Are We In A Deepening Structural Recession?

It looks that way.

But first, let’s differentiate between the old-fashioned, pain-in-the-neck, cyclical recession that comes along whenever the business cycle cools off, generally after a spirited run up in wages, prices and asset values resulting from what Alan Greenspan once called irrational exuberance, and the type of recession in which we currently believe we find ourselves.   We know that garden-variety cycles come and go. We hunker down when the economy softens and, generally, come out slugging when activity begins to pick up again.

Forget, for the moment, about the cyclical recessions we’ve all come to love to hate.  What we’re facing today is another type of recession.  It’s real, it’s tenacious, it’s dangerous and we’d better start doing something about it or else it is going to be around for a very long time. We are in a structural recession that, every day, is making a mockery of what we once knew as the American Dream.  That dream was simply that most people of modest or even meager means could, through their own industriousness, pull themselves and their families out of poverty.  And it wasn’t a pipe dream.  It was the American Dream, astonishingly fulfilled (relative to the rest of the world) by generation after generation of Americans.

We’re not quite ready to assume that those days are over, but they are in a frightening deep freeze.  By nearly every measure, the American Dream seems to be receding into a rapidly fading past.  Professor William Galston of the University of Maryland, and also a senior fellow at the Brookings Institution and a regular columnist for the Wall Street Journal, points out that household incomes are, today, 4.7% below where they were when the last recession ended.  Think about that. By the official definition of cyclical recession (two consecutive quarters of negative growth), the last recession ended in June of 2009, and we’re now in our 240^th week of recovery – and household income is nearly 5.0% below where it was at the commencement of the current recovery.

This should be very troubling to every American.  We find arguments that consider various government welfare transfer payments an offset to declining household income to be minimally persuasive.  True, these payments ameliorate the hardship of poverty, but that is a far cry from earned income pulling people out of poverty.

This is not a phenomenon that should pit one Administration against another or one Party against another.  It is a phenomenon that pits our ability (to compete and grow) against the market demands of the world in which we live.  For much of our modern history the value of labor increased pretty much in lock step with increases in output or productivity.  But that has ceased being true for the last generation. In fact, the value of labor has declined relative to economic output for the last 20 to 30 years.  We shouldn’t be surprised.  Peter Drucker predicted, nearly fifty years ago, in his “Age of Discontinuity,” the information-based (think innovation-based) economy that is, today, driving progress throughout the world.  We had plenty of time to prepare, but for too long we remained (and remain) beholden to, and shackled by, an education establishment that has failed to prepare our youth for the very predictable onslaught of change that futurist Alvin Toffler described in his 1970 best seller, “Future Shock.”

We are paying a very stiff price for this failure to prepare.  Today, the odds of workers escaping poverty in America are lower than in Canada and most of Western Europe.  Think about that too!

Two noted economists, Raj Chetty of Harvard and Emmanuel Saez of UC Berkeley found through an exhaustive search of income tax data that the odds of escaping the socio-economic level into which one is born are no higher today than was the case decades ago.

Today, the odds of escaping poverty appear to be only about half as high in the United States as in the most upwardly mobile countries like Denmark, according to Professor Saez.  Both political parties have latched on to the issue, and both parties, in our opinion, are missing the point. President Obama and the Democrats make the case that the affluent are choking off opportunity from others, and Paul Ryan and other Republicans contend that a large, intrusive government is the culprit.

President Obama argued, at a speech before the Center for American Progress, “The problem is that alongside increased inequality, we’ve seen diminished levels of upward mobility in recent years.” Mr. Ryan, not to be outflanked by the President, argued in a speech at the Brookings Institution that a smarter, smaller government would allow the country to “get back to those days of upward mobility.”

Well, both President Obama and Mr. Ryan are grossly over simplifying the problem.  Absolute mobility, which measures people’s annual income relative to their parents’ income, has increased somewhat as the economy has grown, but median family income has only grown a paltry 12 percent over the last 35 years.  Worse still, the rate of absolute mobility has slowed as the economy has slowed over the last 15 years and the incomes of middle-class and poor families have slowed much more sharply than the rest of the population.  Sadly, this means men and women born into poverty have poor odds of escaping poverty.  As one economist somberly proclaimed, “fifty-five is the new sixty-five.”  In other words, if someone is unemployed at age 55, the odds are very strong that they will still be unemployed at 65, or put another way…forever!

Another study released last summer demonstrates that upward mobility in much of the industrial Midwest and other areas in the south such as Atlanta and Charlotte have fallen way behind Western Europe.  And while Western Europe is outpacing much of the United States relative to upward mobility, wages (across the Atlantic) as a percent of total output still seem to be in serious decline.

What makes this situation particularly troublesome is that it leads to crass and destructive political demagoguery rather than to bold and constructive political action.  Democrats blame our long malaise on income inequality and the concentration of wealth among the ravenous 1%.  Republicans love to harp on the overreach of government’s regulatory intrusiveness as the culprit.  If we don’t find some serious thinkers in both parties and find them soon, we’ll all soon be wondering when the American Dream became the American Nightmare.

True, there are absurd levels of income lavished on relatively few.  We have celebrity superstars making tens (even hundreds) of millions of dollars, corporate executives with companies whose Directors provide them with compensation packages that stagger the imagination, and some who work in finance profit lavishly purely by the size of the transactions they engineer. But all of that is really a sideshow.  Focusing on these extremes is but a distraction with little relevance to the basic structural problems we face.

We are living in a soaring innovation and technology age and with galloping globalization, and while all of this innovation may be the last great hope for America, yesterday’s jobs are being jettisoned at warp speed.  More worrisome is the pathetic job we have been, and are, doing preparing our young for the world in which they have, and will, come of age.

We think we can spend six times more on our elderly than we do on our young and still produce a prosperous future for the next generation.  We believe we can rank 27^th in the world in educating our young and still be competitive.  We believe we can graduate a declining number of students in science and math and still achieve a growing economy in a world that, more and more, will be driven by those skilled in science and math.

America is still the world’s innovator, but the innovation we produce is being driven by far too few “knowledge workers,” a term Peter Drucker coined decades ago.  The quality of our thinking power, multiplied by the number of high-quality thinkers will largely determine tomorrow’s prosperity.  Nothing increases wealth at all levels of society as does innovation.

So what to do? 

 We can tinker with the tax code, raise the level of noise about the 1.0%, reintroduce protectionism into our legislative agenda and demonize our innovators – and at the end of the day we will have accomplished nothing.

We need a new Marshall Plan for education in America…not necessarily to spend more per student (we’re already the most lavish spenders) but to rethink how we educate our kids and to dramatically change the way we prepare today’s students for tomorrow’s challenges.  We can’t keep graduating functionally illiterate children by the millions and pretend we have a bright future.  According to the National Assessment of Education Progress (NAEP) over 60% of high school graduates are not reading at grade level when we send them off to college or out into the world to work.

Investment in the young should focus on early education. Early education works but only if kids in pre-school education advance to competently performing grade schools. Pre-school is a crucial first step to improving the lot of disadvantaged children, and America is an international laggard. According to the OECD, it ranks only 28th out of 38 leading economies in the proportion of four-year-olds in education.

We have to turn this abysmal reality around…and quickly. Let’s get serious about making our tax dollars work more efficiently.  Let’s redirect wasted tax dollars into a new educational paradigm. Let’s redirect as much as we can of an estimated $200 billion in tax loopholes into revitalizing education in America.  Let’s amend our tax code to encourage bringing home the $2 trillion in profits American firms earn and keep abroad.  This would result in tremendous investment in new American production, which in turn would produce jobs and new sources of tax revenue with which to do something really worthwhile.

We celebrate The Greatest Generation as the one that saved the world from tyranny over seventy years ago.  We need a new greatest generation, and we have the wherewithal to be that generation. All we have to do is recognize the problem we have, and focus like a laser on fixing it.  It won’t be easy, but it can be done.  If we don’t find it within ourselves to become that new greatest generation, we will have frittered away the sacrifices of the last greatest generation.

We can do this!  We have no time to spare.