Posts Tagged ‘Great Recession’

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Mainstream economists and commentators, it seems, are worried that the global economy is going to come crashing down as a result of the COVID crisis. That’s why they’re willing now to consider the possibility that the current crisis is more than a normal recession, more serious even than the so-called Great Recession; in their view, it’s an economic depression.

That, at least, is the argument they present up front. But there’s something else going on, which haunts their analysis—that capitalism itself is now being called into question.

But before we get to that alarming specter, let’s take a look at the logic of their analysis about the current perils to the global economy—starting with the Washington Post columnist Robert J. Samuelson, who is basically taking his cues from a recent essay in Foreign Affairs by Carmen Reinhart and Vincent Reinhart.*

Their shared view is that the current slowdown is both more severe and more widespread than the crash of 2007-08, and the recovery will be much slower. Therefore, they argue, the COVID crisis represents the worst economic downturn since the Great Depression of the 1930s.

This is a big deal: mainstream economists and commentators are uneasy about invoking the term “economic depression.” They certainly resisted it for the crisis that occurred just over a decade ago, eventually devising a Goldilocks nomenclature, dubbing it the Great Recession (not as hot as the Great Depression but not as cold as a normal recession). As regular readers know, I had no compunction about calling it the Second Great Depression. And, according to their own logic, neither Samuelson nor the Reinharts should have either.

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According to Barry Eichengreen and Kevin O’Rourke, the financial crisis and recession had led to as big a downward shock to global industrial production in 2008 as the 1929 financial crisis, and had pounded stock market values and world trade volumes harder in 2008-09 than in 1929-30. Thus, from the perspective of the magnitude of the initial shock, the global economy was in at least as dire shape after the crash of 2008 as it had been after the crash of 1929.

Moreover, the downturn that began in 2007-08 was “largely a banking crisis” (as the Reinharts put it) only if they ignore the grotesque levels of inequality that preceded the crash (based on stagnant wages and rising profits)—which in turn fueled the need for credit on the part of workers and the growth of the finance sector that both recycled corporate profits to workers in the form of loans and led to even higher profits, creating in the process a veritable house of cards. At some point, it would all come crashing down. And, eventually, it did.

In any case, Samuelson and the Reinharts are now willing to take the next step and use the dreaded d-word to characterize current events. Here’s how the Reinharts see things:

In its most recent analysis, the World Bank predicted that the global economy will shrink by 5.2 percent in 2020. The U.S. Bureau of Labor Statistics recently posted the worst monthly unemployment figures in the 72 years for which the agency has data on record. Most analyses project that the U.S. unemployment rate will remain near the double-digit mark through the middle of next year. And the Bank of England has warned that this year the United Kingdom will face its steepest decline in output since 1706. This situation is so dire that it deserves to be called a “depression”—a pandemic depression.

And Samuelson does them one better:

In one respect, the Reinharts have underestimated the parallels between the today’s depression and its 1930s predecessor. What was unnerving about the Great Depression is that its causes were not understood at the time. People feared what they could not explain. The consensus belief was that business downturns were self-correcting. Surplus inventories would be sold; inefficient firms would fail; wages would drop. The survivors of this brutal process would then be in a position to expand.

Something similar is occurring today.

Clearly, Samuelson and even more the Reinharts are worried that the global economy—their cherished vision of the free movement of capital (but not people) and expanding trade according to comparative advantage—is currently being imperiled and may not recover for years to come. The volume of world trade is down; the prices of many exports have fallen; corporate debt is climbing; and the reserve army of unemployed and underemployed workers is massive and still growing. The prospects for a return to business as usual are indeed remote.

That’s pretty straightforward stuff, and anyone who’s looking at the numbers can’t but agree. What we’re witnessing is in fact a Pandemic—or, in my view, a Third Great—Depression.

But that’s when things start to get interesting. Because the Reinharts do understand (although I doubt Samuelson does, since he’s really only concerned about government deficits) that, when you resurrect the term depression and invoke the analogy of the 1930s, you also call forth widespread discontent, massive protest movements, and challenges to capitalism itself. Here’s how they see it:

The economic consequences are straightforward. As future income decreases, debt burdens become more onerous. The social consequences are harder to predict. A market economy involves a bargain among its citizens: resources will be put to their most efficient use to make the economic pie as large as possible and to increase the chance that it grows over time. When circumstances change as a result of technological advances or the opening of international trade routes, resources shift, creating winners and losers. As long as the pie is expanding rapidly, the losers can take comfort in the fact that the absolute size of their slice is still growing. For example, real GDP growth of four percent per year, the norm among advanced economies late last century, implies a doubling of output in 18 years. If growth is one percent, the level that prevailed in the shadow of the 2008–9 recession, the time it takes to double output stretches to 72 years. With the current costs evident and the benefits receding into a more distant horizon, people may begin to rethink the market bargain.

Now, it’s true, their stated fear is that “populist nationalism” will disrupt multilateralism, open economic borders, and the free flow of capital and goods and services across national boundaries. That’s as far as their stated thinking can go.

But the apparition that lurks in the background is that rethinking the “market bargain”—what elsewhere I have called the “pact with the devil,” that is, giving control of the surplus to the top 1 percent as long as they made decisions to create jobs, fund schools and healthcare, and be able to tackle problems like the novel coronavirus pandemic so that the majority of people could lead decent lives—will mean expanding criticisms of capitalism and the search for radical alternatives.

That’s the real specter that haunts the Pandemic Depression.

 

*Samuelson sees the wife-and-husband Reinharts as “heavy hitters” among economists:  “She is a Harvard professor, on leave and serving as the chief economist of the World Bank; he was a top official at the Federal Reserve and is now chief economist at BNY Mellon.”

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Mainstream economists continue to discuss the two great crises of capitalism during the past century just like the pillars of society performed in the brothel—a “house of infinite mirrors and theaters”—in Jean Genet’s The Balcony.* The order they represent is indeed threatened by an uprising in the streets, and the only question is: can they reestablish the illusion of control?

The latest version of the absurdist economic play opens with Brad DeLong, who dons the costume of the liberal mainstream economist and argues that, while the Great Depression of the 1930s was far deeper than the Great Recession (what I have long referred to as the Second Great Depression), the recovery from the crash of 2007-08 was so mishandled that it casts a shadow over the U.S. economy in a way the first Great Depression did not.

now we are haunted by our Great Recession in a sense that our predecessors were not haunted by the Great Depression. Looking forward, it appears that we will be haunted for who knows how long. No unbiased observer projects anything other than slow growth, much slower than the years during and after World War II. Nobody is forecasting that the haunting will cease — that the shadow left from the Great Recession will lift.

Basically, DeLong blames two groups—conservative mainstream economists and policymakers (“including the decision makers at the top in the Obama administration”)—for a recovery that was both too long and too slow. The first claims the monetary and fiscal policies that were adopted were wrongheaded from the start, and fought every attempt to sustain or expand them. The second group claims they prevented a second Great Depression and refuses to acknowledge the failure of the policies they devised and adopted.

The customer who dresses up as a representative of the conservative wing of mainstream economics, Robert Samuelson, expresses his sympathy with DeLong’s analysis but considers it be overstated. Samuelson’s view is that slow growth is not caused by the shadow cast by inadequate economic policies, but is the more or less inevitable result of two exogenous events: reduced growth of the labor force and slower growth in productivity.

The retirement of baby-boom workers would have occurred without the Great Recession. The slowdown in productivity growth — reflecting technology, management and worker skills — is not well understood, but may also be independent of the Great Recession.

This is exactly what is to be expected in the high-end economic brothel. It’s a debate confined to growth rates and the degree to which economic policies or exogenous factors should ultimately shoulder the blame of the crisis of legitimacy of the current economic order. Each, it seems, wants to play the fantasy of the Chief of Police in order to create the illusion of restoring order.**

What DeLong and Samuelson choose not to talk about are the fundamental differences between the response to the 1929 crash and the most recent crisis of capitalism. As is clear from the data in the chart at the top of the post, the balance of power was fundamentally altered as a result of the New Deals (the first and especially the second), which simply didn’t occur in recent years. After 1929, the wage share (the green line) remained relatively constant, even in the face of massive unemployment—and eventually, as a result of a whole series of other policies (from regulating the financial sector through jobs programs to unleashing a wave of labor-union organizing), the shares of national income going to the bottom 90 percent (the blue line) and the top 1 percent (the red line) moved in opposite directions. The current recovery has been quite different: a declining wage share (which, admittedly, continues a decades-long slide), the bottom 90 percent losing out and the top 1 percent resuming its rise.

And the reason? As I see it, what was happening outside the brothel, in the streets, explains the different responses to the two crashes. It was the Left—in the form of political parties (Socialist, Communist, and the left-wing of the Democratic Party), but also labor unions, councils of the unemployed, academics, and so on—that pushed the administration of Franklin Delano Roosevelt and Congress to adopt policies that moved beyond restoring economic growth to fundamentally restructure the U.S. economy (which, of course, continued during and after the war years).*** Nothing similar happened in the United States after 2008. As a result, the policies that were discussed and eventually adopted only meant a recovery for large corporations and wealthy households. Everyone else has been left to battle over the scraps—attempting to get by on low-paying jobs retirement incomes based on volatile stock markets, with underwater mortgages and rising student debt, and facing out-of-control healthcare costs.****

It should come as no surprise, then, that the elites who continue to play out their fantasies in the house of mirrors have lost the trust of ordinary people. Unfortunately, in the wake of the Second Great Depression, it’s clear that new masqueraders have been willing to don the costumes and continue the fantasy that the old order can be restored.

Only a fundamental rethink, which rejects all the illusions created within the economic bordello, will chart a path that is radically different from the recoveries that followed both great crises of capitalism of the past hundred years.

 

*I saw my first production of “O Balcão” at Sao Paulo’s Teatro Oficina in 1970, as a young exchange student during one of the most repressive years of the Brazilian dictatorship. Staging Genet’s play at that moment represented both a searing critique of the military regime and an extraordinary act of resistance to government censorship.

**Much the same can be said of a parallel debate, between Joseph Stiglitz and Lawrence Summers.

***Even then, we need to recognize how limited the recovery from the first Great Depression was. Amidst all the changes and new regulations, leaving control of the surplus in private hands left large corporations with the interest and means to circumvent and ultimately eliminate the New Deal regulations, thus creating the conditions for the Second Great Depression.

****As Evan Horowitz has shown, roughly 14 percent of workers have seen no raise over the past year (counting only those who have stayed in the same job). That means, with inflation, their real wages have fallen. Moreover, “when a large share of workers get passed over for raises, wage growth for all workers tends to remain slow in the year ahead.”

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Economic journalists, like Neil Irwin, are falling all over themselves celebrating the strength of the current economic recovery.

According to the latest data from the Bureau of Labor Statistics, 313 thousand new jobs were added in February. The official unemployment rate remained at a relatively low 4.1 percent. Hourly wages grew at an annual rate of 2.6 percent. And so on.

Here’s Irwin:

This is not the kind of data you expect in an expansion that is nine years old, or out of a labor market that is already at full employment. . .

the February numbers are a delicious sweet spot for the economy. Many more people are working, including people who hadn’t even been in the labor force. If that trend continues — and it’s worth adding the usual caveat that each month’s jobs numbers are subject to revision and statistical error — there’s no reason to think this expansion is reaching its natural end.

What Irwin and his colleagues fail to mention is this is an economic recovery that, as in previous years, continues to be spectacularly one-sided. It’s all on capital’s terms.

Let’s look at some other numbers, as illustrated in the charts at the top of the post. The profit share (the blue line in the top chart) has in fact rebounded nicely since the depths of the Great Recession—from a low of 6.2 percent in the fourth quarter of 2008 to 11.9 percent in the third quarter of 2017 (the latest period for which data are available). And that’s true across the board—in both major sectors, nonfinancial (the red line) and financial (the green line). Profits quickly recovered from the crash and, as a result of government economic policy and capital’s own decisions, they’ve stayed at or near the peak of the pre-crash period.

Meanwhile, workers are still waiting for their recovery. The wage share (in the second chart), while currently higher than its nadir (52.1 percent in the third quarter of 2014), is still (at 53 percent) only equal to its previous low (in 2006)—and therefore much lower than it was in the midst of the Great Recession and, on average, for much of the postwar period. Even with lots of new jobs and low unemployment, workers are still getting the short end of the stick.

So, Irwin is right about one thing: the current numbers are a “delicious sweet spot”—for capital, not labor. Capital is getting all the workers it wants, to make even more profits. And workers continue to be forced to have the freedom to find jobs and then to labor in return for a historically low share of what they produce.

No, there is no natural end to this one-sided expansion. Only a fundamental transformation in economic institutions, not pie-in-the-sky promises, will actually benefit American workers.

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The United States is now more than eight years out from the end of the Great Recession and the one-sided nature of the recovery is, or at least should be, clear for all to see.

Even as unemployment has dipped below the so-called “natural rate,” workers are far from recovering all they’ve last in the past decade.

According to the official data illustrated in the chart above, the labor share of national income remains just above the lowest level it reached in the entire postwar period. Using 100 in 2009 as the index value, the current labor share has fallen to 96.5—down from 110.24 in 2001 and 114 in 1960.

The question is, how low can the labor share go?

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That’s what Mirella Casares gets as her “benefit” package from working at Victoria’s Secret. The package doesn’t include health or retirement contributions.

As it turns out, Casares is not alone. Far from it.

Many American workers, because of the precarious nature of their jobs and household finances, are concerned (as reflected in the word chart above) with “money,” “bills,” “health,” and “retirement income.”

According to the Report on the Economic Well-Being of U.S. Households in 2016 by the Board of Governors of the Federal Reserve System (pdf), about 30 percent—or approximately 73 million adults—are either finding it difficult to get by or are just getting by financially. Even more, almost half (44 percent) of adults say they either could not cover an emergency expense costing $400, or would cover it by selling something or borrowing money.

One of the major reasons is American workers simply aren’t being paid enough. That’s why more than half (53 percent) are forced to spend more than they earn and therefore don’t have the ability to save. They also face extraordinary health (approximately 24 million people, representing 10 percent of adults, are carrying debt from medical expenses that they had to pay out of pocket in the previous year) and education expenses (over half of adults under age 30 who attended college took on at least some debt while pursuing their education). Therefore, they have to borrow money and rely on family and friends to make ends meet.

The other reason is because of income volatility. About one third of American adults indicate that their monthly income varies either occasionally or quite a bit from month to month. Thirteen percent of adults (40 percent of those with volatile incomes) report that they struggled to pay their bills at least once as a result of income volatility. One of the major causes of that volatility is variable work schedules: seventeen percent of workers have a schedule that varies based on their employer’s needs, and just over half of those with a varying work schedule are usually assigned their schedule three days in advance or less.

One of the consequences of being underpaid and subjected to variable work schedules dictated their employers is American workers have found it necessary to turn to multiple jobs and informal work. According to the survey, 9 percent of all adults, and 15 percent of those who are employed, report that they worked at multiple jobs. In addition, 28 percent of all adults report that they or their family earned money through one or more of informal and occasional activities (such as babysitting, selling at flea markets, and performing tasks through online marketplaces) in the prior month.

The United States is now eight years into the recovery from the Great Recession and the benefit to American workers consists of little more than 3 bras and a bottle of perfume.

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The latest numbers are in (from Emmanuel Saez [and pdf]): while the bottom 99 percent of U.S. households have managed to claw back some of what they lost during the Great Recession, those at the top have done much better. The result is that, while the economic recovery looks a bit less lopsided than in previous years, income inequality in the United States remains extremely high.

As readers can see in the chart above, rom 2014 to 2015, the incomes of the bottom 99 percent grew by 3.9 percent, which is the best annual growth rate since 1999. Still, even after the second year of real income growth for families in the bottom 99 percent (amounting to 6 percent, for a total of a 7.6 percent gain since the recovery began), they’ve still only recouped about 65 percent of what they lost (-11.6 percent) during the most severe economic downturn since the first Great Depression. The bottom 99 percent still have not experienced the recovery they were promised.

But those in the top 1 percent have in fact enjoyed their recovery. They did much better last year (when their incomes grew by 7.7 percent), as they have since the Great Recession officially ended (for a total of 37.4 percent since 2009—thus more than making up for the losses they experienced after the crash, -36.3 percent). As a result, the share of income going to the top 1 percent of families—those earning on average about $1.4 million a year—increased to 22 percent in 2015 from 21.4 percent in 2014, while the share of income going to the top 10 percent of income earners—those making on average about $300,000 a year—increased to 50.5 percent in 2015 from 50.0 percent in 2014, the highest ever except for 2012.

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Thus, as Saez explains, income inequality in the United States remains extremely high, particularly at the very top of the income ladder: the figure at the top of the post

shows that the incomes (adjusted for inflation) of the top 1 percent of families grew from $990,000 in 2009 to $1,360,000 in 2015, a growth of 37 percent. In contrast, the incomes of the bottom 99 percent of families grew only by 7.6 percent–from $45,300 in 2009 to $48,800 in 2015. As a result, the top 1 percent of families captured 52 percent of total real income growth per family from 2009 to 2015 while the bottom 99 percent of families got only 48 percent of total real income growth. This uneven recovery is unfortunately on par with a long-term widening of inequality since 1980, when the top 1 percent of families began to capture a disproportionate share of economic growth.

Thus, what we’ve seen in the United States is a crash that was caused, over the course of decades, by obscene levels of inequality—which has turned into a recovery that has been characterized, over the course of the last few years, by similarly grotesque levels of inequality. Those at the top, who managed to capture a large share of the growing surplus in the years leading up to 2007-08, have restaked their claim on the surplus during the recovery.

The rest of the U.S. population, most of whom actually produce the surplus, continues to fall further and further behind. The bottom 99 percent enjoyed only 35 percent of the gains from the Bush expansion (from 2002 to 2007), suffered 51 percent of the losses from the Great Recession (from 2007 to 2009), and, thus far, have gotten only 48 of total income growth during the recovery (from 2009 to 2015).

It’s clear, then, the recovery from the crash of 2007-08 has been highly unequal—which really should come as no surprise, since the current recovery has been just as unequal as the period of expansion before it and the downturn itself. Since the same forces are at work, now as then, why should be expect a different outcome?

As Albert Einstein once quipped, the definition of insanity is “doing the same thing over and over again and expecting different results.”

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More than 7 years into the current recovery and all the talk is about the number of jobs created, the falling unemployment rate, and the prospect that workers’ wages are set to finally increase on a sustained basis. Problem solved!

But what about the 1 in 6 American workers who were let go during the Great Recession, victims of the 40 million layoffs and other involuntary discharges during the official downturn that began in December 2007 and ended in June 2009? Not to mention the fact that nearly 14 million people are still searching for a job or stuck in part-time jobs because they can’t find full-time work.

As the Wall Street Journal reports,

Even for the millions of Americans back at work, the effects of losing a job will linger. . .They will earn less for years to come. They will be less likely to own a home. Many will struggle with psychological problems. Their children will perform worse in school and may earn less in their own jobs. . .

Only about one in four displaced workers gets back to pre-layoff earning levels after five years. . .A pay gap persists, even decades later, between workers who experienced a period of unemployment and similar workers who avoided a layoff. Estimates vary, but by one analysis, people who lost a job during recessions made 15% to 20% less than their nondisplaced peers after 10 to 20 years.

And that’s just the tip of the iceberg. Workers who lost their incomes or received lower incomes if and when they found a new job have found it difficult to save and make purchases (and, in many cases, had to dip into what savings they had), own a home, send their children to college, and pay for healthcare.

Losing a job, of course, has more than just financial consequences for workers and their families.

Unemployment often is an isolating experience. A layoff can strip people of their identity as workers in a chosen field and their workplace-based social network of co-workers and other contacts. Researchers have linked job loss to stress, depression and feelings of distrust, anxiety and shame.

Alarming trends that emerged after the end of the 1990s economic boom may have been amplified by the latest recession. The death rate for middle-aged whites has been rising as a result of suicides, substance abuse and liver diseases, all potentially products of economic distress, according to research by economists Anne Case and Angus Deaton.

Data spanning the recession years show a link between high unemployment and increased abuse of painkillers and hallucinogens. The U.S. suicide rate climbed 24% between 1999 and 2014, a rise that accelerated after 2006, according to the Centers for Disease Control and Prevention. One study of Pennsylvania men who lost long-held jobs during the early 1980s found a spike in mortality following a layoff, with middle-aged men set to lose a year to 18 months off their lifespans.

Researchers have found that the children of people who lose their jobs perform worse on school tests and are more likely to repeat a grade. A father’s layoff is linked with a substantially higher likelihood of anxiety and depression in his children. In one study, the sons of men who were displaced from their jobs earned salaries that were 9% lower compared with otherwise similar children whose fathers had stayed employed.

And the list goes on.

What no one in charge seems to want to talk about is the fact that the economic trauma of the Second Great Depression “has left financial and psychic scars on many Americans, and that those marks are likely to endure for decades”—thus scarring not just millions of individuals and their families, but all of American society.

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We’re now six and a half years into the official recovery from the Great Recession and, according to the latest report from the Bureau of Labor Statistics, the headline unemployment rate has fallen to 5 percent.

However, just to keep things in perspective, the number of long-term unemployed (workers who have been without a job for 27 weeks or more) was essentially unchanged at 2.1 million in October and has shown little change since June. These individuals accounted for 26.8 percent of the unemployed in October.

And, as we can see from the chart above, workers’ wages, while increasing, have still recovered much more slowly than during the previous three business cycles.

As I wrote yesterday,

it is clear both that the initial downturn was much more protracted than mainstream economists (including central bankers, like Ben Bernanke) had the courage to admit and that the persistent negative effects of that crisis continue to depress actual rates of growth below the earlier trend.

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We really need to go beyond the headlines to make sense of today’s jobs report.

The headlines are replete with “full health” and “strong” gains (in the Wall Street Journal and Reuters, respectively), based on total nonfarm payroll employment rising by 257,000 in January. But the report itself reveals not much has changed: not the official unemployment rate (5.7 percent), the number of unemployed workers (9 million), the jobless rates for different demographic groups (adult men, adult women, whites, blacks, Asians, and Hispanics), the number of long-term unemployed workers (2.8 million), and so on.

In fact, some numbers have gotten even worse—for example, the unemployment rate for teenagers (up to 18.8 percent) and the U6 unemployment rate (up to 11.3 percent).

About the only positive news is the rise in hourly earnings:

In January, average hourly earnings for all employees on private nonfarm payrolls increased by 12 cents to $24.75, following a decrease of 5 cents in December. Over the year, average hourly earnings have risen by 2.2 percent. In January, average hourly earnings of private-sector production and nonsupervisory employees increased by 7 cents to $20.80.

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Even then, from a bit longer view, there’s not much to cheer at all: average hourly earnings continue to limp along at an annual growth rate of about 2 percent, far below previous increases and much below the growth in productivity.

Looking beyond the headlines, one thing then is clear: there’s been very little recovery for the majority of people more than five years after the official end of the Great Recession.