The Wrongologist

What’s Wrong Today:

Everyone wants to understand why we have both a Great Recession and a jobless recovery at the same time.

Since the start of the Great Recession at the end of 2007, America’s potential labor force (working-age people who want jobs) has grown by over 7 million. But since then, the number of Americans who actually have jobs has shrunk by more than 300,000, while the S&P 500 index has largely recovered and corporate profits are at all-time highs.

But our candidates for President seemingly have no idea how to fix this problem. 

They continue to sing from their parties’ choir books while showing zero ability to address these issues as a coherent whole:

• Romney speaks about how our best years are ahead of us while on his “Believe in America” bus tour
• Obama speaks about how we should stay the course and not go back to the failed economic strategies of the Bush era

Hoover never said it, but both candidates tell us “Prosperity is just around the corner”.

But the economy has not escaped the gravitational pull of the Great Recession. The standard tools have not worked: near-zero short-term interest rates from the Fed, record-low borrowing costs in the bond market, the combination of a too-small stimulus package and tax credits for small businesses have failed to do enough.

That’s because the real problem is not simply a downturn in the business cycle.

We will not have sustained GDP growth unless consumers, (whose spending makes up 70% of GDP) are again spending on a sustained basis. And there is little reason for hope on that score, largely because of the current jobs depression.

So, What’s Wrong?

Too few consumers have the money they need to help drive growth in our economy. There are two reasons for this:

First, persistent unemployment.  According to the BLS, we have approximately the same number of people employed in the US today as we had in 2005. The Labor Participation Rate (this is the ratio of employed people over 16 years old to the total over 16 population) has fallen. It was 63.8% in May 2012, while it averaged about 66% from 2002-2008. So, fewer people are working.

Second, limited wage growth. Hourly wages have flattened. The average hourly wage today adds up to $352.39 per week, just $2.22 more in constant dollars per week (that’s less than a 1% increase, folks) than the average wage from 2006-2010. Worse, the median male worker earns less today, adjusted for inflation, than he did 30 years ago.

So, fewer people are working and they make less money.

The seeds of these trends were sown years ago when new technologies, like satellite communications, low cost sea transportation, computers and the Internet made it cheaper for American companies to use low-wage labor abroad or software-driven tools and robots here at home rather than continuing to pay the typical worker. Now, our largest firms create more jobs offshore than in the US.

Our political classes have to deal with the underlying problem that we’ve avoided for decades: the ever widening income gap.

But technology is making it likely that a Keynesian solution will not be sustainable by consumers, although we should still employ the tools for our crumbling infrastructure. The Wrongologist has argued recently that we also need to redefine American capitalism as part of the solution.

One reason to redefine capitalism is that we are heading to a land where no stimulus magic will return us to the economy we have enjoyed in the past.

Here are two trends driving this conclusion:

Trend 1: Diminishing role of Consumer Consumption
Someone with an income of hundreds of millions a year does not spend more than a small fraction of it on consumption. For those who have money to burn, demand is moving increasingly toward things that are not mass produced: Land, art, rare wines and Super Bowl tickets are being bid up to unthinkable levels. And that only leads to a transfer of income from one well-to-do pocket to another without generating much if any need to make things. Sadly for those in the middle class, income inequality also means more of these things are moving out of reach.

Popular technologies may cause some spending by the middle class to fall. With our increased focus on consumer technologies – we spend more and more of our time on our cell phones, reading emails, watching videos and surfing the web – there is less of a difference between how the super rich and the middle class spend blocks of their time during a typical day. < /p>

The point is that orders of magnitude in income may not make all that much difference in what people spend on the tools they use to communicate and entertain themselves.

If this trend continues, we may see declining technology spending by the middle class. When coupled with low growth in wages and employment, this is surely not the way put of a jobless recession.

Trend 2: Diminishing Labor Component in Production
The production that feeds our demand for most engineered products is being developed with less labor input. This is happening not only because of improvements in production efficiency, but also because the sorts of things we want are particularly well suited to capital-intensive production.
Much of what we want to buy is produced in factories increasingly run with robots, and maintained and operated by a small cadre of engineers. Increased sales of iPhones only add a few sales jobs at less than $12/hour in the US and not many factory jobs in China. Also, keep in mind that some 3 Billion people are looking for work globally and most are willing to work for less than the average American.

So, demand for domestic labor may not rise even if we manage to push consumption up.

There has been a lot written about the liquidity trap, where monetary policy can no longer function as a spur to economic recovery. I believe that to be true.

However, the consumption trap described above is creating similar limits on the ability of the President to employ fiscal policy to push up employment and production.

Trickle down will not bring jobs back. Lower tax rates for multinational corporations will not bring jobs back. Whatever job growth there will be over the next few years will be fueled by very skilled labor getting good-paying jobs. The trickle down will create some low wage jobs to support demand for services by this group of new high wage earners.

So, What Will Work?

This secular decline in jobs is pretty dire for a lot of occupations. Jobs where you can collect a steady and consistent rent for doing the same thing are collapsing all around us. Life has become a zero-sum game between highly-skilled vs. skilled workers, superstars vs. everyone else and capital vs. labor.

The Wrongologist is not sure if Rifkin’s idea of a new class of mid-sized companies comprised of craftspeople involved in niche production makes complete sense, but jobs will have to come from somewhere

The next wave of job creation must focus on local (not easily outsourceable), niche manufacturing and service functions. We can’t just settle for low skilled service job creation.

Most have heard about the need for STEM (Science, Technology, Engineering, and Mathematics) education as a basis for job growth. This leaves skills like creative writing, arts instruction, and other “soft skills” which are not always amenable to rule-based software or to distance learning, on the sideline. The Wrongologist concurs with Rhode Island School of Design President John Maeda’s vision that a move from STEM to STEAM (adding Arts to the mix) is the right vision for boosting innovation.

Technology and systems used in education have to be compatible with this vision. Softer skills like leadership, team building, and creativity will be increasingly important. They are the areas least likely to be automated and most in demand in a dynamic, entrepreneurial economy. This needs to be a NASA style project for the 21st century.

Can we get the money? We may have to kill a few sacred cows to fund it: 

1. Decouple benefits from jobs to increase flexibility and dynamism. Tying health care and other mandated benefits to jobs makes it harder for people to move to new jobs or to quit and start new businesses.
2. Eliminate the home mortgage subsidy. This costs over $130 billion per year, which would do much more for GDP growth if allocated to research or STEAM program education.

Getting it done won’t be easy and in the interim, people will fall through cracks. It also runs counter to the life experience of everyone except itinerant bloggers, investors, hackers or engineers who can work out of a messenger bag with a laptop.

So, after the revolution, bloggers will still be employable. Unless we act, the rest of us, maybe not.