February 18, 2013
Robert Samuelson is convinced that the U.S. economy is suffering from psychological problems. In a piece titled, “why job creation is so hard” he tells readers:
“We have gone from being an expansive, risk-taking society to a skittish, risk-averse one.”
Point number one is the rise in the saving rate:
“In the boom years, the personal saving rate (savings as a share of after-tax income) fell from 10.9 percent in 1982 to 1.5?percent in 2005. Now it’s edging up; from 2010 to 2012, it averaged 4.4 percent.”
Is this really a matter of psychology? People have lost $8 trillion in housing wealth as a result of the collapse of the bubble. Homeless people generally don’t spend much money, is this due to psychological issues? As Samuelson noted, in the pre-bubble years the saving rate averaged more than 8 percent. If anything, we should be surprised by how much people are spending.
Next we have investment. Samuelson tells us:
“Businesses have also retreated. They resist approving the next loan, job hire or investment. Since 1959, business investment in factories, offices and equipment has averaged 11 percent of the economy (gross domestic product) and peaked at nearly 13 percent. It’s now a shade over 10 percent, reports economist Nigel Gault of IHS Global Insight.”
Okay, let’s look at this one more closely. If we check the data, the Commerce Department tells us that business investment averaged 10.9 percent from 1959 to 2012 (Table 1.1.5). In 2012 it was 10.3 percent. That’s a drop of 0.6 percentage points in an economy with huge amounts of excess capacity. Furthermore, if we break it down to the equipment and software component and the structure component, we see that all of the decline was in the latter. Equipment and software investment averaged 7.3 percent over the longer period compared to 7.4 percent in 2012. While the decline in structure investment may be due to psychology, it is possible that the large amount of vacant office and retail space is also an important factor.
Samuelson has even more bad news for us.
“The market is simply regaining levels of late 2007. A report from Credit Suisse argues that returns to stocks will average about 3.5 percent annually (after inflation) in the next 20 years, down sharply from 6 percent since 1950.”
As much as I would hate to argue with people that couldn’t see an $8 trillion housing bubble (or a $10 trillion stock bubble), it is difficult to understand how returns will only be 3.5 percent when the current ratio of after-tax profits to corporate equity is more than 7.5 percent. (The Fed reports the market value of the shares of U.S. corporations was $19,698 billion at the end of the third quarter of 2012 [Table l.213, line 23]. The Commerce Department reports after tax profits for domestic corporations in the third quarter of 2012 were $1,515.2 billion [Table 1.12, Line 15].)
It’s hard to imagine what corporate America will do with the extra money if its earning 7.5 percent for each dollar of market capitalization but the return to shareholders is just 3.5 percent. It’s possible that Credit Suisse envisions a sharp plunge in profits from their current highs (it would have to be very sharp to get to 3.5 percent), but this would go in the opposite direction of the concern expressed in Samuelson’s next sentences:
“To compensate for lower returns, companies would need to contribute more to pensions. Wages would suffer. Consumption spending would weaken.”
Oh well.
There is one more point about the psychology and job creation story worth noting. If psychology, rather than lack of demand, explained slow job growth then we would be seeing firms filling the demand for labor through alternative mechanisms. Specifically we would see an increase in the length of the average workweek and increased hiring of temps. In fact, we see neither. The length of the average workweek is still slightly below its pre-recession level as is temp employment.
In short, the story of the downturn remains depressingly simple. We have nothing to replace the huge amount of construction and consumption demand created by the $8 trillion housing bubble. Perhaps if the problem were more complicated, policy types would have an easier time seeing it.
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