Is Great Depression II on the Horizon?

A new study by Northwestern University economists, called The “Jobless and Wageless” Recovery from the Great Recession of 2007-2009,” found that the economic recovery is highly uneven: corporate profits captured 88 percent of the growth in real national income while aggregate wages and salaries accounted for only slightly more than one percent. In other words, the average American worker has been left behind by the recovery, which officially began in June 2009. “The economic recovery through 2011 I has failed to create any net new jobs since the quarter marking the end of the recession in 2009 II.

“The absence of any positive share of national income growth due to wages and salaries received by American workers during the current economic recovery is historically unprecedented. The lack of any net job growth in the current recovery combined with stagnant real hourly and weekly wages is responsible for this unique, devastating outcome,” wrote the report’s authors. Indeed the share of wealth generated in the recovery period since June 2009 going to salaries was a measly $7 billion in comparison to the $464 billion going to corporate profits. “The only major beneficiaries of the recovery have been corporate profits and the stock market and its shareholders.”

America’s Economy Shrinking

While the current wage and profit numbers are without precedent, the trend of the jobless, wageless recovery has been a feature of the American economy since the 1980s: for three decades, the share of wages in national income growth declined after each recession.

Another trend is the decline of economic growth since the 1950s, when it was over 12 percent, to slightly over eight percent in the 1980s and less than four percent in the three decades since. The chart below illustrates the decline of GDP growth in the last five decades.

Another aspect of the chart is the deeper recessions since 1950. The last recession saw a decline in GDP of four percent, a record fall, but well in keeping with a trend of greater and greater contractions.

Phantom Economic Booms Obscure Economic Realities

But all of this has been recently obscured by two speculative bubbles—the dot com boom and the housing boom—making it appear that things were going great in America in the last decade when, in fact, things were going badly for the average person.

Much of the reason had to do with the prolonged destruction of the industrial sector—where as many as six million jobs had been exported abroad. Writes Karl Smith in Manufacturing collapse, “…[the] real manufacturing recession began in 1999 and simply never stopped. What’s amazing is that we had any recovery at all.”

While these speculative booms benefitted a few, most of America, Smith writes, “had been in a recession ever since the dot-com bubble burst…The job loss that began in 1999 has continued at a greater or lesser pace ever since. More likely this is the result of globalization.”

Economic prospects for many were fading because the American economy’s core has been in the process of decoupling from the periphery, leaving most Americans in the hinterlands of falling incomes and growing want. The core is no longer investing in America, but investing abroad. But the diminished spending power of the average American contributed to the economic contractions. It was declining household net worth that preceded each of the last two recessions. Smith writes in “Structure of a Recession, Part 1”:

The red line indicates the net worth of U.S. household, plotted on the right axis. It flattens out and declines just before 2001 and collapses in 2007. In each case it precedes the weak job market by about a year and in each case the job market does not turn around until net worth starts rising again.

And household net worth again declined after the most recent, epic economic recession, setting the stage for another economic contraction.

Expansion of Welfare Needed Now to Prevent Descent of Tens of Millions Into Poverty

Growing productivity and globalization are part of the reasons for these epic collapses, helping increase profits while at the same time keeping unemployment high and wages down as the American worker has to compete with cheap labor abroad.

These trends are not over nor can they be addressed through any job-creation schemes because there is no demand for the surplus workers—millions of jobs have been shipped abroad, especially to China, a country which developed an enormous industrial base which its domestic consumer market cannot support, and replacements for these jobs can’t be magically waved into existence.

In the absence of generous welfare provisions like those in Europe, structural unemployment in the U.S. will exact a terrible social toll as poverty rates rise in the near future. Unfortunately, policies thus far have been informed by  an austerity dogma, centered not on expansion of federal spending or expansion of social services but on cutting them. Without a vast expansion of the safety net, however, more will fall into poverty in the coming years and overall the economy will continue to deteriorate.