Yesterday Vice President Biden made an important statement regarding the American economy, from ABC News:
Vice President Joe Biden today offered a blunt assessment of the plight of the unemployed, telling supporters at a campaign rally in Iowa that the economy remains “a depression for millions and millions of Americans.”
“The unemployed are in real trouble,” Biden said in a speech on the banks of the Mississippi River in Dubuque. “My grandpa used to say, from Scranton, he’d say, ‘Joe, when the guy in Dunmore…is out of work, it’s an economic slowdown. When your brother-in-law is out of work, it’s a recession. When you’re out of work, it’s a depression.’”
“It’s a depression for millions and millions of Americans,” he said.
Is Vice President Biden right and how many millions? Let’s take a look.
The Vice President specifically noted the unemployed as being in a Depression.
The number of persons unemployed 15 weeks or longer, as a percent of the civilian labor force or U-1 unemployment rate has stayed above 8% for the last few years. But it is important to note that the ubiquitous U-1 measure is only a part of the overall employment story.
The most comprehensive number the Bureau of Labor Statistics produces is the U-6 unemployment rate or the total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force. The unemployed plus the underemployed.
The U-6 unemployment rate for May 2012 is 14.8%
So roughly 15% of the American labor force is unemployed or underemployed. That may be the definition of a crisis – though it does not effect rich people.
But there is another awful side to these numbers, long term unemployment, from CNN:
By the numbers, here’s a look at long-term unemployment.
27: Minimum number of weeks that a person must be without a job to be considered “long-term unemployed.”
5.4 million: Number of Americans who have been jobless for more than 27 weeks, as of May.
12.7 million: Number of Americans unemployed as of May.
39: Average duration of unemployment, in weeks, as of May.
42.8: Percentage of jobless Americans considered long-term unemployed.
21: Percentage of unemployed people under 25 who had been jobless for more than a year, at the end of 2011.
42: Percentage of unemployed people over 55 who had been jobless over a year, at the end of 2011.
63.6: Percentage of Americans counted as part of the labor force in April, the lowest rate since 1981.
And long term unemployment does not just mean constant struggle it also means workers lose skills which may be why only 1 in 10 long term unemployed find work. When it comes to job skills it is use it or lose it and people are losing it.
Income & Net Worth Losses
So America has the lowest labor participation rate since 1981 with around 15% of the labor force unemployed or underemployed – but what about the people who have a job?
Before the crisis in 2007-08 most Americans saw their income stagnate as the rich plundered.
After the crisis there was an average incomes fell and most Americans saw a 40% loss in wealth.
One generation of Americans, often referred to as Generation X, lost more than half their wealth in the crisis.
In fact only one group of Americans had an increase in Net Worth after the crisis – you guessed it, the rich. From Market Watch:
The drop was concentrated in middle-class families. Those in the 60th to 79.9th percentile of income saw the biggest drop in wealth, of 40.4%. The second-steepest drop came from those in the 20th to 39.9th percentile of income, of 35%.
The top 10% actually saw an increase of 1.8%.
The top 10% of earners had a median net worth of $1.19 million, or 192 times as much as the median wealth of $6,200 of those in the bottom 20%. In 2007, the top 10% had 138 times as much wealth as the bottom 20%. In 2001, it was 106 times as much.
Well now how did that happen? Perhaps it is time to let everyone in on a little secret, despite the prevalence of pensions/401k plans the average American owns a practically irrelevant amount of financial wealth. Wealth is so concentrated at the top most Americans are not even in the game let alone making plays. In fact, the bottom 80% of Americans own only 7% of the financial wealth of the United States. Or if you prefer Michael Moore’s frame the 400 richest Americans have more wealth than half of all Americans combined.
What does that mean? It means that when former CEO of Goldman Sachs then U.S Treasury Secretary Hank Paulson and former New York Federal Reserve Chairman now U.S Treasury Secretary Tim Geithner promoted a plan to bail out the banks and leave the homeowners twisting in the wind they understood well enough that the current state of affairs was likely to occur given the realities of financial wealth distribution. Actually, preserving the status quo was the point right?
The use of the term “recovery” is inaccurate in every strata of society save the rich. But let us look at a popular measure of national wealth growth via the Gross Domestic Product (GDP).
At first glance this would seem to mean the country as a whole has “recovered” but that just isn’t so.
Remember, most Americans own very little financial wealth which is to say minimal amounts of Corporate Equity (stock) aka claims on productivity.
So what accounts for the growth? Corporate productivity which – despite layoffs – is remaining strong. In fact, firing workers or reducing costs while maintaining and increasing revenues has lead to record Corporate Profits!
Not surprisingly when Corporate Profits go sky high from laying off workers wages relative to GDP drop.
So most of the “recovery” is actually the rich getting richer with no gains for majority of Americans. Lots of wealth for the top and a heavy helping of unemployment, underemployment, and stagnant wages for the bottom. Yum.
So Is This A Depression Or What?
Well let’s look at what Vice President Biden said “It’s a Depression for millions and millions of Americans” that is surely true especially for the long term unemployed. The long term unemployed, particularly those of advanced years, are unlikely ever to be rehired at all let alone hired by an employer willing to pay comparable living wages. This is not due to some moral or ethical failing or other nonsense posited by the reactionary elements of American society but is instead simply a function of skill destruction. The idleness of unemployment erodes existing skills and prevents the possibility of integrating new ones into existing knowledge bases. Some of the younger long term unemployed can perhaps be retrained or trained in other professions but for many the future consists of scraping by until entitlement programs kick in. For many of the long term unemployed it’s simply over.
But what about the youth? Youth unemployment is also high but another more insidious aspect exists for working and middle class young college graduates – student loan debt which is now past the $1 Trillion Mark.
It is important to note that student loans can never be written off, not even in personal bankruptcy. These debts will follow around those college graduates for the rest of their lives if unpaid and given the job market paying back those debts will be difficult. So the long term unemployed and indebted recent college grads are in a Depression of sorts.
But let us be formal for a moment, while no exact definition of a “Depression” exists there are some general parameters, from The Economist:
The word “depression” is popping up more often than at any time in the past 60 years, but what exactly does it mean? The popular rule of thumb for a recession is two consecutive quarters of falling GDP. America’s National Bureau of Economic Research has officially declared a recession based on a more rigorous analysis of a range of economic indicators. But there is no widely accepted definition of depression. So how severe does this current slump have to get before it warrants the “D” word?
A search on the internet suggests two principal criteria for distinguishing a depression from a recession: a decline in real GDP that exceeds 10%, or one that lasts more than three years.
Aye there’s the rub, the term is seen by many economists to be related to GDP growth. Well, America has that – not enough for an economy with new workers, but there is “growth.” Then what is Vice President Biden talking about?
Everyone it seems has a favorite Joe Biden quote (for various reasons) here is mine, from HuffPo:
In an interview with Jon Stewart on Comedy Central’s The Daily Show Tuesday evening, Vice President Joe Biden acknowledged the anger and frustration many taxpayers feel over the way financial institutions seem to have favored status in Washington D.C.
Pointing to the hundreds of billions of government dollars that have been spent to keep banks from failing, he recalled a “great expression” of his grandfather, Ambrose Finnegan: “It’s socialism for the rich and capitalism for the poor,” Biden said
Biden just answered the $7 trillion question. There isn’t one American economy. We aren’t “all in this together.” America is not one economy nor one society. There are two Americas each with their own set of rules and conditions.
The rich America operates in what Citigroup labeled The Plutonomy:
In a plutonomy there is no such animal as “the U.S. consumer” or “the UK
consumer”, or indeed the “Russian consumer”. There are rich consumers, few in
number, but disproportionate in the gigantic slice of income and consumption they take.
There are the rest, the “non-rich”, the multitudinous many, but only accounting for
surprisingly small bites of the national pie. Consensus analyses that do not tease out the profound impact of the plutonomy on spending power, debt loads, savings rates (and hence current account deficits), oil price impacts etc, i.e., focus on the “average”consumer are flawed from the start. It is easy to drown in a lake with an average depth of 4 feet, if one steps into its deeper extremes.
But the reality of the plutonomy is not just written about among financial institutions, it also the subject of open discussion in some quarters, from the Wall Street Journal:
According to new research from Moody’s Analytics, the top 5% of Americans by income account for 37% of all consumer outlays. Outlays include consumer spending, interest payments on installment debt and transfer payments.
By contrast, the bottom 80% by income account for 39.5% of all consumer outlays.
Not just more wealth produced from increasing financial wealth rather than stagnant wages but given the share of consumption the rich – not the middle class – are now increasingly being considered the center of the consumer economy. WSJ continued:
What is surprising is just how much or our consumer economy is now dependent on the rich, and how that share has increased as the U.S. emerges from recession. In the third quarter of 1990, the top 5% accounted for 25% of consumer outlays. That held relatively steady until the mid-1990s, when it started inching up past 30%. It dipped in 2003 and again in 2008, but started surging in 2009 amid the greatest bull market rally in history, with the Dow Jones Industry Average rising nearly 50% in the last nine months of the year…
The data may be a further sign that the U.S. is becoming a Plutonomy–an economy dependent on the spending and investing of the wealthy. And Plutonomies are far less stable than economies built on more evenly distributed income and mass consumption. “I don’t think it’s healthy for the economy to be so dependent on the top 2% of the income distribution,” Mr. Zandi said. He added that, “In the near term it highlights the fragility of the recovery.”
While Depression has no universally recognized technical definition I would call the one used by The Economist as representing a consensus view. By the consensus view among economists America should not be considered in a Depression because GDP is still growing not shrinking, let alone shrinking by 10% nor shrinking for 3 years.
As we have learned GDP growth is not a measure for shared prosperity when all those gains are captured by the rich. So America’s economy is growing but that mostly reflects gains in the Plutonomy not gains for the average American. There is no shared prosperity.
But, as Vice President Biden says, if you are long term unemployed, a recent college graduate unable to make student loan payments, or a previously middle class American who has lost more than half of their wealth – there is little practical difference between GDP recession and growth. You are living in a personal economic Depression. You do not have a job or a job that can sustain even a lower class lifestyle and you have onerous debt or debts you can not pay, it’s an economic Depression, for you.
So Vice President Biden is right this is a Depression for millions and millions of Americans.