Is a ‘Great Reset’ of our economy inevitable?

Are we experiencing an end to the long-term trend of a rising standard of living in our country?  Are we due for a “Great Reset” of our economy, one that is inevitable due to the competing interests of workers and consumers?

Tyler Cowen warns “Don’t Be So Sure the Economy Will Return to Normal” and asks “what exactly are we experiencing?”

One relatively optimistic view is that observed deficiencies — like slow growth in real wages and the overall economy, persistently low interest rates and low levels of labor participation — are merely temporary. In this view, these problems will dwindle after manageable problems like high levels of public or household debt have been reduced.

Another commonly heard view is that we made the mistake of letting the last recession linger too long, allowing some of its features to became entrenched. That analysis suggests that if we correct past policy errors, whatever they may have been, an underlying normality will re-emerge.

There are some nuggets of truth in both of these arguments, but there is a much more disturbing possibility that could turn out to be more accurate: namely, that the recession was a learning experience that we haven’t fully absorbed. From this perspective, the radical and sudden changes of the financial crisis were early indicators of deep fragility and dysfunctionality.

Slowly but surely, we may be responding to these difficult revelations by scaling back our ambitions for the economy — reinforcing negative trends that were already underway. In this troubling view, we have finally begun to discover some unpleasant truths. Borrowing a phrase from the University of Toronto economist Richard Florida, it’s possible that we are experiencing a “Great Reset.”

A reset is hard for us to see because changes “seem to be gradual and slow”.  And new government policies meant to steer the economy “are no more than changes at the margin”.

Are millennials bearing the brunt of this reset?

Amid much talk about income inequality and an increasingly two-tier economy, it appears that a “heavy burden of adjustment in the overall labor market is being borne by the young”

… Wages for the typical graduate of a four-year college have dropped more than 7 percent since 2000, and the labor force participation rate of the young has been falling. One consequence is that young people are living at home longer and receiving more aid from their parents. They also seem to be less interested in buying their own homes.

Megan McArdle explains that we brought the “Great Reset” on ourselves, with our desire for rising, stable wages that conflicts with cheap services and goods.

The average American is at the heart of this story — as the victim and as the perpetrator. We suffer as employees because we exert influence as consumers.

Is a reset inevitable?

… The reset may not be fair. It will certainly not be easy. But it may be necessary.

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Tyler Cowen, “Don’t Be So Sure the Economy Will Return to Normal”, New York Times, May 15, 2015.

Megan McArdle, “U.S. Workers Brought the ‘Great Reset’ on Themselves”, Bloomberg, May 19, 2015.

Has the underemployment rate topped out?

Has the trend of rising underemployment rates for new college graduates finally turned a corner?

While unemployment rates improved over the last few years, underemployment rates have only started to drop more recently.

The unemployment rate for recent college graduates began to fall in 2011, and it has continued to do so—with a hiatus during 2013—ever since. However, aside from a brief dip in early 2011, the underemployment rate continued to climb well into 2014, rising to a level of more than 46 percent. This divergence between falling unemployment and rising underemployment between mid-2011 and mid-2014 suggests that more college graduates were finding jobs during this time, just not necessarily good ones. The steady growth of non-college jobs, coupled with the relatively soft demand for college graduates during this three-year period, appears to have forced many recent college graduates to take jobs not commensurate with their education. More recently, though, the tide has turned. With the demand for college graduates rising at a solid clip since last summer, underemployment has also finally started to come down. Since last June, the underemployment rate for recent college graduates has fallen by about two percentage points, to 44.6 percent.

The underemployment rate is still historically high.

While these trends are no doubt good news for recent college graduates, it is important to keep the gains in perspective. As we have shown before in this post and this article, the underemployment rate for recent college graduates remains quite high by historical standards. At 44.6 percent, we estimate that nearly half of this group is working in jobs that typically do not require a college degree—a rate that is much higher than when underemployment hit a trough of around 38 percent in 2000. And while the demand for college graduates appears to be picking up, significant labor market slack remains, so continued strong growth in the demand for college graduates may well be necessary to make a more serious dent in the underemployment rate.

The Washington Post has an optimistic view.

Why the era of college grads working at restaurants and cafes is coming to an end

For now, I’ll wait and see.

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Jaison R. Abel and Richard Deitz, “The Class of 2015 Might Have a Little Better Luck Finding a Good Job”, Liberty Street Economics, May 15, 2015.

Wages for recent college grads are not keeping up

Wages are rising, but not for young grads

A new analysis from the San Francisco Fed finds entry-level earnings for new college grads — defined as working graduates age 21 to 25 — grew only by 6 percent from April 2007 to April 2014. In comparison, median weekly earnings for all workers grew two-and-a-half times as fast, at 15 percent. And while recent grads tend to fall behind after any recession, the gap since the Great Recession has been both wide and long-lasting.

Is this cyclical or structural?

There are differences of opinion about whether this stagnation is due to a short-term economic downturn or arises from a more fundamental problem, “like a mismatch between recent grads’ skills and open positions”.

One thing that seems clear is that as the percentage of the population with college degrees continues to increase,  there are “too many college graduates chasing too few college-level jobs”.

Related:  “Technological advancements stunt job growth – ‘the great paradox of our era'”

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Danielle Kurtzleben, “Young college grads’ wage growth is falling farther and farther behind”, Vox, July 21, 2014.

Quick Links – ‘Women’s deaths from painkiller overdose’; over-regulation hurting the economy; students need to learn patience

‘Sharp rise in women’s deaths from painkiller overdose … rise of the single-parent household’ partly to blame

Women are catching up to men.

PORTSMOUTH, Ohio — Prescription pain pill addiction was originally seen as a man’s problem, a national epidemic that began among workers doing backbreaking labor in the coal mines and factories of Appalachia. But a new analysis of federal data has found that deaths in recent years have been rising far faster among women, quintupling since 1999.

More women now die of overdoses from pain pills like OxyContin than from cervical cancer or homicide. And though more men are dying, women are catching up, according to the analysis by the Centers for Disease Control and Prevention. And the problem is hitting white women harder than black women, and older women harder than younger ones.

In this Ohio River town on the edge of Appalachia, women blamed the changing nature of American society. The rise of the single-parent household has thrust immense responsibility on women, who are not only mothers, but also, in many cases, primary breadwinners. Some who described feeling overwhelmed by their responsibilities said they craved the numbness that drugs bring. Others said highs made them feel pretty, strong and productive, a welcome respite from the chaos of their lives….

Women are more likely to rely on prescription pain medicine.

Deaths among women have been rising for some time, but Dr. Thomas R. Frieden, the C.D.C. director, said the problem had gone virtually unrecognized. The study offered several theories for the increase. Women are more likely than men to be prescribed pain drugs, to use them chronically, and to get prescriptions for higher doses.

The study’s authors hypothesized that it might be because the most common forms of chronic pain, like fibromyalgia, are more common in women. A woman typically also has less body mass than a man, making it easier to overdose.

Women are also more likely to be given prescriptions of psychotherapeutic drugs, like antidepressants and antianxiety medications, Dr. Volkow said. That is significant because people who overdose are much more likely to have been taking a combination of those drugs and pain medication.

Broader social trends, like unemployment, an increase in single-parent families, and their associated stressors, might have also contributed to the increase in abuse, but they are slow moving and unlikely to be a direct explanation, Dr. Volkow said.

Related:  ‘Record Number Of Families Rely On Women’s Income, Many Of Them Headed By Single Mothers’ (ThinkProgress)

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Over-regulation is making America poorer.

Federal regulations have lowered real GDP growth by 2% per year since 1949 and made America 72% poorer

In a research paper that appears in the June 2013 issue of The Journal of Economic Growth titled “Federal Regulation and Aggregate Economic Growth,” economists John Dawson (Appalachian State University) and John Seater (North Carolina State University) examine the relationship between the growth in regulations (measured by the pages of federal regulations) since 1949 and economic performance (measured by real GDP growth). As the authors point out in their introduction:

Macroeconomists typically divide government economic activity into four broad classes: spending, taxation, deficits, and monetary policy. There is, however, a fifth class of activity that may well have important effects on economic activity but that nevertheless has received little attention in the macroeconomic literature: regulation. Although microeconomists have analyzed both the causes and effects of regulation for decades, macroeconomists have joined the discussion only much more recently, with a number of empirical studies suggesting that regulation has significant macroeconomic effects.

Economist Mark J. Perry thinks this study actually under-estimates the total cost of regulation since it does not include “wasteful rent-seeking that private firms engage in before the regulations are in place, as they attempt to influence (support, oppose or change) federal regulations when they are first being proposed and considered”.  State and local regulations are also excluded.

… Adding in these costs of rent-seeking, and the costs of state regulations, paints a pretty depressing picture of how much poorer we all are due to the crushing burden of government regulations.

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Patience may be an undervalued 21st century skill.

According to Daniel Willingham, the problem of students’ declining attention span is less about technology changing the brain, and more about never having to face boredom.

Most teachers t think that students today have a problem paying attention. They seem impatient, easily bored.

I’ve argued that I think it’s unlikely that they are incapable of paying attention, but rather that they are quick to deem things not worth the effort.

Today’s kids are rarely forced to be bored.

We might wonder if patience would not come easier to a student who had had the experience of sustaining attention in the face of boredom, and then later finding that patience was rewarded. Arguably, digital immigrants were more likely to have learned this lesson. There were fewer sources of distraction and entertainment, and so we were a bit more likely to hang in there with something a little dull. …

Students today have so many options that being mildly bored can be successfully avoided most of the time.

If this analysis has any truth to it, how can digital natives learn that patience sometimes brings a reward?

Jennifer Roberts, a professor of the History of Art and Architecture at Harvard, suggests an exercise in which students are asked to study a painting for three hours.  While this seems excessive, this long duration of simple observation causes the students to see features about the painting that they would never have noticed if they had given up after a few minutes.

… The goal is that the student think “Okay, I’ve seen about all I’m going to see in this painting.” But because they must continue looking, they see more. And more. And more. Patience is rewarded.

Technological advancements stunt job growth – ‘the great paradox of our era’

In contrast to what has occurred during earlier episodes in history, today’s technological advancements are depressing economic growth, according to Erik Brynjolfsson and Andrew McAfee.

… ­Brynjolfsson, a professor at the MIT Sloan School of Management, and his collaborator and coauthor Andrew McAfee have been arguing for the last year and a half that impressive advances in computer technology—from improved industrial robotics to automated translation services—are largely behind the sluggish employment growth of the last 10 to 15 years. Even more ominous for workers, the MIT academics foresee dismal prospects for many types of jobs as these powerful new technologies are increasingly adopted not only in manufacturing, clerical, and retail work but in professions such as law, financial services, education, and medicine.

There is reason to believe today’s creative destruction differs from historical patterns.
We know that “since the Industrial Revolution began in the 1700s, improvements in technology have changed the nature of work and destroyed some types of jobs in the process”.  But this chart showing the “great decoupling” raises questions about the possibility of a new era with long-term periods of involuntary employment for many.

Perhaps the most damning piece of evidence, according to Brynjolfsson, is a chart that only an economist could love. In economics, productivity—the amount of economic value created for a given unit of input, such as an hour of labor—is a crucial indicator of growth and wealth creation. It is a measure of progress. On the chart Brynjolfsson likes to show, separate lines represent productivity and total employment in the United States. For years after World War II, the two lines closely tracked each other, with increases in jobs corresponding to increases in productivity. The pattern is clear: as businesses generated more value from their workers, the country as a whole became richer, which fueled more economic activity and created even more jobs. Then, beginning in 2000, the lines diverge; productivity continues to rise robustly, but employment suddenly wilts. By 2011, a significant gap appears between the two lines, showing economic growth with no parallel increase in job creation. Brynjolfsson and McAfee call it the “great decoupling.” And Brynjolfsson says he is confident that technology is behind both the healthy growth in productivity and the weak growth in jobs.

Many white-collar jobs have been affected, as ‘“digital versions of human intelligence” are increasingly replacing even those jobs once thought to require people’.

We have seen a “hollowing out” of the middle class.

To be sure, Autor says, computer technologies are changing the types of jobs available, and those changes “are not always for the good.” At least since the 1980s, he says, computers have increasingly taken over such tasks as bookkeeping, clerical work, and repetitive production jobs in manufacturing—all of which typically provided middle-class pay. At the same time, higher-paying jobs requiring creativity and problem-solving skills, often aided by computers, have proliferated. So have low-skill jobs: demand has increased for restaurant workers, janitors, home health aides, and others doing service work that is nearly impossible to automate. The result, says Autor, has been a “polarization” of the workforce and a “hollowing out” of the middle class—something that has been happening in numerous industrialized countries for the last several decades. But “that is very different from saying technology is affecting the total number of jobs,” he adds. “Jobs can change a lot without there being huge changes in employment rates.”…

New technologies are “encroaching into human skills in a way that is completely unprecedented,” McAfee says, and many middle-class jobs are right in the bull’s-eye; even relatively high-skill work in education, medicine, and law is affected. “The middle seems to be going away,” he adds. “The top and bottom are clearly getting farther apart.” While technology might be only one factor, says McAfee, it has been an “underappreciated” one, and it is likely to become increasingly significant.

But ‘no one really knows’.

While questions remain on this issue, no one knows for certain if historic patterns of job creation will be repeated.  Even Harvard economist Lawrence Katz, whose research has shown how technological advances have consistently led to job creation, tells us that ‘we never have run out of jobs, but it is “genuinely a question”’.  Others raise similar doubts.

… “No one really knows,” says Richard Freeman, a labor economist at Harvard University. That’s because it’s very difficult to “extricate” the effects of technology from other macroeconomic effects, he says. But he’s skeptical that technology would change a wide range of business sectors fast enough to explain recent job numbers.

MIT economist David Autor also says “no one knows the cause” for the employment slump.

… The sudden slowdown in job creation “is a big puzzle,” he says, “but there’s not a lot of evidence it’s linked to computers.”

Many of the reasons for sluggish job growth may be rooted in “global trade and the financial crises of the early and late 2000s”.  Government policies may play a role.  But it is possible that recent technological advances have changed the equation in an unprecedented and permanent manner.  Meanwhile, the middle class continues to suffer as politicians, economists, and employers grapple with ‘the great paradox of our era’.

Related:

• Definition of middle class is muddled (Cost of College)
• Middle management jobs will decline further (Cost of College)

Amid declining household debt, rising student loans remain a drag on the economy

Total household debt continues to decline, but rise in student debt hampers economic recovery.

The total amount of debt held by Americans fell again in the first three months of the year and stood at the lowest level since the middle of 2006, the New York Federal Reserve said Tuesday….

The level of household debt in the first quarter fell by $110 billion, or 1%, to $11.23 trillion, mainly because consumers reduced mortgage balances and used their credit cards less.

A…
Auto and student loans rise.

The increase in the value of auto loans was the smallest in four quarters, suggesting that car companies might have cut prices to attract buyers as demand for new vehicles slackened. Still, auto loans rose $11 billion to $794 billion to mark the ninth straight quarterly gain.

Student loans have ‘surged 46% since the end of the recession’.

Student loans, which climbed $20 billion in the first quarter, have surged 46% since the end of the recession to an all-time high of $986 billion. More students are going to college or remaining in school longer to obtain graduate degrees to improve their chances of finding a job amid a slow economic recovery.

Yet the escalation in student loans is also leaving many young people saddled with large debts. Although the delinquency rate on student loans fell slightly in the first quarter to 11.19%, that’s still the second highest rate ever. Before the recession, delinquencies averaged around 7%.

The decline in household debt is good for a recovering economy, but economists believe growing student loans are ‘acting as a drag on growth’.

The anemic economy has left millions of younger working Americans struggling to get ahead. The added millstone of student loan debt, which recently exceeded $1 trillion in total, is making it even harder for many of them, delaying purchases of things like homes, cars and other big-ticket items and acting as a drag on growth, economists said.

There is little evidence that increased education spending drives economic growth

JONAH GOLDBERG: Education is important and necessary for a host of reasons. But there’s little evidence it drives growth.

Questioning whether increased education spending is really the key to “winning the future”

British scholar Alison Wolf writes in “Does Education Matter?”: “The simple one-way relationship … — education spending in, economic growth out — simply does not exist. Moreover, the larger and more complex the education sector, the less obvious any links to productivity.”

Nasim Taleb, author of “Antifragile: Things That Gain From Disorder,” argues that education pays real benefits at a micro level because it allows families to lock in their economic status. An entrepreneurial father can ensure his kids will do OK by paying for them to become doctors and lawyers. But what is true at the micro level is not always true at the macro level.

Think about it this way: Growing economies spend a lot on education, but that doesn’t necessarily mean that spending makes them grow. During the so-called Gilded Age, the U.S. economy roared faster and longer than ever before or since, while the illiteracy rate went down. But the rising literacy didn’t cause the growth. Similarly, in the 20th century, in places like China, South Korea and India, the economic boom — and the policies that create it — always come first while the investments in education come later.

Jarrett Skorup looks at higher education spending.

There is no link between higher education subsidies and economic growth, and none between college degrees and job creation.

Since 1980, Michigan has spent a much higher proportion of personal income on state government support for higher education than nearby states like Illinois and Ohio. According to Ohio University economist Richard Vedder, by the year 2000, the Mitten State was spending the sixth most in the country (2.34 percent of its personal income), double what Illinois was spending and much more than Ohio. This did not lead to higher growth as Michigan’s economy performed among the worst in the country during that time period.

And states with a higher proportion of college graduates do not necessarily grow by adding more college degrees. A comparison of the number of state residents with a college degree with per capital income growth from 2000-2008 yields no correlation.

James M. Hohman of the  Mackinac Center for Public Policy sees “no correlation between a state increasing its college graduate base and growing its economy”.

If the hypothesis promoted by Glazer and the lobbyists engaged by Michigan’s tax-supported public universities was correct, the various points on this chart would be clustered around an upward sloping line, as states with higher growth in the number of grads also enjoyed relative improvements in income. However, no such trend line exists.

Another chart that built in a lag time also showed no correlation.

… The chart below compares state grad growth between 2000 and 2005 and income growth in the three succeeding years; once again no pattern can be detected.

So many factors enter into economic growth, making it believable that education spending would not be a driving factor.

Related:

• Federal ‘investments’ can’t guarantee growth (kansascity.com)
• Phil Power: Michigan politicians starve the engines of economic growth: universities (mlive.com)

Quick Links – fewer men want to marry; record average net worth

»»»  Women finding scarcity of men who want to get married

The battle of the sexes is alive and well. According to Pew Research Center, the share of women ages eighteen to thirty-four that say having a successful marriage is one of the most important things in their lives rose nine percentage points since 1997 – from 28 percent to 37 percent. For men, the opposite occurred. The share voicing this opinion dropped, from 35 percent to 29 percent.

Believe it or not, modern women want to get married. Trouble is, men don’t.

Women are the losers.

It’s the women who lose. Not only are they saddled with the consequences of sex, by dismissing male nature they’re forever seeking a balanced life. The fact is, women need men’s linear career goals – they need men to pick up the slack at the office – in order to live the balanced life they seek.

Suzanne Venker says women are to blame

So if men today are slackers, and if they’re retreating from marriage en masse, women should look in the mirror and ask themselves what role they’ve played to bring about this transformation.

The war on men (Fox News)

……

»»»  ‘American Households Hit 43-Year Low In Net Worth’

WASHINGTON (CBS DC) – The median net worth of American households has dropped to a 43-year low as the lower and middle classes appear poorer and less stable than they have been since 1969.

According to a recent study by New York University economics professor Edward N. Wolff, median net worth is at the decades-low figure of $57,000 (in 2010 dollars). And as the numbers in his study reflect, the situation only appears worse when all the statistics are taken as a whole.

Who’s to blame?

An August Pew Research Center study found that many in the middle-class are divided on how they believe this gap widened.

Fully 85 percent of self-described middle-class adults say it is more difficult now than it was a decade ago for middle-class people to maintain their standard of living. Of those who feel this way, 62 percent say “a lot” of the blame lies with Congress, while 54 percent say the same about banks and financial institutions, 47 percent about large corporations, 44 percent about the Bush administration, 39 percent about foreign competition and 34 percent about the Obama administration.

Just 8 percent put “a lot” of blame on the middle class itself.

An ominous sign for future prosperity

Wolff’s focus on total wealth not only measures how much money a household brings in, but also the amount it accumulates. This latter number is very significant — economically secure households are generally more comfortable spending their disposable income, and are less likely to become a drag on the social safety net.

Student loans are a reason young people not buying homes

Student loans are a reason many young people are not buying homes and “will be a drag on the economy for the foreseeable future”.

According to a recent Federal Reserve study, only 9 percent of 29- to 34-year-olds got a first-time mortgage from 2009 to 2011, compared with 17 percent 10 years earlier. “First-time home buyers are typically an important source of incremental housing demand, so their smaller presence in the market affects house prices and construction quite broadly,” Fed Chairman Ben Bernanke said at a homebuilders’ conference in Orlando on Feb. 10.

Recent college graduates carry an average debt load of more than $25,000, limiting their ability to qualify for mortgages even if they’re able to land a job in a market with an unemployment rate of 9 percent for 25- to 34-year-olds. Dubbing it a “student loan debt bomb,” the National Association of Consumer Bankruptcy Attorneys (NACBA) warned on Feb. 7 about the effects of rising student debt on recent graduates, parents who co-signed their loans, and older Americans who’ve gone back to school for job training.

“Just as the housing bubble created a mortgage debt overhang that absorbs the income of consumers and renders them unable to engage in consumer spending that sustains the economy, so too are student loans beginning to have the same effect, which will be a drag on the economy for the foreseeable future,” John Rao, vice president of the NACBA, said on a conference call.

A silver lining for rental construction, but will that be the next bubble?

Although housing prices have fallen by about one-third from their 2006 peak, young adults who are starting to move out of their parents’ houses want to rent, not buy. While single-family housing starts posted their worst year since 1963 last year, multifamily housing construction has surged as more Americans rent.

I would not urge most young people to buy a home today unless they find themselves in an unusually favorable situation.  It’s just too risky.

The NY Times has a nifty calculator that helps determine Is It Better to Buy or Rent?

Related:

• The End of Ownership: Why Aren’t Young People Buying More Houses? – The Atlantic, 2/28/12 
• Record student loan amounts creating ‘a generation of wage slavery’