As you can see from the graph above, drawn from the invaluable FRED database of the St. Louis Reserve Bank, in 39 months of recovery the total number of jobs in the economy today remains below its pre-recession peak and, indeed, has barely returned to its level in 1999. Essentially, the net effect is that we’ve moved sideways for ten years. This has occurred even as the country’s population has increased by 10% over the period of the last decade.
A quick look at the Employment Situation Reports of the Bureau of Labor Statistics over the last dozen years reveals that of the increase that was seen over that period much was in just three sectors: construction, healthcare, and education. That construction jobs will likely never return to the heights seen at the peak of housing bubble and that healthcare and education spending are largely funded by unsustainable increases in public spending or, in the case of education, by unsustainable increases in public spending and unsustainable levels of private debt are discouraging.
Under the circumstances I thought it might be prudent to revisit what I believe is actually happening, explained as simply as I can.
Following the collapse of the housing bubble and the attending financial crisis, much of the attention of the authorities both in the government and the Federal Reserve has been devoted to what I believe to be mostly futile attempts at restoring health to the banking system. The fallacy in the strategy has been that although a healthy economy will revitalize an ailing banking sector, you can’t cure a struggling financial sector without a healthy underlying economy.
Let’s think about the role that the financial sector and all forms of consumption—personal consumption, government consumption, and business consumption—play in the economy and in job creation.
The various measures, especially QE1, QE2, and what’s now being referred to as QEx, do very little of themselves for the underlying economy. Any amount of money—billions, trillions, quadrillions—can be inserted into the banking sector and, as long as that money doesn’t leak out into the underlying economy in the form of private sector loans or spending, it will have little effect on the underlying economy and practically no effect on employment. That’s the point of the anecdote I’ve told several times here of the three shipwrecked merchants.
Even in the absence of a reluctance to lend (generally characterized as a “lack of credit-worthy applicants” which is circular) some money, of course, will leak out in the form of compensation for people working in the financial sector and executive compensation. That’s concentrated in relatively few hands, accounting for a lot of the increase in income inequality, and has had precisely the effects you would predict: prices for things that rich people buy have gone up a lot faster than the prices of things that the rest of buy. Consider the following graph:
Handily, Forbes Magazine keeps track of this stuff for us and has been tabulating a Cost of Living Exceptionally Well for some time. Here’s their latest report:
This year, 18 of the 40 good and services in our basket are more expensive. What went up? A Russian Sable fur coat (increase due to an international increase in demand for fine Russian sable skins), Turnbull & Asser shirts (due to an upgrade in their basic poplin quality), a Steinway & Sons concert grand piano (due to increased costs of the very best materials, especially woods), season tickets to the Metropolitan Opera, a Patek Phillipe watch and a pair of James Purdey & Sons’ Shotguns (12 gauge Side-by-Side) sold by Griffin & Howe in Bernardsville, NJ & Greenwich, CT.
A total of 13 CLEWI items remained stagnant in price. Caviar, chateaubriand, flowers, bedsheets, a face-lift, a swimming pool and a tennis court were the items that remained the same. Three items are cheaper this year. A Hatteras 80 MY motor yacht (with 1,550hp Caterpillar C-32 engines), priced at $5.1 million, is down 3% from a year ago. A dinner at La Tour d’Argent in Paris is down 6%, due to a stronger U.S. dollar. This restaurant, dating to 1582, has a nice view of Notre Dame, a leaning toward duck on its menu and an extensive wine list. The average price of a thoroughbred at the Fasig-Tipton Saratoga summer yearling sale is down 6% from last year. Dubai’s ruler Sheikh Mohammed has been the New York auction’s most powerful shopping force in recent years and a driving force on its performance. He curbed his spending this year by spending millions less than usual. As a result, prices dropped and most of the of money spent was American this time.
Price increases for luxury good are mostly due to scarcity. French wines have been at maximum production for a century or more. Caviar and sable production is declining, if anything, as wild stocks are hunted to extinction. The number of tickets available for a Metropolitan Opera season is, essentially, fixed. More money available to be spent on these things won’t result in more employment producing them. It just results in higher prices.
Additional consumption by people in the lower income quintiles doesn’t do much to create American jobs, either. The consumer goods that people buy are mostly food, automobiles, gasoline, apparel, and electronics.
Most of the grain (bread) and meat we eat are domestic. Nearly 20% of the processed food that we eat is imported. Roughly 20% of produce is imported and, importantly, nearly all of the increase in produce consumption over the last twenty years has been imported. See also here. Almost 100% of food additives (coloring, texturizing agents, vitamins, etc.) are imported. The amount of domestically produced food with 100% domestic contents we consume is surprisingly small—mostly fresh meat. Read the package. If it’s been flavor enhanced, color enhanced, texture enhanced, or nutritionally enhanced, it is virtually certain to have imported components regardless of what the manufacturer might say (they may not even know). If you drink apple juice or 100% juice products containing apple juice, the odds are that the concentrate used was imported from China and that includes juice labeled organic.
Increasingly, automobiles are manufactured overseas and assembled in the United States. A very large percentage of tires are imported. We don’t produce internal combustion engines for small cars here. If you drive a small car and it’s gas or diesel powered, its engine was imported. Presumably, it goes without saying that a lot of the oil for the gas that we buy is imported. Oil imports have grown from about 40% thirty years ago to 60% today.
Apparel these days is almost entirely imported—98% or more. Just twenty years ago it was 50%. Buying more clothing will produce jobs but the jobs will be in China, Vietnam, and the Philippines.
Do I need to explain that electronic consumer products are almost entirely imported and those that aren’t are assembled in the U. S. from imported components? Twenty years ago we had a domestic electronic consumer products industry. That’s no longer the case. There are a few design jobs left here but those are increasingly moving overseas as well and the electronics production engineering jobs have been gone for years.
Much of government spending these days consists of transfer payments, e.g. Social Security, Medicare, Medicaid, for which the matching consumption has been discussed above. Most of the direct government consumption is defense-related. U. S. military spending comprises 41% of world military spending and ia larger than the military spending of the next dozen largest spenders combined. I don’t believe that increasing real U. S. military spending is either likely or desireable. That largely rules out government consumption as a creator of jobs.
There’s another component of GDP: business investment. Domestic business investment as a percent of GDP has been declining for decades and it is now at a post-World War II low. Uncertainty is one of the reasons for this but it primarily explains why business investment is so low now but it doesn’t explain why it’s been declining for the last thirty years. This is the area that I think must and will change.
In future posts I will consider direct and indirect production, the services economy, and suggest some of the things that we might change to improve our prospects.
In conclusion let’s review.
- Money that remains within the financial sector doesn’t do much to produce new jobs.
- We import too much of what the top decile of income earners consumes for expanding that consumption to produce many jobs and the production of much of what they consume doesn’t expand much with greater willingness to pay, anyway.
- We import too much of what the lowest nine deciles of income earners consumes for expanding that consumption to produce many jobs.
- Do we really want to buy more arms?
- Businesses are in a sort of holding pattern for a variety of reasons. There’s room for expansion through exports and in select industries (e.g. energy production, mining, agriculture) but that’s blocked by trade barriers and regulations.