Should We Start Calling It a Depression?

For why the economy remains becalmed in the doldrums, the answer is found in the Federal Reserve’s triennial “Survey of Consumer Finances” issued in mid-June. It covers the period 2007-2010, bridging the 2008 crash, and reports that the median family income for Americans fell 7.7% and the mean (or average) income 11%. Worse still, the median net worth of families fell a stunning 38.8%; the mean 14.7%.

Some interpretation is in order: The median is the midpoint of all families — half earned more, half earned less. That the average income loss was higher says that the upper income groups lost more income, and indeed the report says that the loss was “most pronounced in the top 10%”. But for net worth, the reverse is true, and to a much greater degree. Net worth of most Americans is primarily the value of their houses –far less so for the wealthy — and housing values collapsed.

Many economists insist that a lack of demand is what is holding the economy back and the Fed study backs up their claim. People have less to spend and are wary of spending what they have. What’s more, they can’t even borrow to take advantage of record low interest rates, because banks won’t lend. Worried that any day they might lose their job, with mortgages under water, Americans aren’t buying. With weak demand for their products, the major corporations are not using their trillions in accumulated profits to hire workers. In addition, a host of uncertainties — Europe, the year-end tax chaos, unsettled regulation — has them waiting on the sidelines.

Between 1980 and 2007, the decades leading up to the Fed study, the real (i.e., inflation-adjusted) income of the median American family rose 22% (it rose sevenfold for the top .01%). David Cay Johnston, an investigative journalist specializing in taxes, found that, while the national economy more than doubled during those years, the average income for most Americans declined. The standard of living rose only because women entered the workforce in the millions. His stunning discovery is that the peak income year for the bottom 90% was 40 years ago, 1973, when the real income of the average taxpayer was $33,000, $4,000 more than in 2005.

Along came the crash of 2008 to make matters decidedly worse, as the Fed reports.

The causes are many. Since 1990 we have shipped 12 million manufacturing jobs overseas, and despite some resurgence, the great majority are not coming back, says former Labor Secretary Robert Reich, the consensus view. This past decade was the worst. Adam Davidson, writing in The Atlantic, notes that, “In the 10 years ending in 2009, [U.S.] factories shed workers so fast that they erased almost all the gains of the previous 70 years; roughly one out of every three manufacturing jobs — about 6 million in total — disappeared.”

Unions in the private sector have been in long decline, partly because of the manufacturing exodus. Gone from the rest of the economy are union jobs such as those for longtime workers at General Motors making $56 an hour, including benefits. Before moving overseas, industry long ago began a migration south to states with right to work laws and few union strongholds. Steven Rattner, who oversaw the auto industry bailout, cites the example of Volkswagen setting up in Chattanooga, TN, with 2,000 new hires — but at starting pay of $14.50 an hour.

In the two years after the Wall Street meltdown, large American corporations slashed U.S. payrolls by a net of 500,000 jobs while they hired 729,000 overseas, according to an article in The Week. Harold Meyerson, “in The American Prospect laments that...

Our corporations don't need us anymore. Half their revenues come from abroad. Their products, increasingly, come from abroad as well…With each passing year, and even more so during the recession, America's leading corporations grow more and more decoupled from the American economy. Their interests grow increasingly detached from those of our workers, our consumers — and our economic future.

An example is Apple. Time Magazine quoted an Apple executive saying early this year "We don't have an obligation to solve America's problems". Well, maybe not, but a New York Times exposé three months later documented how Apple — like Google, like G.E., like others — avoids paying taxes worldwide ($3.3 billion on income of $34.2 billion in 2011), even in its home state. In a Foreign Policy article, former trade negotiator Clyde Prestowitz (who remembers helping Steve Jobs back in the 80s when he was trying to break into Japan) wrote:

I'll bet that the guy who says Apple has no obligation to help Uncle Sam does strongly believe that Uncle Sam has an obligation to stop foreign pirating of Apple's intellectual property and to maintain the deployments of the U.S. Seventh Fleet and of the 100,000 U.S. troops in the Asia-Pacific region that make it safe for Apple to use supply chains that stretch through a number of countries [with] long standing and bitter animosities.

Nevertheless, these extra-national corporations make this downturn different from any other — the Great Depression included — because America’s highly automated multinationals that job out work to other countries can continue to profit without rehiring large numbers of American workers.

Waves of outsourcing of service jobs to foreign companies have eaten away another chunk of American jobs, first at low levels such as call centers, but with the Internet came the realization that anything that could be delivered via a wire could be done elsewhere where white collar workers were far cheaper, so accountants, paralegals, software developers, even radiologists saw their jobs exported. The Economist reminds us that “China and India between them have around 2.5 billion people, so the potential for further offshoring from the rich world is immense”.

Such have been and will be the ravages of globalization. It was inevitable and easily foreseen. Clearly trade between nations of vastly different living standards would drive all toward a common level. Free trade was extolled for improving life for millions, but millions here are paying a brutish price.

Making it worse, more and more jobs have been turned over to machines. They are accurate, do not require sleep, and, once the capital investment is recouped, more economical than even those $14.50 an hour auto plant workers. The president described it in his Kansas speech:

Steel mills that needed 1,000 employees are now able to do the same work with 100 employees, so layoffs too often became permanent, not just a temporary part of the business cycle.

The general case is that workers who are able to find jobs are returning to the workforce at pay much less than what they once earned. That fits what Gallup found a year ago — that in the preceding two years Americans earning more than $90,000 a year increased their household spending by 16%, but for all other Americans spending was flat. Moody’s Analytics reported last September that 37% of all spending was by the top 5% of earners. Turned around, that means that almost the entirety of the population accounted for only 63% of the spending. An economy will remain perpetually stalled if its recovery relies on the ability of only the affluent to spend. Reich said it clearly: “The economy cannot possibly get out of its current doldrums without a strategy to revive the purchasing power of America’s vast middle class”.