Reestablishing the Middle Class
Board: Macro Economics
Regardless of the hoopla around the return of manufacturing to the U.S. the simple fact is: Very few jobs are being created by the minimal shift from foreign sited manufacturing to “HIGHLY AUTOMATED” U.S. based manufacturing facilities. There are some economic advantages to this shift but they do not include long term job creation, increased wages or increased net disposable income for the consumer class.
The reality remains that the U.S. is continuing a net shift away from high paying manufacturing jobs to the creation of significantly lower paying service industry jobs. Any apparent slowing in the rate of change from manufacturing employment to service employment is fully accounted for by the total shift in employment categories that has already taken place over the last 2 decades. In fact, sadly, reporting of new manufacturing employment has been distorted by media and employers who exploited a statistical aberrations that occurs when a relatively few number of jobs is added to a grossly depleted manufacturing labor force number. (Unfortunately a very small number of additional manufacturing jobs can appear to be a 1% or greater increase in manufacturing jobs due to the scarcity of these types of jobs in the U.S. economy.)
For the U.S. economy to truly recover it needs to reestablish a strong middle class that includes gainful employment that offers reasonable increases in wages over time and that allows members of the middle class to build their own “net worth” through housing equity, investment, retirement and savings accounts. The most recent business cycle decimated what had been a viable and active middle class leaving in its place a consumer class consisting of primarily of net debtors. Sadly when we talk about the U.S. savings rate as it relates to the consumer class we are actually talking about the rate of their net debt reduction not their growth in net worth.
To successful reestablish a vibrant and active middle class the U.S. must change its basic value proposition. We cannot continue to place higher value on manufacturing jobs while viewing service employment as somehow representing low skilled entry positions deserving of significantly lower compensation. The reality is that U.S. employment is now dominated by services sector positions and only by recognizing this fact and adjusting our prejudices will the U.S. economy move toward net growth in GDP driven by consumer demand.
Investment stimulus through tax cuts and Federal Reserve Policy have, not surprising, proven ineffective in raising the fortunes of the consumer class. Indeed “supply side stimulus” commonly known as supply side economics is understandably ineffective in creating improvements in demand side characteristics such as net increases in total earnings, disposable income and growth in net worth. Growth in these critical metrics is essential in order to reestablish a viable middle class and indeed to create an environment that will sustain long term growth in US GDP.
The current environment suffers from severe problems in the demand side of the overall GDP equation. Supply side economic stimulus measures work best when an economy has strong domestic and international demand for the goods produced: when demand exceeds available supply, or production, investment capital freed by supply side stimulus will flow into the building of new plants thus providing for both short and long term GDP growth by growing the number of jobs with the resulting increases in total earned income, overall disposable income and the building of middle class net worth.
However in the current economic environment U.S. manufacturing is not fully utilizing existing production capacity and there is a lag in both domestic and international demand for goods being produced in the U.S. In this environment of “DEMAND SHORTAGE” free capital realized through favorable tax policies flows into existing equity markets creating the first stage in valuation distortion.
Federal Reserve Policy has further exacerbated valuation distortion by providing capital at near or below zero real rates of interest. A survey of corporate behavior in the current supply side stimulus environment finds that U.S. corporations have undertaken the single largest disinvestment in U.S. businesses in history. Rather than using free cash resulting from favorable tax treatment and the ability to borrow at near zero interest rates to improve and expand production capabilities in the U.S. Corporations have undertaken a policy of disinvestment in their business by returning capital to shareholders at rates never before seen. Dividend payouts and stock buybacks, the preferred way to disinvest, are at record highs while net new investment (investment – depreciation) is U.S. plant and equipment is negative. Sadly corporate leaders have spoken in mass and they are saying they cannot productively invest in the U.S. economy so funds are being returned to investors.
One perverse aspect of this disinvestment is to create and additional upward distortion in the equities markets. With the Federal Reserve continuing to artificially hold interests near zero the only remaining opportunities for investment are in the equity markets. Funds being returned to investors from a disinvestment in U.S. manufacturing assets are being reinvested in the now reduced number of shares outstanding and thus causing a rapid rise in prices for those shares remaining. Earnings growth has largely been a function of reduced shares outstanding and share value growth has been accelerated by the ever increasing stream of money from disinvestment chasing after ever fewer shares.
Federal Reserve Policy has played a major role in this distortion without having any measurable positive impact on employment. Indeed Fed Policy and the Fed mandate regarding full employment have proved a useful crutch for congress to become ever more ineffective. While the Fed casts about with interest and quantitative policy in attempts to ignite job growth congress has been able to continue to hold the economy, and the country, hostage, with the full knowledge that while employment will not improve the Fed will insure we do not enter a catastrophic economic downturn. For the point of view of congress “the Fed’s got their back”, a very policy that ignores the basic time function dictated by the law of diminishing returns and accelerated by capital depletion in the manufacturing sector.
Fed policy cannot directly create jobs and when there is intrinsic demand side weakness as we have today neither Fed policy nor additional Supply Side policies can create jobs or expand the economy. Lacking demand (domestic or international) there is simply no need for supply side expansion.