Doggie paddle economy

from Peter Radford

Remember the doggie paddle? That’s what the economy’s doing. Lots of effort. Lots of splashing about. Even more huffing and puffing. All to little or no avail. We’re going nowhere. And we’re not going there very quickly.

On Tuesday we learned from the Institute for Supply Management that the manufacturing sector has lost momentum. Less than half of our factories are reporting growing business. The ISM index slipped very slightly to 49.6% in August from july’s 46.8%. That decline is meaningless, but that fact that both months saw readings below 50% is not. Obviously manufacturing is not as robust as it was earlier in the year. The combination of Europe’s continuing woes, and our own tepid growth more than explains why factories are not expecting more business. Still there is no sign of a collapse, so we can add this news to the steady trickle of mediocrity that is now all too familiar. 

A little more surprising was Tuesday’s news of a 0.9% drop in construction spending in July. The biggest decline was in private residential construction, which fell at an annual rate of 1.6%. The unusually warm weather appears to have distorted the year’s activity and allowed more construction earlier. This phenomenon, when combined with a seasonal adjustment unable to compensate for it, is the most likely cause of the drop. As ever, we need to wait for a few months to determine whether there is a real downward shift taking place or whether this is simply an oddity of statistics.

So the week started off on a weaker note.

Then, however, things perked up somewhat.

The monthly report from ADP, the private payroll processor, gave better news for employment. According to ADP private payrolls rose 201,000 last month, up from 173,000 in July. This gave brief hope that today’s government employment report would beat expectations and would break the recent trend of utter mediocrity.

It didn’t.

If anything it merely confirmed what we all know: we are mired deeply in a terrible mess with no momentum at all.

This, of course, surprises no one. Well not us at least. In an economy struggling to shed debt, slowed by miserly pay increases – if any, burdened by ongoing retrenchment by state governments, and with a gridlocked and viciously partisan political environment, of course we aren’t going anywhere.

There are some who blame the uncertainty supposedly propagated by a supposedly anti-business Obama administration. That is preposterous. Businesses are not investing not because of red tape or excessive regulation. Nor because of the prospect of higher taxes. They are not investing because they see, correctly, that there is no demand. Without people buying stuff only the insane invest to make more of it.

Now, as you all know, I happen to think the lack of demand is the logical result of policy error combined with the long term corporate self-defeating obsession on shareholder value. These two tragic mistakes have created a perfect storm to swamp the middle class and put and end to most of what we all thought was endless: namely the steady march towards greater prosperity for the vast majority of Americans. Indeed those two mistakes have started a dangerous and potentially devastating reversal. By gutting the current and prospective purchasing power of that vast majority, and by redistributing our gain in wealth upwards to an ever more exclusive minority, those policies and corporate obsessions have undermined the very engine they hoped to build.

If you don’t pay your workers enough to buy the stuff you make eventually you sell less. The downward spiral is your doing. It is unreasonable, indeed it is stupid, to expect households to continue to consume by taking on more and more debt. At some point the reliance on ponzi finance topples the entire system into the abyss. This is eminently predictable. It is simple to understand. It is clearly our misfortune – or our own error – to have fallen for the snake oil embodied in those policies and obsessions.

Deregulation, the unbridled pursuit of shareholder value, and the consequent redistribution of wealth upwards starves the economy, eventually, of its lifeblood. Especially when those who benefit, the upper echelon of our society, have no allegiance to the society they are exploiting. When they can shovel their gains abroad they starve the economy of investment. When they skew the tax code in their own favor, they starve the government of revenues. When they cut costs to beef up profits they reduce the purchasing power of their own communities. When they shift jobs abroad to lower costs they increase profit but undermine their homeland. And when they start to feel the rot of their actions, they spend to influence the government that enables and encourages those actions.

Continuous and excessive deregulation coupled with a corporate culture dominated by the pursuit of profit at all costs is the basic cause of our malaise. And we cannot break out until we reverse course.

In that context the upcoming election could not present a more stark contrast.

The Republicans want to deepen and extend the trends that caused the problem. The Democrats want, at least in part, to undo them. The outcome remains in doubt because of economic news like today’s. The stupor and continuous tepid response are alarming. They allow extreme notions and ideas to fester. And they encourage a cynical disregard for balanced thought.

Given our political climate I doubt this election will resolve much. This will hearten the extremists and those who harbor utopian visions. The rest will suffer as the extremes batter each other with competing and utterly unreal solutions.

As for economics: it will continue its slide into irrelevance as it either offers up its own utopias or it recycles old ideas that no longer fit well with economic reality. The paucity of new, truly new, ideas will ensure it withers. Perhaps it deserves to. After all the doggie paddle economy is built on the sands of orthodox economics with its call for deregulation, more open markets, and its underpinning of the paraphernalia of modern finance. Utopias don’t exist anywhere, least of all in our real world. Too bad that’s all orthodox economics talks about.

Paddle away folks. It’s a long way to shore.