When there is a long-term economic downturn, it is popular to blame the situation on those in power. The “blame game” enters politics easily from whichever center of power any one person wants to blame – typically either big government or big business.
While this exercise is easy and offers some degree of truth, there are three large forces of change that have swept over the economy that are beyond the control of the supposedly powerful. There are responses that are more appropriate for changing conditions that may not have been exercised, certainly, so political and economic leaders can’t be let off the hook. But a better understanding of the forces pushing those in power and pain alike demonstrates how dynamic the situation is.
Business Cycles – Cycles in economic activity have been recorded as far back as the book of Genesis. There is broad disagreement among economists about the nature of business cycles, but investors have come to rely on them. Most agree that since 2000 we have been in a “secular bear market” – that is, a trend that lasts so long it seems permanent.
As Jurrien Timmer, an analyst at Fidelity Investments noted in 2013, “Since the (tech) bubble burst in 2000, stocks have been languishing in a secular bear market, during which the S&P 500 has returned only 1.4 percent in nominal terms and –1.0 percent in real terms.”
There is considerable controversy about the nature of business cycles and their effect on the economy as a whole. The most wide ranging version comes from Nikolai Kondratieff, a Soviet economist who is credited with being the father of modern business cycle theory. After working on Lenin’s first five-year plan, Kondratieff published a work entitled “The Major Economic Cycles” (1925). In this, he divided the phases of economic health into four “seasons” that follow roughly a human lifespan in total length. What we might commonly call a “Depression” is what Kondratieff called “winter.”
While this view of cycles has caught on as “Secular Market Theory” among investors, it has remained more popular among Marxists due to its origin. There is little doubt that a cyclical downturn started in the year 2000 and continues to this day. This means that investment is down and job growth has been minimal and the pressure falls eventually on working people. The graph below of real (inflation adjusted) household income since 1992 shows how the gains of the previous “autumn” in Kondratieff cycles came to a halt even before 2000 and have not come back yet:
There is hope at the end, because business cycles do not last forever. If each “season” of the cycle is as long as the previous, “spring” will come between 2017-2020.
Globalism – There is little doubt that the process of creating one world market out of many national markets has changed the world. While this has brought unprecedented wealth to some and lifted many out of poverty, the process has certainly had its downside.
There is considerable controversy as to how it will all continue to play out, but one critic of the path taken so far is an unlikely one. Paul Craig Roberts, as Assistant Secretary of the Treasury under Reagen, is often credited as the architect of the policies of that administration. But his most recent book, “The Failure of Lessez-Faire Capitalism,” blasts the progress of the global economy so far.
“Markets are not self-regulating – they can only function if a referee ensures fair play, which is why deregulation has ushered in an era of pervasive looting and criminality.”
His criticism is that we are still operating in a time of “empty world” growth and have yet to move to “full world” stability where everyone has access to the same market.
“Even if countries are able to produce empty-world economic growth, economists cannot tell if the value of the increase in GDP is greater than its cost, because the cost of nature’s capital is not included in the computation.”
Roberts cites economist Herman Daly of the University of Maryland, who says elites “Have figured out how to keep the benefits for themselves, while ‘sharing’ the costs with the poor, the future, and other species.”
Roberts sees the effects wreaking havoc on both developed and developing economies alike.
“Jobs offshoring has destroyed the productivity advantage of first world labor, hollows out the real economy and cuts the connection between markets and human welfare.”
A true solution to the problems noted by Roberts has yet to be worked out, and defines the challenges of the economy that is being created today.
Demographics – The “Baby Boom” of the early 1950s defined much of American culture and economic growth since the day they first arrived, kicking and screaming. As they approach retirement age many are leaving the workforce to rely on Social Security and their savings. The challenges for social policy are obvious, but there is a potential upside as jobs become available for younger people.
The decline in workforce participation in the U.S. has become a big issue in the popular press, but it is not all bad news.
“Almost all of the decline (80 percent) in the participation rate since the first quarter of 2012 is accounted for by the increase in nonparticipation due to retirement,” notes Shigeru Fujita, an economist at the Federal Reserve of Philadelphia. “This implies that the decline in the unemployment rate since 2012 is not due to more discouraged workers dropping out of the labor force.”
But this effect is far from universal. The workforce continues to age ahead of this retirement wave, with the median age of a worker rising from 37.1 years in 1992 to 41.9 today. This has happened because workers are not retiring as soon as possible, despite the large wave that is defining the job market. The effect is not necessarily a bad thing.
“Retaining older workers does not hurt the job prospects of younger ones, meaning that protecting Boomers from downward mobility goes hand in hand with promoting the upward mobility of youth,“ according to a Pew Research study.
While there is reason to believe that the demographic challenges are working their way through the system with less upheaval than could be expect. A decline in workforce participation has implications for the entire economy that are not readily being addressed, especially in health care.
Taken together, the three big forces on the U.S. economy point to continued rapid change. They have each shown a tendency to out-strip policy, meaning that political leadership is responsible for the situation more by errors of omission rather than any action deliberately taken. A deeper understanding of these forces should lead to a more productive politics where real choices about the future of the nation are debated in light of the dynamic nature of the situation we all face together.