2013 has been an interesting year for the economy, on the one hand we have had relatively good growth in finance and the real estate market, and on the other we have had weak growth in real careers and wages for average Americans. Under the spell of so called "trickle down" economic theory, this would not be much to worry about because eventually we should see a growth in the areas of the economy that would benefit middle class households. The reality is though that in this new unpredictable economy, wealthy individuals are more likely to try to hold on to gains or re-invest them in proven areas rather than open up risky new businesses that could actually provide robust and long term job creation.
Further, since the 1970s real wages as a function of productivity growth have been relatively stagnant following the twin policies of de-regulation and low taxes on the wealthiest among us. This has a lot to do with how the economy has developed over that time and is not necessarily a result of those policies, but it does seem to indicate that trickle down only seems to work in economics textbooks.
Despite this empirical evidence, and despite the fact that the excesses of the finance, insurance, and real estate or "FIRE" economy, led directly to the crash of 2008, policy makers including the President have failed to institute or even propose meaningful structural reforms to the economy that would re-emphasize actual productive activities instead of risky rent seeking. As a result, there is little to look forward to in the 2014 economy, unless of course you are already a wealthy investor.
Examining things more closely, three key points bear discussing in order to better understand where we may be heading next year.
First, we see that job growth has increased steadily over the last year, lowering overall unemployment more than any year since the 2008 crash. However, we also see that we are still above an average of 8% unemployment, not good given long term trends. Further, growth has generally been in low paying and low career potential jobs such as minimum wage fast food and customer service. These are not the jobs that young people starting off in the job market can use to build a firm financial future for themselves or that older people can use to get back to once stable middle class lifestyles.
Second, as mentioned, things for wealthy investors could not really be any better. Recent data suggests stock market returns of around 30%, something not seen since the mid-1990s right before the tech stock boom. Real estate is also back up, perhaps not to pre-2008 levels, but decent enough to earn good money for all those investors that swept up bad properties after the crash. The difference is of course, that with very tight credit markets these days, those who have benefited are primarily big time domestic and foreign investors that had the cash to purchase bulk properties from struggling or foreclosed homeowners. They are reaping good returns while regular families deal with rising rent and being priced out of many decent areas of the country even if they have good credit and good income. Making things worse and perhaps driving income inequality wider, middle class Americans are still heavily indebted and paying a great portion of their income to a financial elite that was bailed out in 2008. Such high private debt in this context means more money for wealthy investors and less for those living off earned income.
This brings me to my third point, which is that nothing is being done to re-orient the FIRE economy towards economic activity that actually generates value and wealth for the whole of the country. Finance, insurance, and real estate have traditionally been ancillary industries that have facilitated or served the more primary industries such as manufacturing, transportation, energy, and the small businesses where new innovative goods and services are created. Higher taxes on capital gains and property incentive the wealthy to get out and make new businesses or spend their money rather than keep it locked away in unproductive but safe assets. The current regulatory and policy regime though favors investing in static assets rather than dynamic ventures. This is ironic because we have heavy regulation at the level where small business operate, whether it be through costly licensing and permits, or burdensome tax structures, while at the same time making things relatively easy for those in the top income brackets to use their money to make even more money.
Finance, insurance and real estate thus become ends in of themselves instead of mediators and brokers between those who have money to invest and those with the new visions that will drive the economy in the future.
It is worth mentioning that energy and mining have seen good growth in the last year and these do provide well-paying and long term jobs for people willing to work in more uncomfortable and austere conditions. Yet these industries are heavily localized in resource rich areas and traditionally they are supportive rather than generative in the sense that they exist to provide the raw material and energy for use in other areas. While it will be good for the US to become a net energy exporter in the next few years, this only truly benefits us if there is also robust and varied economic activity as well.
We have had movements in the past year to favor lower income people a bit more, especially with the fast food protests and campaigns to raise the minimum wage to at least 15 dollars an hour. While these are noble in their intention, the way things are currently structured means that if they are successful, the only thing that will happen is that more jobs will disappear and the middle class will be in even greater trouble. This is because we are reaching a point in which automation is becoming cheap enough that it will make more sense for businesses to use machines rather than hire workers if the minimum wage increases significantly.
As has occurred in the past, businesses may be incentive by higher wages to deploy new automated technologies as replacements for workers in various tasks. Such incentives may be even more powerful given health-care and other liabilities currently taken on by businesses in regards to workers. We are already seeing tablet enabled ordering systems in restaurants where the waiter is no longer a necessary component of the dining experience. Create a robotic hamburger flipping and ingredient adding system and you might not need those two or three workers in the back of your local McDonalds or Wendy's anymore.
Once automation reaches the last vestige of somewhat decent job growth found in the service industry, we are going to be facing some major economic and social challenges. It may not be a good idea to speed up that day by increasing the minimum wage, even if it is the right and fair thing to do. In any case, the real reforms that need to take place are much deeper than simple minimum wage issues. We should see this as little more than a political distraction and election tool because it does not address our fundamental problems.
Unemployment (or joblessness), as defined by the International Labor Organization, occurs when people are without jobs and they have actively sought work within the past four weeks. |
Thus looking out to 2014 and beyond, we should continue to see good growth in areas that benefit investors and relatively weak growth or even stagnation in areas of the economy that would benefit the middle class. Private debt will continue to be a big problem, and as young people start defaulting on their student loans in larger numbers due to not having gotten good jobs after 2008, a new crisis in that area might manifest itself soon. Either way, lifestyles and consumption will still be financed by debt and far too many people will not be able to build a real financial future for themselves. Moreover, since the wider economy does not seem to be going anywhere new and innovative either, we may see another big asset bubble somewhere or perhaps multiple smaller ones spread out across stocks and real estate.
All of this and it seems the Pope is the only one commenting on how things need to really change somehow. The president is focused on his legacy by trying to salvage the health-care debacle and maybe getting immigration reform passed before the end of next year, a difficult task since republicans must now look to defend themselves from fiercely anti-illegal immigrant tea party groups in their respective primaries. In any case, politicians from both parties will be focused on getting re-elected and or dominating the legislature. They will probably talk a lot about the economy, but nothing coming out of the powerful wing of either party hints at the getting away from a focus on FIRE and on to something that benefits everyone and the long term situation of the country. Worse still, few if any of our leaders can even identify the main problems in the first place, let alone propose concrete policy solutions. Too many of them just go on thinking that licking the boot-heels of finance is the only way to keep an economy afloat.