Sh!t’s Complicated (Economy Edition)
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One of the main themes of this election is that every problem can be solved with a little common sense and facts are up for debate. Trump has thrived off the misinformation campaigns run on both the right and the left, which seek to earn profits by reinforcing what each respective side wants to hear, regardless of whether or not these views are grounded in fact.
While this makes some of us feel like we really know what’s going on in the world, it also gives us a false sense of security in our knowledge.
This has resulted in a break-down of discourse between political adversaries. Media outlets, particularly TV, fed into this trend by spending almost no time on the issues and a record amount of time simply playing back all the most sensationalist and bombastic aspects of the campaign. A Harvard analysis indicated that substantive policy issues received only a small amount of attention in the 2016 election coverage.
The more one reads, the more it becomes clear that nothing is crystal clear. Political issues cannot be broken down into sound-bites and neither side has a monopoly on answers. People as consumers of media are often drawn to what is flashy and assertive over what is factual, dry and often inconclusive. But that shouldn’t deter us from embracing the unknown, and letting our uncertainty push us to seek more information. Yet here I am, playing the anti-media in the hopes that someone will read this, and use their knowledge to inform someone else.
While I can’t go over every detail, I hope to give a rough idea of the forces that have shaped our economy, what the issues are, and how they might be resolved in the future.
Plus, I have charts. Lots of charts.
This is not so much a fact check as it is a reality check. Now that we’re past the election, rather than getting caught up in the rhetoric, let’s really look at the issues because things can no longer be passed off as campaign promises and grandeur.
In order for America to debate its issues, we first need to know what we’re debating. So, without further ado,
Trump consistently talks about the slow rate of growth that is plaguing the economy. He believes that it is going down the tubes and he harkens back to a golden age where stable manufacturing jobs reigned. But the “golden age of manufacturing” was just a blip in our relatively new economy...plus it wasn’t all that golden.
The era where manufacturing was a significant employer in America grew steadily from 1850–1952, peaked in 1952 and has been declining ever since. Below is a table from a 1984 Bureau of Labor Statistics report, detailing the share of employment enjoyed by the agricultural, goods and service industries over time.
At its peak, manufacturing employed about 35% of workers, and almost always less than the service sector’s share. Below is a graph from 2010, showing essentially the same trend, still persisting almost 30 years later.
Also, that time period was far from peaceful. From 1900–2008, the U.S. experienced 23 recessions (They are marked here in red.) The U.S. faced 13 recessions between 1940 and 1970 alone.
The truth is, as humans we are still trying to figure out how to run a large, unwieldy economy that is constantly shifting and evolving. Trump’s goal of trying to claw back narrow gains from the past jeopardizes our future.
If you take a step back and take in the view, our current situation is a dramatic break from thousands of years of human existence. Over the past 150 years, per capita GDP (gross domestic product, or a country’s wealth per person) has grown exponentially. The average person today is almost 20x wealthier today than the average person from 1870…in fact, the GDP measurement itself didn’t exist until the Great Depression.
Americans are wealthier than we’ve ever been, ever, but why don’t we FEEL it?
The theory of economics that dominated the idyllic era that Trump describes, the time period from the 1940’s to the late 1970’s, was fashioned by John Maynard Keynes and is known as Keynesian economics. Keynesian economics was developed in the 1930’s in an attempt to understand the Great Depression (aka my emotional state after the election.) It advocated increased government expenditures, greater government control of the economy and lower taxes to stimulate demand and pull the global economy out of the Depression. During this time, states established trade barriers, in addition to a variety of other methods to provide control and stabilize the economy. States also provided protection for their industries and the workers within those industries.
Keynesian economics advocates influencing demand through activist stabilization and intervention by the government. It is considered to be a “demand-side” theory that focuses on changes in the economy over the short run. Essentially it advocates for an activist government that will reduce the volatility of the business cycle.
Trump’s policies, by contrast, are largely supply-side, giving the largest tax cuts to business interests and the wealthy, along with decreased regulation and government interference (although, the recent Carrier deal says otherwise.)
Keynesianism coincides with the era in which American children could expect, with more than 50% certainty, to earn more than their parents. A time that lasted from around 1940–1979. Those born in 1980 are only 46% likely to make more than their parents did.
At the same time though, GDP per person in the U.S. has grown at a remarkably steady average rate of around 2 percent per year, for nearly 150 years. Starting at around $3,000 in 1870, per capita GDP rose to more than $50,000 by 2014, a nearly 17-fold increase.
So why aren’t more Americans experiencing this wealth? Well, the increases are not as evenly distributed as they once were. Income gains in America were very evenly distributed in the U.S. from about 1940–1980.
According to findings from the Economic Policy Institute, starting in 1978, CEO pay far outpaced average worker pay. Today it is up by 997%. Some CEOs have seen severance packages worth the yearly wage of about 300 standard employees.
Income has since become extremely concentrated in the top 20%, as evidence by the pie charts below. This fraction of the population receives 48% of the income. The remaining 80% receive 52% of the income. Things are even more skewed for wealth. You can read more about it at the Center for Budget and Policy Priorities.
Corporate profits have also been steadily climbing since the 1950s. Yet average worker wages and salaries have not kept up. Below you can see the comparison with corporate profits in light blue and U.S. wage and salary growth in black. The left axis is in billions of U.S. dollars (corporate profits) while the right is percentage gained/lost (wages.)
The Center for American Progress finds that corporate profits have even grown faster than GDP as a whole.
According to Jan Hatzius, chief U.S. economist at Goldman Sachs: “the strength (in profits) is directly related to the weakness in hourly wages, which are still growing at just a 2% nominal pace. The weakness of wages and the resulting strength of profits are telling signs that the US labor market is still far from full employment.”
Despite an unemployment rate of about 4.9% in 2016…
…one of the main issues that came to a head through Trump’s campaign was the phenomenon of white, non-college educated males dropping out of the workforce in record numbers.
According to a White House report, “The share of men between the ages of 25 and 54 either working or actively seeking work, also known as the prime-age male labor force participation rate, has been falling for more than 60 years and today stands at 88 percent. In 1964 participation rates were similar for different education levels — with 98 percent of prime-age men with a college education participating in the workforce as compared to 97 percent of prime-age men with a high school degree or less.”
Today, only 83% of non-college educated males are participating in the labor force. That’s a decrease of 14% over time. This disparity is even greater for African American males.
This combination of stagnating wages, wealth inequality and prime-age unemployment as a result of education level, were arguably significant driving forces behind Trump’s campaign. Voting trends showed that Trump won big league with the non-college educated.
So, how did we get here from the (RELATIVE/NARROW) economic egalitarianism of the 50’s?
In the 1970s, economic turmoil spurred US voters to forsake the Keynesian economic policies of the past, believing they had become obsolete. The election of Reagan signaled the beginning of the end of Keynesian economics and a shift to the free market worship. Policies of the Reagan era allowed for trade liberalization, weakening of unions, offshoring and the exposure of U.S. workers to downward wage pressure through increased competition with overseas workers.
Reagan declared in 1986: “Our trade policy rests firmly on the foundation of free and open markets. I recognize … the inescapable conclusion that all of history has taught: The freer the flow of world trade, the stronger the tides of human progress and peace among nations.” The Reagan administration subsequently launched the Uruguay Round of multilateral trade negotiations in 1986 that lowered global tariffs and created the World Trade Organization. The Reagan administration also won approval of the U.S.-Canada Free Trade Agreement in 1988, the agreement that expanded to become the North American Free Trade Agreement (NAFTA.) These policies of free trade and globalization were continued under H.W. Bush, Clinton, W. Bush and Obama.
Essentially, American prosperity as painted by Trump existed in a narrow window, from 1940 to the late 1970’s. Factors like the presence of unions that bolstered collective bargaining rights, the protectionist trade policies and the interventionist activities by the government, created an environment starting in the 1940’s that was pro-worker and allowed for the prosperity of the working class. By 1980, these aspects were being reversed.
Union membership was robust in the era of relative income equality, strengthening workers’ collective bargaining rights for higher wages and better hours. Union membership was particularly strong in states that were manufacturing powerhouses, like Michigan, Pennsylvania, Ohio and Illinois.
Beginning in the 1980’s, membership has dwindled dramatically,
Today, union membership is less than half what it was in 1964. This is a result of the shifting economy, globalization, technological advancements, minimum wage laws and Conservative policies. You can learn more about the decline of Unions at The Economist.
According to an article in The Week, “The [offshoring] trend began in earnest in the late 1970's at large manufacturers such as General Electric. GE’s then CEO, Jack Welch, who was widely respected by other corporate chieftains, argued that public corporations owe their primary allegiance to stockholders, not employees. Therefore, Welch said, companies should seek to lower costs and maximize profits by moving operations wherever is cheapest.” His sentiments are lifted almost verbatim, from the economist Milton Friedman’s 1970 New York Times article on corporate responsibility, in which he argues, “In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers [shareholders.] That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”
Therefore, outsourcing was born of a profit-maximizing motive.
As wages in America rose as the result of union strength and increased productivity, with barriers to trade falling, companies began looking overseas for cheaper labor. American workers simply can’t compete with the nearly $2.00 average hourly wage in China or India.
The average American manufacturing worker, by contrast, receives $35/hour in compensation costs as of 2012.
But offshoring has grown to mean so much more than cheap labor as firms could also sidestep more-stringent U.S. workplace and environmental regulations, while taking advantage of foreign government subsidies designed to lure foreign investment. They can also tap a labor pool that is often better versed in math and science than the U.S. workforce is.
Outsourcing has absolutely been profitable for companies. In the third quarter of 2010, U.S. corporate profits hit an all-time high of $1.659 trillion, despite a U.S. unemployment rate hovering above 9 percent. By no coincidence, in 2009, nearly half — 47 percent — of the revenues of the 500 largest U.S. public companies came from outside the U.S. According to some estimates, outsourcing can increase productivity and competitiveness 10- to 100-fold. To add insult to injury, the American tax code currently promotes outsourcing.
FREE TRADE IS WHY WE HAVE STORES WHERE STUFF COSTS A BUCK.
Or in the more eloquent words of Ronald Krieger at the Cato Institute, “Cheap foreign goods are thus an unambiguous benefit to the importing country. The objective of foreign trade is therefore to get goods on advantageous terms.”
And it turns out, the vast majority of Americans prefer items that are cheap to items that are “Made in the USA.” An Associated Press-GfK poll from April of this year found that nearly three in four Americans would like to buy goods manufactured inside the United States, but those items are often too costly or difficult to find. A mere 9 percent say they only buy American.
“When the survey asked about a real world example of choosing between $50 pants made in another country or an $85 pair made in the United States — one retailer sells two such pairs made with the same fabric and design — 67 percent say they’d buy the cheaper pair. Only 30 percent would pony up for the more expensive American-made one. People in higher earning households earning more than $100,000 a year are no less likely than lower-income Americans to say they’d go for the lower price.”
The Atlantic did a great, short article about the shift in pricing between products like toys, cellphones and refrigerators, which are largely produced outside of the U.S. and imported, and the necessary services like healthcare and education, which are more expensive and based in the U.S. Below is the graph from that article, which shows the decline in price over time for consumer objects, but the rise in service prices.
The difference between the lower rungs of the service sector minimum wage and manufacturing wages is very stark. The chart below shows the wages and salaries for full time employees from the manufacturing sector, as compared to employees from some of the lower-paid areas of the services sector.
Manufacturing employs about 9.9% of workers, while healthcare and social assistance, educational services, administrative and waste management services, transportation and retail trade employ a total of about 25% of the workforce. As you can see, the average income of these 25% make less than manufacturing wages.
If manufacturing were to be largely “on-shored,” without a boost in their own wages, these individuals would find it difficult to afford new, American made products. Their prices would rise significantly, unless companies rethought their profit-margins, or their CEO compensation practices.
Or maybe the real solution is a reexamination of American consumer society as we know it.
Regardless of the effects of Keynesian economics or the free market, the economy has been shifting in response to its own dynamism, changing from an economy powered by goods, to an economy powered by services.
Services account for about 80% of U.S. economic output. According to the Bureau of Economic Analysis, “transportation and warehousing; health care and social assistance; and professional, scientific, and technical services were the leading contributors to the increase in U.S. economic growth in the second quarter of 2016.” As evidenced by the graph below, services have grown more steadily when compared with goods.
This shift from a goods to a service economy (called “deindustrialization) is often thought to be a product of greater Gross National/Domestic Product (GNP or GDP) per capita, leading to shifts in consumer trends and therefore shifts in employment. Due to more disposable income, people are more likely to buy services along with goods. Private service firms (like HR firms, IT, etc.) are being decoupled from the manufacturers themselves, as evidenced by the chart below. This decoupling accounts for 36% of the rise in the service sector and 25% of the drop in manufacturing employment since the 1970s.
According to the author of the report, “…lamenting the decline of manufacturing misses the fact that future growth and export competitiveness will depend more and more on the service sector.”
If you would like to know more details, you can find the full report here.
Technological advances have led to a shrinking of the manufacturing sector, and the growing of the services sector, as rapidly rising productivity precludes the need for more workers. At the same time, greater productivity pushes up wages because more output can be extracted from each worker.
Mark J. Perry from the American Enterprise Institute says, “The ability of the US manufacturing sector to produce increasing amounts of output with fewer and fewer workers should be recognized as a sign of economic strength and vitality, not economic weakness. Thanks to advances in technology, the factory floor today is one with modern, advanced, state-of-the-art equipment that requires fewer employees, but with greater skills and training than in the past.” Rapidly growing productivity in industry, meant that the goods sector was producing more than the demand for industrial products.
This means that U.S. needs fewer industrial workers and thus many workers get pushed out of industry. But, the U.S. is still getting wealthier and demanding more services. The problem is that boosting productivity in the services sector is not as simple as boosting productivity in industry. Giving a welding robot to a shop clerk doesn’t help them sell more soap (at least, I don’t think it would….) Slow productivity growth in this sector means that to provide these services it has to pull in more workers to get more output, often those workers have been shed by industry.
Therefore, neither tax cuts nor tougher trade policies can address the demand for more and varied services, nor will they address the relatively slow productivity growth in the service sector and its stagnant wages. Until wages in the service sector can be raised, bringing manufacturing back from overseas, or trying to make more durable goods in the U.S. will make life hard for those who work for a good portion of service sector wages.
Increase Productivity Through R&D Spending
Because of corporate thinking around shareholder value, funding for research and development has slowed in the U.S. Activist investing groups have used their unfathomable wealth to buy up shares in companies like DuPont and IBM and slash R&D spending and “bloat” to dramatically increase shareholder value over the short term. While some of their efforts save flailing companies, they are also reducing the potential for innovation.
You can learn more about activist investing from this article in The Atlantic.
As a result, the U.S. spends less on R&D than countries like South Korea, Germany and Japan.
According to research by the State Science & Technology Institute (SSTI) “…federal spending has historically remained an important part of total research and development spending. Within the private sector, R&D is seen as a necessary cost of doing business, an important part of driving future innovation and competitive advantage for a firm. [However,] companies have moved away from…models that afforded research scientists in the private sector more time (and funding) to focus on research that may not have direct application, at least in the short term.” This sort of research is known as “basic research,” defined as “is systematic study directed toward greater knowledge or understanding of the fundamental aspects of phenomena and of observable facts without specific applications towards processes or products in mind.”
Since it is more difficult to boost productivity in the service sector, perhaps more R&D spending is needed, along with the quicker adoption of technological advancements by service sector firms. You can read more about the stagnation of American innovation at The Wall Street Journal.
Fight Currency Manipulation Through Trade Deals
Currency manipulation effectively means that a country suppresses its own population’s purchasing power by buying up foreign currency, which then lowers the price of its own exports by comparison. It puts undue pressure on American workers and exports by making them domestically more expensive when compared to cheap foreign goods. According to PIIE, “the US current account deficit has averaged $200 billion to $500 billion per year higher as a result of manipulation.”
Overseas consumers lack the purchasing power to afford U.S. exports because their own currency is so weak comparatively. The practice is duly frowned upon in the international community, but so far there are no international mechanisms to address or combat this practice. Under the rules of the WTO, labeling a country a currency manipulator merely opens up talks between the two countries, but other than that the WTO is not particularly equipped to handle the issue.
Trump’s prescription to label China is about 20 years too late. While China was manipulating its currency in the 1990s, and was labeled a currency manipulator for doing so, at the moment it is in fact trying to boost its currency to stem the outflow of investment. Fun fact, the U.S. Treasury has actually placed quite a few countries on its currency manipulation watch list in addition to China, these include Germany, Taiwan, Japan, Switzerland, and South Korea.
One way the U.S. can counter the effects of currency manipulation is to write enforceable provisions in multilateral trade deals to prevent the practice from happening again. The TPP originally had such a provision, but not that the whole deal may be scuttled, well, it’s lost. If Trump wants to make a lasting impact, rather than prosecute each case individually, creating an enforceable, international framework would keep the law in place for years, rather than simply on a case-by-case basis.
If you’d like to read more about currency manipulation and trade deals, you can check out this post by the Peterson Institute for International Economics.
Better Education
Our education system so far has not kept up with the shift in the economy and the rapid pace of technology. Computer science fields are growing almost ceaselessly and yet computer science is not taught in grade schools at the rate of subjects like math or foreign language. According to Exploring Computer Science, “Despite its critical and growing importance, computer science is taught in only a small minority of U.S. schools. There currently are just over 42,000 high schools in the United States. But only 2,100 of them were certified to teach the AP computer science course in 2011, and in fact only 21,139 students took the AP exam.” A 2016 report from Google found that only 40% of computer science classes included coding in their curriculum, while only 14% included data visualization or analytics.
Introducing computer science at a young age creates the impression that it can lead to a successful and accessible career. Currently, there is a lack of computer science teachers and a lack of awareness about the importance of CS in K-12 education. The Obama CS for All initiative begun last year, seeks to bring computer science into the national K-12 curriculum. Trump would do wise to keep this initiative alive.
The Bureau of Labor Statistics is predicting that jobs for computer scientists will increase by 19% between 2010 and 2020. These jobs pay between $70,000 and $120,000 per year to boot, above average wage. If you’d like to know more about the trends in computer science, you can check out the occupational handbook from the Bureau of Labor Statistics.
Universal Basic Income
Maybe our economy isn’t large enough to support everyone. In that case, a universal basic income could be considered. Those who advocate for its implementation describe one option:
“…every American citizen age 21 and older would get a $13,000 annual grant deposited electronically into a bank account in monthly installments. Three thousand dollars must be used for health insurance (a complicated provision I won’t try to explain here), leaving every adult with $10,000 in disposable annual income for the rest of their lives.”
“The UBI is to be financed by getting rid of Social Security, Medicare, Medicaid, food stamps, Supplemental Security Income, housing subsidies, welfare for single women and every other kind of welfare and social-services program, as well as agricultural subsidies and corporate welfare. As of 2014, the annual cost of a UBI would have been about $200 billion cheaper than the current system. By 2020, it would be nearly a trillion dollars cheaper.”
Countries like Finland and Switzerland have recently considered the idea of a Basic Universal Income.
You can read more about the plan at The Wall Street Journal and The Economist.
And finally,
Ok maybe not.
Anyway, I hope this has broadened your horizons at least a little bit. If I’ve messed up any where, please don’t hesitate to correct me.
