Monday, September 1, 2008

The US Economy's Performance in the Clinton and Bush W. Eras

Today's Topic: The US Economy in the Clinton and Bush Era

At Carpe Diem, the libertarian web site run by Mark Perry, a talented economist at the University of Michigan, prof bug posted three long commentaries that differed with a chart and comments on it posted by prof Perry. Together, they tried to show that how average unemployment in the Clinton and Bush eras have been the same -5.2% in each case. This disagreement led prof bug to widen his criticisms of the economy's performance in the Bush era, and on a variety of scores: job creation, rises or stagnation in average wages, and the large increase in national debt beginning in 2001 and sustained ever since then. Click here for the Perry post and buggy replies.

More Criticisms

As you'll see, the comparisons in average unemployment during the two eras is particularly misleading. In particular, Clinton inherited an economy where unemployment was 7.0% or so, whereas Bush started office when it was below 5.0%, and curiously --- even after the short and shallow recession in the first three quarters of 2001 ended --- unemployment continued to rise over the next 21 months until it reached 6.2%.

On a wider scale, prof bug returned to a theme he has hammered away at Carpe Diem for the last several weeks: tersely put, despite an impressive macro-economic performance in the US for the last 27 years or so --- the US pioneering the new post-industrial knowledge-based economy, and so far the only rich industrial country to reap the full benefits of the Internet age in productivity growth --- US average wages have stagnated (a real rise of only 2.0% since 1979), and at the same time income inequality has markedly grown. To make matters worse, though it's no fault of the Bush presidency, the Consumer Price Index has risen rapidly the last year to over 5.0%, mainly owing to the big jump in energy and food prices.

True, the Federal Reserve in deciding what to do about interest rates --- raise them, say, which would harm economic growth and add to unemployment (now rising to around 5.5%) --- doesn't track the CPI itself, rather core CPI that eliminates energy and food prices as being too volatile. For instance, if the Fed had followed CPI and not the core CPI, it might have been panicked by the 30% increase in oil prices to close to $150 by mid-July and raised interest rates a good percent or two. Since mid-July, of course, oil prices have plummeted and are now heading to $110 a barrel. (The Fed, by the way, watches other core price indexes, like the Personal Consumption Expenditures --- a chained link index --- and the Producers Price Index, plus a few more exotic indexes.

The Wider Political Fall-Out

The gap between the performance of the US economy's macro-performance --- the US having a per capita income lead in PPP terms (purchasing power parity) now of $47,000 to Germany's and Japan's $34,000 --- and the growing discontent of the American public with our national economy and the direction of our economy is a big political problem. Right now, survey polls show that 80% of the US public think that our economy has been performing very poorly or fairly poorly. A similar percentage thinks that our country is on the wrong track, just as somewhere between 73% and 80% find that George W. Bush's performance as president has been disappointing too.

What's Going On?

Essentially this: ever since the start of the American Republic in 1789, a populist rebellion against business, financial, and political elites has erupted every few decades --- and quite simply for a widely shared sentiment: to wit, that the economy's functioning has gradually been operating unfairly, at their expense and for the benefit of a small group of business leaders, financial institutions, investors, and speculators, as well as for political elites who respond to these rich and powerful interests.

The first populist upsurge was the Whiskey Rebellion of the early 1790s. The next one erupted in the 1828-1836 era of the Jackson presidency, when Andrew Jackson initiated all sorts of programs aimed at curbing the influence and power of bankers and well-to-do business firms. In the 1880s and 1890s, a new agrarian populist rebellion emerged in the Mid-West and plains states as well as in parts of the South, all aimed at the growing power of new financial institutions --- the stock market, brokerage firms, investment banks --- and giant manufacturing corporations. It was then replaced by the more middle-class progressive movement, led eventually by Theodore Roosevelt after his reform presidency ended in 1909. A similar grass-roots rebellion among small farmers and industrial workers flared in the 1930s Great Depression, leading to FDR's New Deal.

The Recurring Causes of American Populist Outbreaks

What has characterized each of these populist eras --- notice that they have occurred about even 40-60 years --- is easy enough to pin down: in a word, a fundamental structural change in the base of the US economy . . . accompanied by a sense of growing frustration, a feeling that the new economy is now working fairly for average Americans.

Since 1980 or so, a no less far-reaching restructuring of the US economy has occurred . . . the shift from a largely manufacturing industry (40% of the US labor force in 1950) to a knowledge-based service-oriented economy in which manufacturing accounts for 13.5% of GDP while employing around 10% of the labor force. At the same time, the knowledge-based economy favors well-educated Americans; low-skilled labor has poured into the US ever since 1965, whether legal or illegal; and as if that weren't bad enough for low- and semi-skilled Americans, globalizing forces --- while adding to competitive pressures in the US economy and hastening the introduction of information and communications technologies that feed back into globalization and speed it up --- have further held back wage rises for US males on an average, even as low-skilled labor has lost noticeable ground. (Women's wages have more than doubled in real terms since 1979, though the gap between them and male workers is about 30% lower.)

The recent huge spike in energy and food prices has further added to a sense of disillusion and populist backlashes. Add in a growing sense of insecurity about jobs and health care, and the new populism isn't hard to explain.

But Wait

Oh, and don't forget all the financial innovations that have led to a recurring series of financial crises: the dot.com boom and crash of the late 1990s; the hedge-fund collapses and rescue by the Federal Reserve; the accounting scandals and financial hanky-panky symbolized by Enron; the subsequent sub-prime mortgage boom and ponzi-scheme followed by a crash in the early- and mid-1980s; and the recent credit-squeeze, with further rescues of brokerage houses and banks by a worried Federal Reserve. By now, most Americans seem punch-drunk with these financial crazes, and the gap between what financial institutions should do properly for an economy --- allocate capital to business investment, house-buyers, and consumers wanting to buy other durable goods, while managing financial risks with a sense of responsbility and credit-analysis --- and how these institutions have actually behaved seems to have outrun any ability of our existing regulations to bring more transparency, accountability, and credit-management to these institutions: banks of various kinds, brokerage houses, insurance companies, independent mortgage dealers, hedge-funds, and commodity buyers.

The Political Future of the New Populism

As in the past, the new populist wave won't easily disappear --- this, no matter who wins the presidential election this spring.