I always told my students that it is necessary to examine many statistics to understand what is going on in the economy. The growth of the Gross Domestic Product (roughly our total yearly production) is often used as a measure of the economy’s health. However, the GDP could be growing rapidly, while the growth could be maldistributed. Those already rich could be getting most of the additioanl income generated by the higher output. Growing inequality has an independent effect on a wide range of social indicators. In my book, Naming the System, I wrote:
“In a study done comparing states within the United States, it was discovered that, all else equal, the greater the inequality of income in a state (as measured by the share of income going to the poorest 50 percent of households in each state), the higher the mortality rate. In a summary of this research, Peter Montague writes,
This measure of inequality was also tested against other social conditions besides health. States with greater inequality in the distribution of income also had higher rates of unemployment, higher rates of incarceration, a higher percentage of people receiving income assistance and food stamps, and a greater percentage of people without medical insurance. Again, the gap between rich and poor was the best predictor, not the average income in the state.
Interestingly, states with greater inequality of income distribution also spent less per person on education, had fewer books per person in the schools, and had poorer educational performance, including worse reading skills, worse math skills and lower rates of completion of high school.
States with greater inequality of income also had a greater proportion of babies born with low birth weight; higher rates of homicide; higher rates of violent crime; a greater proportion of the population unable to work because of disabilities; a higher proportion of the population using tobacco; and a higher proportion of the population being sedentary (inactive).
It appears that the psychological damage done to poor people as they contemplate the gap between themselves and those at the top of the income distribution has an independent effect on a wide variety of individual and social health outcomes.”
So any good effects of the rising production of goods and services could be negated by greater inequality. To make a judgment about the economy’s performance, then, we must examine both the growth of the output produced and the change in the distribution of this output.
The GDP has been falling since the end of last year, and every economist agrees that we are in a deep recession. Over the period from the end of the Second World War until now, the growth of GDP has been weaker during the entire eight years of the Bush administration than for any other presidency. Inequality in income has grown mightily during these eight years (though the financial meltdown has probably evened incomes out some, as the wealthy have lost gobs of money). If we look at the economy in terms of output and its distribution, we must conclude that we are not in good shape.
Another key indicator of an economy’s health is its labor market. Almost everyone has to work to get the money needed to buy the goods and services. If jobs are in short supply, that is a bad thing. If they don’t pay adequate wages, that too is a sign of poor labor market health. But what is true for production is also true for labor markets: one measure won’t do. The most often used measure of labor market performance is the unemployment rate. The Bureau of Labor Statistics calculates a national unemployment rate each month. It does this by having interviewers ask questions about the members of a sample of 60,000 households (households are physical spaces in which people live, like apartments, homes, condos, etc. Those living in institutions such as prisons and nursing homes are excluded from the survey, as are homeless persons). For all those over sixteen years old, the interviewers ask questions so that they can place each such person into one, and only one, of three categories: employed, unemployed, and not in the labor force. To be counted as employed a household resident must have worked for pay for at least one hour in the week prior to the week in which the survey is conducted. To be counted as unemployed, a person must not be employed and must have actively searched for work in the prior four weeks. All other persons in the households are classified as not in the labor force. The unemployment rate is equal to the ratio of the unemployed to the sum of the employed and unemployed. The denominator of the fraction (employed plus unemployed) is called the labor force. In December of 2008, the unemployment rate was 7.2%, which translated into 11.1 million persons. The rate has been rising for many months; in December 2007, it was 4.9%.
The unemployment rate misses many persons who suffer labor market distress. Two important missing groups are those who are working part-time involuntarily—they want full-time work but either cannot find it or have had their hours cut by their employers; and discouraged workers, those who want jobs but cannot find them and simply quit looking for work. Both groups have been growing in size: in December 2008, there were 8 million involuntary part-time workers, 3.4 million more than one year before; there were 642,000 discouraged workers, 279,000 more than in December 2007. Adding these two groups to the unemployed and calculating an “expanded” unemployment rate, we get a figure of nearly 13%, up nearly five percentage from one year earlier. I don’t think there is any doubt that these rates will get higher in the months to come. There is plenty of labor market distress, and there will be much more. And this doesn’t take into account those who are employed but at low wages. In 2007, more than one-fourth of all jobs paid a wage that would not support a family of four at the federal government’s official poverty level of income. This wage rate was a paltry $10.20 an hour. None of the overall labor market distress measures tell us how this distress is distributed by race. The labor markets offer blacks and Hispanics much less hope now than they do for whites. For blacks and Hispanics we are now in depression territory.
In an interesting article in the Business Section of the New York Times for January 21, 2009, David Leonhardt says that “It’s Bad But 1982 Was Worse.” He uses the labor market statistics just discussed to argue that the downturn of 1982 was worse than the current recession. 1982 was bad. I lived in Johnstown, Pennsylvania then, and I remember that the state’s Department of Labor estimated that the unemployment rate in the two-county area surrounding Johnstown (Cambria and Somerset counties) hit 26%. The state doesn’t use the same method to estimate unemployment that the Bureau of Labor Statistics employs, but even if there is a larger margin of error in local unemployment rate estimates, 26% unemployment is evidence of economic catastrophe. We don’t know how many hidden unemployed there were in the Johnstown area, but there must have been quite a few, implying that the expanded rate must have been well over 30%. Nationally in 1982, the unemployment rate hit double digits during some months. For the entire year, the official unemployment rate was a whopping 9.7%. We’ll have to see considerably more job loss in 2009 for the yearly rate to hit this level. In 1982 the expanded unemployment rate peaked at 16.3%, again much higher than today’s 13%. In 1982, like today, home sales plummeted, even more than now.
I suppose that Leonhardt wrote his column to put our current economic mess into perspective, maybe to remind us (many of us weren’t alive in 1982 or too young to remember) that yes, things are bad but they have been worse. So don’t despair. He does tell us that worse things might well happen and the economy might continue to deteriorate, but the overall thrust of the article is optimistic.
There are serious problems with Leonhardt’s comparison of 1982 and today. Then the Federal Reserve was in the process of ridding the economy of inflation, which had burgeoned in the late 1970s. Inflation benefits debtors—who are more likely to be in the working class—because they get to pay back loans with depreciated dollars. It therefore harms creditors, like banks, and these and their owners have always been prime concerns of the Fed. Federal Reserve chairman Paul Volcker (name sound familiar? He is on Obama’s economic team) pushed interest rates into the stratosphere. I had cash in a money market fund that was paying more than 15% interest. As the Fed tightened, less money was availalble to banks to lend out, and they responded by increasing their rates to prospective borrowers. Business firms couldn’t secure short-term loans, and this wreaked havoc on some industries, notably the steel companies, which began to downsize and shed workers. By the end of the 1980s, Johnstown had lost thousands of high-paying mill jobs, as had other steel towns, like Pittsburgh and Gary. This was when, as Leonhardt points out, the term “rust belt” became part of the language. One of the outcomes of the de-industrialization, helped along by the high interest rates, was a gravely weakened labor movement (President Reagan helped here too with his historic firing of the striking Air Traffic Controllers). The economic bleeding and the consequent arrow to the heart of organized labor set the stage for the implementation of the regime of deregulation, cuts in social programs, and privatization known as neoliberalism. All of this is to say that the recession of 1982 served a political purpose—to squeeze workers and help employers gain the upper hand vis-a-vis unions, while laying the groundwork for the freedom of movement of capital that characterizes the world economy today.
It is true that the housing market was frozen in 1982. There were at least 1,000 unsold houses in the Johnstown area alone. And even if you had money, no one wanted to take out a mortgage at 12%. However, mortgage lending is locked up today when interest rates are at historically low levels. Once inflation and labor were tamed by Mr. Volcker, he had plenty or room to pressure interest rates down to get credit and the economy moving again. The Reagan administration could use deficit spending and tax cuts to boost spending as well. By the time Reagan came up for reelection, in 1984, unemployment had fallen and the GDP risen. Today the situation is completely different. The Fed has pushed the interest rates it controls to near zero and still credit is unavailable. Few qualify for mortgage loans, despite low rates. In 1982 households were not nearly so over their heads in debt. By any measure we care to make, working class households (and many well-to-do families as well) are more in debt than at any time in history. After 1982, lower interest rates and tax cuts fueled consumer spending. Today these have no impact on spending, as households must pay back debt or put money aside in anticipation of job loss. After 1982, inequality rose almost every year, and as the rich got richer and the poor got poorer, the latter borrowed money to maintain living standards. Now the piper must be paid, mainly by those in debt, but also by the lenders, at least those who haven’t been bailed out by the government.
One final point: in 1982 the nations’ financial system was not nearly as large, opaque, and complex as it is today. There was not a rash of bank failures; certainly the titans of Wall Street were not about to go under. Today Wall Street as it was in 1982 has disappeared. And we are nowhere near the bottom in terms of financial fallout. The problem is that the financial sector is intertwined with the rest of the economy (around the world too) and as financial sector implodes, so too does the real economy.
What Leonhardt failed to do in his column was to first, show how 1982 helped pave the way for 2008 and second, to explore how radically different are the two periods. I think that as the months pass, it may become more appropriate to make a more horrible comparison: today versus 1932.
Stay tuned. In my next post, I will try to list and examine a few of the explanations for the current economic debacle.
Sources: The Bureau of Labor Statistics takes much abuse about its unemployment statistics, but this government agency does excellent work. Check out the wealth of information at www.bls.gov. Another good source of labor and other economic data is The State of Working America, the book put out every other year by the Economic Policy Institute. Parts of the book, including all the tables, are online at www.epinet.org. Once you understand how the statistics are defined and collected, you will be angry everytime you hear someone on TV talk about them without knowing anything about them.