After Friday’s jobs announcement reported that unemployment is down to 5.6 percent, many in the media, including Jonathan Chait at New York magazine and the Christian Science Monitor asked whether we could be getting close to full employment. On the contrary, full employment is still a distant vision. If that sounds like a radical and contrarian claim, you weren’t listening to what these same people saying about the economy seven years ago.
Before the recession, the Congressional Budget Office (CBO) projected we would have 5 million more jobs at the end of 2014 than we actually do. It also projected that the GDP would be more than 11 percent higher in 2014 than it is now. This translates into a difference in annual output of roughly $2 trillion or more than $6,000 per person. They predicted that wage and salary income would be roughly 20 percent higher than it is today. Many economists had similar projections.
Measured against where these people expected the economy to be at this point seven years ago, the economy is indeed awful. Millions of people who should have jobs don’t, and those who do have jobs are working for much lower wages than would be the case in a healthy economy.
The level of confusion in public discussions of the economy is astounding. The people extolling the virtues of the economy today were too blind to see the $8 trillion housing bubble that had been driving the economy before the downturn. Most experts just say what other economic experts say; they are not capable of independently assessing the economy.
Many experts touted the big 0.4 percent jump in average hourly wages that the Bureau of Labor Statistics (BLS) reported for November as a sign of the “tide turning.” In December the BLS released data showed a drop in nominal wages so that the average hourly wage for the month was less than 0.1 percent higher than its October level. But monthly wage numbers are highly erratic. Wages did not actually jump in November and then fall in December; this was just a measurement error.
While the 240,000-per-mont pace of job growth in 2014 is certainly better than prior years in the recovery, it is still weak in comparison to recoveries from severe downturns in the past. The economy created 7.3 million jobs between December 1982 and December 1984. Given today’s larger labor market, an equivalent rate of growth would imply more than 10.6 million jobs over a two-year period, or more than 440,000 jobs a month.
Even the 5 percent GDP growth reported for the third quarter is not especially impressive. The economy averaged 5 percent GDP growth for three years following both the 1974–1975 and the 1981–82 recessions. In this context, one quarter of 5 percent growth should not be much cause for celebration, especially since the growth this quarter was largely an anomaly. It was driven by an extraordinary jump in military spending and a big fall in the size of the trade deficit that is unlikely to be repeated.
Lastly, consumers are not being hesitant about spending, as economists frequently say. Consumption is actually high relative to income measured by any standard except the peaks of the stock and housing bubbles. Similarly, investment is not especially low as a share of GDP. It is not quite back to its pre-recession peak, but it is at 2006 levels, a year in which economists were not claiming that investment was depressed. Housing construction remains low, but with a higher than normal vacancy rate, this is hardly surprising.
Public discourse on the economy seems unaware of some basic facts. First and foremost, capitalist economies generally grow. It makes no more sense to celebrate the fact that the economy is larger in 2015 than in 2014 than it does to celebrate that your ten-year old kid is taller than when she was five. Growth is the norm; the relevant measure is the rate of growth, and here there is little to be happy about.
Second, the stock market is not a measure of economic success. It is a measure of how much wealth the people who own stock have. If the stock market rises rapidly because the economy is growing, and profits and stock prices are growing along with it, then this is further confirmation of a strong economy. However, if the stock market rises because there has been a redistribution from wages to profits, as has been the case, this is hardly reason for the bulk of the population, who hold little or no stock, to cheer.
Finally, most workers are unlikely to see wage growth until the labor market has far less unemployment than at present. If the economy continues to add 240,000 jobs a month, we may be at this point somewhere in 2016, but we aren’t there now and we will almost certainly not be there any time in 2015. While the unemployment rate has fallen most of the way back to its pre-recession level, this is largely because millions of unemployed workers have dropped out of the labor force and are no longer counted as unemployed. Contrary to what is often claimed, this is not a story of aging baby boomers retiring.
Millions of prime age workers (ages 25–54) did not just suddenly decide to retire. They left the labor force because of weak labor demand. The number of people involuntarily working part-time is still 2 million above its pre-recession level. Furthermore, the share of unemployment due to people voluntarily quitting their previous jobs, a measure of confidence in the strength of the labor market, remains well below its pre-recession level.
The economy’s basic problem remains: we lack a source of demand to replace the demand created by the housing bubble.
There are two obvious ways to fill the demand gap. One would be with larger budget deficits. More government spending on education, infrastructure, or research and development could easily fill the demand gap, but deficit spending is out of fashion in political circles. Even Democrats celebrate job-killing deficit reduction.
The other mechanism for filling the demand gap would be a lower trade deficit. This could be achieved by reducing the value of the dollar. But this is not likely to happen because powerful interests such as Walmart and General Electric benefit from the low-cost imports they get due to an over-valued dollar. (Plus, a weaker dollar doesn’t sound macho, so politicians don’t want to talk about it.)
So, the economy is left gradually to fill the gap in demand that is preventing workers from having enough bargaining power to secure higher wages. But even this story is not assured. The recent rise in the dollar will likely increase the trade deficit, weakening demand growth in 2015 and 2016.
Even worse, the Fed may raise interest rates. This would discourage investment, increase mortgage costs, and in other ways dampen demand. Ironically the Fed is debating higher interest rates at a time when inflation is well below the Fed’s 2 percent target and actually is heading downward.
And if the rate of job creation slows substantially, who knows how many years it will be before workers start seeing real wage growth. But hey, our political leaders in Washington are fighting over who should get credit for the great economy.