Every month the number of jobs added to the economy gets a lot of publicity. Recently, the economy has added about 200,000 jobs a month which sounds and feels good combined with headline unemployment of 5 percent.
But there is a story these numbers do not tell and a darker reality that is less publicized.
According to various estimates there are between 2 and 7 million Americans who are not working and have stopped looking for employment. According to the American Enterprise Institute, just counting men, there are 7 million in this category.
These folks live in deep and dire poverty. Many are homeless and lack access to a computer or transportation, which they need to apply for jobs, training or housing. They are not included in the official unemployment numbers.
According to the Bureau of Labor Statistics there are 7 million officially unemployed and nearly 6 million people who are working part-time but want to work full-time. Together the total unemployed and underemployed actually number around 20 million.
The Great Depression
John Maynard Keynes recognized that business investment was the most unstable element in modern economies and likely to cause the most severe unemployment. During the Great Depression business investment evaporated, unemployment was greater than 35 percent and Gross National Product (GNP or the size of the economy) contracted.[i]
To combat the Great Depression President Franklin Roosevelt introduced the New Deal which increased federal government spending dramatically between 1933 and 1937. This action, along with looser monetary policy, bought the economy back to life as GNP nearly doubled and unemployment fell from 35 percent to 20 percent. Corporate spending also returned and by 1937 it was greater than before the Great Depression began.
But the New Deal was an experiment and Roosevelt decided to go in a different direction in late 1937. At that point bank lending was curtailed by tighter monetary policy and federal government spending was reduced markedly. This reversed the recovery as unemployment climbed dramatically and GNP contracted.[ii] Some have labeled this a double-dip recession.
Do the actions of the New Deal have practical lessons for the present?
During the Great Recession of 2008/2009 the size of the economy (now GDP) shrank, corporate spending contracted and seven million people lost their jobs. To resuscitate the economy President Barack Obama passed the federal stimulus which increased federal government spending and the Federal Reserve Board lowered interest rates. By the second half of 2009 GDP was growing, employment was returning and the stock market had recovered.
Since 2011 federal government spending has been restricted and business investment has retreated to 2009 levels. The lack of corporate spending and falling exports has led to anemic economic growth as highlighted by low GDP numbers in the first six months of 2016.[iii]
Research from investment bank Morgan Stanley indicates policy makers may be making the same Great Depression-style mistakes that led to the double-dip recession in 1937. It warns, “policy decisions today contributed to the slowdown in recent quarters.” They write what is needed is “more stimulus.”[iv]
According to the investment bank, the U.S. economy is about to experience its fifth consecutive year of below average growth. It suggests increased public spending “particularly now when rates are still low, could lead to a virtuous cycle, where the corporate sector takes up investment, thus sustaining job creation and income growth”.
Government interest rates are, and have been, at historic lows. The current yield on the 10 year U.S. bond is 1.6% and has remained below 2% since the beginning of the year. The value of the dollar has been rising and should remain high as European and Japanese banks deploy negative interest rates to remain competitive. The Chinese central bank is keeping the value of the yuan low as well. In fact, the value of the dollar is currently so high it’s hindering exports.[v]
Since 2008 the U.S. Federal Reserve and other central banks around the world, have loosened monetary policy though lower interest rates and quantitative easing. Some economic analysts, like Mohamed El-Erian of Allianz and Morgan Stanley, argue that this monetary expansion may have reached a point of diminishing returns.[vi]
Keynes advocated increased government spending when business spending tanked. Would government spending provide a productive boost to the economy?
According to the Wall Street Journal, “It Has Never Been Cheaper for Cities and States to Borrow Money.” In 2004 states and localities borrowed more than $300 billion to fund construction projects; in 2016, this number will be less than $100 billion. Federal construction grants to states and localities, which were more than $90 billion following the Great Recession, have shrunk to less than $50 billion.[vii]
In California borrowing is almost 40 percent lower than it was in 2009 and construction spending for the next five years has been cut by an additional 28 percent. Florida has refused to fund its main construction program for public schools and universities for the last five years.[viii]
The McKinsey Global Institute recommended the U.S. boost infrastructure spending by $129 billion a year to meet transportation, water, energy and telecommunications requirements. S&P Global Ratings analyst, John Sugden, has written that delaying repairs could drive up costs in the long run.
The American Society of Civil Engineers (ASCE) says the U.S. will need to spend $1.4 trillion over the next decade to meet its infrastructure requirements.[ix] Economist and former Treasury Secretary Larry Summers has recommended the U.S. put $1 to $2 trillion over the next decade into rebuilding.[x] Summers warned that the cost to repair infrastructure needs “compounds at 10 or 20 percent a year” while government bonds compound at “1 or 3 percent a year.” Others have noted that even this 1 to 3 percent rate would be close to zero percent after inflation.[xi]
Borrowing costs have never been lower, the value of the dollar has rarely been higher, materials costs are down and the expanding hole at the bottom of the wage ladder has rarely been more pronounced.
Both Presidential candidates have voiced support for increased infrastructure spending. Secretary Clinton’s plan calls for a combination of borrowing and spending to increase public construction spending by $500 billion over the next decade. At $50 billion a year, this falls well short of what ASCE, McKinsey and Secretary Summers recommend.[xii]
Donald Trump has pledged to spend twice as much as Clinton, but has provided few details. As his tax plans are projected to shrink federal revenue, it is difficult to view his spending pledges seriously. He has discussed the use of debt financing but has also set aggressive targets to reach a balanced budget.[xiii]
History, economic theory, infrastructure needs and crippling unemployment demand significantly increased spending to rebuild America. How long will these economic needs be thwarted by the politics of fiscal minimalism?
[i] Watkins, Thayer. “The Recovery from the Great Depression of the 1930s.” San Jose State University Department of Economics, www.sjsu.edu.faculty/watkins/recovery.htm . (and) Lebergott, Stanley, National Bureau of Economic Research, “The Annual Estimate of Unemployment in the United States, 1900-1954.” http://www.nber.org/chapters/c2644.pdf , 1957
[ii] See i
[iii] “U.S. Growth Starts Year in Familiar Rut.” Wall Street Journal http://www.wsj.com/articles/u-s-first-quarter-gdp-advances-at-0-5-pace-1461846715 .
[iv] Morgan Stanley, “For the World Economy, Is it 1937 All Over Again,” July 15, 2016, http://www.morganstanley.com/ideas/global-economy-risks-double-dip-without-more-stimulus .
[v] Lange, Jason and Saphir, Ann. “WRAPUP 1-Fed’s Yellen sees stronger case for interest rate hike.” Reuters, Bond News,
[vi] See iii and El-Erian, Mohamed, The Only Game in Town: Central Banks, Instability and avoiding the Next Collapse, Random House, 2016. August 26, 2016, http://www.reuters.com/article/usa-fed-idUSL1N1B71UY .
[vii] Harrison, David and Gillers, Heather. “American Paradox: It’s Never Been Cheaper for Cities and States to Borrow Money…And They Refuse to Do It.” Wall Street Journal, Aug. 7, 2016,http://www.wsj.com/articles/american-paradox-its-never-been-cheaper-for-cities-and-states-to-borrow-money-and-they-refuse-to-do-it-1470562203 .
[viii] See vii
[ix] American Society of Civil Engineers. “New Report Find Aging Infrastructure Comes at a High Cost to the Economy,” May 10, 2016. http://www.asce.org/templates/press-release-detail.aspx?id=20935
[x] Newmyer, Tory. “Larry Summers: The Next President Will Need Up to $2 Trillion for Infrastructure.” Fortune, July 27, 2016. http://fortune.com/2016/07/27/larry-summers-2-trillion-for-infrastructure/
[xi] Goldfarb, Jeffery. “Note to D.C.: Jack-hammer away on infrastructure.” Reuters, Breaking Views, August 3, 2016, http://blogs.reuters.com/breakingviews/2016/08/03/note-to-d-c-jack-hammer-away-on-infrastructure/ .
[xii] “Hillary Clinton’s Infrastructure Plan: Building Tomorrow’s Economy Today.” Hillary Clinton Campaign website. Factsheets, The Briefing. https://www.hillaryclinton.com/briefing/factsheets/2015/11/30/clinton-infrastructure-plan-builds-tomorrows-economy-today/ .
[xiii] Long, Heather. “Trump vows to outspend Clinton on roads, bridges.” CNN Money, August 3, 2016, http://money.cnn.com/2016/08/03/news/economy/donald-trump-infrastructure/ . Also, Thomas, Zoe. “U.S. election: Could Trump really cut the US $19tn debt in eight years.” April 8, 2016, http://www.bbc.com/news/business-35974537 .