1. The slump began in late 2006. And indeed, we were hardly enjoying good times through early 2006.
2. It’s a big slump, and GDP per capita fell by over 7 percent.
3. We remain a long way below the previous peak.
4. It’s going to take a long while to return to where we were back in 2006. Most forecasters are expecting GDP to grow by around 3 percent, implying per-capita growth closer to two percent. At those rates, average incomes in 2013 will (finally!) be back around the levels of 2006.
He has some nice charts. Check ’em out.
Unfortunately, both he and the Fed think that the last few years are essentially cyclical — i.e., connected to and integrated with economic behavior and welfare/consumption before and to come. Things are grim to be sure, but we’ll get back (in 2013, go team). If only it were so.
First, as you know Dear Reader, the Stiftung has argued for years that the American economy ceased generating real (as opposed to phantom, transient, financially engineered) income and per capita growth since the mid-1990s. Second, financial engineering hid this structural dysfunction from 1994-2011 by constantly generating bubbles to obscure the real underlying atrophy and decay.
Wolfers is optimistic about 2013 because his return data point, 2006, is actually itself a bubble popping high point. Don’t look down, it’s a long, long way to fall.
For the Stiftung, our economic narrative is thus: (a) the First Tech/Telecom Bubble (1994-2001); (b) the National Security Boom (2001-present); (c) Tax Cut -Redistribution (2001-present); (d) the Second Real Estate Bubble (2002-2007); and (e) the bailouts/USG and Fed subsidies (2008-present). Bernanke all but assured in recent appearances that money will continue to be free – as in close to zero % cost of borrowing. Under normal circumstances, if we were in a cyclical moment, the Fed would not only watch out for but want to see inflation. On cue, a Second Tech Bubble is getting ready for its close up.
Our predicament is not related to normative, linear macro-economic narratives. But because we collectively don’t realize that, the U.S. continues to make illusory and dangerously erroneous choices along an inflated baseline curve. Our real welfare curve is an order of magnitude smaller. It’s highly unlikely the U.S. will hit Wolfers’ mark in 2013 because there’s literally no there, there.
To be blunt, many of the jobs vaporized since 2008 are not coming back. Those few that do will be significantly reduced. People really haven’t internalized any of this yet.
Crony capitalism aside, stabilizing banks et al. in 2008 made sense for systemic stability. (Putting aside how well it was done). There’s no rational economic reason to coddle them now (and they all became bank holding companies in late 2008).
The reason the U.S. stood in the same place in real terms economically is because these now banks generated the bubbles that created an illusion of wealth (which we then leveraged). Dealing with the real American economy and its actual purposeful economic activity requires repudiating financial engineering and its so-called ‘products’ and ‘technology’. The financial sector is a systemic cyst that must be cauterized, painful as that may be. It’s wholly out of alignment for national needs going forward regarding traditional commercial lending, underwriting and other assists. The LBO boom of the 1980s at least required companies to be game chips.
Now, the banks can bet on commodities and phantom, notional trades by themselves. At all times, this grotesque caricature of capitalism *requires* fake activity to hide its non-productive extraction of wealth. And all the external costs are again cost-shifted on to the American public. We don’t have a precise analytical frame for exactly how much smaller the banks should be, but we at the moment are thinking down to 60-65% as a first pass.
Second, we’re not going to get 2006 in 2013 per Wolfers because the National Security Boom years (DoD outlays alone have *doubled* since 2001) are over. Politically, the argument for DoD alone so far is between 1% real growth from today’s bloat (Gates’ proposal) or essentially a steady state (sold as usual ‘massive cuts’ in out year spending yada, yada, yada). Like the financial engineers, the DoD and Permanent National Security State nomenklatura has begun to live on its bonus. Like the financial engineers, this nomenklatura offers no positive net investments (given the OPTEMPO in Afghanistan and Iraq, it’s unquestionably true now).
All Administrations are skilled at hiding the true scope of discretionary spending for ‘national security’. When one adds DoD and War Supplementals in years past, DHS, the IC, Foggy Bottom, state and local law enforcement militarization, etc. even Dimon should stand in awe.
Wolfers’ calculations do not take into account systemic shock effects in the military-industrial sector (now stunningly pervasive). Second, jobs cut back are so baroque finding civilian-equivalents anywhere in CONUS problematic. Third, military necessity often mandates uneconomic expenditures, i.e. keeping design teams intact, expertise native and plants operational, etc. We no longer have civilian commercial industries to absorb or replenish them. Economic budgetary changes may be unrelated to the actual general economic activity taking place or overall impact.
We don’t have to reinvent the wheel. Modern economies successfully built native industries that generate hard currency export growth. The examples are (in no particular order): Germany, Japan, Singapore, Taiwan, South Korea, China and your candidate here. All built world class industries from essentially nothing. What’s striking is none of them did so on Kool Aid sloganeering about some Invisible Hand.
They started out with specific, limited objectives, achieved them and built upon them. Tax, tariff, education, urban planning, infrastructure were all coordinated. None of them relied on a so-called ‘comparative advantage’ — they created it to help them achieve their goals. Each of them did so differently. (We’re most familiar with the Japanese and German examples as you might guess, but for other reasons not unfamiliar with South Korea and Taiwan).
If applying development to the U.S. is too radical or ferrin for one’s taste, how about Alexander Hamilton? When he sought to develop industries that he knew *eventually* would have natural economies of scale and competitive advantage, he introduced tariffs and other measures to protect them. Supporting enterprise to win in the global market is as American Washington checking out his Facebook page crossing the Delaware, concerned his Chinese white iPad 2 might slip. You get the point.
This kind of holistic sectoral concept and and overall macro view to track investments and align policy is worlds apart from the kindergarten approaches advanced by either party. That’s no surprise. None of them have a clue how to jump start, nurture and then promote a wealth-producing industry generating real economic activity.
When we were in Eastern Europe in the 1990s, we’d sit in on meetings with the ministers of privatization or the head a major industrial concern. In one case, it was a director of an ICBM factory. He later became his country’s president. We’d hear their ideas for what they were going to do under ‘conversion’ (from defense to commercial – think of it as that time’s ‘winning the future’). So the ICBM plant? Easily profitable. They were going to make world class bicycles and microwaves. How? You can imagine the rest.
When we see American economists on cable or elsewhere we get the same feeling. Politicians, of course. ‘High paying green jobs of tomorrow’ blah, blah. Worse, the pundits writing about capitalism and the like? Advising presidential candidates? Wouldn’t know a Term Sheet if it fell on their lap. They think ROI is Twitterese for ‘really obnoxious interviewer’.
Well, thirteen hundred words. If only Wolfers is right. We suspect he’s an unwitting Pollyanna.