In researching another project yesterday, I came across two articles about the economy that seemed to describe completely different realities. The first was by Joe Weisenthal of Business Insider, and described a general consensus among the great and good of Davos that “the economic crisis is over.” Wiesenthal refers to Mohamed El-Erian of PIMCO who coined the term “the new normal” to describe the post-crash economic malaise. Apparently, even El-Erian now sees a possible end to our woes.
But you wouldn’t know that from reading sociologist Erin Hatton’s Opinionator post this weekend at the NY Times, which described the economic “new normal” on the planet where the rest of us live:
… According to the Census Bureau, one-third of adults who live in poverty are working but do not earn enough to support themselves and their families.
A quarter of jobs in America pay below the federal poverty line for a family of four ($23,050). Not only are many jobs low-wage, they are also temporary and insecure. Over the last three years, the temp industry added more jobs in the United States than any other, according to the American Staffing Association, the trade group representing temp recruitment agencies, outsourcing specialists and the like.
Low-wage, temporary jobs have become so widespread that they threaten to become the norm.
This would be easy to dismiss as another case of the 1% vs. the 99%, but I think it’s worth looking at exactly how this split has developed, and what reinforces it.
The first thing to bear in mind is that the people who go to Davos have one thing in common – all of them have benefited enormously from the financialization of the global economy, whether through their stock price of the company they run, the portfolio they built after selling their company, or (more often) by virtue of working directly in finance. So for these people, the economy matters to the extent that it affects their portfolio.
So what have these people seen since the crisis? This is a pretty good indicator:
The stock market has more or less regained everything it lost. So if your sense of well-being is tied up in financial markets, you have to be feeling pretty good.
The infuriating part, of course, is the reason why stock prices are so high, which is where Hatton’s work enters the picture. The media has been full of reports about corporate profits hitting record highs, which is true, but here again they don’t get at the components of that. To grossly oversimplify, we can disaggregate corporate profits into revenue minus costs. And since there are any number of ways to specify those, I’m going to keep it simple and use proxies.
If we assume that revenue is a function of overall economic activity, then GDP seems a decent place to look. And here the picture is surprisingly strong – not great in terms of percentage growth, but in terms of the dollar amount of output (shown here), there is consistent growth since the bottom in 2009.
The other side – costs – is where things get ugly. I took as proxies here the yield spread of the BAA corporate over Treasuries, which measures how much extra a company with this credit rating has to pay to issue bonds (there are other ratings, but the downward pattern is the same), as well as the change in the average wage. If we treat these as proxies for the costs of capital and labor then the pattern is quite clear:*
What is especially frustrating is just who is paying these costs. In terms of capital, the Fed has made it clear that its various policies involving purchasing mortgage and Treasury bonds are intended to drive down yields across the market. Those policies are connected to their decision to maintain short-term rates – and thus the yields for savers – at extraordinarily low levels. So while the exact amount is hard to quantify, it seems fair to assume that savers are subsidizing both corporate profits (through lower borrowing costs) and financial portfolio returns (through falling yields, which are synonymous with rising prices).
The picture with labor is more direct. With companies needing fewer and fewer employees, and hiring more and more of those as temps or contractors, the pressure to raise wages just isn’t there in the aggregate. So here again, the rest of us (just by virtue of needing to work) are bearing the cost of lower wages that in turn support record profits.**
So if I had to capture the real “new normal” in a single graph, I think it would be the one below. The red line is GDP growth, and the blue line is wage growth, both relative to the year prior (this is why I can get away with putting them on the same graph). What we have is an economy that is growing twice as fast as wages are growing, and that’s only for those who have a job – you don’t even show up if you’re unemployed.
Doesn’t look like grounds for optimism to me, but then I don’t live on Planet Davos.
* Yes, this is a fudge to use rate of change in wage rather than the underlying wage, but using the base amount wasn’t informative without doing a lot of fiddling.
** There wasn’t room in this post, but it’s always worth looking at U6 unemployment rather than the number they give in the news. U6 takes into account those who are working part-time but don’t want to be, as well as those who have given up looking for work (though I don’t think it takes into account temps). The graph for that is here and tells the same story of stagnation at a very uncomfortable level.