In considering the Occupy Wall Street movement and the economic arguments around it, I have been struck by the lack of historical analysis. The arguments never seem to put the current economic crisis into a wider context either to understand the changed nature of work, the changed structure of the world economy, or the extent of the American economic crisis.
For those who are unemployed and struggling to make ends meet, it may be cold comfort. Yet, it is important for the right argument to be made with the right reasons for it to succeed. If America is to change, to develop a socially and economically just society, then such arguments must begin with an understanding of the economic reality. http://www.osjspm.org/economic_justice_for_all.aspx One may find that the American model remains economically just in that it continues to deliver what it originally promised opportunity based on the pursuit of happiness, but let us return to the core issue.
My focus here is to consider the economic statistical indicators today and those with a previous era. The reason for this is that the current crisis has to be put into a historical perspective so that we can understand what needs to be done. Without this historical knowledge, we cannot know where we have been to help us understand where we are now and where we need to be.
First, let us put the current economic crisis into some context. Second, what do we need to compare it against and why? Let us compare it to 1979/1980 when the US economy was beset by a number of major structural problems and endogenous shocks.
Here is the table of the three indicators.
|Interest Rates||Average of 15% (highest 20%* (April 1980!) (1978-85 average 10%)||.25%||Here is the source on current interest rates. http://bit.ly/mVE2f7
for US 1978 to 1985 http://bit.ly/rdzNhw
|Inflation||10%||2.2%||Here is the source for inflation rates. http://bit.ly/nimxm8
|Unemployment||9.7% 1982 Peak||9.6%|
The current crisis is not as structural as the 1980 crisis. In the earlier crisis, the manufacturing base was undergoing a fundamental shift. The northern manufacturing states were losing workers and unemployment was surging. At the same time, the oil shock was hitting from the oil price hikes. The country was undergoing a fundamental shift in its political and economic structures. The nature of work was beginning to change, but the full impact was still to be seen. http://lyndagrattonfutureofwork.typepad.com/lynda-gratton-future-of-work/future-of-work/
The current crisis is something different. In many ways, it is self-inflicted. The low interest rates after September 2001 attacks masked the housing bubble. As housing prices continued to rise, and interest rates remained low, people could buy a home and see its value appreciate. One only needs to see that the largest refinancing in the housing crisis was for releasing cash and not refinancing the home to see the issue. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1020396
In effect, the average consumer was leveraging their home. By contrast, in 1980 the average consumer was struggling to keep their home because of interest rates had made mortgages so expensive. They had no option of refinancing to extract more money because the market was not lending because there was no demand. By contrast, the market is not lending because the wrong kind of demand exists. Homes are not in demand because so many remain empty, people cannot get loans to consume, and investment opportunities do not exist in the same way. In other words, America has not yet digested the toxic assets left over from the credit binge.
The difference, in a sense, can be described as the difference between a manufacturing crisis and a banking/service industry crisis. The latter is affected more by the changing nature of work rather the changing nature of industries. In the former, the change in interest rates has a direct impact on the choice of manufacturing at home or abroad. The interest rates can shape the economy. As work left, the workers could not shift to another industry. By contrast, the current market, with a high proportion of service industries, has people shifting in the markets. The problem though is that they are not shifting to higher income jobs but moving sideways, different service but similar pay or shifting downwards, lower pay.
Although unemployment is high, it is something that does not affect everyone. High inflation and high interest rates affect everyone because they shape the market. No one can escape high inflation or high interest rates in the way that one can escape unemployment. Here is the issue for the current crisis, unlike the workers in 1980 who could retrain and thereby get a new job; the work in 2011 has changed. To retrain requires a wholesale shift in the way that people work. The same service jobs are disappearing. The need for specific skills sets is emerging. In particular, the need to show a value added is growing. While relatively unskilled services will always be needed, how they are paid is changing. Thus, what we are seeing now is a hollowing out of the service industry akin to the hollowing out of the manufacturing sector in the 1980s.
What remains to be seen is whether the economic changes within the United States can reduce unemployment without igniting inflation or requiring interest rates to rise so fast or so far that they cut off any recovery. In the end, the success of this economic shift will depend on the educational system’s ability to educate students to have the right skill sets leaving schools so that they too can “add value” and thus make sure their employability.
- Some tentative thoughts on why the Occupy Wall Street Movement will fail to change America (lawrenceserewicz.wordpress.com)
- Economic View: Ben Bernanke Needs a Volcker Moment (nytimes.com)