America’s paradoxical economy


The economic situation and choices for America are not terrific. This is clearly the case after the April 2013 unemployment report indicated only 88,000 new jobs generated last month, coupled with nearly 500,000 individuals leaving the job market. But the jobs’ numbers only point to one part of the overall American economic paradox.

One the one hand the stock market is at a record high along with many companies showing record profits. This should be good news for the economy but not necessarily. First, the record profits are coming at a time of high unemployment. Companies are making products or delivering goods and services but they are not hiring workers. The profits are coming via increased productivity through automation or via flat wages that can be maintained as a result of high unemployment. In short, companies have failed to hire workers because they are being replaced by machines as in manufacturing, or simply they do not need to increase wages because high unemployment is not pressuring wages up. Couple that with weak unions and there is no real pressure to increase wages.

The consequences of a flat labor market mean that there is insufficient consumer demand for significantly more goods and services. Couple that with still high consumer debt (along with student loan debt) and there are structural limits to how much consumer demand can drive the economy out of a recession.

Now consider data demonstrating that the economic growth is weak. The GDP is not expected to grow much in the coming year and the best evidence is that the sequestration will perhaps take approximately .05 off annual GDP growth that is essentially not expected to grow more than about 1-2% this year. Sequestration will also lead to government layoffs and add to the unemployment program. What we have here is an economic austerity program similar to Europe that is not a recipe for economic growth.

Now think about one potential bright spot for the economy–the housing market. The real estate market appears back with stronger demand and increased prices. Yet here too there is a problem. The growth in part is stimulated by record low interest rates that appear to be overheating the market. There is no question that it is a great time to borrow for housing and there are indications that the low interest rates are encouraging speculative building. None of this is really good. Why? We really do need to increase interest rates to cool down the market otherwise we are headed for another bubble. The low interest rates fueled the last real estate bubble that burst in 2008. Moreover, we have done very little since 2008 to reform the real estate and housing markets. Dodd-Frank, the financial reform law, has done little to change behavior here.

But if one increases interest rates at the Federal Reserve Board to cool off the housing market then that rate increase could very well hurt the rest of the economy. Cutting back on economic demand while raising interest rates is a terrific way to throw the economy into a recession.

Now consider that sequestration is already cutting back on the safety net for the poor and unemployed. Obama is now talking about agreeing to further cuts in government spending for Social Security and other similar programs. These cuts too will hurt the most vulnerable and also damage the economy in the sense of cutting back on money that money to consume.

Finally, think of all those individuals who have left the job market. They cannot find jobs, perhaps lack the training to find new ones, face job discrimination, and often lack the resources or capacity to borrow for retraining. We have in these individuals significant underutilization of their skills and talents–letting them go to waste.

In sum, we have a tremendously paradoxical economy. It is both overheated and underperforming at the same time. Tools to fix one part of it may damage the other. There is no question we need to develop and grow the economy but at the same time we need to attend to the redistributional aspects of an economy that is the most skewed in terms of wealth and income in many generations. Policies are needed to grow the economy, cool the growing housing bubble, train workers for reemployment, and relieve many from the continued high consumer and other debt that they hold.