How Did 2011 Go So Wrong? America's Two-Speed Recovery
It's not just high gas prices. America has a growth problem and a jobs problem that might be beyond Washington's control.
When Jim O'Neill, Goldman Sachs's celebrated Asset Management director, dubbed 2011 "the year of the USA" two days before Christmas last year, his brand of optimism wasn't rogue. He was merely the loudest member of a growing crowd of market cheerleaders.
The poison and crud from the recession had finally worked its way through the economy, they said. Corporations were flush with cash and ready to hire. Financial institutions were swimming in profits and ready to lend. Housing prices had taken a beating, but that was a good thing in way. Homes were affordable again, and families who had spent two years shedding debt were itching to buy something big.
So how did 2011 turn out so poorly? Six months later, unemployment is still above 9%. Small business sentiment, which fell for the third consecutive month in May, is lower than a year ago. Real wage gains still look like a pancake, and the American Consumer -- the world's greatest engine of growth -- is showing up like LeBron James in the fourth quarter of a Finals game.
High gas prices hurt consumers and businesses. Europe's never-ending debt trauma hurt exports and the stock market. But you can't blame it all on the rest of the world. You can't even blame it all on Washington.
Economists at the IMF like to talk about a global "two-speed recovery." That means China is battling inflation with 9% yearly growth, while Europe and the U.S. are fighting double-dips with sub-2% growth. But there's a two-speed recovery at home, as well. Financial companies and multinationals are enjoying record profits, and the stock market has recovered better than most analysts expected.
But the wealth isn't trickling down. Small businesses -- which account for 99 percent of all companies and two-thirds of all hires -- are selling into a weak consumer market. Banks know it, so they're withholding loans. It's a cappuccino economy: The top is as frothy as the bottom is static.
At the top of the economy, financials and multinationals are growing, but they're making do with fewer workers. At the bottom of the economy, small businesses aren't growing, and they're not hiring workers. Two speeds, one reality: It's hard out there for a worker.
Something is broken, but what? Northwestern economist Robert Gordon says the most successful large companies have learned to make the worker "disposable." In the last 40 years, a perfect storm has eroded labor's power, including:
1. The shift of executive compensation towards stock options to maximize shareholder value
2. Lower real minimum wages
3. More competition for goods (imports) and workers (low-skill immigrants, outsourcing, automation)
4. Mainstreaming of contract/part-time/freelance work
Between 1930 and 1970, workers thrived in an economy that looked after labor. Union laws protected hours and wages, and manufacturing, where workers could make high salaries for little to no post-high school education, accounted for one out of four jobs in the economy. But the era of labor is over. The era of productivity is here, and there's no use trying to put the genie back in the bottle.
The last factor in America's two-speed recovery is the housing bust. There are two huge contributors to the net worth of American households. One is investments, although the investor class is concentrated in the top 10 to 25% of income distribution. The other is the house. The value of the typical home has fallen by nearly half in the last five years:
"We're seen more than a 40% drop," said Gary Burtless of the Brookings Institution. "Prices fall, which hurts net wealth. The borrowing capacity of people who would move into new homes is questionable, so homes go unoccupied. With lots of unoccupied housing, nobody builds anything new."
This isn't a problem that can be "solved" with another $1,000 per family in payroll tax cuts (although it might help). It's certainly not a problem that can be solved by cutting government and praying somebody else picks up the slack. The hardest thing for Washington to understand is that not every economic question can be solved in Washington. Taxing and spending policy is important. But America's two-speed crisis is deeper.