I actually agree with Robert Samuelson’s observation that the reason that job growth is so slow is a factor of changing psychology:
We have gone from being an expansive, risk-taking society to a skittish, risk-averse one. Before the 2008-09 financial crisis, the bias was toward more spending. The inclination was to surrender to immediate gratification. Want a new car? Sure, why not? More meals out? Great idea! Businesses behaved similarly. Banks made the next loan; companies hired the next worker and approved the next investment project. An ever-expanding economy justified optimism, and optimism supported an ever-expanding economy. Hello, bubble.
The psychology has now reversed. The bias is against extra spending. Eat out? Try leftovers. Remodel the basement? Oh, leave it alone. In the boom years, the personal saving rate (savings as a share of after-tax income) fell from 10.9 percent in 1982 to 1.5 percent in 2005. Now it’s edging up; from 2010 to 2012, it averaged 4.4 percent. It could go higher, imposing a further drag on the economy.
Where I disagree is on the matter of timing. I think that Mr. Samuelson misleads, maybe even misleads himself, by considering average rate of new firm foundation rather than the rate of new business formation by year and how that’s changed over time. That’s illustrated in the graph above, which uses Small Business Administration and Census Bureau data. As you can see beginning in the early 1990s the rate of new business formation declined sharply and has continued its decline since. If you look at the data going back before 1990 the pattern is even more pronounced. I’d've extended the graph to illustrate new business formation since 2007 but I didn’t want to frighten the children.
As I see things, a number of interacting factors have been at work:
- Generational change
- Opening China up to foreign trade
- Currency manipulation by China, Japan, and South Korea (just to name a few)
- Mass shedding of jobs by large firms
- Slower rate of new business formation
- Mass immigration of low-skilled workers
- Fed policy that encouraged asset inflation
- Management that thought one quarter at a time
- Vast subsidies given to relatively unproductive sectors, e.g. healthcare, education, and finance.
just to name a few.
The oldest Baby Boomers turned thirty in 1976; the youngest turned thirty in 1994. China officially ended its policy of autarky in 1979 and pegged its currency to the dollar in 1992. The auto manufacturers, just to give one example, have cut their hourly payrolls in half or more over the period of the last 30 years.
Over the years that I’ve been operating this blog I’ve produced dozens of suggestions for changing the dynamics the factors outlined above create. Let large firms fail. Retaliate against currency manipulators. Workplace enforcement to reduce the number of illegal workers, disincentivizing the immigration of low-skilled workers and forcing us to make the necessary change away from business models that rely on a continuous supply of low-skilled workers at low pay. Abolishing the corporate income tax to allow businesses to think farther ahead than one quarter at a time. Changes in corporate governance rules to the same end.
It’s not a question of whether our psychology has changed but when. Our psychology didn’t suddenly change in 2007. Thinking that drives you to the wrong conclusions about what’s wrong now. We’ve been heading towards the shoals for a long, long time. The direction in which we’re headed is unsustainable and we will inevitably make substantial changes. That’s not a case of whether but when, either.