From the Great Moderation to the Great Stagnation


For much of the past decade, I was a proponent of the thesis that that the American economy had entered a “great moderation,” where expansions lasted longer and recessions were fewer, shorter and milder. Productivity had seemingly reached a permanently high plateau; inflation seemed tamed. The spreading of financial risk, across institutions and around the world, seemed to have reduced the odds of a crisis.

Events of the past 30 months have put that thesis to rest.  I gave my mea culpa in Growth Strategies #1039 (October 2009), and also explained why we would instead be experiencing slow growth, high unemployment, low productivity growth, and higher taxes for the foreseeable future. That future has come to pass, and will continue to play out for years to come.

Where does the economy go from here? Profits are up, the markets are up. Inflation and interest rates are still tame. How to reconcile rising profits, a robust stock market, and other positive indicators with unprecedented bankruptcies, foreclosures, underwater mortgages, business failures, unemployment and underemployment? The “working” economy has decided to move ahead and do fine and just leave millions behind. The future would be bright for many, okay for some and dark for many, and recommend being in the first group. 

What about the overhang of debt and toxic assets? We seem to have opted for a long and slow process of rationalization, rather than a short, sharp and fast one. That means years of mixed messages and mixed trends: the good, bad and ugly.

The Shattered American Dream

A national survey of workers who lost their jobs during the Great Recession, conducted by two professors at Rutgers University, paints a gloomy view of the economic prospects for ordinary Americans.

More than 15 million Americans are officially classified as jobless. The professors at the John J. Heldrich Center for Workforce Development at Rutgers have been following their representative sample of workers since the summer of 2009. The report on their latest survey, just out this month, is titled: “The Shattered American Dream: Unemployed Workers Lose Ground, Hope, and Faith in Their Futures.”

Over the 15 months that the surveys have been conducted, just one-quarter of the workers have found full-time jobs, nearly all of them for less pay and with fewer or no benefits. As the report states: “The recession has been a cataclysm that will have an enduring effect. It is hard to overstate the dire shape of the unemployed.”

Nearly two-thirds of the unemployed workers who were surveyed have been out of work for a year or more. More than a third have been jobless for two years. With their savings exhausted, many have borrowed money from relatives or friends, sold possessions to make ends meet and decided against medical examinations or treatments they previously would have considered essential.

Older workers who are jobless are caught in a particularly precarious state of affairs. As the report put it:

We are witnessing the birth of a new class — the involuntarily retired. Many of those over age 50 believe they will not work again at a full-time “real” job commensurate with their education and training. More than one-quarter say they expect to retire earlier than they want, which has long-term consequences for themselves and society. Many will file for Social Security as soon as they are eligible, despite the fact that they would receive greater benefits if they were able to delay retiring for a few years.

There is a fundamental disconnect between economic indicators pointing in a positive direction and the experience of millions of American families fighting desperately to fend off destitution. Some three out of every four Americans have been personally touched by the recession — either they’ve lost a job or a relative or close friend has. And the outlook, despite the spin being put on the latest data, is not promising.

No one is forecasting a substantial reduction in unemployment rates next year.
Carl Van Horn, the director of the Heldrich Center and one of the two professors (the other is Cliff Zukin) conducting the survey, said he was struck by how pessimistic some of the respondents have become — not just about their own situation but about the nation’s future. The survey found that workers in general are increasingly accepting the notion that the effects of the recession will be permanent, that they are the result of fundamental changes in the national economy.

Fundamental Changes

Fundamental changes in the American workforce are taking place, and they hold tremendous implications for employers and employees alike. According to an Annual Workforce Trends Study commissioned by Yoh, a human resources firm, 80% of employers expect the size of their non-employee workforce (defined as consultants, independent contractors, temporary employees, and project teams) to stay the same or increase within the next year, even as the economy regains its footing.

This new, temporary workforce presents issues for employers who will need to manage, compensate, and motivate workers who no longer view themselves as employees committed to a single employer. At the same time, for employees, this new workforce ushers in a new era of free agency, and holds vast implications for how they will build careers in a flexible work environment, where knowledge and skill trump seniority and security.

Employers’ protracted reliance on a non-employee workforce as the US emerges from a severe recession represents a marked change from past economic recoveries when employers would add temporary talent before transitioning to full-time employees. Historically, temporary employment has served as a bellwether for permanent hiring, but these findings suggest that something much more substantial is occurring to overall workforce composition. Employers are saying that the recent recession has fundamentally changed their employment strategies and led to a “just-in-time” hiring strategy that will make temporary employees an even greater pillar of the American economy.

The transformation of the workforce composition will have significant implications for both employers and employees. Employers now have the flexibility to quickly adjust the size of their workforce depending on project load.

Employees, meanwhile, will have to overcome the stigma associated with “temporary talent.” Now that it’s here to stay, “temporary” workers might find themselves engaged in projects for longer periods of time, frequently transitioning into new opportunities and gaining access to jobs that were perhaps previously filled with full-time employees.

The Great Stagnation

Tyler Cowen of George Mason University is author of the e-book The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better. Cowen argues that in the last four decades, the growth in prosperity for the average family has slowed dramatically in the United States relative to earlier decades and time periods. Cowen argues that this is the result of a natural slowing in innovation, and does not expect a return to prosperity until new areas of research dramatically improve productivity growth.

Part of Cowen’s core point is that up until sometime around 1974, the American economy was able to experience rapid growth by harvesting low-hanging fruit. There was cheap land to be exploited. There was the tremendous increase in education levels during the postwar world. There were technological revolutions occasioned by the spread of electricity, plastics and the car.

But that low-hanging fruit is exhausted, Cowen continues, and since 1974, the United States has experienced slower growth, slower increases in median income, slower job creation, slower productivity gains, slower life-expectancy improvements and slower rates of technological change. Cowen argues that our society, for the moment, has hit a technological plateau.

Is Cowen right? In my view he overlooks the growth of government over the last 40 years as an economic drag. Creative individuals and companies would be a lot more innovative if taxes were lower, regulations fewer, and the system of patents more reasonable.

If stagnation is to be the new normal, we just can't afford it. We are a nation, an economy, a society, based on growth. America needs to grow   We must therefore constantly replace, replenish, invent, create, innovate.

For a long time I have been worried that the US was going the way of Europe: slow growth, high taxes, overregulation, high unemployment and underemployment, debt, deficits and little prospect of change. But perhaps we may have to worry instead is going the way of South America: an oligarchy of prosperous elites, and a great mass of the undereducated, under-skilled and underemployed, with little prospect of hope, change or opportunity.

If you think I overstate the case, consider the disconnect between the people and governing classes. Only a minority of Americans express confidence in major institutions, according to Gallup. Only a minority of Americans believe that the federal government has the consent of the governed (Rasmussen).  In my view this disconnect may be an even bigger issue than stagnation.

Dr. Roger Selbert is a trend analyst, researcher, writer and speaker. Growth Strategies is his newsletter on economic, social and demographic trends. Roger is economic analyst, North American representative and Principal for the US Consumer Demand Index, a monthly survey of American households’ buying intentions.

Photo by Martin Deutsch

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.

Reinventing the American Dream

For a long time it has appeared that America's economy has been moving south (getting more Mexican) rather than moving north (getting more Canadian). Dr. Selbert seems to be pointing south, which is bad for those who include upward mobility as a component of the American Dream.

Regarding the use of temporary labor, European employers have done that for years. A prominent architecture firm in London at its peak had over 100 designers sitting at workstations, which made for a full office. However, less than 20 were permanent full-time employees; the rest were freelancers who worked at more than one firm. Common in Europe, the idea is being imported here.

Kenneth Boulding commented a long time ago that economists wrongly tend to view the world through their western scientific lenses when it comes to employment. The American elite earn money through a single full-time job (and the most elite households only need one full-time job for that household - the wife doesn't work). The rest of America, and the rest of the world, has a household that might earn money from five or six different income sources, none full time, some piece work, some hourly, etc.

It is that vanishing American Elite class to which Selbert refers as having lost that full-time employment status. The American Dream will need to reinvent itself to accomodate the more common income model of multiple sources.

You work much harder for far less money in this new model, that's for sure.

Richard Reep, M. Arch.
Winter Park, FL

The problem with the

The problem with the assessment that inflation was somehow controlled during the previously healthy economy is a bit misguided. The truth is that inflation was actually extremely high and it came in the form of skyrocketing home prices- the single largest asset any American will ever purchase as well as the one item most of their income goes to pay for.

To me the problem we had and in my opinion still have is that housing is basically viewed in one light and one light only: That inflating its value is an overall good thing and that accelerated house values in turn contributes to a healthy economy. True- rising home values indeed benefits many financial industries and if you're a homeowner and timed it right, you might have done ok.

We need to reverse this notion. Instead houses need to be deemed merely as places to live and not "investments". People need to become more familiar with how the financial system actually works. If people invest, they should do so in a careful and conscious way. It was housing inflation- no different than overall inflation- that brought down the economy. A return to a modest, stable housing market free of bubbles would create a more stable economic situation for all.