David Lynch at Bloomberg is writing about the attention President Obama seems to be giving to the structural problems that exist within the economy. Lynch writes in "Obama Focuses on Risk of New Bubble Undermining Broad Recovery":
"Obama this month spoke four times in five days of the need to avoid what he called 'artificial bubbles,' even in an economy that's growing at just a 1.7 percent rate and where employment and factory usage remain below pre-recession highs."
"Obama's cautionary notes call attention to the risk that the lessons of the financial crisis, which was spawned by a speculator-driven surge in asset values, will be forgotten, widening the income gap and undermining a broad-based recovery."
I am happy to hear the president speaking of these issues. What I fear is that he will not back up these speeches with appropriate actions.
These economic concerns were underscored once more with the release last week of the latest information on capacity utilization and industrial production in the United States. Take a look at the rate at which industrial production in the United States is growing. The year-over-year rate of growth for July was a meager 1.4 percent.
This is down from the 1.8 percent, year-over-year, average rate of growth for the second quarter of 2013, which was down from 2.4 percent in the first quarter of the year, which was down from 2.7 percent in the last quarter of 2012, which was down from 3.3 percent in the third quarter of 2012. This is not a very encouraging trend.
Let's look at indications of the structural problems that exist … let's look at capacity utilization in manufacturing in the United States. In July 2013, capacity utilization stood at 77.6 percent. This is down from a 77.7 average in the second quarter of 2013 and a 78.0 percent number for the first quarter. In the last quarter of 2012, capacity utilization was at 77.6 percent so there has been roughly no change in capacity utilization over the past year.
The more dramatic fact, to me, is that capacity utilization was just short of 81.0 percent just before the Great Recession began in December 2007!
The even more dramatic fact in the capacity utilization numbers is that the peak in capacity utilization in every recovery since the late 1960s has been at a level that is at or below the peak reached in the previous recovery. For example, the peak reached before the 81.0 percent achieved in the last recovery was around 85.0 percent. In the late 1960s, the capacity utilization number was around 90.0 percent.
My argument is that these figures indicate there is a structural problem in the United States economy. The physical capital present in the United States economy does not match up with current technological advances. That is, a lot of the manufacturing capacity of the United States is out-of-date!
This is also true of the labor force! A large portion of working age Americans do not have the skills or the capacity to find productive work in the United States economy. This is exemplified by the labor force participation rate, which has now fallen to levels that existed in the early 1980s and the under-employment rate, which I estimate to be about one in every five Americans of working age.
To me, these are supply side issues. These supply side issues have come about because of fifty years or more of Keynesian-type stimulus efforts to put unemployed people and physical capital back to work in the occupations that they formerly used for. As a consequence, the workers and the owners of physical capital had no reason to keep up with technology and other innovations because the government was always trying to keep things "as they were."
The structural problems require a longer-term solution…a solution that is beyond the horizons of most politicians who only care about getting re-elected in the short run. The structural problems are generally only solved in a generational way…that is through education, training, and physical investment that takes years to accomplish.
Remember, the last major structural adjustment that occurred in the United States took twenty years or more and a world war.
If this is true, then the structural problems that exist in the United States economy will not be solved by more and more credit inflation. In fact, it has been the fifty years of credit inflation that has put us in the position we are now in. Further quantitative easing on the part of the Federal Reserve or further major short-term stimulus spending on the part of the federal government will not solve these problems.
In fact, continued efforts to create more credit inflation on the part of the government will only lead to President Obama's concerns about a "widening income gap." The president talked about how this might result from "a speculator-driven surge in asset prices," a topic that I have written about many times. Note, I am not against the wealthy making money, I just believe that it is too bad when government policy sets up the situation in which only the wealthy can make money.
So, I hope President Obama backs up his concerns over the state of the economy. I hope that he does do more to address structural issues rather than just short-run, myopic, stimulus packages aimed at the next election.
President Obama is a "lame duck" now. He doesn't have to concern himself about getting re-elected again. Therefore, he should focus more on addressing the longer-term, structural issues that abound in the economy. In fact, in my mind, any attempts to achieve a U.S. growth rate above the 2.0 percent to 2.5 percent range over the next three years will achieve very little during his tenure in office and will only set up a whole new set of problems for the person taking office in 2017. And, the structural problems will still need to be dealt with.