sector generated 176,000 new jobs in June according to the ADP report on payrolls. This is up from a revised figure of 136,000 in May. We have been here before. That level of job creation is scarcely enough to keep up with population growth. If the unemployment rate falls in Friday’s relies by the government it will surely be because people are giving up and leaving the workforce. Indeed I would urge you all to consider the story told by the workforce participation rate data – it is terrible – rather than any of these more superficial numbers as being a guide to just how depressed the economy had become. We have an enormous and growing number of people sitting idly by. They have disengaged from the economy because they see no hope and little evidence of a change in opportunity. They may have opted for early retirement, or that may simply be eking out a living by using up savings or selling off assets. Their lack of participation hurts us all because it represents a massive loss of demand from the economy, and that lack of demand shows up as lost sales, and thus reduced profit and wage opportunities for the rest of us who remain engaged in the economy.

Lastly: retail sales seem to be tailing off. Following, and confirming, the June reduction in consumer confidence, retail sales were very disappointing last month. This story comes from the sales reports being announced by the biggest retail store chains, over three quarters of whom have seen sales lower than expected during the past few months. This suggests to me that when we start to see the GDP figures for the second quarter consumption will be a problem. This, as you all know, is a problem for an economy that relies on consumption to drive it forward.

But it is entirely consistent with a depressed economy struggling to emerge from a banking and debt induced crisis. Households are trying to bring their debt back down to manageable levels and thus back into balance with incomes. Since wage gains had been meager, to put it politely, debt reduction for many has become a case of running in place. Even stringent cuts in spending have not produced enough spare cash to pay down debt fast enough. And since people are having a hard time seeing an end to their problems they remain cautious. This caution accumulates across the economy in the form of higher savings, or less spending, and thus becomes self-fulfilling downward shift in activity.

These bouts of caution produce the halting and insufficient pattern we see in the data and seem set to continue. Especially in the absence of leadership and forceful corrective policy action.

It takes little imagination or perception to see that we will get no substantive policy action at least until after the election in November, and even then there are no signs of anything remotely in the right range to fix our problems. So people have every right to be thoroughly soured on our leadership, and to stay holed up in the hope that the storm blows by of its own accord.

There are those, of course, who welcome inaction. They are those who believe in the efficacy of so-called marketself-correction. They are like the doctors of yore who were powerless in the face of disease and relied on the self-curing defenses of the human body to provide the remedy. Sure a lot of folks died along the way, but some survived, thus confirming the self-curing narrative. The strong survive. The weak don’t. But the society that emerges after the ravages of disease is tougher for the experience.The self-correcting magic of markets is precisely the same. Lacking the tools to cure the disease people who believe in market magic simply wait out the storm. They acknowledge the pain along the way, but shrug it off as a necessary by-product of a free economy. They frame it as a purging of the rotten and an affirmation of the good.

This is absurd. For two reasons.

We have the tools, we just aren’t using them.

Second, and more importantly, it is absurd to self inflict pain in a modern democracy where the weak have a vote, supposedly on a par with the strong. It is one thing to plunge an old-fashioned authoritarian economy through a depression, it is another to tolerate it in a democracy. In the older economy no one really cares about the poor, they have no status in society anyway. But in a democracy that fight back. They want to be counted. And if they are ignored long enough they resort to extreme positions. They will threaten the peaceful democratic consensus that enables the rich to remain rich.

A good gauge of how close we are getting to the edge of democratic breakdown is the way in which the spoils of business are carved up. That is to say: what share do wages get? And what share do profits get? Looking at this division we can see immediately the power shift of the last thirty years. Deregulation and the opening up of markets has benefited profits enormously. Profits are at their highest proportion of the spoils for well over fifty years. The creditors are doing well. In contrast, and by extension, wage earners have been systematically excluded and under-rewarded for decades now. Their share is at an all time low – or close to. This inevitably breed social tension. And it produces an extraordinarily lopsided economy. Our slide into third world style inequality stems from this division of the spoils.

Along the way our elites have sided entirely with the creditors. Few of their solutions have sought to alleviate the problems of wage earners or debtors. And those that have been proposed have been either half-hearted or ill thought through. I keep hearing people say that borrowers should have been more careful and thus they deserve no help. But this is half the story. Lenders ought to have been more careful as well. Why do they deserve help when they manifestly made bad, inept, or downright stupid decisions? Where, in all the bending over backwards to serve the interests of creditors, is there a moral being taught?

Or are moral teachings only for the poor?

And are we supposed to believe the incredible notion that the rich are paragons of morality?

I think not. But more on that another time.