News headlines are touting all sorts of economic glad tidings.
The unemployment rate is lower than it has been in years, the stock market is expanding, businesses are reporting record growth and GDP is up and set to go even higher.
So why so do many people see little or no improvement in their own financial fortunes?
A big reason is that we are living in a different economy than the one that ended in 2008. The driving force behind that economy was industry, and the one we are building now isn’t. It is much harder to gauge the health of the economy today fundamental economic truths no longer are what they once were.
Take the stock market for instance. In the old industrial economy increasing stock prices meant investors were confident that the economy doing well. They bought shares in companies they thought had a bright future. When the stock market is in the rise it means companies are expanding – building new plants and offices, selling more of what they make and moving into new markets.
Many large corporations active on the stock market have moved into “financialism” – rather than making things, these companies now act more like banks than manufacturers.
Rana Foroohar explains this at length in her very readable book on finance and economics, Makers and Takers. She points out that corporate borrowing is higher than it has ever been, but the borrowing is not for traditional business expansion.
Instead, corporations are buying back shares, making divided payments, outsourcing labor and using debt financing to minimize tax exposure. Instead of making things, large corporations are manipulating their balance sheets – in legal ways – to increase the value of the company.
This has devastating effects on workers. With the rise of software and robotics, one way to increase stock value is to replace workers with machines.
Workers are usually the most expensive part of any business overhead, so reducing workforce is a positive step to investors. Companies announcing layoffs are more efficient than those hiring workers are, and are therefore better investments.
This is unheard of.
For hundreds of years business expansion meant more job creation and hiring. The idea that business can improve their financial health by laying off workers is just the opposite of conventional investing wisdom.
If you have been following business news for the last couple of years, you know that Sears has been dangling on the edge of collapse. It is selling its real estate – its stores – to offset the cost of borrowing essential to survival.
The details make for interesting reading.
According to Foroohar, in 2015 Sears bundled 235 of its stores into a Real Estate Investment Trust (REIT), then leased the same stores back to itself. Its retail divisions, already losing money at an astonishing rate, now has the added burden of lease payments to Sears Holdings Corporation.
There is a perverse secret to making money in real estate – debt financing. Most of us think of debt as something to avoid because there is no real upside. That isn’t true for big players, though. There are huge tax advantages to debt financing. Money a company borrows can be deducted as businesses expenses and at the same time, an REIT can generate cash through the leases on property. It’s a win-win.
Sears borrows its money from ESL Investments, a hedge fund owned by Sears Holding CEO Eddie Lampert. (Yes, Lampert is CEO of both the lender and the borrower.) Every time Lampert injects money or lays off employees, Sears’s stock price increases a bit, and every time he closes another store, ESL gains another property.
This is just one small example of how the economy has changed at a very basic level. The idea that debt can be an advantage to a company is difficult for most of us to accept, and that illustrates a larger issue – nobody is quite sure how to measure and manage this new economy.
In The Only Game in Town, Mohamed El-Erians’ interesting and very readable book on modern economics, quotes William Dudley, New York Federal Reserve President on the state of knowledge of our financial leaders in this era of financialism:
“We still don’t have well developed macro-models that incorporate a realistic financial sector.”
In other words, the Federal Reserve doesn’t really know how to measure economic consequences of large companies moving away from traditional trade and towards debt financing.
Something else we have a hard time measuring is jobs. In the old economy when someone had a job, it meant they could rent a house or apartment, buy a car and have enough to eat. Now a job does not necessarily mean any of those things are possible.
Part of the problem is defining and counting jobs. In 2015, the Government Accounting Office (GAO) delivered a report to Congress putting the proportion of contingent work jobs at about 40% of all jobs. That is, almost half of people counted as employed were actually “involuntary part time workers” who did not make a living wage.
However, a 2017 report by Katz and Krueger from the Federal Reserve put the portion of contingent jobs at about 15%. It also estimates that only 6% of the jobs created between 2010 and 2015 are traditional full time jobs. The other 96% are contingent jobs.
Contingent jobs are just part time versions of regular full time jobs. The education industry has been moving to all contingent instructional staff for some time. At the community college where I work, about two thirds of the teachers are adjunct, and teach the great majority of classes. Adjuncts are paid about one third that of full time teachers.
That is typical for most industries.
This brings up another new normal issue that is affecting American workers.
Wages are not increasing, and they haven’t for some time. The slowdown in wage growth began in the early 21st century, prior to the Great Recession. Advances in robotics and software is almost certainly driving the shift away from human capital and towards automation. In other words, humans are losing value in the workplace.
In a 2013 research paper, Frey and Osborne estimated that technology would reduce the need for human workers partly or completely for about half of the occupations then in existence. This analysis found that most of the jobs at greatest risk were those paying low wages and requiring little training.
A paper published in 2017 by Lordan and Neumark found that the push for an increased minimum wage was actually causing employers to accelerate their move towards automation. An obvious example is the move by McDonalds introducing kiosk ordering and delivery by Uber. Autonomous cars are already entering our transportation system. By the time they are common McDonalds will likely have few or no humans in its stores.
This trend is not new. Between 1977 and 2012, more than 6.6 million manufacturing jobs were eliminated by either technology or offshoring. The interesting aspect is that while industrial jobs were disappearing, the manufacturing sector was doing quite well. Productivity actually increased at the same time that employment was decreasing.
One of the great challenges us is how to interpret our new economy. It is so unlike the old one that we have trouble understanding even its most basic concepts.
Sources cited in this article:
El-Erian, M. A. (2017). The only game in town: Central banks, instability, and avoiding the next collapse. New York: Random House.
Foroohar, R. (2016). Makers and takers: The rise of finance and the fall of American business (First edition. ed.). New York: Crown Business.
Frey, C., & Osborne, M. (2013). The future of employment: How susceptible are jobs to computerisation? (Publication., from University of Oxford: http://www.oxfordmartin.ox.ac.uk/publications/view/1314
GAO. (2015). Contingent Workforce: Size, Characteristics, Earnings, and Benefits. (GAO-15-168R). Washington DC: GAO Retrieved from https://www.gao.gov/assets/670/669766.pdf.
Katz, L. F., & Krueger, A. B. (2017). The rise and nature of alternative work arrangements in the United States, 1995–2015 (2016). The Global Talent Competitiveness Index, 2016.
Lordan, G., & Neumark, D. (2017). People Versus Machines: The Impact of Minimum Wages on Automatable Jobs. Cambridge, MA: National Bureau of Economic Research.