The Daily Beast Acts Up On The Economy

by: Dean Baker

Sometimes a little kid will deliberately be bad just to get attention from her teacher or parents. This seems to be the philosophy of a Daily Beast column by Zachary Karabell, which uses what seems to be some deliberately bad economic analysis to tell us things are really pretty good.

The piece begins with the incredible assertion:

years from now, when we look back at 2011, it may be remembered as one of the best worst years of the early 21st century. You’d be hard-pressed to come up with an extended period where people were more negative, yet remarkably, in the United States at least, not much actually happened.

No, 2011 looks better than 2009 and 2010 and certainly better than ending of 2008, but most of the country would be hard-pressed to find a reason to put 2011 ahead of any of the years prior to the crash. The unemployment rate for the year is likely to average above 9.0 percent. The number of people who are involuntarily underemployed has generally been 8.5 and 9.0 million, close to double the pre-recession level. Millions more have given up looking for work altogether. Real wages have been stagnant or falling for the last 4 years, with little prospect of turning around any time soon as the high rate of unemployment continues to depress wages.

In addition, tens of millions of baby boomers are approaching retirement with almost nothing to support themselves other than their Social Security. According to a recent study by the Pew Research Center, the median older baby boomer (ages 55-64) had just $162,000 in wealth. This is roughly enough to buy the median home. This means that if this household took all of their wealth, they can pay off their mortgage. They would then be completely dependent on their Social Security to support them in retirement. And, half of older baby boomers have less wealth than this.

In short, most of the country is looking at a situation where they are desperate for work or fearful about losing their job. Older workers are looking at a retirement where they are not far above the poverty level, even after spending a life working in middle class jobs. The bad attitudes toward this situation are not the result of "groupthink" as the column asserts, they are the conclusion of people better able to understand the economy than Karabell.

For extra credit in the acting up department Karabell throws in a few broad assertions that are simply wrong. For example he tells us that:

Overall growth for the next year is shaping up to be 2 percent, give or take. That is pretty lame compared to the heady days of the 1990s or even the mid-2000s. But those seemingly halcyon periods benefited from bubbles, whether the stock market and telecom spending in the 1990s or the housing and debt-inflated growth of the mid-2000s. So while activity now doesn’t look so good by those comparisons, it is actual economic activity undistorted by bubbles. It’s as if the economy of the past 20 years was wearing platform shoes (“Wow, she’s like 6 feet tall”); it looked a lot bigger than it was.

Actually 2.0 percent annual growth would look bad compared to the 80s, the 70s, the 60s, and the 50s. It is simply a very bad growth rate. Trend productivity growth in the U.S. is between 2.0 and 2.5 percent. Labor force growth is averaging around 0.7 percent. This means that we need growth of around 2.5 -3.0 percent just to keep even with the growth of the labor force. At a 2.0 percent growth rate unemployment will be rising, not falling. This has nothing to with platform shoes, it's arithmetic.

Furthermore, given the severity of the downturn we should be seeing growth in a 5-8 percent range to get the economy back to its potential level of output. People should be outraged at the thought that the economy might only grow at a 2.0 percent rate.

Karabell also tells readers:

It is also true that we have a structural jobs issue, but not an issue of making things and innovating.

If we had a structural jobs issue then there would be sectors of the economy where large numbers of jobs are going unfilled, workers are putting in long hours, and wages are rising rapidly. This would be the result of the labor shortages in these areas.

We don't see any major sectors that fit this bill. That implies that the problem is not one of structural unemployment but simply a lack of demand. We just need the government to spend more money, the Fed to be more aggressive in pushing down long-term interest rates or boosting inflation, or a decline in the value of the dollar to boost exports. We can also put more people to work by having people work shorter hours through work sharing. Saying the problem is structural is simply wrong and points people away from the obvious solutions.