Why the US Economy Won’t Fully Recover

Yves here. It almost seems quaint to think that someone (in reality, large swathes of the investor and orthodox economics community) thinks the US economy will someday bear a passing resemblance to its former bubble-stoked vigor. I agree wholeheartedly with one of van Onselen’s cause for concern, that of low wage growth in the US (which is probably more accurately described as an unduly high profit share of GDP), and have doubts about the other, an expected rise in the dependency ratio. As regards the latter, demographic forecasts are fraught. The US was predicted to show a decline in population due to a decline in the birth rate, in keeping with advanced economy norms. The 2000 Census showed the demographers to have been all wet, due to a combination of a modest rise in the birth rate plus immigration.

The fallacy of the dependency ratio concern is that it does not allow for adaptations in the average age of labor force entry and exit. While I know many people who retired early, some voluntarily, many not, I also know lots of people who plan on working or actually have worked past the age of 65. Similarly, with the payoff of a debt-funded college education looking dubious, we may see more young people foregoing that, with a result in the average age of entry into the workforce falling. A college education was once seen as a guarantor of a middle class lifestyle if you were also reasonably diligent and organized about finding a job. If that’s no longer the case because college costs are wildly out of whack and the middle class is going the way of the carrier pigeon, why should we expect the same proportion of young adults to go to college as now (believe me, I think this trend is a disaster, but making college so costly has meant that many students can’t afford to treat is as an exercise in self-betterment that will work out without them thinking too much about it). The discussion of demographic trends also points to a rise of McJobs replacing better-paid work, which suggests that the picture of stagnant wages has the potential to morph into declining wages if present trajectories are not reversed.

So while I have no doubt we’ll wind up at pretty much the same place, I suspect there will be some changes in workplace norms that will alleviate the impact of an aging workforce on labor force participation rates. Perversely, not having enough decent jobs is likely to prove to be the stickier problem.

Finally, I am hearing from well-placed sources that the war on drugs will be wound down (apparently as much as Wackenhut enjoys having loads of young men, mainly non-whites, in prison, the consensus in the Beltway is moving towards decriminalization of some now-controlled substances and different approaches to others, which in the next 10 to 20 years should lower the percent of working age adults in prison).

By Leith van Onselen, Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. You can follow him on Twitter at @leithvo. Cross posted from http://www.macrobusiness.com.au/2013/08/rise-of-the-bullshit-job/“>MacroBusiness

The Wall Street Journal (WSJ) has produced two excellent reports shining a light on why the US economy will continue to struggle and won’t produce a full-fledged recovery.

In the first of these reports, the WSJ looks at average real US wages, which have fallen since 2009 and are erroding the purchasing power of consumers, denting consumption expenditure:

Stagnant wages erode the spending power of consumers. That means it is harder for them to make purchases ranging from refrigerators to restaurant meals that account for most of the nation’s economic growth.

All told, Patrick Newport, an economist at IHS Global Insight, expects real wage growth of only 1% by the end of 2014. That is “good news for employers,” he said, “not-so-good news for workers.”

Consumers remain the biggest driver of the U.S. economy, but without more money coming in, it will be difficult for them to spur robust growth.


The second report examines the ageing of the US population, which will shrink the relative size of the working-aged population, reducing potential growth of GDP and incomes in the process:

New research by two economists, Richard Burkhauser of Cornell Universityand Jeff Larrimore of Congress’s Joint Committee on Taxation, suggests things may get even worse in coming years—thanks to two basic population trends. After supporting the economy during their peak earning years, America’s Baby Boomers are starting to retire, which will mean higher numbers of lower-income older individuals. Second, the researchers argue, relatively high-earning whites are over time being replaced by minority workers, especially Hispanics, who tend to make less money.

Burkhauser and Larrimore project these two factors will reduce growth in median incomes by about 0.5% per year through 2030.

Demographic trends used to support income growth. The median household income rose about 9% between 1979 and 1989 and 13% between 1989 and 2000, the researchers note. A key driver was the increased employment and earnings of women.

But in the mid-2000s incomes slumped. Many Americans apparently took this in stride since home values were climbing significantly, boosting wealth, and credit was easy to get. To offset stagnant incomes, Americans took on more and more debt, which made the Great Recession that much worse, according to a separate paper by New York University economist Edward Wolff. As the crisis took hold, net worth plummeted. At the same time, median household income dropped about 7% from 2007 to 2010, more than the 3.5% fall seen between 2000 and 2004 and a 4% decline between 1989 and 1992.

The demographic pressures facing the US are being played-out right across the developed world (and in China). While the workforces of many Euro countries have been in relative decline for more than a decade:


It is a relatively new phenomenon for the Anglospehere nations:


Overall, population ageing is a key reason why growth rates in the US (and elsewhere) are likely to underwhelm in the decades ahead.

This piece is cross-posted from Naked Capitalism with permission.

3 Responses to "Why the US Economy Won’t Fully Recover"

  1. George N. Wells   August 28, 2013 at 3:13 pm

    Why is the workforce shrinking? Probably due to a confluence of many factors, not simply the retirement of the Boomer Generation (of which I am a Medicare Card Carrying Member).

    The nature of work is changing with the reduction in transportation costs as well as the ability to communicate seamlessly across international boundaries. With more-and-more work classified as: "Symbolic Analysis" (as defined by Reich) most of this type of work can, and is, performed from anywhere on the planet where the skilled analyst resides. Physical presence in a particular place at a particular time is only required of: "In Person Service" workers. Since the analyst can work from almost any location the compensation for the job is competitive and driven towards the lowest global wage where the top skills can be obtained.

    In high cost nations the effect is to drag down employment and/or compensation of the nationals in favor of somebody less expensive than the national worker. That translates into less purchasing power and lower demand for goods and services; thus having an effect on the In Person Service people in the high cost nation as well.

    • George N Wells   August 28, 2013 at 3:14 pm

      The question then turns towards the analyst living in a lower cost nation: Will she become more of a consumer purchasing more goods and services and will she also look for even higher compensation and thereby raise the global minimum compensation for the same work? We can guess that she might, but she might not be as powerful a consumer as the American once was. We can also assume that there are still a lot of well qualified people who, at this time, are not competitive in the global symbolic analyst market that might soon get that internet connection and further drive down the global compensation.

      At the core of my thoughts is one hard question: "Is capitalism, as we now practice it, capable of providing work for everyone on the planet who wants/needs employment?"

  2. Lombard Risk   September 6, 2013 at 8:26 am

    You have to wonder , just how long this is all going to go on for. Here in the uk there seems to be one step forward and then two backwards

    I agree with George you are seeing a lot of work moving out to places where labour is cheaper. Countries like America and the UK feel the brunt of this