It’s hard to fathom the celebratory mood in the US markets, save that the moneyed classes are benefitting from a wall of liquidity reminiscent of early 2007, when risk spreads across virtually all types of lending shrank to scarily low levels. Then the culprit was not well understood, although Gillian Tett discerned that CDOs were a huge source of leverage, and in April 2007, an analyst, Henry Maxey at Ruffler, LLC, did an impressive job of piecing together how levered structured credit strategies were driving market liquidity.
Now it’s a lot easier to see what is afoot. The Fed has been trying to reflate asset values to goose the real economy. What it has done instead is goose the incomes of the top 1% while everyone else is on the whole worse off. But the central bank is suffering from a very bad case of “if the only tool you have is a hammer, every problem looks like a nail” syndrome. It’s unwilling or unable to admit that its program is working only for a very few. It has convinced itself that if it just keeps on the same failed path long enough, things will turn around. As we can see from Japan, “long enough” can exceed 20 years, and it is not clear that the latest Japanese pump priming will finally pull the economy out of the ditch.
Matt Phillips fleshes out how badly ordinary Americans have fared. From the Atlantic (hat tip Ed Harrison):
The stock market alone hasn’t repaired the damage done to American household finances in recent years. In many ways Americans are still sucking wind after the gut punch they suffered in 2008. Here’s a look.
These haven’t gone anywhere but down since the recession hit. Real median US household income — that’s “real,” as in “adjusted for inflation” — was $50,054 in 2011, the most recent data available from the US Census Bureau. That’s 8% lower than the 2007 peak of $54,489.
Yes, it’s true that those 2011 data are pretty old. But if consumer expectations are any reflection on income levels, it doesn’t look like the pay has gotten anywhere back to normal pre-crisis levels. And while the US economy has gotten back on track, workers’ pay has been a progressively shrinking piece of total GDP since the recession hit.
So the new high on the Dow appears mainly to be a reflection of the way corporations have been able to squeeze workers, even after the biggest economic upheaval since the Depression. So all the market giddiness is really about how secure the have feel in their advantaged position.
Yet despite all the talk about how great earnings are, actual S&P 500 quarterly earnings per share peaked in the first quarter of 2012 and were down in the following two quarters (the 4Q actual should be out shortly).
And a new report by MIT on innovation and production (hat tip Marcy Wheeler) has an almost desperate undertone. It starts by pointing out how the data understate how bad the competitive erosion is:
One of the key danger points identified in these reports is the declining weight of the U.S. in the global economy. Even though the U.S. share of world manufactured output has held fairly steady over the past decade, economists have pointed out that this reflects good results in only a few industrial sectors. And even in those sectors, what appear to be productivity gains may be the result of underestimating the value of imported components. A close look at the composition of a worsening trade deficit shows that even in high-tech sectors the U.S. has a deteriorating picture. While the output of U.S. high tech manufacturing is still the largest in the world and accounted for $390 billion of global value added in high-tech manufacturing in 2010, U.S. share of this world market has been declining, from 34 percent in 1998 to 28 percent in 2010, as other countries made big strides ahead into this market segment.
Jobs are another huge concern. The great spike in unemployment over the past five years was disproportionately due to loss of manufacturing jobs. And as the economy revived, such jobs were very slow to return. In fact it is clear that many of them never will.
It makes clear how far hollowing out has gone in the manufacturing sector, and how the economy has lost so many components critical to innovation that it isn’t clear how to restore them. The researchers went beyond the venture capital darlings to find what it called “Main Street Manufacturers.” It found they were at a serious disadvantage due to the lack of firms with complimentary know-how in their ecosystem. After quoting the experience of one firm, the authors noted:
But in this company as in most of the others in this category that we interviewed in the U.S. all growth depended on their internal resources. They were not finding any complementary capabilities they could draw on in the industrial ecosystem as they tried to develop new components: no outside funding, no connections with community colleges, no trade associations, no research consortia (all regular fixtures, we would discover, on the landscape of German companies in the same industrial sector.) As we wondered why the contributions to innovation of the Main Street manufacturers did not lead to greater profits and faster growth, the comparison with Germany was inevitable. An Ohio machine toolmaker is not going to take off like Microsoft or Facebook, but we saw underexploited possibilities. How could we galvanize more innovative activity within Main Street manufacturers, a faster uptake of new technology, and a tighter enabling connection with new start-ups across the economy?
I suggest you read the MIT report in full. It is short, informative and extremely important. One important discussion is of the model for manufacturing in the US in its heyday resulted from internal integration. The authors dare voice doubts about the new approach of fragmentation of tasks across firms and geographies:
The possibilities for innovators and designers to draw on the manufacturing capabilities of the entire world has stimulated a huge wave of new enterprise creation both in the U.S. and in the developing economies. On the face of it, this is an enormously positive outcome. What we do not know, though, across different industries—and particularly for emerging new high-tech domains—is whether the separation of innovation from manufacturing will allow innovation to continue full-bore at its original home, or whether separation comes at the price of learning and creation of capabilities that might produce future innovation at the original home base. Separating innovation and manufacturing—in different companies, or in different locations—might make it unlikely that a firm would gain full advantage from implementing technological advances within manufacturing, for example, from learning how to accelerate the scale-up of a biotech drug from test tube to mass production or learning how to fabricate semiconductor chips at lower volume, higher value, and lower cost to run the medical devices that aging generations of baby boomers will need to keep them healthy and functioning at home and out of hospitals.
It has long looked like outsourcing and offshoring are not about improving flexibility and innovation, but about what managers usually say it is about: lowering labor costs. But it’s actually a form of looting, just not the financial kind. The reduction in manufacturing floor costs is partially offset by an increase in managerial coordination, so it’s actually a transfer from blue to white collar workers, particularly the very top executives. And it increases risks of the enterprise. Look at how even master logistician WalMart has experienced major supply chain screw-ups. And what would happen, say, if all that saber-rattling in the Middle East finally leads to a hot conflict with Iran? If oil prices shoot up, the economics of transporting intermediate products around the world might not look so hot.
It’s perverse that stock market averages are treated in the business and popular media as a proxy for the health of the economy. They are now the indicator, at most, of the well being of the wallets of the wealthy, which is coming more and more at the expense of everyone else.