After some rhetorical ostentation about the pitfalls of punditry and a tirade against Roger Altman http://www.ft.com/cms/s/0/3d89a930-220d-11de-8380-00144feabdc0.html (former deputy Treasury secretary in the Clinton Administration) , leftist Prof. John Kozy http://www.globalresearch.ca/index.php?context=va&aid=13109 says: "Some economists have begun to speak of another "jobless recovery." I can't even imagine what that could mean? About three quarters of the American economy was driven by consumption." But in saying this, Prof. John Kozy is no better than the pundits he decries.
THE CONCEPT
Firstly, the concept of a jobless recovery (or jobless growth) has a very precise meaning, namely, an increase in real net output (or real GDP) at the end of a recession, without a corresponding increase in the employment rate of the labour force.
In this context, the press recently reported for instance:
"Preventing higher unemployment "depends critically on policy," Bernanke told the National Press Club in Washington on Feb 18. "If we can take strong and aggressive action, including the Fed's actions to try to improve credit markets, I think we can break the back of this thing and we will begin to see improvements in 2009." While some Fed officials expect economic growth to resume in the latter half of this year, unemployment may not get below 7 percent until 2011 or even later, according to the latest forecast. That means the US may be in for its third jobless recovery since 1991." http://www.chinadaily.com.cn/cndy/2009-02/24/content_7504838.htm
The two recent "jobless recoveries" in the US, I should explain, occurred from 1991 and from 2001.
In the third quarter of 1990, US real GDP growth was zero, after that it declined quarterly by -3% and -2%. After the recession of 1990/1991 ended, US GDP increased again, by a quarterly 2% or so, reaching 4%+ growth in 1992, but total US employment stayed constant during 1992, and there was a net increase in 1993 by only 2 million jobs, followed by a gain of a net 4 million jobs in 1994. You can easily verify this story from: ftp://ftp.bls.gov/pub/suppl/empsit.ceseeb1.txt and http://www.bea.gov/
In the recession of 2000/2001, US real GDP growth dipped from -0.5% to -1.4% in two quarters but growth returned in the fourth quarter of 2001. >From the year 2000 until 2003, however, total US employment actually declined by a net 1.8 million jobs, and the level of 2000 was reached again only in 2004 (keep in mind the total population increases all the time, by approximately 0.8%-0.9% per year). Then from 2004 until the current depression, a net total of about 6 million extra jobs were added in the US (keep in mind that from 2000 to 2009, the total US population increased by nearly 25 million people, including 8 million immigrants).
Another Leftist Professor, Stanley Aronowitz actually wrote a whole book on this subject, namely: "Just around the corner: the paradox of jobless recovery" (2005). It's on Google books. Perhaps Prof.
Kozy should go and read that.
Prof. Aronowitz notes - like Joachim Hirsch does for Germany - among other things that a lot of the new jobs created were "temporary" jobs of some kind. These are also the first in line to be wiped out by the recession, although the total of temporary employees might actually increase. The modern business model, after all, consists of a "core" of ideologically committed permanent staff, then a stratum of workers on renewable annual contracts, and then a stratum of temporary and casual workers. The ability to hire and fire at will disciplines the workers, their ideological view and their wage demands.
Of course, it is quite usual for employment growth to lag GDP growth at the end of a recession for at least one or two quarters (companies seek confidence from evidence that their earnings will really increase in future, before they will hire new staff), but what is meant here, is the persistence of much the same unemployment and underemployment levels for several years, despite a return to positive GDP growth.
The structural problem there is, that even if measured labor productivity increases, this does not increase labor income or employment levels. It's effectively a euphemism for an increase in the labor-exploitation rate (which is obscured by the Solow-type growth models). Obviously GDP data doesn't tell you much about income distribution in the whole society.
CONSUMPTION SPENDING
Secondly, when Prof. Kozy says "About three quarters of the American economy was driven by consumption", this is just waffly. What the hell does that mean? Is he talking about fast-food drive-ins?
What he presumably means, is that US final personal consumption expenditure (principally on housing expenses, cars, food, and health care) is equal to three quarters of total expenditure on GDP. Well, in fact, as Roger Altman notes in his article, it is (only 0.1% more than) 70% of GDP (NIPA Table 1.5.5).
In saying what he does, however, Prof. Kozy implies the popular fallacy of equating "the American economy" with US GDP. This is simply not true, since GDP is designed to measure only the gross new value added by new domestic production, grouping financial transactions included in the ledger in such a way, that the value of the total net output (gross output less intermediate consumption), the total gross domestic income, and the total gross expenditure minus intermediate expenditure are the same. http://www.nzier.org.nz/Site/economics_explained/GDP.aspx
But GDP in principle excludes
- transfer income,
- foreign factor income,
- domestic and foreign property income,
- land sales,
- capital gains,
- sales of secondhand goods,
- certain kinds of military expenditure and government spending,
- the shadow economy (equal to approx. 7-8% of US GDP) etc.
In reality, final sales to US domestic purchasers (including both investment items and consumer items) have continued to be consistently larger than US GDP right up to, and including, the last quarter of 2008 (see NIPA Table1.4.5). But then, the total income receipts of Americans are significantly larger than GDP.
All this becomes highly important in the modern "financialized" rentier economy, in which - although most Marxists still refuse to understand this - capital invested in means of production is only the minor part of total capital holdings.
For the bulk of ordinary US wage and salary earners, real earnings are either fairly stagnant or actually falling, meaning the possibilities for aggregate credit expansion for their group are slim. Any structural upturn in product markets therefore depends strongly on the wealthier US middle classes starting to spend and borrow using the "discretionary" income and assets that they are currently not spending, but saving. But what would motivate them to do so? Roger Altman's article and forecast make some perfectly valid points I think, although, like Summers, he views recessions mainly (and rather superficially) as the result of inflationary pressures.
CONSOLATION
Presumably confidence will return, only when people feel confident that their income will not disappear, and the value of their assets will not fall drastically anymore. The bourgeois consolation for workers is that the slump which resulted from financial gambling losses will be only a "temporary" inconvenience. But this is not true - employment levels will take many years to recover from their lowest point, and are unlikely to recover fully to their former levels. The debate among the pundits is just about when the lowest point of the downturn in GDP will be reached, and when the recovery will start. But nobody really knows quite for sure, within a range of about a year, since the financial linkages have changed profoundly already since the last recession. Almost everybody who is serious agrees however that the economic recovery, when it arrives, cannot be very strong.
Americans made deals worldwide on the assumption that they owned $2 trillion which they do not own, and they were caught out. They tried to get rich quick, using borrowed capital or using the expectation of future earnings, to extract net income from asset deals, but the scams caved in. However, it's not as though the same things didn't occur in Europe, China, Japan, Brazil, Russia and Australasia, though perhaps not on the same scale. And obviously they will occur again, because nothing much has been done to prevent that; the current assumption is just that the slump itself will teach the preventative lesson business people need to learn.
Prof Kozy argues: "Consumers borrowed not because they felt wealthier, they borrowed because they needed the money." That is not true, because many property owners borrowed and spent extra money on the strength of the rising market value of their property (the capital gain). And what about the consumption habits of the American fatties? Looking at the statistics for the average US consumer, it's clear that e.g. nearly half of all money they spent on food concerns food bought in restaurants, cafes and snackbars. ftp://ftp.bls.gov/pub/special.requests/ce/standard/2007/income.txt
The real problem is with the statistical measures themselves, which do not distinguish between the unemployed poor, the working class, the self-employed, the new middle class and small employers, and finally the US bourgeoisie proper (i.e. those owning a million dollars or more, circa 6.3 million people, about 2% of the US population, or about 3.5% of the adult population). From a financial point of view, the different social classes just happen to live in very different worlds.
For example, although the wealthiest bracket of US households, earning $70,000+ (about 37 million households, or 31% of all households) spend about two-thirds of their net real income receipts on consumption, about half of that consumption expenditure involves the purchase of durables which are assets that can be resold (houses, cars, furnitures, jewellery etc.).
The US crisis policy is a bit like people on a sinking ship, who realise they cannot plug all the holes through which the water enters. But they reason, if we plug sufficient holes, we may be able to keep going until we reach land, and get off the boat; if the ship sinks anyway before that time, there's enough lifeboats for all the officers. Unfortunately Prof. Kozy's kind of analysis doesn't illuminate all that. He just lapses into economic nationalism: "The Congress, at the behest of corporate lobbyists, wrote into legislation the rules that permitted companies to offshore jobs, reduce real wages, and permit risky financial practices. Therein lies the root cause of this crisis." That's a very naive idea. Outsourcing US jobs involves only about a quarter million jobs per year. The problem is not so much the reduction of real wages, but the increasing spread (disparity) of real incomes. Risky financial practices have always been there. What we are talking about here is swindling, utilizing false economic perceptions.
Jurriaan
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Received on Mon Apr 13 20:23:57 2009
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