Good times are coming back to America. The Dow is flirting with pre-recession levels. US joblessness has fallen by more than 200,000 in each of the last two months, and the trend shows signs of persisting. And whatever the curmudgeonly groundhog from Punxsutawney says (six more weeks of winter), spring came early to America’s side of the Atlantic. While Europe was blanketed in snow, Washington had early daffodils.
Indeed, so sharply has the mood shifted that last week’s strong note of caution from Ben Bernanke, the Federal Reserve chairman, was largely ignored. Far from joining the celebrations, Punxsutawney Ben spent much of his testimony urging senators not to slap an early frost on the recovery (by premature fiscal tightening). Nor did he see much to celebrate. Mr Bernanke said America’s 8.3 per cent unemployment rate “understates the weakness of the labour market”. Long-term joblessness had shifted higher.
Some commentators saw Mr Bernanke’s words as a display of tactical pessimism from one whose reputation suffered from his pre-recession optimism. Yet his observations went to the heart of today’s US economy. No one suggested America would not recover. The right question is what kind of recovery it will be. Will it be like the 1990s, when a rising tide lifted all boats? Or will it follow on from the last cycle, in which the US had the same total of jobs at the end as it had at the start – and in which median income fell?
There are three reasons to listen to Punxsutawney Ben. First, the structural forces driving the US labour market are just as strong as before. America’s educational output relative to other rich countries remains below average, having comfortably exceeded everyone for most of the 20th century. America’s human capital “exceptionalism”, in the words of Larry Katz and Claudia Goldin, is not coming back soon. Fewer Americans graduate than in most other rich economies, and more drop out of high school.
The fact that a growing share of US growth will come from overseas, both via Barack Obama’s export drive, which is showing results (although imports are growing faster), and through the continued globalisation of US companies, means US workers will be competing even more fiercely with their counterparts around the world. Last year the US economy grew by 1.7 per cent. Median wages fell by 2.7 per cent. Expect that bifurcation to persist.
Second, in spite of having been elected partly to tackle the “permanent recession” of America’s middle class, the president has been consumed in fighting a large economy-wide one. Mr Obama is hopeful that his 2010 healthcare reform will shift the needle towards better security – assuming the US Supreme Court does not strike down the law’s core principle next month when it hears a constitutional challenge. But it is a relatively thin reed on which to base hopes that this time will be different.
As Jared Bernstein, the former White House economic adviser, observes, the share of US profits earned overseas keeps rising – and at the expense of employee income growth. The profit margins of the S&P 500 leapt from 6 per cent to 9 per cent of gross domestic product in the past three years – a share last achieved three generations ago. At roughly a third, the foreign share of those profits has more than doubled since 2000.
And as David Rothkopf points out in his incisive and timely new book, Power Inc, the pendulum has swung sharply from public to corporate in the last generation. That has changed the character of the US economy. “In the past there was a tight connection between economic growth leading to jobs creation, which in turn led to broad wealth creation,” Mr Rothkopf says. “Those links no longer seem to work.”
While profits have been soaring for the past two years, the US economy is now beginning to add enough jobs to reduce the headline rate. But at this speed it will still take until 2020 to restore those lost since 2007 and make up for population growth. For a small share of Americans, strong income growth is back. But for most of those now finding jobs, wages are well below the starting salaries in previous recoveries. “Two-tier” corporations, such as Caterpillar and Chrysler, which hire new people on less than half the wages of older ones and with fewer benefits, are becoming typical.
Third, there is the politics. In a nutshell, there is a negative feedback loop between US politics and the US economy – the polarisation of both have grown in lockstep. Unlike in earlier periods of change, there is no popular groundswell today in favour of improving education and skills. Indeed, it is striking how little grassroots populism there is. Much of the political void is being filled by the wealthy. Of the $181m so far spent by super-Pacs – vehicles that can spend unlimited sums as long as they are legally independent from their candidates – more than half came from fewer than 200 individuals.
Under these circumstances, what are the chances politics will give Punxsutawney Ben’s long-term jobless the remedial boost they need to survive in a globalised economy? And what about the 15m Americans who have dropped out of the labour market altogether – will they be reabsorbed? Aggregate growth is certainly returning to the US, although at what rate it is unclear. But for many Americans, this recovery is going to be cold and it is going to be grey. Let us hope it does not last for the rest of their lives.
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