Economics for the 99% One Percent Recovery
Wednesday, 17 July 2013 10:01
By John Weeks
How a trickledown recovery works (thanks to www.iam1percent.com)..
The mainstream media tells us that the US economy is in the process of recovery from those dark days of 2007-2008. If by a recovery they mean an end to decline and an expansion of national income (aka gross national product, gdp), then true it is. But the pundits of nonsense fail to tell us at least three major characteristics of this recovery.
One, such as it is the recovery results from increased public expenditure (the dreaded "fiscal stimulus"). Two, the growth in GDP has reduced unemployment at a rate that would leave it a loser in a race with a snail. And, three, while profits have recovered substantially, average wages and salaries are now slightly below their level when the right wing Chief Justice of the Supreme Court swore in President Obama in January 2009, four long years ago.
In other 99% columns I showed the close and obvious link between public expenditure and growth. Here I go again (as the late, unlamented R Reagan might say). In the chart below I measure federal expenditure in millions of dollars on the left and the growth rate of the economy (gdp) on the right in percentage points. In 2009 the new administration introduced a fiscal stimulus (again, forgive my foul language) sufficient to bring the economy from a negative 3.1 percent in 2009 up to positive 2.4 percent.
Then, the stimulus virtually ended, much to the delight of the reactionary Republicans (a redundancy), and so did the increases in growth. During the next three years, 2010-2012, growth stuck at a threadbare two percent (1.8, 2.2 and 1.8, respectively). Increases in public expenditure expand the economy proportional to those increases. Holding public expenditure constant results in a tapering off of growth. The basic idea is not terribly difficult to understand, and real events verify it.
Why the economy stopped going south: GDP growth
and federal expenditure, 2008-2012
Economic Report of the President 2013.
However, all recoveries are not the same. Strong recovery, such as 4 to 5 percent growth, reduces unemployment and makes it easier for workers to obtain wage increases. Weak recoveries result in very little if any decrease in unemployment. We are in the throes of a very weak recovery, indeed. Have a look at the chart below. It shows several disturbing characteristics of the recovery. First, not until the growth rate reached almost 3 percent did the unemployment rate decline (by a miniscule -0.2 percentage points).
Second, for the 12 quarters or three years of positive growth, the ratio of growth to unemployment reduction was close to five; that is, a five percent growth rate was required to reduce unemployment by one percentage point. It comes as no surprise that during the first quarter of this year, the official unemployment rate was only 0.5 percentage points less than when the Chief [in]Justice swore in the president (from 8.2 to 7.7, passing through 10 percent during the last three months of 2009).
Third, this unimpressive decline during four years overstates the amount of improvement. Since inauguration day employment increased by 1.8 million, but 8.8 million people left the labor force. As I pointed out back in May, we can explain this exit by people ceasing actively to search for work when none can be found.*
Fourth, as show above for annual statistics after its four quarter rally prompted by the fiscal stimulus of 2009, the US economy finds itself stuck at 2 percent annual growth. We will require at least three years at this growth rate to return to the unemployment rate at the beginning of 2008, five percent. Eight years to return to where we were before the banks devastated our economy. If the Partying Tea-Totallers have their budget-cutting way, aided and abetted by the president, even 2 percent growth will be out of reach.
The Economy recovers and Unemployment Barely Changes,
GDP growth and the change in the official unemployment rate,
The chart shows changes from the same time period a year later (annualized changes). For example, from the second quarter of 2008 to the second quarter of 2009 the economy contracted by 4.5 percent.
Economic Report of the President 2013 and Bureau of Labour Statistics.
If so far this description suggests that we are in a recovery for the 1%, that impression is verified by the final chart. It shows the quarter-to-quarter change in non-managerial wages and salaries and corporate profits. You need to look very closely to see the former, which averaged zero, as in 0.0, for the three years in the chart, compared to an average of 1.9 per quarter for profits.
In at least one thing the 1% excels and that is hiding profits. The 1.9% quarterly increase or eight percent annually over the four years is a case in point. Those relatively small increases in 2012 compared to 2011, and the negative value for the beginning of 2013 result from accounting tricks named "inventory evaluation" and "capital consumption" adjustments. These legal accounting devices allow corporations to deduct from their profits alleged declines in the values of their inventories and depreciation of plant and equipment.
As a result, when corporations reported their recent -1.4 percent change in profits, their "operating surplus" increased by 1.6 in the same quarter. Think about that for a moment. Corporate income after taxes and non-wage costs rose by 1.6 percent, and wages and salaries declined. But reported profit went down. The technical term for that combination is "cooking the books", or "creative accounting".
A Lovely Recovery for Corporate Profits: Percentage change from one quarter
to the next, corporate profits and wages & salaries 2010-2013
The current economic recovery is going nowhere very slowly with a high likelihood of further budget cuts that will further delay the arrival in Nowheresville. We have Elected Representatives of the People (ERPs) that recognize the mess we find ourselves in, such as Senator Bernie Sanders of Vermont (a real ERP). It appears that the President is not among them, so the probability of a recovery for 99% is near 1% at best. Which suits the richest 1% to a Tea[-Party].
A new book by John Weeks, The Economics of the 1%: How mainstream economics serves the rich, obscures reality and distorts policy (Amthem Press) comes out in November 2013. Order from Amazon.com or http://www.anthempress.com.