Friday, October 23, 2009

A "Jobless Recovery" is a Myth

The story we are getting from the government and the mainstream media is that the United States will experience a "jobless" economic recovery. This is a myth! A jobless recovery means no economic recovery in the United States
By definition, an economic recovery means a net increase in economic activity, which also dictates positive wealth generation. When an economy is expanding and producing real wealth, this must also result in job creation.

The phrase "jobless recovery" fails the test of rationality. Why?

When the very wealthiest members of society have most of the disposable income, it is impossible to have a robust economy.

The reason for this revolves around the economic concept of "marginal propensity to consume". The very poorest people have a marginal propensity to consume of 1 or 100%, since they are forced to spend their money as fast as they receive it just to survive. Conversely, a billionaire may have a propensity to consume of (at most) 0.1 or 10%.

When nations have a strong middle class, it means they have a large proportion of its citizens with a decent "marginal propensity to consume" and a large fraction of each new dollar of wealth produced is spent, which produces economic activity.

Conversely, in a society where wealth is concentrated in a small percentage of the population, only a small fraction of each new dollar of wealth produced gets spent.

Nowhere are these economic principles more true than in a consumer-based economy like the United States. More than 70% of the nation's GDP revolves around consumer spending.

For well over two decades, the US economy has become totally dependent on ultra-high levels of consumption in order to sustain the economy. We had bubbles in the economy - tech, housing, etc. - which produced illusory wealth and temporary jobs related to the bubbles.

The problem now is that the bubbles have burst, jobs are being lost and the middle class has little wealth (savings) left and they have hit the limit as to how much debt they can incur in an attempt to sustain their spending.

The wealth in the United States has become too concentrated in too few hands in order to sustain the economy the way the economy is currently constructed.

There was an interesting analysis, conducted by economists Emmanuel Saez of the University of California, Berkeley and Thomas Piketty of the Paris School of Economics, which showed that in the US the rich are indeed getting richer.

Their report revealed that two-thirds of the US's total income gains from 2002-2007 went to the top 1% of households, with this top 1% holding a larger slice of income in 2007 than at any time since 1928.

The findings, released by the Center on Budget and Policy Priorities, show that during those years in the study, the inflation-adjusted income of the top 1% of households increased than 10 times faster than the income of the bottom 90% of households.

The last time such a big share of the income gain during an economic expansion went to the top 1% - and such a small share went to the bottom 90% - was in the 1920s.

I'm sure many of you will recall reading about that era (The Great Gatsby, etc.) and what followed in the 1930s.

Without a larger portion of the populace having significant spending power, you cannot have a healthy economy - only "jobless recoveries" where Americans mortgage their futures and their children's on more and more debt.

This has been true for thousands of years. The Greek philosopher Plutarch said "An imbalance between rich and poor is the oldest and most fatal ailment of all republics."

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