Economic State Of The Union -- 2008  |
by Charles McMillion, President and chief economist of MBG Information Services in Washington, D.C.
As we head into another recession and hear politicians tell us howrecession can be avoided with stimulus packages that further expandhousehold and government debt, remember that between 2001 and the endof 2007 each new job created by these same methods cost $1.8 millionper job in new debt liabilities.
In just the past seven years, U.S. household debt almost doubled andfederal debt soared by near two-thirds, rocketing by a combined $10.5trillion. The total combined debt of households ($14.4 trillion) andthe federal government ($9.2 trillion) is now 168 percent of GDP, farhigher even than in the brief spike during World War II. All otherlevels and ratios of debt also have soared far beyond any pastprecedent.
Yet, this record-shattering explosion of debt stimulus created theweakest seven-year job growth (4.4 percent) and one of the weakestperiods of real GDP growth (18.1 percent) since the Depression: lessthan 6 million new jobs ($1.8 million of debt per job) and a mere $4trillion increase in GDP.
This period began with the collapse of Wall Street's stock marketbubble from the late 1990s and ends now with the collapse of WallStreet's housing and other debt bubbles. That such massive mortgage andconsumer borrowing, tax cuts and war spending produced such remarkablyweak real economic results suggests the months and years ahead could bequite difficult.
Yet, along with the Fed rate cuts for cheaper debt, the only policiesseriously considered by this year's crop of Wall Street-fundedpolitical candidates is more short-term household and federal debt"stimulus." Locked into a failed, 30-year-old ideology of deregulationand debt, there is still no option to compete with the remarkablyeffective industrial and trade policies pursued by China and others.
2008 will be the ninth consecutive year the U.S. economy grows slowerthan the world's growth while China grows more than three times faster.In the past seven years of sluggish growth, the United Statesaccumulated manufacturing trade deficits (production shortfalls) ofover $3 trillion with full current account trade losses of $4.3trillion; more than the entire nominal growth of GDP.
At the same time, now in the third year of their remarkable eleventhFive-Year Development Plan, China's accumulated Current Account surplussoared by nearly $1 trillion since 2001, near 13 percent of GDP in2007. These surpluses are funding China's now $1.5-trillion war chestof foreign currency reserves.
Record trade losses have accelerated the hollowing-out of the oncedynamic U.S. economy. For the first time on record, in 2002 the UnitedStates lost its historic global trade surplus in advanced technologyproducts (ATP). Worsening sharply, since 2004 the ATP deficit becamelarger than the U.S. trade surplus for intellectual property services,royalties and fees. That is, for the past four years the United Stateshas a worsening combined deficit in technology goods and services.Technology no longer pays any part of the U.S. import bills for oil,cars, electronics and clothing, etc. China now accounts for half theU.S. manufacturing trade deficit and more than the entire deficit intechnology.
Reflecting the production shortfall from the trade deficits, BLS datashow output growth since 2001 is among the weakest since the Depressionand the gain in total hours worked (just 0.5 percent) is, by far, theweakest. This is why productivity growth has appeared misleadinglyhealthy; productivity is a measure of output per hour of labor.
Another powerful measure of the hollowing out in the economy is theradical shift in the job market. Of the 5.92 million total new jobs inthe last seven years, only 4.32 million were in the private sectorwhile 1.66 million were in state/local governments, mostly for publiceducation, health and prisons. The federal government cut jobs in thePostal Service.
More than all of the new jobs added by the private sector since 2001are in private education and health care bureaucracies (3.34 millionnew jobs) and in bars and restaurants (1.53 million new jobs.)Uniquely, all net new jobs added fall in the non-supervisory/production category -- half a million supervisory jobs were lost.Manufacturing lost 3.28 million jobs (19.1 percent) and now providesfewer jobs than in July 1942 -- seven months after the attack on PearlHarbor.
Despite concerns about illegal immigration, since 2001 the labor forcehas grown more slowly (7.4 percent) than during any seven-year periodsince 1955 and participation rate of those in the labor force -- thoseworking or looking for work -- also fell sharply -- from 67 percent to66 percent. This is the reason that the unemployment rate, now 5.0percent, is not much higher.
The average weekly wage for non-supervisory jobs buys 2.0 percent morenow than seven years ago and the average real salary and benefits forall workers is up by 9.0 percent. These real increases are down fromthe bubble period of the late 1990s but they are far better than thedeclines of the previous 20 years. Unfortunately, these recentincreases in "average" wages appear to be a product of the latestfinancial bubbles: the widening use of stock options and very largebonuses in compensation, particularly on Wall Street.
Median real wages have continued to decline, including by 1.4 percentover the past year. Median household real incomes fell 2.0 percent from2000 to 2006 (latest data available) and even the average income fell0.5 percent with inequality now the worst on records back to the 1960s.The total current savings of ALL households over the past three yearsis virtually nothing; by far the worst since 1933.
The foolishness of powerful, self-interested claims of a "new paradigm"is again exposed. The fantasy is that soaring debt and the loss ofproduction through trade deficits are good things and the lack ofcurrent savings irrelevant. As a long forgotten advertisement onceproclaimed: "If you don't have yourself an oil well, get one!" We canall live well from royalties and asset appreciation.
Soaring debt and debt schemes did drive up many asset prices, creatinga borrowed illusion of general prosperity along with enormous actualwealth and power for a few. But now, unprecedented debt and soaringinventories of unsold homes are driving down the inflated prices forhomes and other assets. For at least the next several years, mosthouseholds will now be forced to cut spending and earn, not borrow,their living standard.
Another short-term debt stimulus may take the edge off the difficulteconomic conditions of the next few months. But trading away our onceunique economic strengths while borrowing against the future hasfailed. Making even minimum interest payments on these massive, soaringdebts will be increasingly difficult as the success of thoughtfulindustrial and trade policies in China and elsewhere continues.
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Editor's Note: This article recently appeared in Manufacturing and Technology News and we thank Dr. McMillion for giving iTulip permission to publish his important article here. Dr. McMillion details the true costs the average US taxpayer incurs asthe US government attempts to preserve the now strugglingde-industrialized and financialized US economy for the Finance,Insurance, and Real Estate (FIRE) sector industries maintained by FIRE industry sector subsidies.The FIRE sector supports our government through lobbies, campaigncontributions, capital gains tax revenues made possible by asset priceinflation monetary policies, and other tax revenues enabled by FIREsector friendly tax policies.
Many professional economists work for the FIRE sector, such as for thereal estate industry where in the interests of their employers theyobfuscated clear economic data to deny the existence of the housingbubble 2002 - 2006, dutifully reported and repeated ad nauseum in thebusiness media at a time when warnings by voices of authority couldhave helped prevent much of the excess that has led to the hardshipthat many home owners are experiencing today. Other economists, such asDr. McMillion, continue to fight for and represent what remains of ournation's once globally dominant industrial economy, including itstechnology industries. We applaud their efforts. As the US faces itsdebt deflation deflation crisis, the result of 30 years of FIRE Economyexcesses, we hope their time has come and that a new administration ingovernment will seek their guidance on policies to grow the productivesectors of our economy -- including nanotechology, biotechnology, andalternative energy technology -- to re-industrialize the US economy tomake it sustainable with minimal dependency on debt and finance for GDPgrowth, a high national savings rate, more equitable distribution ofincome and wealth, opportunities for higher education and high wagejobs, and continued open access to capital and markets by USentrepreneurs.
