Tuesday, October 19, 2004

An Emergency-Room Economy, and No Physician in Sight

Summary Report
Published on Wednesday, September 29, 2004 by CommonDreams.org
An Emergency-Room Economy, and No Physician in Sight
by Alan G. Nasser


According to a recently released Census Bureau report, family, household and individual incomes have declined steadily since 2000.

And this has been accompanied by a sharp rise in the number of poor and medically uninsured.

These are symptoms of an economy that is, on inspection, currently far more unstable and vulnerable to crisis than it was in the period immediately preceding the Great Depression.

The key to a healthy economy is job- and income-creating investment in capital goods, which in turn generates a virtuous cycle of further growth in investment, jobs and income.

Ominously, the investment, growth, employment and income pictures are unprecedentedly dismal.

Compared to recoveries since 1949, growth rates since 2000 have been half their previous average.

Even this weak performance required historically unprecedented fiscal and monetary stimulus: 13 rate cuts, three tax cuts, massive government deficits and record growth in money and credit.

Official figures mask the economy's most serious problems.

Growth figures are annualized by U.S. statisticians.

Thus, the much-touted 7.1% growth rate in the third quarter of 2003 was the one that would emerge after twelve months if the current trend were to continue.

The same growth rate would have been reported in the eurozone as 1.8%.

Since the mid-1990s the Bureau of Economic Analysis (BEA) has adjusted upward actual business dollar outlays on computers and related equipment to take into account quality improvements (faster processors, bigger hard drives, more memory).

Accordingly, the BEA estimates that business high-tech investment quadrupled between 1996 and 2002, from $70.9 to $283.7.

But in actual dollars spent, the increase was only from $70.9 billion to $74.2 billion, very low by historic standards.

The high-tech boom was both greatly exaggerated and misleading.

After all, neither profits nor wages are taken in "hedonically adjusted" dollars.

The difference between real and hedonic outlays explains what would otherwise be a paradoxical feature of the years 2000-2003: government was reporting big increases in high-tech investment, while manufacturers were bemoaning declining sales.

Hedonic pricing has accounted for a steadily rising percentage of all reported capital investment.

But if we look at actual dollars spent, we find that since 1998 the growth rate of business fixed investment has actually been declining.

Real capital investment has not been this weak since the Great Depression.

The fudging of investment figures also obscures the sorry state of the jobs market.

The Commerce Department's figures on nonresidential investment for the third and fourth quarters of 2003 reported increases of, respectively, 12.8 and 9.6%.

A closer look reveals that the "adjusted" hi-tech sector is the only bright spot, with production and capacity rising, respectively, 24.6% and 11.1% over the past year.

But hi-tech is not where significant jobs increases are found.

Employment in hi-tech has declined steadily through the so-called "recovery" since its 2001 peak.

In non-hi-tech manufacturing, where investment figures are not adjusted, production from January 2003 to January 2004 rose only 0.9%, while capacity actually declined -0.2%.

This represents a record nineteen-straight-month decline in mainline manufacturing capacity.

Since it is mainline manufacturing which employs almost 95% of all manufacturing workers, it comes as no surprise that for the first time since the Great Depression the economy has gone more than three years without creating any jobs.

The jobs crisis is even worse than it appears.

Here again statistical sleight-of-hand, this time by the Bureau of Labor Statistics (BLS), obscures economic reality.

Based on data gathered employing the "net birth/death adjustment," BLS announced in April that the long-awaited jobs recovery had finally arrived.

Nonfarm payrolls had allegedly surged by a whopping 308,000 in March.

The birth/death model uses business deaths to "impute" employment from business births.

Thus, as more businesses fail, more new jobs are imputed to have materialized through business births.

This improbable statistical artefact accounts for about half of the reported 308,000 March payroll increase.

The birth/death model is based on statistics covering 1998-2002.

This was a period of explosive telecom and dot.com startups, quite unlike today's flat economic landscape.

Thus, two thirds of the 947,000 new jobs BLS "imputed" for March-May were never actually counted by BLS and never reported by any firm.

BlS's household and establishment surveys tell a more sobering story.

March employment by private industry actually fell by 175,000, and the number of self-employed workers declined by 288,000.

Without the simultaneous increase of 439,000 government jobs, the March job announcement would have been a calamity.

And both average weekly hours and total hours worked declined markedly, even as (according to the dubious birth/death findings) the work force increased.

This is the first time ever that net job growth has been negative 26 months into a recovery.

During the current recovery, wage and salary growth has actually been negative, at -0.6%, in contrast to the average increase of 7.2% characteristic of this point into each of the other eight post-War recoveries.

For the first time ever, in March 2001, overall debt levels (mortgage debt plus consumer debt, mainly credit card debt and car loans) rose above annual disposable income.

Since the collapse of stock market/hi-tech bubbles in 2001, the illusory "wealth effect" has been sustained, and consumer spending thereby encouraged, by another bubble, the enormous inflation of house prices.

Bloated home equity then provided rising collateral to underwrite still more borrowing.

What makes this especially problematic is that over the last ten years, the average family has suffered under large increases in health premiums, housing costs, tuition fees and child care costs.

The mortgage refi boom has fizzled, and consumer spending is beginning to decline.

Late last year the Fed's quarterly Beige Book reported a disturbing shift in the composition of credit spending: more and more families are using their credit cards to finance spending on essentials, such as food and energy.

What is required is a shift from bubble-, debt-, and consumption-driven growth to investment- and income-driven growth. This in turn necessitates a decline in Americas principal export, jobs. Domestic job growth, a higher minimum wage, tax cuts aimed predominantly at low- and middle-income families, a sharp reduction in defense spending and a redirection of these funds to long-neglected and pressing social needs such as health care reform, the provision of universal pre-school, and across-the-board repair and upgrading of America's deteriorated infrastructure of roads, highways,tunnels and bridges, all these should be at the forefront of a Democratic administration's agenda.

The restoration of infrastructure is especially labor intensive, and would generate an enormous number of productive jobs. And as a national project spearheaded by government initiative, government would emerge as a major employer.

The author teaches political economy at The Evergreen State College in Olympia, Washington and has written articles and essays that have appeared in The Nation, Commonweal, Monthly Review, and a range of professional journals in economics, sociology and law

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