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We've know for years that this recovery is the weakest post-war recovery on record, and the chart above makes the case. If this had been a typical recovery, national income (GDP) would be about $2.8 trillion higher than it is today. That's like saying that average wages and salaries would be 17% higher. For a family earning $60,000, that's over $10,000 more income per year that has failed to materialize despite all their hard efforts.
What's been lacking is productivity (the additional output that each unit of labor produces), because productivity is the key to rising prosperity. We can only earn more if we work and produce more. We've had about the same rate of jobs growth during this recovery as we had in the 2001-2007 recovery, but GDP growth has been much weaker. The reason? Very low productivity growth, as seen in the chart above. I use a 2-yr rolling annualized growth rate to measure productivity, since it is quite volatile on a quarter-to-quarter basis. Over a 2-year period I think the quarterly volatility tends to wash out and a truer picture is revealed. Note that the productivity readings we've had in the past several years have always been associated in the past with recessions. It's no wonder that everyone keeps complaining about the economy. It's as if we've been living in recessionary conditions even though things have been slowly improving. Put another way, we've had to work unusually hard just to enjoy very modest improvements in our standard of living.
The chart above uses the same data, but instead of a two-year rolling period, it uses a 5-yr rolling period. This, I believe, captures the effect of policies put in place by different presidential administrations. It can take years for policies to be put into effect and then have an impact on the economy, and good policies can have effects that last even after they have been reversed.
The colored bars correspond to different presidential terms, with the red bars reflecting a sustained period of declining productivity growth and the green bars a sustained period of very strong and/or rising productivity growth. I would be quick to note that Republican administrations have yielded three periods of declining productivity (Eisenhower, Nixon, and Bush II), while Democratic administrations have only yielded two periods of declining productivity (Carter and Obama). No political party can lay a claim to implementing policies that consistently lead to sustained rises in prosperity.
One thing that stands out is that the Obama years have seen productivity growth that rivals the malaise that characterized the Carter administration. For the five-year period ending last December, non-farm productivity rose at a miserably slow 0.3% annualized rate. In all of post-war history, only the five-year period ending in mid-1982 was worse (small footnote: Reagan's tax cuts did not take effect for almost two years, so his faulty implementation of tax cuts only served to prolong the declining productivity of the Carter years).
There are many factors that contribute to the slow growth of productivity, such as rising regulatory burdens that increase the cost of economic activity, high marginal tax rates that reduce the incentive to work and invest and take risk, and transfer payments that create a culture of dependency and a reluctance to seek out work.
The charts above show that a significant increase in transfer payments (money the government gives to people for a variety of reasons) beginning in late 2008 corresponded to the beginnings of a significant decline in the labor force participation rate. Many millions of workers have left the workforce, and it could be due at least in part to the fact that the benefits that accrue to those not working (e.g., food stamps, disability payments, welfare, earned income credits, assistance to single-parent families) are greater than the net benefits of working, especially on an after-tax basis. Transfer payments now equal almost 20% of disposable income, and that is a big number that currently totals $2.7 trillion and consumes fully 72.5% of all federal government spending. Yikes! Maybe it's simply the case that our government has grown to the point where it is now suffocating the private sector. Too few people are working and too many are on the receiving end of federal largesse. And for those who are still working, the burden of complying with regulations and the burden of taxes is simply inhibiting their ability to work and invest more.
We are not going to see significant improvement in productivity and living standards unless and until we adopt policies that are more conducive to work, investment, and risk-taking. It's that simple. Unfortunately, the proposals being discussed on the left (e.g., Sanders and Clinton) are only going to exacerbate the current situation. Can the right produce a candidate capable of winning and turning the policy ship around? That is the key question this year.
33 comments:
Scott points to political policy while William suggests monetary policy. Could it be both?
Misery's the river of the world, misery's the river of the world.
Everybody row, everybody row;
misery's the river of the world Tom Waits
The productivity growth rate over the past five years has averaged about 0.3% annualized. That's misery. It could also be that the government is underestimating productivity in the increasingly important service sector. How do you measure service sector productivity?
Productivity in the manufacturing sector was 1.5% over the past year and has averaged 1.4% over the last 5 years. You see, manufacturing output is much easier to measure, I would think.
So the problem may not be government policies. I am troubled with many of them, especially the drastic increase in transfer payments. The problem may not be the Federal Reserve and low interest rates. Low rates ought to boost economic growth.
The problem may just be the way we count.
I have an out of box viewpoint on this and am curious what you think of the following thoughts. In addition to your comments on productivity being hurt by transfer payments and regulations, as importantly, productivity is being hurt by two additional issues. First is the transition from baby boomers who are finishing up their peak experience and productivity years and being replaced by millennials who are entering the workforce at lower productivity due to their age and inexperience (and time spent on cellphone apps as opposed to focused on work - this is a real issue due to the difficulty in staying focused when constantly looking at the phone), Note the low productivity in the late 70's and early 80's on your chart when baby boomers were just entering the workforce. Also, I disagree with the conventional wisdom on how the maximum tax rates effect productivity. The top people who drive productivity and thus make lots of money and are the top earners are encouraged out of the workforce by low tax rates. Low tax rates mean they can live off their past successes and investments instead of still working. Note that we had very high marginal tax rates in the 50's and 60's and productivity and GDP growth were great. Look at it from your personal perspective. If you had to pay 90% on your investment income would you be writing this free blog or would you be in the workplace today? I speak as someone who retired at age 58 after building 3 successful private companies and have no incentive to take on the stress of business given current investment income tax rates.
Scott, what do you make of buybacks/dividends displacing investment/R&D over the last decade for declines in productivity growth?
bravo
Re "what do you make of buybacks/dividends displacing investment/R&D over the last decade for declines in productivity growth?"
Business profits have been strong, but business investment has been weak, and that helps explain why the recovery has been weak. Businesses prefer to return profits to shareholders rather than make new investments. This is just more evidence that this has been a "reluctant recovery." People and businesses have been risk averse and cautious. Confidence in the future has been lacking. To fix this, we need less government intervention and better incentives to reward work and risk-taking. Government is suffocating the private sector with regulations and taxes and mandates.
Rick Louden: I see things differently. I'm retired and living off investments not because the tax on investments is low (investments are subject to double and triple taxation, by the way) but because the tax on working is high. The rewards to going back to work or starting a business are pitifully small (my marginal tax rate would be 65% on the first $125K of income) relative to the effort and the risk that would be required.
Great post Scott! You've, plain and simply, nailed what's holding back the economy!
I would simply add Trump to your list of candidates whose ideas would only exacerbate the situation...
Great post. I would love to see a measure of the recovery based on the effectiveness of the congress- i.e. bills passed and number of days worked and level of the filibuster in use. Since we do have an administration and a congress.
For example, I note that the PLUNGE in the non-farm productivity took two nose dives: 1. at the start of the recession which was relatively flat after the initial dip. 2. post the 2010 congressional change, which shows a dramatic crash.
I would also love to see a measure of the productivity based on two factors:
1. The level of taxes
2. The level of regulation cost.
I believe we would be very surprised by the data...
It seems stunning that in this golden age of technology, access to information, data and people anywhere + anytime that productivity can be so low.
Mark: I would concede that it is difficult if not impossible to fully and accurately measure productivity, since so much of what is new (e.g., smartphones, which replace dozens of other things and change our lives in so many ways) adds up to qualitative differences that are not easily quantified. Surely technology has added measurably to our collective productivity, but perhaps it is not fully reflected in the numbers.
But nevertheless it is also true that government has been intruding into our lives in grand style these past seven years. Obamacare rejiggered fully one-sixth of the U.S. economy in ways that would never have happened if the healthcare market were a free market. Corporate taxes are obviously so out of sync with the rest of the world that businesses reorganize on a global scale almost every day. (Art Laffer taught me that taxes are too high when they influence people's decisions. I know that I would be doing a great many different things if it weren't for punitive tax rates.) Dodd-Frank made a significant change in the way banks operate, and consumer "protection" laws have undoubtedly restricted the flow of credit to otherwise-worthy projects. What does the Dept of Homeland Security produce with its gargantuan workforce? How about the many hundreds of billions of dollars that have been lavished on "green" industries which have gone up in smoke? What did the wars in the Middle East produce? Lots of money has been poured down the Keynesian and Green drains, and this has most assuredly sapped overall productivity.
Come on, Romney's plan was the same. In many ways it expands the free market by enabling more people to access healthcare who otherwise couldn't afford it If they actually seek preventive care, that saves money.
I agree about the Middle East though
Who said Romney's plan was good? In any event we could have expanded the market even more by just giving people vouchers, without disrupting everyone else.
Great post.
BTW, the national security R&D budget is $100 billion a year. I prefer to end that completely, and just piggy-back on private-sector developments, which are incredibly rapid (GPS, drones, smart phones, better materials and batteries, Internet etc).
But, if we are going spend $100 billion year on R&D, why not in the form of X-prizes for inventions that benefit the economy or productivity?
Forget all the regulations, and political connections, and so forth: If you can obtain result X, and it is verifiable, you get $1 billion.
I think Obamacare is a bad idea, and it is probably time to relieve employers of the obligation of health care. At this point, single-payer would work better and cheaper.
Totally free markets would also obtain better results, but I think we need some sort of backstop for people who cannot afford health care. Yes, some people are wastrels, and cannot plan ahead, and others will cynically take advantage of free care if it exists.
Maybe we can open up the VA to poor people, if they sign away any rights to sue or complain about service, and they get only basic (though good) care.
Meanwhile, back at the ranch...both the "winning" candidates in this season's very first Primary are accused of rigging the results. Right outta the chute! There is video evidence of both occuring that anyone can watch on YouTube. Nothing is done about it. Contested results, and markets reprice.
And just for a bonus:
The PUB winner is foreign born, (not a natural born citizen), and Constitutionally ineligible to serve as POTUS. He was a citizen of a foreign country until a year and a half ago! He running for POTUS anyway. Nothing is done about it. Markets reprice.
The DEM winner is criminally negligent (or simply a willful criminal) and has allowed every major foreign intelligence service to pluck State secrets from her personal email server, while she spends years shaking down foreign governments and corporations for "donations" and "speaking fees" to fill her fake charity slush fund. Nothing is done about it. Markets reprice.
Extra Bonus...an avowed & committed Socialist barely lost the opening Primary in America's Heartland by only 5 delegates. He actually won if the votes had been tallied honestly. Socialism is now the unabashed new normal. Markets reprice.
So we continue to add more layers of lawlessness to the current environment which ALREADY features both Parties promoting cronyism while layering on the most piles of unConstitutional regulations and debt since the Great Depression.
Ryan's Omnibus bill in December signaled that the 7 year pushback against Big Government has now ended. Market dropped 700 points in 2 days, and have since created the third worst January performance in US history. Feb hasn't been so hot, either.
Lawlessness is the number one investment theme. It creates bad policy, and causes massive risk aversion.
Johnny BD: Good points all, except for Cruz. Anyone born to a U.S. citizen is a "natural born" citizen regardless of where he or she is born. I learned this 40 years ago when my daughter was born in Argentina. This is a well-established fact.
I respectfully disagree that its well established. Nothing has been settled on this matter, because it hasn't been challenged. I think the weight of evidence rests on a requirement for birth on US soil. Some judge is going to end up ruling on this. Maybe it will be "ObamaCare Roberts", whom Cruz vetted for Supreme Court Justice for the Bush administration.
When the Constitution was ratified, "natural born" regularly meant born inside your country. But the Constitution did not define the term. Kids born abroad to US citizen parents used to have to go thru a lengthy "naturalization" process to secure citizenship and voting rights, etc. In the 1800s, Congress eventually allowed kids in that situation to skip that lengthy process. They were then automatically naturalized at birth. But Congress doesn't have the power to convert a person born abroad to "natural born".
Congress briefly declared in the 1790 Act that children in this situation should be considered "natural born". But that didn't last. That act was quickly repealed and replaced, and the "natural born" allowance for those kids was purposely struck out of the superseding law. In fact, it was struck out personally by the Father of the Constitution, James Madison himself who wrote about the importance of place of birth as criterion for the office of President. Signed into law by Washington, and then signed into law in another update by Jefferson. That allowance for foreign born kids has never reappeared in any law ever since.
The Founders wrote that they didn't want a POTUS to have divided loyalties to their home country and to the US. But they also said they didn't want the citizens to have to question a foreign born President's loyalty to the US.
Goldwater was born in US territory which later became a state...not a foreign country.
McCain was born in Panama, which was a US territory at the time. His lawyers say that they stood ready to argue in court that US Territory should count the same as being born inside the US itself. In fact, McCain had the US Senate take a vote to affirm that US Territory counts the same as US soil. They knew that birth place matters. There was never any question of whether he was a citizen...just about whether he was "natural born" or not because of his birth place.
The entire hoopla over Obama's birth certificate legitimacy centered over whether He was truly born in the US or not. Not about whether He was a citizen. He was of course a citizen because of His mother.
Cruz's situation is very different from those. He was literally born in a foreign country, and of this there is no dispute. This would be contested and unprecedented, and needs a lawful remedy.
The Constitution made a special allowance for any citizen at the founding of the country to be President to start us off. Original citizens didn't have to be born on US soil, because there was no US. In over 250 years we have never had a single nominee for President that was born in a foreign country. With no disrespect toward your own family's situation, I think it would be a very bad precedent to start allowing foreign born Presidents. We have enough erosion of national sovereignty as it is, imo. If people think we should have foreign born Presidents in this new globalist age, then they should persuade enough of their fellow citizens of the wisdom of it, and amend the Constitution to allow it, instead of ignoring the intent and spirit of the law. That way it would be settled through due process, and would be lawful.
Sorry this is WAY off the topic of Productivity! LOL. But nobody has to read it. Wanted to make my point. Thanks for your consideration if you even made it this far. Im sure your daughter is a fine upstanding US citizen. No disrespect intended to her in this post, and I hope none taken! I just want my Prez to be born in the US like Madison, Washington and Jefferson did.
Check out this Harvard Law Review article on the subject of "natural born citizen." My daughter automatically became a natural born citizen of the U.S., and the U.S. Embassy in Buenos Aires had no hesitation in issuing her a birth certificate testifying to that fact.
http://harvardlawreview.org/2015/03/on-the-meaning-of-natural-born-citizen/
I have read quite a few articles in the same vein.
I know that one. Its the famous one being referenced a lot, but this Washington Post editorial is a pretty compelling rebuttal to those two Harvard guys....especially in the links within.
https://www.washingtonpost.com/opinions/ted-cruz-is-not-eligible-to-be-president/2016/01/12/1484a7d0-b7af-11e5-99f3-184bc379b12d_story.html
Sorry, but that is not nearly as compelling as this one:
http://www.cato.org/publications/commentary/yes-ted-cruz-can-be-president
As Shapiro argues in another article (http://www.cato.org/publications/commentary/ted-cruzs-canadian-play)
"Cruz’s eligibility isn’t a hard constitutional question. Under Article II, Section 1, to be eligible for the presidency, you have to be a “natural born citizen.” The original public meaning of that term, combined with statutes enacted by the First Congress, indicate that it means both birth within the nation’s territory—set aside the controversy over birthright citizenship—and birth abroad to American parents in a manner regulated by law.
In other words, anyone who is a citizen at birth—as opposed to someone who naturalizes, or who isn’t a citizen at all—can be president. So the only question is whether Cruz was a citizen from the moment he emerged into this world. Under the law in place when he was born, babies born to one citizen-parent who has lived in the United States for at least 10 years, including five after age 14, are citizens at birth. Nobody disputes that Cruz’s mother meets that standard."
Randy Barnett provides further very compelling arguments in the Washington Post (https://www.washingtonpost.com/news/volokh-conspiracy/wp/2016/01/07/why-ted-cruz-is-a-natural-born-citizen/). One excerpt:
"All authorities seemingly concurred that the offspring of the King, regardless of place of birth, were plainly the King’s “natural-born subjects.” No statute was ever needed to make such persons “subjects.” Indeed, as Blackstone added, even the King’s ambassadors, because of their representative capacity, likewise carried abroad, by extension, the movable bodily sovereignty of the King: “the children of the king’s embassadors born abroad were always held to be natural subjects.” Unlike children born abroad to ordinary subjects, these children required no parliamentary naturalization at all—they were always deemed “natural-born.”
In our republic, however, the citizens became the sovereign. As Chief Justice John Jay wrote in Chisholm v. Georgia, “at the Revolution, the sovereignty devolved on the people; and they are truly the sovereigns of the country…; the citizens of America are equal as fellow citizens, and as joint tenants in the sovereignty.” If so, then the citizens of the American Republic arguably carry with their bodies abroad this sovereignty just as the King and His ambassadors had. Consequently, since 1776, any child born to a member of the sovereign citizenry of the United States is as much a “natural-born citizen” of our Republic as a child born to the sovereign King was the natural-born subject of the British monarchy."
From what read, there is some sexism in the current yet antiquated law, which is admittedly foggy, and that is a US father overseas sires US citizens, but a US mother overseas is considered to have birthed foreigners.
It is a bit puzzling that Cruz maintained his (dual) Canadian citizenship until 2015. Keeping his options open, I guess. But then, at least Cruz banks his money in the United States, as opposed to Mitt Romney, who banked in the Cayman Islands but wanted to be president of the United States.
Hillary is even less appealing than the pair discussed.
Usually I say hold your nose and vote. This year, it will be, "Put on your gas mask and vote."
Johnny BD--go get 'em. Yes Cruz, who has been Bible-thumping in Iowa, opening speeches with Scripture, had no problem at all sticking the knife into Ben Carson's back, his fellow Christian.
We just disagree. I'm going with what the Founders wrote, and with common law, and with the specific purposeful striking out of natural born status for foreign born citizens by the very people who invented the nation. I want to conserve the spirit of their intent. They were smarter than any politician Ive seen, and i take great comfort in the protections they put in place for me. I think we have a proper channel for Change...and its the amendment process.
I think it's a bad precedent to allow a foreign born Prez...especially within an environment of such lawlessness as we have now with so much risk aversion. I've had enough "change" in government overreach lately to last me for a few decades. If 2/3 of Congress and 3/4 of state legislatures disagree with me, then I am an official fuddy duddy, and will accept my fate.
Ramming it thru by some snake oil globalist sleeper cell guy who vetted John Roberts for Chief Justice and remained a foreign citizen his whole life is just too much, too soon. I need another 250 years before feeling comfortable with foreign born Presidents. Can't we find a person without controversy to be POTUS???
BTW...I'm just a backward white male clinging to the past as Barack describes. LOL. I do appreciate the dialogue, though, and respect your position.
Earnings are gruesome -- something is very wrong with the US economy...
http://blogs.wsj.com/moneybeat/2016/02/08/no-profit-relief-in-sight/
I posted the data below on 16 DEC 2015. On a TOTAL, pre-tax profits basis, not the per share basis, US corporate profits have been weakening since Q2 of 2015. I feel this provides a better view than per share profits which are inflated by stock buy backs.
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Bureau of Economic Analysis - National Income and Product Accounts (NIPA)
Line Item "US Corporate profits" - pre-tax!
2015 Q3 - 2014 Q3 = minus 2.8% growth
2015 Q2 - 2014 Q2 = plus 0.96% growth
2015 Q1 - 2014 Q1 = plus 7.19% growth
2014 Q4 - 2013 Q4 = plus 4.77% growth
http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&903=55
Deluded by an theocratic fixation on tight money, the Fed suffocating prosperity.
It is instructive to recall that in 1992 Milton Friedman wrote an editorial for The Wall Street Journal. The Fed had just cut interest rates from 10% to 3%, and inflation was running at about 3%. Milton Friedman bashed the Fed...for being too tight.
This constant bleating for tighter money when inflation is headed towards zero if something new on the American politico-economics scene. It is also reckless and dangerous to American prosperity.
Unreasoning idolatry has replaced sound monetary policy.
William: after-tax corporate profits according to the BEA are what's important to me. In Q3/15 they were $1.784 trillion (at an annualized rate), and that's up 1.3% from the year prior. Over the previous two years they are up at an annualized rate of 2.8%. According to S&P 500 EPS, after-tax profits fell 2% in the year ending January 2015.
Scott, thanks for sharing your experience and wisdom with us. I always appreciate your balanced and well-considered take on the markets and global economy.
Compliments in comments are always followed by disagreements, but as those were sincere, I hope this is collegial in tone. :-)
What happens when regulations become oppressive? From what I've seen, economically creative people check out of the economy. For example, it's very difficult to start a manufacturing, land development or related business in California. You can make interest rates whatever you want and shower the state with easy credit and it's not worth the time and effort to fill out endless forms, conduct studies doomed to rejection and genuflect repeatedly to regulatory agencies whose employees are predisposed to not just reject you, but outright hate you. I'd suggest that it's not about credit and central banks any more, but about creative people going Galt.
Yes, I know that sounds like a Randian rant, but rest assured I'm not one of her fans. I'm simply observing things here in California both in my own job and as my children try to find work. My son graduated with an EE degree, has 4 summers of related experience and really wants to work in the power industry. Despite having multiple connections, he can't even get an interview because there is no power plant development going on in the state. It has nothing to do with credit, it's all about regulatory burdens.
Think about that for a minute. California's a high-tech hub, has a growing population, is frequently threatened in the summers with brownouts and we aren't building power plants. It's possible to do so, but it's not happening. The people who are natural leaders in the economy, ones with drive, ambition and creativity, have checked out and gone somewhere else. The economy can't grow without these leaders. They have the most options, so when they decline to create new businesses, they have no problem finding easier ways to make money. Instead of providing the economy's motive force through hard work, they take an easier route and just become another worker bee somewhere.
Where I work, our purchasing department is heavily regulated with the regulations growing more onerous all the time. In the last year, many of our buyers quit to go do something else. They were the ones who could easily find other employment. It's not that their jobs were impossible, it's that they became sufficiently painful to the point that they left to do something easier.
I would argue that this is why the central banks' strategies have all failed. Individual people are making decisions based on things other than interest rates. Creative, talented people are finding easier ways to make a living. Unfortunately, the rest of us need these people to do more than make a living if we're to have good jobs and growing productivity and wages.
I'll take your response off the air. ;-)
KT Cat: Sounds to me like your experience is a good validation of Rand's teachings. As for central banks, I don't think they've "failed." I think that what we have learned is that central banks can only do so much. They can't stimulate growth by moving interest rates up or down. They have two central functions: providing a stable currency and being lenders of last resort. The latter is what has been the issue since 2008, and they have dealt with the problem of the banking industry by engaging in QE. Banks, like almost everyone else, became very risk averse in the wake of 2008 (regulators even forced them to), and that created a shortage of risk-free assets which central banks have supplied via QE.
All the problems you describe revolve around bad fiscal policy, high tax burdens, and huge regulatory burdens. We need to look at politicians for solutions, not at central banks.
Thanks for the reply, Scott. The $64,000 question for me is this: Why don't the central banks acknowledge this publicly and throw in the towel on QE? I would argue that they really believe in their own omnipotence. I can find nothing in Janet Yellen's talk to suggest that she thinks the Fed has become a second- or third-order factor in the economy. Even the Japanese central bank is still thrashing about after 20 years of failure.
It looks to this hard-core Papist that the central banks have become religious hubs where faith in their powers blinds them to data points which contradict their fiscal theology.
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