Economic recovery for the few

By Max J. Castro
majcastro@gmail.com

The latest economic news is bad, very bad indeed, at least for the vast majority of Americans, although not for corporations and the rich.

Rather than pick up speed, the economic recovery, which began at the end of 2009, appears to be petering out. In the last quarter of 2009, Gross Domestic Product (GDP), the broadest measure of economic activity, grew at a relatively robust 5 percent. In the first quarter of this year, however, GDP rose by a mediocre 3.7 percent. And, in the latest quarter (April-June 2010), GDP increased at an anemic 2.4 percent.

Thus to say that the economy is dead in the water is an understatement. In fact, we are losing ground. The U.S. economy needs to generate at least 125,000 jobs each month just to keep pace with the increase in the labor force resulting from population growth. But, with an increase of GDP of just 2.4 percent, the economy is likely to create fewer than 100,000 jobs. Thus the unemployment rate of 9.5 percent is likely to go higher, unless a large number of the long-termed unemployed are sufficiently discouraged that they drop out of the labor force altogether. Individuals who are not actively looking for work are not counted in computing the unemployment rate. If discouraged workers and those who have been forced to take part-time work against their will were counted, the real unemployment rate would be much higher than 9.5 percent.

So why is the Great Recession proving so recalcitrant? Consumer spending drives the U.S. economy, accounting for about 70 percent of economic growth. And consumers are not spending, mainly because they have no money or are afraid they will lose their jobs and want to save their money for that eventuality. Except for the rich, of course, who have money but spend a much lower fraction of their income than those who live one or two paychecks away from bankruptcy. The figures tell the tale: Last quarter personal consumption grew at only 1.6 percent, a rate too low to motivate employers to hire new workers.

Rampant financial speculation triggered the current crisis, but its roosts lie in the breathtaking increase in economic inequality in the United States in recent decades. Before the Great Recession, several factors masked the problem of structural inequality. Wages for the middle and working class have been stagnant for decades while the top 10 percent of the income distribution have reaped all the benefits of economic growth. Yet easy credit and inflated home prices enabled consumers to keep on spending above their means. During most of the Bush years, credit card debt and home equity loans allowed consumers to spend just enough to grow the economy, albeit at an unimpressive rate compared to the previous fifty years.

Even this paltry growth stopped during the last years of the 2000-2009 decade. Recently revised government figures show that between 2006 and 2009, GDP declined at an average rate of .2 percent per year. Thus the U.S. economy was already in trouble when, in 2008, the home price bubble finally burst, the financial system teetered on the edge of disaster, the credit crunch began, consumption declined, and unemployment soared.

But there is more to the story, as Bob Herbert points out in a recent column in The New York Times:

“From the fourth quarter of 2007 to the fourth quarter of 2009, real aggregate output in the U.S., as measured by the gross domestic product, fell by about 2.5 percent. But employers cut their payrolls by 6 percent.”

The result of the imbalance between the decrease in output and the decrease in jobs is that, while vast numbers of workers were losing their jobs and incomes and many Americans had their homes foreclosed, corporate profits soared:

“At the end of the fourth quarter in 2008, you see corporate profits begin to really take off, and they grow by the time you get to the first quarter of 2010 by $572 billion. And over that same time period, wage and salary payments go down by $122 billion.” Thus we have a very special recovery, one in which employers reap rich rewards and employees not only fail to share in the riches, they are actually worse off than before the recovery!

Thus, as Andrew Sum, economics professor and director of the Center for Labor Market Studies at Northeastern University in Boston concluded, this economic recovery “has seen the most lopsided gains in corporate profits relative to real wages and salaries in our history.” No wonder that, as the economic fortunes of the average American have sunk, the stock market lately has been doing well, thank you. Thus the trend toward an ever-more unequal society, which has been going on for decades, has now reached a new peak.

As a result of this bonanza for business, right now non-financial corporations are sitting on $1.84 trillion in cash. That’s a 27 percent increase since the beginning of 2007.That $1.84 trillion is twice the Obama stimulus package. We are talking about real money, money that could be put to use to employ idle workers and produce goods and services instead of sitting in corporate coffers.

Many hoped that the presidency of Barack Obama would begin to reverse the trend toward more inequality. Alas, while the stimulus package, health care reform, and allowing the Bush tax cuts for the richest Americans to lapse are genuinely progressive steps, the President has not made a dent in the huge level of inequality. Nor has he identified the issue as a priority. In fact, inequality has risen under his watch. And whenever he has tried even mild reforms that would adversely affect the corporate sector, Republican obstructionism in the Senate has frustrated almost every attempt.

In spite of the fact that this mild recovery has brought giant profits to employers and less than nothing to workers, the most visible political consequence of the Great Recession has not been an anti-corporate populist movement. It has been the rise of reactionary movements like the Tea Party and the resurrection of the Republicans as an ever more right-wing party. The ascendance of these actors, who would enact policies which would favor the corporate sector and the well-off even more, do not auger well for any effort to regain some degree of socioeconomic balance in this society. And, absent unforeseen events, it looks like the worst has yet to come. We are probably in for a long, hard slog.