The economy: good times to roll or looming train wreck
I sound like Chicken Little, cautioning that while the sky is not falling right now, it will at some unknowable time in the not-too-distant future – anywhere from tomorrow to a few years from now. And the fall will be worse than what any of us has seen in our lifetime.
How can this be? Doom and gloomers like me look ridiculous right now. The economy seems to be picking up nicely. As the President told us in his State of the Union Address:
- “After years of wage stagnation, we are finally seeing rising wages.
- “Unemployment claims have hit a 45-year low. African-American unemployment stands at the lowest rate ever recorded, and Hispanic American unemployment has also reached the lowest levels in history.
- “Small business confidence is at an all-time high. The stock market has smashed one record after another, gaining $8 trillion in value.”
- The Business Roundtable CEO Economic Index Outlook has never been greater; the Optimism Index of the National Federation of Independent Business is at its highest since September, 1983; the Conference Board’s Consumer Confidence Index has matched its November 2000 high.
Interest rates remain low; unnecessary, onerous regulations are being eliminated or cut back.
These points are true but are not an accurate depiction of the current and prospective economic reality for regular Americans. We are looking at ants while elephants are tiptoeing by in the night. Here are some indicators from David Stockman’s Contra Corner and elsewhere that give a longer-term perspective on trends in the economic health of the U.S. and the rest of the developed world:
• No growth in median income. The latest data on real (inflation-adjusted) median income of U.S. households (2016) show that it stands at $59,039 or just $352 more than in 2000. It is no wonder regular Americans feel something is wrong.
• Subpar economic growth throughout the developed nations, despite tens of trillions of dollars of central bank “money printing” (creation of paper currencies backed by nothing). Over the ten-year period from the pre-crisis peak in 2007, real (inflation- adjusted) GDP grew at a compound annual rate of 1.4%, the lowest ever recorded for the United States; final sales grew at 0.6% annually; labor productivity grew at 1.1% per year, half the rate between 1953 and 2010. So much for the contribution of digital technology so far.
• Widening income inequality. From 1980 through 2016, the share of national income received by the top 1% in the U.S. rose from a little less than 11% to a little over 20%, whereas the share of the bottom 50% declined from about 21% to around 13%. My guess is that the top 0.1% benefited in gross disproportion, especially those who work in financial services. The money people over the last 36 years have done really well, far better than the rest.
• Shrinkage in the working age population as a percent of total.
• High and rising debt relative to GDP. Even before passage of the budget busting tax “reform” bill, the ratio of government debt to GDP was 106%, and is expected to reach 140% by the end of the 2020’s. Total private and public debt has grown from 150% of GDP in 1970 to over 350% today. This amounts to an extra $37 trillion debt burden on the U.S. economy.
• Underfunding of America’s entitlement programs – Medicare, Social Security, federal government pensions, state and local pensions, and private pensions. The multi-trillion-dollar funding gap is staggering, equivalent to several multiples of GDP. Tens of millions of people are going to discover that they are not going to have the purchasing power they thought they were going to get, and many of them will be too old to recover. The off-the-books unfunded obligations of the federal government alone exceed $200 trillion dollars. By comparison, US nominal GDP was $19.36 trillion in 2017.
For reasons to be presented in future posts, I believe that the optimism over the stirring of animal spirits and the salubrious effects of the Drumpf tax cuts is overdone. There may be some uptick economic activity, but any short-term upturn eventually will be swamped by the malign effect of decades of policymaker failure to walk back promises that can’t be kept and to take the hard but necessary steps required to promote a sustainably thriving economy and society.
I have no idea when the collision between utopian fantasy and economic reality will occur. I am confident that it will occur in a way and at a time that is unknowable. Reality is a harsh mistress and always wins in the end. The longer the delay in the adjustment of the imbalance between claims on future wealth [debt] and the ability of the U.S. and the global economy both to support those claims and grow, the greater will be the degree and extent of economic hardship. Even worse, big changes tend to be sudden and discontinuous so few people will have time to protect themselves. I am particularly concerned that tens of millions of people, dependent on the kindness of strangers for their cash flow, i.e., other people’s tax payments, are going to be disappointed.
What makes this dour outlook wrong? After all, nothing bad has happened yet and the trends and circumstances cited above have been in place for years. The performance of financial markets suggests that the right scenario is the rosy one. While markets occasionally get out of whack, the collective intelligence they embody usually is vastly greater than that of any one individual.
Here are the strongest disconfirming arguments I can think of:
• There is a steep increase in productivity per capita, as the promise of digital technology and other disruptive technologies finally begins to be realized;
• Governments worldwide focus less on redistribution and regulation, and more on stimulating economic growth, especially by encouraging entrepreneurship;
• Interest rates stay low, and equity prices stay high;
• For reasons that I don’t understand, the debt burden does not prove to be as onerous as I think it is.
Given the facts presented here, I have a hard time disconfirming my inferences. I would very much like to hear more compelling reasons why my worries are overwrought.