Friday, December 20, 2019

Measuring our 21st Century Economy with 19th Century Metrics

Politicians and Journalists all seem to accept the assertion we have a "good" economy because unemployment is hovering around historic lows, about 4%.

In the 19th Century the unemployment rate really meant something.  People who didn't have jobs had no income, so when folks lost their jobs there was an immediate impact on consumption based demand, which would in turn cause other folks to lose their jobs.  In the 1800's and early 1900's our economy flipped back and forth between spurts of rapid growth and depressions on average about every seven years.  The unemployment rate was the perfect canary in a coal mine to warn of an impending recession or depression.

But we don't live in the 19th Century, we live in the 21st Century.  In the early 20th century labor organizations started to make progress on job security for workers, so employers couldn't start firing people the second they saw an advantage to their bottom line.  Then mandatory unemployment insurance spread across country.  During the Great Depression In the 1930's Social Security and further worker protections were enacted. 

Those changes ended Depressions.  After generations of our ancestors experiencing depressions every seven years or so we have not had a depression since the Great Depression in the 1930's.

The events that caused the Great Recession, if they had happened in the 19th century, would have sparked a horrendous depression.  But they didn't, because the drop in consumer demand was minimized since laid off folks had income from  unemployment checks, and then many older workers dropped out of the job market to receive pension and Social Security checks.  We have stumbled along with mediocre growth since the Great Recession. 

Our 4% unemployment rate is not a sign of economic health, it is a sign of economic stagnation.  Our 4% unemployment rate masks the fact that the number of people actually working as a percentage of the population, has dropped from 64% of the population before the Great Recesssion, to around 60% of the population today.  Because the population has grown by 30 or 40 million people growth hasn't completely collapsed, but where I live in the Bay Area employers tell me they have permanent help wanted signs because there are never enough workers to fill the available jobs (our foolish immigration policy doesn't help).

Wages are so historically low the 68 million people drawing social security see no reason to get a job.  So their spending still provides a floor under consumption, but they are not capable of fueling growth because they live on a fixed income.

So if unemployment figures don't explain whats happening how do we understand our current economy?  

Maybe stop ignoring debt?  Levels of virtually every kind of debt are near historic highs.  Consumer debt, lending on real estate, corporate debt - and most glaringly, our national debt.

Government debt didn't matter in the 19th century because the world ran on the gold standard, so governments that ran up debts hobbled their economy.   We ran up debt during wars, then paid it down between wars.  The Civil war ran the National debt up to about 40% of GDP, then it dropped down to about 5% of GDP right before jumping up near 40% of GDP in World War I.  The debt dropped for a few years, then climbed to about 45% by the Great Depression, then up to 116% of GDP during World War II.  

After World War II debt dropped from 116% down to about 30% by 1980.  

Since 1980 it has gone from 30% to over 100%.  Since 1980, as a percentage of GDP, we on average have incurred more debt each year than GDP growth.  That change in economic trajectory can be traced directly to Republicans focusing on cutting taxes on the wealthy for the last 40 years.  Since the Trump tax cuts our national debt has grown more than twice as fast as GDP growth.

But economists disregard government debt in computing GDP, so policitians hail GDP numbers as a badge of their competence and ignore the rising debt.  

We have painted ourselves into a corner.  We can't pay off our debt by taxing consumers without undermining consumption and growth.  Only those with wealth beyond their needs can be taxed without undermining consumption.  But that has been politically untouchable.

It is not a sustainable economic model.  Unemployment as the canary warning impending short term economic problems no longer works.  But the correlation of GDP growth to national debt growth is our modern canary warning us of long term economic stagnation.

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