There Is Something In This More Than Natural - Part 1

Six years after the Great Financial Crisis and the MSM narrative of "recovery"... following up on Atlas Shrugged Or Let Nature Take Its Course?
Summary
  • Of Economic Base Metamorphosis, Capital Misallocation and The McJob Malaise.
  • There are unnatural side effects from the interrelationship of QE, ZIRP and Secular Stagnation.
  • 35 years of economic deconstruction; the fallacies of central bank policies; and the resulting misallocation of capital; cannot be turned around without a return to the basics.
  • An effort must be made to incentivize productive investment and reconstitute a durable domestic economic base.
In Part 1 we examine how it took 25 years of financial deregulation, globalization and outsourcing to labor at the margin to emasculate our durable domestic economic base.

Kevin Flynn makes some subtle and accurate observations regarding the Fed, the stock market and the economic base over the last 25 years in Why the Fed Can't Save Us:
1. The Fed cannot save the stock market.
The central bank cannot save us from the end of the business cycle, and stock prices will fall once profits and production fall, regardless of what level interest rates are at. You can't win by betting on a dying horse, no matter how good-looking the jockey.

 A great deal of money has been hoovered up by low-grade securities and leveraged bets requiring very low funding rates to be profitable. What the effects will be on these securities once the Fed starts to raise rates (to a still-low level) is unknown, but I suspect that the transition is going to be problematic.
2. The other thing that the Fed cannot do to save us is repair the economy.
The Fed-proof repair problem that I wanted to talk is thus not the balance sheet, but our anemic growth rate. The aspect I want to focus on here is the pressure on incomes and the middle-class. What I do want to do is point to one substantial, glaring problem that cannot be solved by monetary policy: our diminished productive capacity.
More than half of the damage occurred from 1990-2003, when the Great Outsourcing of the 1990s was at first partly offset by the tech bubble, then... the housing bubble helped cushion the effect.
Some of the change is attributable to technology, but some is not: the US decline from 2000 to 2014 is double the rate of Germany.
3. Nor can (The Fed) force the kind of investment or structural and fiscal policies that result in higher levels of real income growth.
It can (The Fed) provide accommodative policy, but employment growth is far more sensitive to the business cycle than to the absolute level of interest rates.
The Nattering One muses...
Manufacturing peaked in 1979, with over 19 million jobs or 18% in a labor force of 104 million. Today almost 80% of our economic base is classified as service related with manufacturing jobs numbering 12 million or 7.6% in a labor force of 156 million. See chart below.
A few of the 7 million jobs were lost to technological advances and streamlining or workflow optimization (BPR - Business Process Re engineering). Unfortunately, most of the productivity gains since 1990 were due to RIF's (reductions in the workforce) and sweat-shopping (those who weren't laid off must work harder and longer hours without pay increases in order to keep the remaining jobs).
Due to the almost total disconnect between Main St and Wall St, the majority of these job losses have been through outsourcing to labor at the margin. Most of the higher paying manufacturing jobs have been replaced with lower paying service sector and part time McJobs. See chart below.


 Demonstrated in the above graph, one can see adjusted for inflation, by the more accurate 1980 CPI index:

 1. Non supervisory production workers weekly average hourly pay peaked in October 1972, 46 years ago.

 2. In November 2018, we have just reached the same hourly pay level as in April 1978. Yes, read that again and contemplate...

This is a tragedy of the commons, and perhaps that graph should be titled: 40 Acres and a Mule or 40 Years Without a Raise?

 The real story is that of the 14 million people added to the adult population of the US since 2008, only 1 million have found real jobs.  Worse yet, since 2000, there are an additional 16 million adults who can no longer pay the bills.

 From David Stockman: “Going back to September 2000, for example, there were only 76 million adults not in the labor force or unemployed, and that represented just 35.8% of the adult population of 213 million.

 This means there has been a 26 million gain in the number of adults not working – even part-time – during that 14-year period. About 10 million of that gain is accounted for by retired workers on Social Security – a figure which has risen from 28.5 million to 38.5 million during the interim.

 But where are the other 16 million? The answer is on disability (+4.5 million), food stamps (+25 million), survivors and dependents benefits, other forms of public aid, living in parents’ basements on student loans or not, or on the streets.

 The employment ratio has plunged; full-time breadwinner jobs have actually shrunk; total labor hours employed have been stagnant; real GDP has grown at only 1.8% annually for 14 years – compared to 4% annually between 1956 and 1970; and real net capital investment is 20% below its turn-of-the-century level."

As a result, the US wins the gold medal in low wage paying jobs with 25% of our work force.
As a result, in 2013, the median household income adjusted for inflation was still 8% below its 2007 level and has declined 4% since the recession officially ended in June 2009.
Since the 80's of Milken and Keating, outside of stock market scams, bad RE loans, the MBS based upon them, and the Zippo lighters used to burn the notes and debentures, we have become the masters of making money out of thin air, with little or no tangible end product.

 This has resulted in a non durable service based economy which is comprised of tourism, hospitality, food service, pharma and health care (for an aging, obese and sickly populace).

As a percentage of GDP in 2012, 18% of our economy is healthcare based, of which 35% of the profit goes to middlemen or health care management firms. In other words, the sicker the populace, coupled with less health care insurance regulation, the greater the profit. Thus far, the social legislation towards this end has been feeble at best.
Back on track, studies have shown that each manufacturing job lost likely results in another two (2) to four and a half (4.5) jobs being lost throughout the supply chain. As to the real damage caused by the 7 million job haircut since 1979, lets use an average of three (3) additional jobs lost for each manufacturing job lost, netting an additional loss of 21 million potential jobs.

Going back to the 1950s, goods-producing sectors accounted for nearly 40% of private job creation. By the 1990s, that share had fallen to 20%.
And it's getting better all the time: The 1990-1999 (goods production) employment share was 20.4% on average, falling to 17.2% from 2001-2007 and to 14.1% from 2009-2014.

Anyway you do the math, the end result has been declining household income, a lower standard of living and the eradication of the American middle class.

More to come in Part 2 as we examine how this morphing effected household income; and how spending patterns were maintained during the period.

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