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The fundamentals of the economy

By Karl Smith

Via Matt Yglesias, I see that Third Way is very concerned about growth:

Democrats must now invest the same passion and intellectual rigor in economic growth – the new crisis for America’s middle and working classes.

For roughly 75 years, America dominated the world economy, taking robust economic expansion for granted. Those days are over. If the United States doesn’t attain growth far greater than what is projected for the next 20 years, we will never attain the middle class living standards we expect; claim the leadership role we need for a safer world, or pay for the entitlement state we’ve created.

This fear that America is slipping behind is at the heart of today’s middle class anxiety. The answer is not anti-business economic populism, which won’t propel growth -- and, tellingly, landed like a lead balloon on Election Day.

The middle class is seeking a political party with constructive ideas that drive super-charged, private-sector economic growth.

This feeds into the notion that there is something fundamentally rotten in the American private sector. We’re missing that basic mojo that propelled us over the past century.

No.

American business is wildly profitable. This is profit growth over the past 10 years:

Yes, that’s over 90 percent year-over-year profit growth at the end of 2009. Not only is that far higher than anything during the previous 10 years but it is faster growth than any period during the recession was decline. Indeed, the U.S. economy is “out of recession” primarily because corporations are doing so well.

Now, these figures are often pointed out to justify some anger at corporations or higher tax rates. I am proposing neither. I am simply suggesting that the problem with the U.S. economy isn’t that suddenly our businesses can’t compete or can’t earn money. They’re earning money hand over fist.

Moreover, this is being driven by massive gains in productivity. The productive heart of the American economy is not slowing down, it's speeding up. Here is productivity growth over the past 10 years.

The high performance of the past few years isn’t as stark as profits, but notice that we had back-to-back quarters that were higher than anything in the past 10 years. Indeed, only one other quarter even comes close.

The problem with the American economy isn’t that business isn’t profitable or that workers aren’t productive. The problem is that people are buying far less than they used to, and that means that businesses are employing fewer people.

Here is growth in personal consumption:

Now perhaps, you believe this is only prudent after our extreme overconsumption. I think this is a misreading of the period, but let’s go with it. Wouldn’t it then be nice to see us doing more investment, building more factories and the like? Unfortunately, that’s fairly tepid as well.

It’s not historically weak, but it’s not enough to make up for the drop off in consumption or to make up for the huge losses during the recession.

So business profits are strong, and workers are producing a lot when they go to work. However, buying is weak. The result is that businesses are doing more but they are doing it with fewer work hours. Here is the growth in total hours of work performed in the U.S.

This is a problem of demand. Workers are producing a lot when they work. Businesses are profitable when they sell goods and services. However, the demand for those goods and services is weak.

This is why inflation is weak.

And core inflation is even weaker:

Karl Smith is an assistant professor of economics and government at the University of North Carolina and a blogger at ModeledBehavior.com.

By Karl Smith  | November 8, 2010; 2:14 PM ET
 
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Comments

as a fan of class warfare, I think this article is Fantastic!!!

those rich corporations are not publicly traded companies that pay profits to middle class americans and help increase the value of their 401K and retirement accounts, they are blood sucking vampires
that exist only to feed on the weakest among us, mostly women and minorities and the poor.

great article!

Posted by: simonsays1 | November 8, 2010 2:27 PM | Report abuse

dr smith

thank you for all of the interesting articles you are posting here.

i read all of your articles, but must confess i dont understand most of them, but i do keep trying.
but there is something that i really dont understand now, about the economy.
many people in the united states, have money in mutual funds and bond funds and equities.
the stock market is doing very well.
so many people, turn on their computers, and must breathe a sigh of relief and say to themselves," my savings are in much better shape again. and are replenishing nicely, i have pared down on my lifestyle, and cut down on my spending."
to my mind, this must constitute many, many people.
if big american corporations are doing well, if people's savings and portfolios are improving, i just dont understand how main street isnt experiencing some level of relief or recovery.
i sometimes wonder if news outlets like huffpost, with their huge photos of "third world america" dont make things worse than they are, overexaggerating, or misrepresenting things.
i dont know anyone right now that is unemployed.
or out on the street. mostly everyone i know is very middle class.
they all seem to have weathered the economic storm pretty well.
i dont like when i see the photos, proclaiming "third world america." for those who have been in third world countries, we are not there yet. not by a long shot. and it is very upsetting to keep reading it, because the longer someone keeps saying something, the more truth it appears to have.
if i go to a mall, i cant find a parking place, the middle class restaurants are all mobbed, people seem to have money for kindles and nooks and ipads and every expensive new thing that comes along. every person i see, seems to have a cellfone, and working telephone service....
maybe some of the overblown and ridiculously self-indulgent spending of the nineties and the sybaritic clinton years has been knocked out of us, but isnt that also a "good" thing?
dealing with reality??
anyway, if people's savings are doing better, and it makes their future more secure...how can things not, on some level, be getting better?

Posted by: jkaren | November 8, 2010 2:44 PM | Report abuse

I think the case is pretty clear that our troubles are demand-side in nature. I worry that the demand can come just as easily from overseas as it can from here in the States.

In other words, where is it written that domestic corporate profit is tied to domestic increases in wages and employment? Not in a seamless global economy, anyway.

This all looks like a decoupling of the American labor force from American business.

Getting profitable again hasn't been the hard part. The challenge is in ensuring that some of that profit is enjoyed by the American Working Stiff.

What are the policy prescriptions for that, and do we care? Somewhere in that morass is the ideological challenge of our times.

Posted by: itstrue | November 8, 2010 2:52 PM | Report abuse

"those rich corporations are not publicly traded companies that pay profits to middle class americans and help increase the value of their 401K and retirement accounts, they are blood sucking vampires
that exist only to feed on the weakest among us, mostly women and minorities and the poor."

there are plenty of publicly traded companies that are doing extraordinarily well, and are in commonly held savings plans and portfolios, and for the millions of americans who have investments, this is reflected very clearly, in the increases in their portfolios. and many of them, are women and children who are benefiting.
i think many, (not all) but many people are starting to see improvement, but they still like to complain anyway.
i dont think we are going to, or "should" see the kind of run away indulgence that we experienced for years in this country.
it was lavish and ridiculous, showed a lack of simplicity and humility.
i think that downsizing has been an important spiritual lesson for americans.
and sometimes, maybe the economy and spirituality have more to do with one another than people may care to think about.
it is easy to blame corporations, but there has also been plenty wrong with the spending and saving habits of americans, and there have been a lot things to reflect on, over these past years.
i also think that president obama is not getting enough credit for the improvement, and as long as we are on the climb back to recovery, there will still be opportunities to further crucify him for every single thing that is wrong with the economy, the space program, health care reform, trips to india....anything that anyone can grasp out of the air, and pin on him.
i think it is a long fall into hard times, and a hard climb to find your way back out. impatience marks the fall, and patience, transformation and discipline is all about the climb out.

Posted by: jkaren | November 8, 2010 2:56 PM | Report abuse

@jk: you need to get out more...what are you calling middle class? I guess you don't know any teachers in districts that are cutting back. I personally know several people who were laid off when I was, when our company closed its office in our town. And the real problem is with the working poor and poor people, not with those who have houses, cars, savings accounts, etc...Anyone living paycheck to paycheck is feeling the pain. too bad you don't rub shoulders with a more diverse crowd.

Posted by: srw3 | November 8, 2010 3:02 PM | Report abuse

I wonder how much those profit and productivity numbers are skewed by Wall Street firms doing incredibly well, but not employing a ton of middle class or lower class people.

Posted by: thoughtbasket | November 8, 2010 3:13 PM | Report abuse

"..Anyone living paycheck to paycheck is feeling the pain. too bad you don't rub shoulders with a more diverse crowd."


actually, i think i do rub shoulders with a pretty diverse crowd.
working in a rescue mission, working as a nanny in a predominantly middleclass community, with young families with many financial demands, and hanging out with a lot of retired folks on fixed incomes, and financial issues.
the point that i was trying to make is that i think there has been an improvement over this year.
and my question is that i dont know how, when people see the market going up, and their savings plans doing better, they dont feel a psychological and tangible sense of relief, over where we were a year and a half ago.
as i recall, paul krugman was predicting a depression, a cycle of extreme pain that would last for ten years, and i think the vision was, at that time, that most of us could stand to lose everything.
that has not happened. life has been harder, but the middle class has not disintegrated, and it seems to me that things are improving.
i also feel that for about twenty years, americans were living far above their means. and eventually, the pendulum would have to swing.
like everyone else, i see the budget cutbacks and the effects that it has....but i also see signs of improvement over where we were a year and a half ago, amidst all of the problems.
and i dont see how, when american corporations are doing well, and people's savings are stabilizing and increasing, how that doesnt resonate as an improvement for anyone with a savings plan for their future....from where we were at the beginning of the obama administration.

Posted by: jkaren | November 8, 2010 3:32 PM | Report abuse

I'm happy to change my moniker to broken record. But-

We've taken Reaganomics to its logical extreme. I'm willing to believe that though it was horribly unfair, that it probably re-started to US economy at a critical time. But now we see high productivity, high profits, and low wages just aren't having the same umph that they did twenty years ago. It's time for Obamanomics to come into vogue - high wages, moderate inflation, and a somewhat weaker dollar. This will help the export problem as well as the domestic consumption problem.

Posted by: klautsack | November 8, 2010 3:34 PM | Report abuse

"We've taken Reaganomics to its logical extreme. I'm willing to believe that though it was horribly unfair, that it probably re-started to US economy at a critical time."

I agree. It's not that supply-side is always the way to go, or, conversely, that all our problems can be fixed by simply handing people money to spend.

Sometimes the situation requires a leftish intervention, sometimes it requires a rightish one.

When taxes take 70+% of your earnings, and regulations make it impossible to do business, then yeah, call me a Reaganite. Otherwise, no.

My feeling is that today we're in dire need of leftish (read "demand side") policy in order to protect the interests of the little guy on a regulatory basis, and to ensure that what they earn is in line with something that looks like the American Dream.

Tax cuts and more bending over for business won't get us there. Not this time anyway.

To be hackneyed, if you're a hammer (or anything that's obtuse), everything looks like a nail.

Not all ideologies offer a way out for all problems. Maybe not any of them.

Posted by: itstrue | November 8, 2010 4:41 PM | Report abuse

karl wrote:

"This is a problem of demand. Workers are producing a lot when they work. Businesses are profitable when they sell goods and services. However, the demand for those goods and services is weak.

This is why inflation is weak."

You need to speak to EK's other guest columnist of the day Mike Konczal. He says it'a liquidity problem not a demand problem.

Posted by: 54465446 | November 8, 2010 5:54 PM | Report abuse

The corporate profit figures don't seem to present an accurate picture of how most companies are doing. Profit margins have not grown exponentially but have struggled not to lose ground between price competition factors and low demand. How much of the total shown in the graph is comprised of the financial services sector and other thriving sectors that don't actually make anything?

Posted by: wswest | November 8, 2010 8:35 PM | Report abuse

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