Back when the housing market was booming, Wall Street firms were handing out record bonuses, and unemployment had fallen all the way to 4.5%, I was regularly being called "Dr. Doom" by the various groups I spoke to, and by members of the media who called me to get an 'alternative' opinion. This gracious label was bestowed upon me because I believed at the time that the overall economic boom, not to mention the red hot housing market, were not being driven by fundamentals but by a massive asset bubble that gave consumers a false sense of wealth and financial firms a false sense of security. As a forecaster, I look back at my analysis during the boom years with some degree of comfort because I called it right – but that victory has always been largely undermined by the tremendous economic consequences we’ve all faced since the fall.
Today I find myself happily fighting the opposite battle. When I look at the fundamentals it seems clear that things really are on the upswing. While the economy has not yet fully recovered from the downturn (and may never completely return to its pre-recession path of growth), it is clearly growing. And for the vast majority of American workers and businesses, the situation today is better than it was yesterday. Manufacturing output is growing at a healthy pace, employment is on the upswing as are incomes, and business bankruptcies have decline substantially.
Listen to the news, however, and you wouldn’t know it. Every article or story about a statistic that has positive implications for the economy is followed with an obligatory disclaimer that while there might be a bit of good news, overall things are not well. Stories on solid employment gains are immediately discounted by disclaimers that the unemployment rate is still well north of 8%. Human-interest stories invariably seek out people struggling to find a job, rather than the three million who have gone back to work since we hit bottom in the labor market. Reports on the housing crisis continue to focus on foreclosures, with little mention of the rapidly falling delinquency rate in existing loans. We are told that consumers are too scared to spend, businesses too scared to hire, and banks too scared to lend. And election year posturing hasn’t helped.
Republican candidates keep telling us that the economy is broken, and how they better land in the White House so they can get busy fixing the situation with tax cuts and deregulation. President Obama tells us the economy was broken when he inherited it, and we better let him continue repairing it by borrowing more and spending. We are told the middle class is disappearing, businesses are fleeing the nation, and that nothing is produced in the United States anymore.
Sounds pretty bad. Fortunately the negative hype is not born out when you leave the rhetoric behind and look at the data. The labor markets are bouncing back with private sector growth well above average. The consumer is buying, the manufacturing sector is on fire, exports continue to expand, banks are starting to lend again, and even the beleaguered home sector is seeing some increases in building permits. While the nation has a long way to go, the trends are all pointing in the right direction. Yet the debate continues to focus on how bad things are.
The height of ridiculousness was reached in Paul Krugman’s recent column in the New York Times. The title alone “Things are Not Okay” foretells his overall point, as does the first line of the last paragraph when he writes “this is still a terrible economy.”
As a PhD student I read many articles by this Nobel prize-winning economist. His insight into economics was extraordinary, as was his ability to convey complex ideas simply. Yet this latest column is shockingly off-base. He describes the economy as ‘depressed’ based on the fact that employment today is the same as it was in 2001, and that the percent of the long-term unemployed is higher than it has been since the Great Depression.
Pure red herrings. The comparison to January 2001 employment is fraudulent. At that time employment numbers had been inflated far beyond any rational level because of the dot com bubble. Comparing the ratio of households to payroll employees at the time clearly demonstrates this. Equivalently, while many people remain in the long-term unemployed category, Krugman’s implicit comparison to the Great Depression is equally exaggerated. In the 1930’s unemployment peaked at 25% and stayed elevated for almost a decade. And of course this was before the advent of the social safety net—when losing a job really could result in starvation. The share of long-term unemployed is tiny today relative to what it was during the Depression era. Oh, and guess what? It’s starting to fall. Moreover, I have yet to see any massive soup lines snaking down America’s city streets.
Let’s keep things in perspective. Today over 58% of the eligible workforce has a job. While this is lower than pre-recession when it was 63%, it is still higher than at any point prior to 1977, and considerably higher than many industrialized nations who have not seen their female population move into the labor force as in the United States. Moreover, a good portion of those who have dropped out of the labor force have returned to school, retraining for a better future. Yes, a lot of people are out of work, but there are many, many more with jobs.
As for how terrible our lives are in this ‘depressed’ economy, I would point out that economic output today is higher than before the recession. And according to the CIA World Factbook, purchasing power adjusted per capita income in the United States in 2011 was still the 7th highest in the world among the largest 100 economies. As for those 6 nations above us, they are made up of city-states (Hong Kong and Singapore), oil producers (Qatar and Norway), and tax havens (Bermuda). Among comparable nations the only ones close to the United States are Switzerland and the Netherlands, both with levels of income that are 10% less than in this country on a per person basis. Terrible? Quite the contrary. Americans continue to represent the richest group of producers and consumers on the planet.
What is even odder about Krugman’s analysis is his reasoning behind the need for more stimuli. According to Krugman, it boils down to creating jobs for the numerous children who, due to lack of employment, continue to live at home with Mom and Dad. Krugman’s reasoning is that once they get a job, they will move out, seek their own housing, stimulate the construction of homes in our ‘under-housed’ economy, and fix all out economic woes.
There is scant evidence of a generation failing to move out of their parents’ homes. Today, the average household size is modestly smaller than it was in 2000. Yes, it is probably larger than in 2005, but that is only because many new homeowners at the time actually weren’t. Instead, they were claiming as much to disguise their investments in multiple homes. Even if you look exclusively at adults per household, that number has grown only a small amount, from 1.86 to 1.88 according to the 2000 and 2010 censuses—the most reliable source of such data. And if we assume this increase was due to the economy, and pushed the number back down to 1.86, it would absorb roughly one-third of the new supply of vacant homes in the United States.
Moreover, why would we assume that household size should be the same or falling in the first place? With large numbers of new immigrants in the country (many of whom have larger family sizes), and with an aging population that has many seniors living in group facilities or with family members, we can’t say for sure that household size shouldn’t have gone up.
And in any case, the long-term unemployed Krugman is worried about aren’t young people shacked up with their parents. They are middle-aged and older workers with few skills. They likely couldn’t buy a house even if they had a job. This isn’t to say that the foreclosure problem isn’t slowing the recovery in the housing sector to some extent. It is, by shifting demand into the multi-family sector.
But even here, the housing construction sector would only fix 30% of the U.S. output gap if it returned to normal levels of production. It is not the panacea Dr. Krugman claims it to be. Remember, even at the peak of the housing bubble, new residential construction made up only 5% of the U.S. economy.
Realistically, exports and imports are a far more important source of rebalancing. The U.S. economy continues to run a trade deficit of nearly 4% of GDP, a fact seemingly ignored by the pundits. Export more, import less, throw in the multiplier effects and you increase output by 6%. Yet this balancing act can only come from acknowledging that, far from being deprived, American consumers currently consume too much despite the weak state of the economy and labor markets. Consumer spending is currently running 71% of GDP—higher than it has ever been.
Politicians have always campaigned by promising us that they will make our world better, while the other guy will make it worse. Realistically, neither side has nearly the command over the economy they pretend to have. And the press will inevitably dwell on anecdotes rather than focusing on the larger situation—sob stories sell.
Krugman’s article unfortunately represents one of the worst features of people in my profession—the triumph of ego over reality. So much of the debate over policy and the recession comes from academics who seem bent on promoting ideological purity, rather than acknowledging that in a world as complex as ours there are no ‘right’ models and no one solution. Krugman has, for years, been pushing the idea that the economy is trapped and only more fiscal stimulus can pull us out of the hole. The very idea that things may be getting better is a threat to his worldview. It seems that until the evidence piles up to a point where he can’t ignore it, he will twist reality in order to create justification for his views.
Krugman’s ideological counterparts on the right are no better. Their claims that taxes and regulations are halting the recovery are wrong in concept and in reality. Taxes don’t kill growth except at much higher levels than has ever been seen in the United States. Taxes for Americans have fallen to record low levels in recent years under Obama with little impact. As for regulations, the increase in the number of them is similarly exaggerated. The economy is vastly freer today than it was in the 1970’s.
What’s the reality? The economy is getting better not because of any politician or economist. It’s happening because the forces that pushed us into this mess have ameliorated, and growth is the default mode of the economy. Don’t do anything dramatic—like close the Federal deficit at a hasty pace, start a trade war, or allow interest rates to climb rapidly—and the United States will continue to accelerate its growth. And the good news will continue – whether or not it receives proper attention from pundits and the media.
Of course there are people who continue to suffer today. The impact of a recession doesn’t fall equally on a population. But in a nation as rich as ours, surely we can continue to maintain an appropriate safety net to help those in need survive this tough period without resorting to massive macro economic efforts. And, yes, we can afford to raise taxes to help pay for this safety net.
Why can’t we begin to accept that the truth, as always, remains somewhere in the middle?