The US Economy Since the
Crisis: Slow Recovery or
Secular Stagnation?
Plenary Session on “Varieties of Stagnation? Europe, Japan and the US”
Conference on “The Spectre of Stagnation? Europe in the World Economy”
FMM/IMK/Hans Böckler Foundation, Berlin, Germany
October 23, 2015
Dr. Robert A. Blecker, Professor of Economics, American University
Washington, DC, USA, blecker@american.edu
Slow recovery and secular stagnation

The US economy is experiencing both the slowest and
weakest recovery since World War II and a longer-term
slowdown


Sluggish recoveries from the last two recessions (2001 and
2008-9) are an indication of longer-term stagnation
Some claim it’s not so bad (Ben Bernanke, Jason Furman)
 The US has done better since 2008 than it did after 1929


The US is doing better than other advanced economies


True, but it’s not a high standard
But most of the others (euro area, Japan) are also stagnating
The US economy is experiencing its slowest growth since
World War II and the slowdown pre-dates the 2008-9 crisis
and Great Recession

Especially in terms of job growth/employment creation
Comparisons with the Great Depression
and the Euro Area
(C+I)
Source: Jason Furman, “It Could Have Happened Here: The Policy Response That Helped Prevent a Second Great Depression,” Macroeconomic
Advisers’ 25th Annual Washington Policy Seminar, September 9, 2015 (expanded version of remarks).
The US only looks relatively good in comparison with the other advanced economies,
which are doing even worse
Average annual percentage growth rates
Pre-crisis (1992- Crisis (2008- Recovery (20102007)
2009)
2015)
Advanced Economies
United States
Canada
Euro area
France
Germany
Italy
Spain
Japan
United Kingdom
Emerging Market and Developing
Economies
ASEAN-5
China
India
Russia (data start in 1993)
Latin America and the Caribbean
Middle East, North Africa, Afghanistan,
and Pakistan
Sub-Saharan Africa
3.2
3.0
2.1
2.1
1.5
1.4
3.2
1.1
2.8
-1.5
-0.8
-2.0
-1.4
-2.4
-3.3
-1.2
-3.3
-2.3
2.3
2.4
0.8
1.0
1.9
-0.3
0.1
1.4
1.9
4.9
10.7
6.7
2.0
3.4
3.9
9.4
6.2
-1.3
1.3
5.4
8.2
7.3
1.8
3.1
4.7
4.4
3.7
5.0
3.6
5.1
Source: International Monetary Fund, World Economic Outlook Database, April 2015 and July 2015 update, and author’s calculations.
Data for 2015 are IMF staff projections from the July 2015 update.
The current US recovery is the weakest in the
last 35 years
Each recovery and expansion has been weaker than the one before it since
1981.
Average annual GDP growth rates, US recoveries/expansions, last four business cycles
Cycle
(Peak-trough-peak)
First 16
quarters of
recovery
Expansion
(trough to
peak)
Entire cycle
(peak to peak)
1981Q3-1982Q4-1990Q3
5.2
4.3
3.4
1990Q3-1991Q1-2001Q1
3.4
3.6
3.3
2001Q1-2001Q4-2007Q4
3.2
2.8
2.6
2007Q4-2009Q2-2015Q2*
1.9
2.2
1.1
Source: BEA, National Income and Product Accounts, release of August 27, 2015, www.bea.gov, and author’s
calculations. Business cycles follow the NBER chronology.
*2015Q2 is not a cycle peak, but is the most recent period available.
Real GDP: Weakest and longest recovery in any
business cycle since 1960
Percent Real GDP losses in recessions since 1960
1960-Q2
1969-Q4
1973-Q4
1980-Q1
1981-Q3
1990-Q3
2001-Q1
2007-Q4
Percentage change relative to peak quarter
2
1
0
-1
-2
-3
-4
-5
0
1
2
3
4
5
6
7
8
9
10
Quarters after GDP peak
11
12
13
14
15
Employment: longer and more “jobless” recoveries since
1990
The 1990 and 2001 recessions were worse in terms of
employment than GDP
In the current recovery it took more
than 6 years for employment to
return to its previous peak.
Each of the previous three
recoveries has been more
“jobless” than the previous one.
The long-term slowdown in US employment growth (since 2001)
Total US Nonfarm Employment in Millions,
Monthly, January 1980 to August 2015
150
Trend (peak-to-present, February
2001 to August 2015)
140
Millions
130
120
Trend (peak-to-peak, March
1980 to February 2001)
110
Average Annual Growth of
Employment (in millions)
100
90
80
1980
1985
1990
Mar. 1980 – Feb. 2001
2.00
Feb. 2001 – Aug. 2015
0.66
1995
2000
2005
2010
2015
Source: US Bureau of Labor Statistics, www.bls.gov, Employment, Hours, and Earnings from the Current Employment Statistics survey
(National), downloaded September 26, 2015, and author’s calculations.
Real median US family income,
annually, 1947-2013
80,000
70,000
2013 US dollars
60,000
50,000
40,000
30,000
20,000
10,000
1947
1953
1959
1965
1971
1977
1983
1989
1995
2001
2007
2013
Source: Economic Policy Institute analysis of BLS, Current Population Survey Annual Social and Economic Supplement Historical Income
Tables (Table F-5), in State of Working America, 2014, www.epi.org.
Demand-side causes of secular stagnation:
increasing inequality

Inequality has worsened since the 1980s along
several dimensions, including:


Increased wage gaps between more and less educated
workers (so-called “skill premium”)
Real wages have lagged behind labor productivity since
1980s




Decreasing labor share of national income since 2000
Increasing shares of highest quintiles, top 1%, etc. in the
distribution of household or family incomes
Rising remuneration of CEOs relative to employees
This weakens most households’ ability to finance
consumption expenditures out of current disposable
income
Labor productivity and real hourly compensation, all employees,
US nonfinancial corporate business sector, 1960Q1 to 2015Q2
300
Indexes, 1960-62 average = 100
250
Labor productivity
(output per hour)
200
150
100
Labor compensation
(real wages and
benefits per hour)
50
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Source: US Bureau of Labor Statistics, www.bls.gov, Major Sector Productivity and Costs, downloaded September 27, 2015, and author’s calculations.
Index of the labor share of value added, US nonfinancial
corporate business sector, quarterly 1960Q1 to 2015Q2
105
Index, 1960-62 average = 100
China
joins
WTO
100
Financial
crisis
95
90
85
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Source: US Bureau of Labor Statistics, www.bls.gov, Major Sector Productivity and Costs, downloaded September 12, 2013, and author’s calculations.
Average annual US family income growth by quintile
and top 5 percent, various time periods
1979–2007
2007–2013
3%
2%
1%
0%
-1%
Top 5 percent
Top fifth
Fourth fifth
Middle fifth
Second fifth
-2%
Bottom fifth
Average annual percentage growth rate
1947–1979
Source: Economic Policy Institute analysis of BLS, Current Population Survey Annual Social and Economic Supplement Historical Income
Tables (Table F-3) , in State of Working America, 2014, www.epi.org.
Shares of top 1% and top 0.01% in US income,
1913-2014
25
10
Share of top 1% (left scale)
20
8
15
6
10
4
5
2
Share of top 0.01% (right scale)
0
0
1913
1923
1933
1943
1953
1963
1973
1983
1993
2003
2013
Source: World Top Incomes Database, http://topincomes.parisschoolofeconomics.eu/, last updated July 25,2015, downloaded September 27, 2015.
Household borrowing delayed the
stagnation of demand

Rising inequality and stagnant earnings were counteracted by
increasing household debt and asset price bubbles during the
expansions of the late 1990s and early 2000s

This was encouraged by a deregulated financial system that offloaded the
risk from the banks that originated the loans into securitized assets


But the debts and bubbles were unsustainable


Godley (1999); Pollin (2003); Cynamon, Fazzari, and Setterfield, eds. (2013);
Lavoie and Stockhammer, eds. (2013); Hein (2012); and many others
Most of the increased debt was in mortgages, used to pay for housing


Financialization/money manager capitalism
But some of the borrowed funds can be used directly or indirectly to pay for
consumption
Rising debt service burdens, the collapse of house prices, rising
unemployment, and tighter credit conditions after the bubble burst in
2007 put an end to this household debt-led consumption boom
US household debt as a percentage of disposable
personal income, quarterly 1960Q1 to 2015Q2
140
Percent of disposable personal income
120
100
80
60
40
Mortgage debt (housing loans)
20
Consumer debt (credit cards etc.)
0
Sources: Federal Reserve, Financial Accounts of the United States (Z.1), http://www.federalreserve.gov/releases/Z1/default.htm; release date 9/18/15; BEA, NIPA
Table 2.1, www.bea.gov, release date 9/25/15; all data downloaded 9/27/15; and author’s calculations.
US Real Housing Price index, quarterly,
1991Q1 to 2015Q2 (SA)
170
160
Index, 1991Q1 = 100
150
140
130
120
Ratio of Federal Housing Finance Agency
(FHFA) purchase-only house price index
to the Bureau of Economic Analysis (BEA)
chain-type price index for gross domestic
product, both seasonally adjusted, and
rebased to 1991Q1 = 100.
110
100
90
1991
1994
1997
2000
2003
2006
2009
2012
2015
Source: FHFA, www.fhfa.gov, data released 9/22/15; BEA, www.bea.gov, NIPA release of 9/25/15; all downloaded 9/27/15; and author’s calculations
Investment has not increased to take up the
shortfall in aggregate demand


In spite of record high profits and low interest rates, business fixed
investment as a share of GDP has been trending downward since
2000

Firms seem to be responding mainly to the lack of demand growth
(strong accelerator effect)

Contrary to some studies that have found “profit-led growth” in the US

This also shows the weak impact of monetary policies (conventional and
QE)
Both housing and business construction are still depressed

Business investment in equipment and “intellectual property” has
recovered relatively more, but not enough to make up for weaker
construction

Firms are diverting profits to stock buy-backs, mergers & acquisitions,
FDI, and other uses that don’t augment domestic capital stocks
Business fixed investment share of GDP
and profit share of corporate value added
25
Profit share
Percentage
20
15
Investment rate
10
5
1980 Q1
1985 Q1
1990 Q1
1995 Q1
2000 Q1
2005 Q1
2010 Q1
2015 Q1
Gross domestic business fixed investment share of GDP
Net operating surplus share of value added, total corporations
Source: US Bureau of Economic Analysis, www.bea.gov, NIPA Tables 1.1.5 and 1.14, data release of 25 September, 2015; downloaded 2 October,
2015; and author’s calculations.
US interest rates, monthly, January 2005 to August
2015
7
6
Percent per year
5
4
3
2
1
0
Federal funds rate
10-year bond yield
30-year mortgage rate
3-month Treasury bill rate
Moody's Aaa corporate bond rate
Source: Board of Governors of the Federal Reserve System, Statistical Release H.15 Selected Interest Rates,
http://www.federalreserve.gov/datadownload/, downloaded September 25, 2015.
US Housing Units Started, Monthly,
January 1970 to August 2015 (not seasonally adjusted)
Thousands of housing units (per month)
250
200
150
100
50
0
Source: US Census Bureau, www.census.gov, Business and Industry Surveys, New Residential Construction, downloaded September 25, 2015.
Impact on growth of potential output

The slower accumulation of capital reduces the growth of
potential output on the supply side



The decrease in growth of potential output is endogenous and results
largely from the demand-side slowdown (L. Ball and others)
Reduced labor force participation and slower human capital
accumulation also contribute
“A reduction in capital deepening—which we view as mostly an
endogenous response to weak demand—caused almost half of the
cumulative shortfall in potential output from its pre-crisis trend”

Reifschneider, et al. (2013, p. 33)

Decreased labor force participation and depreciated human capital of
long-term unemployment workers also contribute
Fiscal policy: Austerity US style

Tax cuts under Reagan (1980s) and George W. Bush (2000s)
generated chronic budget deficits, which were later used as an excuse
to slash social expenditures and public infrastructure investment

Stimulus policies during the crisis: too little, too late, too short



A small tax cut under Bush, spring 2008

Combined tax cuts and spending increases under Obama, 2009-10
Government expenditures have been cut repeatedly since the
Republicans retook control of the House of Representatives in 2011
and Senate in 2013

The debt ceiling compromise (2011) led to the fiscal cliff and sequestration
(2012-13)

The Republicans have demanded spending limits as a condition to avert a
government shutdown or raise the (artificially imposed) debt ceiling
The result has been a serious “fiscal drag” on the recovery
US Real Government Expenditures in the Last Four
Recessions and Recoveries (up to 30 quarters)
135
Index, previous cycle peak = 100
130
1981-Q3 to 1989-Q1
(Reagan)
125
120
Obama stimulus
115
2001-Q1 to 2007-Q4 (Bush II)
110
1990-Q3 to 1998-Q1 (Bush I - Clinton)
105
100
95
Republicans take over House
of Representatives
2007-Q4 to 2015-Q2 (Bush II - Obama)
90
0
2
4
6
8
10
12
14
16
18
20
22
24
26
28
Quarters after previous cycle peak
Source: US Bureau of Economic Analysis, www.bea.gov, NIPA Table 1.1.6, data revised August 27, 2015, and author’s calculations. Note: Total
government expenditures include federal, state, and local.
30
Underlying structural causes


The story of greater inequality and a reduced wage share
creating a tendency toward weaker consumer demand, which
was offset by household borrowing and asset price bubbles
until 2007, has been told many times
But what were the causes of increased inequality and a lower
wage share in the US?


There are many causes; I will focus on the ones most directly related
to secular stagnation of income and employment
The causes are structural and related to the deteriorating
performance of the US labor market and the changing position
of the US in the global economy
Changes in the composition of output and
structure of industries

The share of manufactures and other goods in GDP is falling;
the share of services is rising


Driven by a rising trade deficit in manufactures and the vertical
disintegration of industries (offshoring of intermediate goods and
assembly operations) as well as profound technological changes
What remains of US manufacturing needs relatively little labor as
a result of technological innovation and vertical specialization


The most labor-intensive operations are outsourced
This has a two-sided effect on labor markets and inequality:

Downward pressure on wages


Most of the growth in manufactured imports comes from low-wage
countries (Mexico, China, other developing and emerging economies)
Decline in high-wage employment

As manufacturing shrinks and low-wage services expand
US manufacturing trade balance as a percentage of value
added in manufacturing, annually, 1978-2014
15
10
Percentage of value added
5
0
-5
-10
-15
-20
-25
-30
-35
-40
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
Source: Census, FT900, various years, www.census.gov; BEA, International transactions accounts (release of September 17, 2015) and GDP by
industry (release of April 23, 2015), www.bea.gov, all downloaded October 3, 2015, and author’s calculations. Note: trade balance data for
manufacturing in 1978-1991 are author’s extrapolations (backward forecasts). Details available on request.
Shares of US imports of goods, annually, 1986-2014
100%
90%
80%
Major industrialized countries
70%
60%
50%
40%
Other developing and emerging countries
30%
20%
China + Mexico
10%
0%
1986
1990
1994
1998
2002
2006
2010
2014
Source: BEA, International Transactions Accounts (balance of payments basis), Table 2.1 and historical Table 2b, release of September 17, 2015, downloaded
October 3, 2015, and author’s calculations.
US Manufacturing Employment in Millions,
Monthly, January 1980 to August 2015
20
18
Millions
16
14
12
10
8
6
1980
Changes in US manufacturing
employment (in millions)
1980 to 2001
−2
2001 to 2015
−5
Cumulative 1980-2015
−7
1985
1990
1995
2000
2005
2010
2015
Source: US Bureau of Labor Statistics, www.bls.gov, Employment, Hours, and Earnings from the Current Employment Statistics survey
(National), downloaded September 26, 2015, and author’s calculations.
The impact of a rising share of services in GDP
on employment in cyclical recoveries

A growing proportion of services industries implies a
slower recovery of employment after recessions
(Olney & Pacitti, 2015)


Service producers don’t need to restock inventories in
anticipation of increased demand

Also few services are exported so exports don’t provide a
boost in the recovery

Much of the recovery in manufactures is transmitted to the
exporting nations that supply US imports
These factors leader to longer recoveries for
employment after a cycle trough, as we have seen
following the past three recessions (1991, 2001, 2008-9)
The impact of a rising share of services in GDP
on long-term employment trends

Services are not all equivalent (Basu & Foley, 2013)

Some services have “measureable value added” (MVA)


These sectors create jobs in proportion to value added
Other services don’t have measurable value added

Their “output” is imputed based on income received, and not
closely related to job creation


Especially “FIRE” (finance, insurance, real estate)
The growing proportion of non-MVA services in total
GDP makes employment growth become delinked from
(measured) output growth

Thus employment growth has become weaker relative to GDP
growth in the last several business cycles and secularly since
2001
100%
90%
80%
Other services with output imputed by income
(professional and management, educational, health,
government, and other)
Percentage of GDP
70%
Finance, insurance, and
real estate (FIRE) services
60%
50%
40%
30%
Services with measurable value added
(wholesale and retail trade, transportation, information, arts and
entertainment, accommodation and food, administrative)
Other goods*
10%
Manufacturing
0%
Goods
20%
Measurable value added
Output imputed by income
Composition of US Output (Value Added by Industry),
Annually, 1960-2012
1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
Source: BEA, www.bea.gov, GDP by industry tables, release of April 25, 2013, and author’s calculations. Categories suggested by Basu and Foley (2013).
*Other goods consist of agriculture, forestry, fishing, mining, and construction.
Principal Net Global Demand Flows:
A Schematic View
Deficit
countries,
demand
generators (US,
UK, Southern
Europe)
Manufacturing
exporters: China,
Germany, Japan,
East and South
Asia, Mexico
Resource
Exporters: South
America, Africa,
Middle East,
Australia,
Canada
A weakening of the
US role in generating
global demand is
contributing to
stagnation or slower
growth in the two
other groups
Global impact of US stagnation



In the 1990s and early 2000s, global growth was sustained by a triangular pattern
of trade imbalances, financial flows, and demand transmission

The US current account deficit and corresponding East Asian surpluses

Intraregional imbalances and demand flows within the Euro Area, North America, and
East Asia
This pattern of imbalanced growth led to rising commodity prices for resource
exporters in the early 2000s

The commodity price boom has now ended, causing growth slowdowns in primary
commodity exporting nations

During the boom, Dutch disease caused deindustrialization in mixed primarymanufactures economies, e.g. Brazil and Canada
Manufacturing exporters (Germany, China, Mexico, etc.) ultimately relied on debtdriven household demand in the deficit countries (chiefly the US, also the
European periphery) for their export-led growth

The fallacy in this strategy is that it ultimately weakens the very source of its dynamic by
undermining employment and incomes in the deficit nations that generate the demand
A smaller US current account deficit implies a weaker demand impulse to the rest
of the world since 2008
US current account balance as a percentage of GDP,
quarterly, 1980Q1 to 2015Q2
2
1
Percentage of GDP
0
-1
-2
-3
-4
-5
-6
-7
1980
1985
1990
1995
2000
2005
2010
2015
Source: BEA, National Income and Product Accounts, Tables 1.1.5 and 4.1, revised September 25, 2015, www.bea.gov, and author’s calculations.
Global economic prospects


The US is not likely to be as strong a generator of global demand in
the foreseeable future as it was before 2008

The continued US large trade deficit in manufactures is only partly offset
by improved trade balances in services, and investment income

Smaller US current account deficits imply less transmission of demand
stimulus to the rest of the world
To avoid sustained global deflationary pressures, the surplus
nations and resource exporters need to generate more of their own
demand, and not rely so much on the US or other deficit countries
to be the locomotives of growth in the coming years

Enhanced “South-South” trade (among developing and emerging
market countries) can play a pivotal role

But the major surplus countries (Germany, China, Japan) also need to
do their part to prevent a deflationary adjustment
Summary

The US economy is currently locked into a trajectory that
implies a tendency toward secular stagnation as a result of
these interrelated factors:

Underlying weakness of household demand due to stagnant real
wages and increasing inequality





Once the artificial fillip of excessive borrowing and debt is removed
Structural changes leading to reduced employment generation in
proportion to output growth and a shrinkage of high-wage
manufactures
Weak private sector investment in spite of record profits and low
interest rates
Political gridlock and the imposition of austerity in fiscal policy
Reverberations from foreign slowdowns especially in the euro area
and resource exporters, which are key markets for US exports
Tendencies vs. predictions


The last time I predicted US stagnation was in a 1994 book chapter

Very bad timing; I learned a lesson

Any prediction must be conditional on the absence of counteracting forces
Possible offsets include:



A new financial bubble and debt-led spending boom

We should not underestimate the ingenuity of Wall Street or the short memories of policy
makers and private agents

Of course it would not be sustainable
An enhanced role for the public sector

For example, though public investment in infrastructure, clean energy (solar, wind), and
other social needs – or a new military build-up?

Restoring Hyman Minsky’s “big government” and possibly creating an “employer of last
resort” for countercyclical purposes
None of this will make a dent in inequality unless it creates sustained high
employment leading to a recovery of wages relative to productivity, and unless the
underlying structural problems are also addressed