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The Great Stagnation continues

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These days, most of my writing is about the graph atop this post. Question 1: How do we get unemployment down? Question 2: How do we get unemployment down faster?

But one of the Great Recession's quieter attacks on our economic security has been its ability to distract us from its predecessor, and in some ways, its cause: what Ed Luce calls "the Great Stagnation."

Look at the graph atop this post again. It's about the long road back to early 2007. But early 2007 was terrible. Not compared with late 2007, of course. But though the economy hadn't yet crashed, we'd already lost control. You can pick your statistic: Median incomes weren't rising, but income inequality was. Poverty was doing something we'd never seen before and increasing amid an economic expansion. Debt was up, and income mobility was down. But for my money, I'll stick with this factoid from Luce: "In the last expansion, which started in January 2002 and ended in December 2007, the median U.S. household income dropped by $2,000 – the first ever instance where most Americans were worse off at the end of a cycle than at the start.

This bad economy led to a bad economic crash. For all that we blame Wall Street for the financial crisis, we vacuumed up the mortgages and the credit and the refinancing offers and all the rest of it because we were replacing real income growth with fake asset growth. That worked, until it didn't.

Digging out of our current hole is daunting. It has, quite understandably, distracted us from figuring out how to clamber back up the mountain. But one is no less important than the other.

There's been a real allergy to long-term thinking amid a short-term crisis. The stimulus attempted to include some long-term measures -- medical research, health IT funding, energy research, and more -- amid its raft of short-term spending. The reconciliation package that finished health-care reform also expanded access to college education. But those moves were criticized -- the focus, we were told, should be on jobs -- and so there've been few further attempts. Instead, we're letting states chop apart their education systems, and we're hearing calls for the government -- which is to say, us -- to back off and stop trying to modernize our health system, our energy grid, our tax code, and our physical infrastructure.

Wrong or right, that means that if we ever get out of this hole, we're merely back to the lip of the abyss. That's not good enough. We can be pretty sure that the Great Recession will end. We've not yet come up with a plan to banish the Great Stagnation alongside it.

By Ezra Klein  |  August 2, 2010; 12:41 PM ET
Categories:  Economy  
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Comments

More propaganda from the journolist.

Almost all of the money that Obama has spent and actually goes to people just happens to go labor unions/government workers.

I guess you cannot actually expect certain facts to make it through the journolist filter.

Posted by: TECWRITE | August 2, 2010 12:55 PM | Report abuse

Income inequality isn't bad. Someone else creating wealth does not make you poorer- and it doesn't make redistribution of wealth right.

On the other hand, this following quote is right on:
"For all that we blame Wall Street for the financial crisis, we vacuumed up the mortgages and the credit and the refinancing offers and all the rest of it because we were replacing real income growth with fake asset growth. That worked, until it didn't."

What's missing is that we aren't doing anything to change the game we set up to favor this approach...

Posted by: staticvars | August 2, 2010 1:34 PM | Report abuse

@staticvars:Income inequality isn't bad.

So it is just a coincidence that income inequality has been at its highest just before the two most recent major economic downturns, (1929 and 2008)?

"Someone else creating wealth does not make you poorer- and it doesn't make redistribution of wealth right."

No but subsidizing the rich through a warped tax code that taxes dividend and interest income at rates far below what ordinary people pay on salary or hourly income among other things, massive bailouts of rich bankers, allowing people to hide their assets in the Cayman Islands, investing in companies that ship jobs overseas, is definitely wrong. The top 2% of us income earners pay much lower taxes than their contemporaries in Europe, even though their 2-10 times higher. We don't have to go to European tax structures but moving a bit in that direction wouldn't be so bad...

BTW, why do we have a wealth tax on real estate, but not on any other class of assets? It just so happens that the vast majority of people not in the top 10% of income earners have only 1 asset to speak of (outside of retirement accts if they have those) and that is their house, if they even have that. Is that fair?

Posted by: srw3 | August 2, 2010 2:20 PM | Report abuse

Ezra is part of a large and growing chorus of serious analysts--of all stripes--that is correctly diagnosing a problem: businesses left on their own will not hire fast enough to reduce unemployment to reasonable levels for many, many years. And, Ezra notes, they likely would lead us back to an unacceptable 2007 situation. The only serious solution proffered by anyone is to jump-start hiring via targeted government stimulus money (to job-creators) and government hiring (ala FDR with WPA and CCC, focused on investment projects). I suggest we need to start analyzing this approach--the real upsides and downsides should be explicated, after which informed political debate can begin.

Posted by: pjro | August 2, 2010 2:21 PM | Report abuse

What happened in 2002? The first Bush tax cuts took effect, then in 2004 the second round took effect. The rich started getting richer faster while government programs were being pared back by the GOP Congress except for Medicare Part D for seniors and of course the wars and the national security state, which benifitted contractors. The Bush Admin also gutted virtually every regulatory agency, from the NLRB to the SEC to the FTC to everything in the Dept of the Interior and the EPA.

Unbridled capitalism just means the most goes to the most aggressive and the least inhibited by morality and common decency. The wreckage all around us is the result. Why should business hire when they can use temps and avoid all those pesky things like benefits, workers' comp, unemployment insurance when it's time to downsize again.

Don't hold your breath that it's all coming back.

Posted by: Mimikatz | August 2, 2010 2:41 PM | Report abuse

"The only serious solution proffered by anyone is to jump-start hiring via targeted government stimulus money (to job-creators) and government hiring (ala FDR with WPA and CCC, focused on investment projects)."

Robert Schiller's article (referred to in the morning Wonkbook) put a $30 billion price tag to employ a million workers in this type of program. Had policymakers approved a jobs program like this in size back in 2009, there would have been millions more employed. True, they would be taking flak about gov't created jobs but think about the impact it might have had on this election cycle. The employed tend not to bite the hand that feeds them.

But policymakers enacted a stimulus bill. The biggest portion of the stimulus is spent, the recovery is sputtering, and the unemployment rate is near double digits. No surprise that many voters are in the mood to throw da bums out this November.

Posted by: tuber | August 2, 2010 3:28 PM | Report abuse

"So it is just a coincidence that income inequality has been at its highest just before the two most recent major economic downturns, (1929 and 2008)?"

Maybe not, but what's the causal mechanism?

I'd accept that credit bubbles tend to inflate the incomes of the wealthy the most, and so you'd expect to see the widest gap in income distribution right before a crash. I don't see how income inequality in and of itself creates a financial panic, but I can see how the same factor would tend to cause both.

"No but subsidizing the rich through a warped tax code that taxes dividend and interest income at rates far below what ordinary people pay on salary or hourly income among other things"

How are the rich being subsidized via taxes? Dividend taxes are paid after corporate taxes, and the effective corporate tax rate is about 25%. Interest income is taxable as ordinary income.

In any case, the rich, despite lower rates on certain types of income, provide a large chunk of total income tax revenue.

"massive bailouts of rich bankers"

I agree with you here, certainly doesn't help.

"allowing people to hide their assets in the Cayman Islands"

People will hide their assets and income when taxes are burdensome. There really isn't much a non-totalitarian state can do about it other than chip away at the edges.

"investing in companies that ship jobs overseas, is definitely wrong."

Why is it better to employ Americans than Indians, Mexicans or Chinese? From a utilitarian perspective, employing people from poorer countries over those from richer ones can be a moral act.

Posted by: justin84 | August 2, 2010 4:20 PM | Report abuse

"BTW, why do we have a wealth tax on real estate, but not on any other class of assets? It just so happens that the vast majority of people not in the top 10% of income earners have only 1 asset to speak of (outside of retirement accts if they have those) and that is their house, if they even have that. Is that fair?"

What's worse is that houses aren't even assets. Not really. Even when you own a home outright, it's still cash flow negative.

In any case, there are a lot of government supports for the housing market - the mortgage interest tax deduction, FNMA/FHLMC/FHA, the capital gains exemption, etc.

There is no GSE offering stock market investors 4.5% 30yr fixed rate loans (with favorable prepayment terms), guaranteed by the government, to invest in stock with only 3.5% down.

The wealthy (most years) have gift and estate taxes to deal with.

Also, retail sales taxes are essentially wealth taxes. A lump sum tax on wealth, or a periodic tax on wealth as it is consumed are mathematically the same. These taxes don't hit real estate as hard because the primary "income" from real estate is that you get a roof over your head.

Wealth taxes on financial assets are very distortionary. It doesn't take a lot of imagination to see how much more economically damaging a 2% tax on financial wealth is vis-a-vis a 2% tax on real estate wealth.

Posted by: justin84 | August 2, 2010 4:36 PM | Report abuse

The stagnation will continue until the Private Sector concludes that risk levels have dropped. Under this administration they can't predict a thing, and this raises risk. Let's see; this administration has:
-demonized corporations in particular and capitalism in general.
-demonized "the rich"...which we all know is code language for anyone above the median who votes Repub.
-Passed controversial legislation; thousands of pages with tens of thousands of footnotes. Even if implemented as intended, it's of mind-boggling complexity. And then we have the unanticipated consequences which are always legion.
-Continues to agitate for even more radical and draconian legislation.
-Has lost the confidence of a majority of voters, which has suppressed optimism, which has reduced spending, etc.
-And finally, that $13T national debt (smartly on track to reach over $20T by 2016). Think Business might be a bit tentative over the potential economic fallouts of the debt?
-And of course unions. The Dems pushing like crazy to expand union power and size.

Just the right environment to convince Business to risk scarce capital, bring onboard more costly labor, and throw caution to the wind. IMO Business is hunkered down and waiting for a congress and administration that's pragmatic...and not what we've got now which is rank ideology and grubbing for power.

Posted by: JohnR22 | August 3, 2010 9:25 AM | Report abuse

Ezra,

It sounds like you are begrudgingly starting to communicate some of the truth to your readers.

(Democratic) Congress created a real estate bubble by demanding that loans be made to borrowers who could not afford to repay them. This pushed up housing prices and generated "wealth" (through artificially inflated housing prices), this fueled expansion despite the fact that wages declined in the period.

Government used the increases from the expansion to grow its spending (including fattening pensions to government workers). In truth however this is unaffordable and we must right-size government. Expanded funding of government (and higher taxes) reduces the growth of jobs and wealth creation in this country.

Obama's policies of increased taxes, more regulation, and wealth redistribution are killing jobs and reducing the standard of living for all Americans.

Posted by: ELF2 | August 3, 2010 12:02 PM | Report abuse

The only solution I can see is for the U.S. to sell a LOT more goods and services to the rest of the world: cars, locomotives, food, fibers, tourism, education, etc.

But the only quick way to make that happen would be a big devaluation of the US dollar. With interest already near zero, how do you make that happen?

Some bitter pills yet to be swallowed, no matter how to look at it.

Posted by: bobskis | August 3, 2010 3:44 PM | Report abuse

Considering that Obama's policies have in fact cut taxes to their lowest levels in decades, and that regulations have been diminished to criminal levels of negligence, I'd have to say that 'ELF2' doesn't know what he's talking about.

Posted by: jeffreymcmahon | August 3, 2010 3:47 PM | Report abuse

You wrote:

Wrong or right, that means that if we ever get out of this hole, we're merely back to the lip of the abyss. That's not good enough. We can be pretty sure that the Great Recession will end. We've not yet come up with a plan to banish the Great Stagnation alongside it.


Here's a plan in three words: Exports to China.

This stagnation is happening because too much lending was made on consumption and speculation instead of investments in economic productivity.

And because too many American workers have insufficient skill sets to successfully compete in a consumer and information-driven economy.

As commenter bobskis noticed, exporting our way to recovery will require a devaluation of the dollar. This is a change in the economic status quo, and change is always with risks, but it seems staying put with current dollar values is unhelpful for a country needing to import less and export more.

It will also require world-class production of the goods that China will need: infrastructure, cleaner and more efficient technologies for China to power and run itself with, consumer goods for an increasingly middle-class Chinese society, devices of all sizes that maximize water efficiency and conservation, and innovations that can greatly increase crop yields and diversity.

While there are many opportunities in China, reorienting the economy from one that imports consumer goods to one that exports goods for developing nations like China is something that will take time and patience.

And I'm unsure about how relaxed China will be to foreign producers benefiting from Chinese economic growth. My guess is that China will look to restrict and limit the benefits foreign producers receive and maximize the benefits for the Chinese people.

Still, if anyone has other and better ideas- ?

Posted by: InclusiveCheer | August 3, 2010 5:29 PM | Report abuse

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