A Stock Market Boom is Not the Basis of Shared Prosperity

By Thomas Palley

The US is currently enjoying another stock market boom which, if history is any guide, also stands to end in a bust. In the meantime, the boom is having a politically toxic effect by lending support to Donald Trump and obscuring the case for reversing the neoliberal economic paradigm.

For four decades the US economy has been trapped in a “Groundhog Day” cycle in which policy engineered new stock market booms cover the tracks of previous busts. But though each new boom ameliorates, it does not recuperate the prior damage done to income distribution and shared prosperity. Now, that cycle is in full swing again, clouding understanding of the economic problem and giving voters reason not to rock the boat for fear of losing what little they have.

Read rest here.

The slow recovery in historical perspective: 10 years after the Great Recession

It's hard to believe, but it has been almost a decade since the Great Recession. The official recession started in December 2017, but everybody remembers the collapse of Lehman in September of 2008. When you look at the recovery from the last recession in historical perspective, two things are clear. If you take GDP fall, or increase in unemployment, the Great Recession does not compare to the Great Depression, and that means that fiscal policy (automatic stabilizers and stimulus package) did work. The other is that 10 years into it, we are more or less were we where after 10 years of the Depression (which means the New Deal worked too, since the decline in GDP back then was much more pronounced, and recovery started in 1933).

But what I think is crucial, if one extends the historical data, is the effect of that crucial Keynesian experiment, World War II. Keynes was correct when he wrote in 1940 that: "It is, it seems, politically impossible for a capitalist democracy to organize expenditure on the scale necessary to make the grand experiments which would prove my case -- except in war conditions." And indeed, it seems very hard to see any circumstances that would push spending up to the extent needed to avoid the slow recovery to continue its course, and for 'secular stagnation' to prevail.

Actually if one looks at GDP per capita (per worker in fact), as The Economist (from last December, which was the inspiration for the graph above) does, then it seems that the New Deal/World-War-II policy experiment already looks better than the last decade.

And that is not considering that there seems to be a bubble in asset markets and the Fed is hiking rates (although I doubt that much). So things do not look particularly good.

GDP recovers a bit in the third quarter

According to the BEA, the advance estimate of GDP growth in the third quarter is 2.9%, which is a significant improvement on the second quarter (1.4%). So maybe there is no recession in the near future (Neil Irwin might be right about that), which does not mean Yellen should hike the Fed rate in December anyway.

Weak jobs report should kill interest rate hike

Or so it seems. The BLS last employment situation summary says that only 38000 jobs were created last month. Unemployment fell to 4.7%, but that is mostly the result of the fall in the participation rate, that is, less people in the labor force (see below).

In other words, unemployment rate is lower not because unemployment decreased (at least not much), but because workers stopped looking for jobs. Since the crisis there has been no recovery in the labor force participation rate, as shown in the figure above. This report is consistent with the slow rate of GDP growth announced last week. The economy is slowing to a halt. The Fed should not hike the rate later this summer, but that's not enough. The US needs less austerity. Urgently.

Revised GDP and the slow recovery

BEA released the second estimate of the first quarter GDP, and it's up from 0.5 to 0.8%. Not bad, not great. Note that federal government spending is a drag on the recovery (although local and state governments are positive force, and part of that is actually funded by the federal government anyway; so the actual negative impact of contractionary fiscal policy is smaller than what the numbers suggest). At any rate, this will be used to demand higher rates in the next meeting of the FOMC. You can bet about it. Listen to Dean Baker at the Rick Smith Show here, suggesting why this is a terrible idea.

More on the slow recovery

The private sector added 156,000 jobs in April, according to the Automatic Data Processing (ADP) report, ahead of the Bureau of Labor Statistics (BLS) more comprehensive release this Friday. As the graph shows there is a slowdown form last month.

This adds to weak manufacturing growth,and a smaller trade deficit, resulting from lower imports, that is, a slower economy. I still think a recession might not be in the immediate horizon. However, the data seem to indicate, as I said before, that there are good domestic reasons for Yellen not to hike the rate of interest.

By the way, not surprisingly labor productivity has been weak, and according to the BLS it "decreased at a 1.0 percent annual rate during the first quarter of 2016... From the first quarter of 2015 to the first quarter of 2016, productivity increased 0.6 percent." This is sometimes reported still by suggesting that "low productivity [is] a puzzle to economists." It shouldn't be a puzzle, of course. Low productivity is the result of low growth. And that is the result of a contractionary fiscal stance, in an economy with too much inequality, and slow growing wages.

John Cochrane on economic growth

There are three kinds of lies, "lies, damned lies, and statistics," supposedly said Benjamin Disraeli. This applies to John Cochrane piece in the Wall Street Journal today. Cochrane says that:

"Sclerotic growth is America’s overriding economic problem. From 1950 to 2000, the U.S. economy grew at an average rate of 3.5% annually. Since 2000, it has grown at half that rate—1.76%. Even in the years since the bottom of the great recession in 2009, which should have been a time of fast catch-up growth, the economy has only grown at 2%. Last week’s 0.5% GDP report is merely the latest Groundhog Day repetition of dashed hopes."

That is all true, and I myself complained about slow growth last week. However, this gives a false impression that the slowdown is a very recent thing, of the 2000s. In all fairness there has been a slowdown in growth going back to the 1970s or at least the 1980s. Growth since 1973 has been around 2.8%, and 2.6% since 1980, the years of the first oil shock and the productivity slowdown, and the beginning of the Reagan revolution respectively.

Yes, it is true that growth has further slowed down since the last recession (1.8% since 2000, and 1.2% since 2008), but growth has not only been slower over the last three decades (which, by the way go hand in hand with worsening income distribution), but also it has been more dependent on financial bubbles. And the last three recessions have been associated to the burst of a bubble. And given the structural conditions of the US economy, it seems that only with a bubble we will have healthier growth again.

The point is that an economy that depends on excessive accumulation of private debt, and debt-driven consumption bubbles is more volatile and prone to crisis. And that is associated both to financial deregulation and worsening income distribution. Certainly not to what Cochrane sees as the main American problem: "that the U.S. economy is simply overrun by an out-of-control and increasingly politicized regulatory state. If it takes years to get the permits to start projects and mountains of paper to hire people, if every step risks a new criminal investigation, people don’t invest, hire or innovate."

The notion that further deregulation would lead to a spurt of growth is preposterous. Yeah, because deregulating the financial sector has worked so well.  By the way, investment is a result of growth (accelerator) as well as innovation (Kaldor-Verdoorn). The problem is not enough spending on a sustainable basis, because party politics impedes public investment, and income inequality makes private spending more unstable. Austerity and inequality, not excessive regulation are behind low growth. But at least he is right that growth did not slowdown because of lack of innovativeness or a savings glut.

Slow recovery continues

In the first quarter the economy slowed down grinding nearly to a halt. Real Gross Domestic Product (GDP) slowed to a 0.5% annual growth rate in the first three months of 2016, according to the Bureau of Economic Analysis (BEA). By the way, federal government spending has been a drag on growth. And here in lies the problem. Don't expect any stimulus this year, and very unlikely that this would change significantly any time soon. The problem isn't secular stagnation, it is rather short-term inaction.

Payroll employment rose by 215,000 in March

That's more or less the same pace of growth as before, and suggests that the slow recovery continues. The unemployment rate ticked up to 5%, since the labor force participation rate increased from previous month. (but still below the pre-recession level, as shown below). So in this case, a slightly higher rate of unemployment is not a bad thing. It means more people are confident they can find jobs.

Notice that manufacturing employment has declined for the third month in row.  This also might add to Yellen's reasons for being dovish, as discussed earlier this week.

PS: Report here.

Domestic reasons for Yellen to remain dovish

The last estimate of real GDP growth in the fourth quarter of 2015 indicates that the economy expanded at 1.4%. Not very fast. Also, this week the Bureau of Economic Analysis (BEA) announced that personal consumption expenditures (PCE) increased 0.1%, and revised down the January number to 0.1%. In other words, consumption is slowing down, or so it seems. More importantly, the report says: "The February PCE price index increased 1.0 percent from February a year ago. The February PCE price index, excluding food and energy, increased 1.7 percent from February a year ago." In other words, core inflation remains below the 2% target, and it has decelerated a bit, since in the previous report it was indicated that core inflation increased 1.3% on a yearly basis.

So there are good reasons for Janet Yellen to remain dovish, and suggest that interest rates will not increase significantly. Actually, there are good domestic reasons for that, even if she seems to emphasize the uncertain international economy.

PS: There is also the question of whether we are (or not; and we aren't) at full employment. But that's a topic for another post.

Fed holds on the interest rate hike, for now

From the Federal Reserve Board press release:

"The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. However, global economic and financial developments continue to pose risks. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further."

For that reason:

"The Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation."

There was one dissenting vote, Esther George the president of the Federal Reserve Bank of Kansas City, who wanted to hike the rate to 0.75%.

Although they cite the international situation as the cause for caution, my hunch is that the slow recovery also played a role. And the doubts about the idea that we are below the natural rate with unemployment at 4.9% must be at the center of Yellen's decision.

Austerity and the weak recovery

From Papadimitriou, Nikiforos, and Zezza's new Levy Strategic Analysis:

"over the last 25 years policymakers in Washington have become increasingly fiscally conservative. The current recovery is the only one in the postwar period during which government expenditure has decreased in real terms. Fiscal austerity, together with weak foreign demand, has put the entire burden of supporting aggregate demand on the private sector spending in excess of its income and borrowing. This has led to a rapid increase in the private sector debt-to income ratio in the United States."

Read full report here.

The strongest, most durable economy in the world, but very unequal

Obama went to Detroit this week, and defended his economic record, including the bailout of the auto-industry. He went further on the offensive, as in the State of the Union, and suggested that Republican candidates that complain about the economy don't have a clue. In his words:

"The United States of America, right now, has the strongest, most durable economy in the world... So when you hear people -- I won't say who -- but when you hear people claiming that America is in decline, they don't know what they're talking about. They're peddling fiction during a political season." [full speech here]

On the other hand, Bernie Sanders (Obama was certainly referring to the GOP candidates, not Bernie) has made the center of his campaign the poor state of the economy, the fact that only the wealthy have benefited to a significant degree from the recovery, and that we need revolutionary changes, including a higher minimum wage, health care for all, and free access to public education, besides re-regulation of the financial sector (breaking the too-big-to-fail banks as part of that). For example, see his take on democratic socialism here.

So who is right? In a sense, both are partially correct.

In a very broad sense, Obama is correct. Meaning that the US is not only in the middle of a recovery, but also that fears of the decline of American hegemony, economic and military, are incredibly exaggerated. The US spends way more than any other country in military terms (and the differences are probably underestimated) and there is no serious security threat to US global dominance. The more than 800 military basis abroad are clear indication of that. The expansion of NATO to areas that were for a long while considered out of reach in Eastern Europe is one example. And even if there is, and there will be more blow back, because of the disastrous decisions in the Middle East, there is little doubt that no other country has the power to resist US threat of military intervention.

But more importantly, American corporations are still dominant, with a significant amount of the technological innovations that will dominate the global economy in the future still coming from the US. And one should note a good chunk of that comes from the Department of Defense (DoD), in particular Defense Advanced Research Projects Agency (DARPA), and other government agencies that are crucial for technological innovation. Think, for example, about Google's driverless car, which would be impossible without DARPA's Grand Challenge. Note that private corporations depend, directly and indirectly, from the hidden developmental state, that promotes, subsidizes and funds many of their efforts.

So in a very real sense the American economy is still the strongest and the most durable economy in the world, as Obama said. And yet, most workers in the US have not benefited from the continuous dominance of American corporations. Only the ones at the top have benefited in any significant degree. Real wages have stagnated and lagged behind productivity, as it is well-known, and in this recovery only more recently have real wages started to increase, modestly, one might add. Even the labor market, with unemployment at 5%, while much better than Europe and many other advanced economies, is still relatively weak. The increase in employment has not been sufficient to increase the employment-to-population ratio from the same low levels that it reached after the crisis in 2008. That is, most job growth went hand-in-hand with the increase in population.

So Bernie is correct too (and in some weird way right-wing populists complaining about American decline are too, even though their pro-corporate policies would make things even worse). American corporations and elites are doing fine. The rest of the country not so much.

Growth slowsdown in the third quarter

BEA released the advanced estimate for GDP growth in the third quarter, 1.5%, well below the 3.9% growth of the second quarter. One can see that the recent recovery is slow even when compared to the Clinton and Bush II recoveries.

So, nothing new, the slow recovery continues. If the budget deal gives some hope that at least we're not going to shutdown the government, and as a result avoid an even worse slowdown, there is very little reason to hope for the kind of fiscal stimulus we need.

More Jobs, Flat Wages: Trade and the Trade Deficit Continue to Hurt Us

By Thomas Palley

April’s Employment Report showed a gain of 223,000 jobs and a further one-tenth percent decline in the unemployment rate to 5.4 percent. The good news is the report shows the economy continues to nudge forward and create jobs for newcomers into the labor force. The bad news is the economy is not growing fast enough to raise wages.

Average hourly earnings for production & non-supervisory workers, who are eighty percent of the workforce, are up just 1.85 percent over the past year. In April, the rate of wage increase actually declined.

The broad (U-6) measure of unemployment stands at 10.8 percent, which is far above the level of past economic cycles. Furthermore, unemployment is widespread across all business sectors. The labor force participation rate also remains at a historically low level, indicating that many workers stand ready to re-enter the work force when jobs become available. Together, these conditions show labor supply is plentiful and there is no threat of inflationary shortages.

Read rest here.

Labor market results

Grading finals. Very slow posting. BLS published the Employment Situation Summary and labor markets suggest that the slow recovery continues. A bit more than 220k jobs created in April, and the unemployment at 5.4%. Wages still basically stagnant.

The slow recovery has come to a halt

From the last press release of the Bureau of Economic Analysis (BEA):

"Real gross domestic product -- the value of the production of goods and services in the United States, adjusted for price changes -- increased at an annual rate of 0.2 percent in the first quarter of 2015, according to the 'advance' estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 2.2 percent."

So basically zero growth. And some people want higher rates of interest to preclude the danger of inflation. Oh brother.

Job market still terrible

BLS report shows that employers added only 126,000 workers in March, and the rate of unemployment remained at 5.5%. Labor force participation and employment population ratio basically unchanged. I want to see how inflation hawks are going to spin the need for raising the rate of interest now.

Martin Feldstein doesn't care about the inflation target

But he does want the Fed to raise rates soon and resolutely. Why? Because the labor market is too tight. Yes, I know (see here and here). One interesting thing is that a prominent Republican economist says that this is a "solid economic upturn." So there are some Republicans for Obama then.

More interestingly he suggests that the Fed's lack of preoccupation with inflation, since Janet Yellen does not seem to believe that 5.5% is the natural rate, is misplaced. But there is more. In his view, nobody should be concerned if inflation is below the target. In his words: "who cares if the inflation rate is a bit below an arbitrary 2% target?" Exactly, who cares about an arbitrary 2% target. Who? Feldstein of course, since he is really concerned that inflation would be above the arbitrary 2% target.

Besides, the notion that double digit inflation rates are around the corner is preposterous. And the problem of financial stability is not related low interest rates, but to the lack of regulation and the gutting of the Dodd-Frank legislation.

Robin Hahnel on the Fed & the pressure to raise interest rates

From The Real News Network

Translating from Fed speak, Janet Yellen is doing everything within her power to slow down the pressure that she's under to start raising interest rates here in the United States. We actually have a news network that today sort of asked the question, is Janet Yellen too socialist? And I think that's actually a good way for people to sort of understand what's going on. As much as any chairperson of the Federal Reserve Bank of the United States can be, she is actually trying the best she can to act in the interests of the general public, which is quite unusual. And so she is trying to delay as long as possible raising interest rates in the United States, mostly because she doesn't want to derail the sort of slow and tepid recovery that's going on and she understands that raising interest rates prematurely and too rapidly would have the significant danger that it would slow our recovery. And she's pointing out that there is no sign that there is inflation on the horizon, that the only reason the Fed should have to be raising interest rates really is if there is inflationary pressure and if there is a danger of inflation. And the people trying to convince the Fed to raise interest rates keeps claiming that we need to do this to prevent inflation, but they have no evidence on that side.

Originally posted here, with full transcript. Video below.