We remember what a real recovery looks like – and this ain’t it.
In this morning’s New York Times , Floyd Norris asks why Americans have a hard time believing that our economy has turned the corner.
Well, Floyd, the answer to that question is that when you wake up in the morning and have neither a job nor any real prospects of finding one, it’s hard to be optimistic. When you get requests from friends who’ve been out of work for more than 6 months for a little help in paying their rent, it’s hard to be optimistic. When your neighbor just sold their house for less than they bought it, because they were facing foreclosure otherwise, it’s hard to be optimistic. When your pastor pleads with the congregation for food donations, because demand at the food pantry has doubled in the past year, it’s hard to be optimistic. In other words, when you’ve played by the rules – went to school, got a job, raised your family, stayed out of trouble, paid your bills, etc. – and you’re still face to face with economic misery every day, it’s hard to be optimistic about the economy.
Norris tries to compare the current recession (although he argues that is a misnomer; since the recession ended in August) with the economic downturns of the mid-1970’s and early 1980’s, but forgets some inconvenient truths in his comparisons. Either that, or he simply ignores them. Although he claims that “If you are under 45, you probably don’t have much recollection of the last strong recovery, after the recession that ended in late 1982,” it seems as if he is one of those who is fonder of Justin Bieber than the Beatles. For starters, he has dates mixed up: as anyone who accurately recalls the recession to which he refers can tell you, that recession didn’t end until late 1983.
Dates aside, he looks at the economic indicators and finds striking similarity between then and now. What he isn’t doing is looking at the underlying cause-and-effect of policy actions taken by government and industry during that period. Nor does Norris really do an apples-to-apples comparison; it’s like somebody looking at a zebra and saying, “What a cute horse!”. He bases his campaign for optimism on three factors: a surging stock market, good unemployment news and increases in retail activity. He may be the first person I’ve read who actually thinks the news on employment has been good recently, but there may be others.
So, even if we grant that these indicators all point to a robust recovery (a dubious proposition, which I’ll get into later), there still is a difference in what these indicators are saying now versus what they said in 1983. In 1983, not only stock prices were increasing (in fact, between April 1983 and today, the Dow is up some 8,000 points, nearly quadrupling it’s value) but so was volume. That is, more shares were being traded at higher prices. People wanted in – they were optimistic that the economy had recovered and companies were going to start making money again. Today, even Norris admits that volume is at best stagnant. He seems reticent to have to admit that most of the market’s price surge is being fueled by money managers simply moving funds from one asset to another. His employment numbers are derived from the household survey, not the employer survey, and he claims a net gain of 1.1 million jobs for the first quarter of 2010. That is wildly divergent from the employer survey, which shows a net increase of only 162,000 jobs for the quarter. Given that there are currently an estimated 23 million Americans either unemployed or underemployed, that equates to 142 quarters (or 35 years) to get everyone back to work. Hardly inspiring news. And if, as he claims in his article, the recession ended seven months ago, it’s worth pointing out that job growth in Q4 1983 added 2.1 million jobs to the economy. That’s using the employer survey, so the apples-to-apples comparison shows that even with a smaller available work force, the recovery of 1983-84 was adding jobs at 9 times the rate of the current recovery. Add in that roughly 1/4 of those unemployed have been out of work for 12 months or more and that there are 6 potential employees for every job opening, and the two recoveries don’t compare favorably, at all. As for the surge in retail spending? It doesn’t take a genius to see what where we’re spending our money: while overall retail activity increased by 0.3%, spending on gasoline jumped 24% and groceries jumped 11.8%. While folks are spending on life’s necessities (and the cost of those necessities continue to increase), not too many people are going out and buying that new Maseratti.
So, what’s the difference in the two recoveries? Why was 1983 so robust, while 2010 is so…meh? The difference lies in the way our economy has been significantly restructured over the past 18 months. In 1983, upon assuming office, President Reagan promptly began initiatives that reduced government involvement in the private sector. His stimulus package involved spending money, as did President Obama’s; however, Reagan spent less money to provide incentives to employers and tax reductions than Obama spent on his plan. Reagan let companies that were in distress fail; Obama (and Bush before him) spent tremendous economic and political capital to subsidize and/or outright purchase failing corporations. There are two other huge distinctions, too. The Reagan budgets left us with a debt of approximately 28% GDP. The current administration will, by their own estimate, leave us with a debt of 118% GDP. Reagan moved swiftly to reduce interest rates and inflation, partly by strengthening the dollar – a debt as large as the one now being created can only lead to inflation and monetary devaluation.
So, Mr. Norris, if your wondering why Americans are so pessimistic, there’s your answer. It’s not that the recession is or isn’t over in our minds. It’s that we remember what a real recovery looks like – and this ain’t it.