One of the important dynamics why recessions end is that inflation decelerates more than wage growth. Thus, for the 90% or so of people who still have jobs, there are some compelling bargains, enough to jumpstart more spending.
That all gets short-circuited if wages actually decline. Then, the fact that debt payments, unlike prices, do not decline, overwhelms the possibility of spending growth. That was one of the most ruinous aspects of the 1929-33 great contraction.
This is why I keep harping every month on the poor wage growth shown in the jobs reports. Here we are, over eight years into the economic expansion, and wage growth is actually declining a little, now at just 2.3% YoY:
This is the smallest wage growth of any expansion since the reports began over half a century ago. Simply put, we are more at risk of another wage deflationary “event” during the next recession, whenever it hits, than at any time since the 1930s.
Let me try to show this in detail.
As already noted, during recessions wage growth declines. What I’ve done below is to show that for each recession for the last half century, with one alteration: I’ve recalculated the starting number for peak wage growth during the previous expansion to 2.3%, to match its current rate:
Starting from +2.3%, 4 of the last 7 recession produce a period of wage deflation. The three worst recessions: 1974, 1981, and 2008, produce wage deflations of about a year or more.
But that is just on a YoY basis. When we take a look on a month over month basis, episodes of wage deflation continue off and on all through our current expansion:
And even following shallower recessions like 1991 and 2001, brief episodes of wage deflation occur for several years:
Of course, these charts are strictly hypothetical. The point is that, if actual wage deflation were to occur, because debt payments do not deflate, the dynamic can take on a life of its own, creating a vicious downward spiral, as it did in 1929-32.
Imagine such a deflationary event were to begin to occur in, say, late 2019. Imagine that the makeup of Congress then is similar to what it is now. Now imagine how such a Congress would approach such a deft deflation dynamic.
That is the stuff nightmares are made of.
Bert:
Sorry, you have been warned about multiple identities several times.
I have never thought about the problem in this way. It seems to me that you are looking at an effect of the true cause.
My best explanation of the Great Depression was cemented when I discovered the 1930 article “Credit Expansion, 1920 to 1929, and Its Lessons”” by Charles E. Persons.
Extracted from the conclusion at the end of his article:
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… “The essential point here is that during the period of introduction of these new financial devices and while the newly opened reservoirs of credit are filling, we have a temporary increase in the nation’s purchasing power. A combination of circumstances has rendered this expansion of large dimensions in the decade just closed. While the new credit is expanding to its justified limits, more than the normal amount of commodities may be sold. The industries affected are stimulated to expand their productive capacity and to build up their labor force to the level set by this temporary bulge in consumption. In the working out of competitive forces their great prosperity leads to expansion even beyond this limit as overeager producers seek an enlarged share of the market and profits. Once the newly developed credit resources reach maturity, new debt created is balanced by installments due on previously assumed obligations. The nation can buy only such volume of goods as is covered by its current Income. The check to expansion is sharp and is intensified by the excesses inevitably associated with periods of over-rapid expansion. Such a course of events is clearly proven by the evidence as to credit expansion in the period 1920 to 1929. The depression into which the nation fell in the latter year was undoubtedly due in part at least to these developments in our complicated economic structure. Manifestly these events are too recent and our records too incomplete to attempt to measure their relative importance as compared with other factors of great weight. But there can be no doubt that their influence was large.”
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In the 1920s the new financial device was installment loans. Beginning in about 1996 the new financial device was investment bankers securitization of home mortgages. This led directly to an extraordinarily easy availability of home loan refinancing at lower and lower rates. Paired with the housing bubble, this loan refinancing put more and more money into the economy every year.
In both cases once easy credit was no longer available there was a severe correction. Consumer demand plummeted. The number of employed consumers fell. And wages fell even more because the best paying jobs had been in manufacturing. (And construction)
The deflationary pressures which began in 1929 got worse and worse until President Roosevelt took office in 1933.
The deflationary pressures which seemed to begin in 2008 were tempered by government spending on Social Security, Medicare, Medicaid, and very large defense expenditures. Add to those the stimulation by the Fed interest rate policies and the deficit spending by the US Congress.
But those have not been enough to return the economy to normal.
And here is Larry Summers commenting on a generally unrecognized compounding factor:
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“One of the reasons for my concern was that before the financial crisis, when we had the mother of all bubbles in the housing market, that was enough to propel growth to perhaps adequate levels, but not enough to produce any kind of overheating as measured by wage and price inflation or as measured by unemployment relative to traditional low points. Imagine the economy between 2003 and 2007 without the consequences of housing bubbles and overly easy credit. Housing investment would have been two to three percent of GDP lower, and consumption expenditure would have been considerably lower, as well, resulting in very inadequate performance.”
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From: https://www.washingtonpost.com/news/wonk/wp/2014/01/14/larry-summers-on-why-the-economy-is-broken-and-how-to-fix-it/
He is pointing out that deflationary pressures were already at work before 2003.
Sorry for the length.
I refer to Larry Summers commenting on a ‘ generally unrecognized compounding factor’ in my earlier comment.
It is a compounding factor because it pushes the beginning of our current Great Recession back to at least before the March 2001 when that recession began.
And here are our trade balances since 1994:
Year___Trade Balance_____Increase in Trade Deficit since 1994
1994_____-98,493
1995_____-96,384___________-2%
1996_____-104,065__________6%
1997_____-108,273__________10%
1998_____-166,140__________69%
1999_____-258,617__________163%
2000_____-372,517__________278%
2001_____-361,511__________267%
2002_____-418,955__________325%
2003_____-493,890__________401%
2004_____-609,883__________519%
2005_____-714,245__________625%
2006_____-761,716__________673%
2007_____-705,375__________616%
2008_____-708,726__________620%
2009_____-383,774__________290%
2010_____-494,658__________402%
2011_____-548,625__________457%
2012_____-536,773__________445%
2013_____-461,876__________369%
2014_____-490,336__________398%
2015_____-500,445__________408%
2016_____-504,793__________413%
Note: The trade balance is in millions of dollars
Trade balance data from: https://www.census.gov/foreign-trade/statistics/historical/index.html
Why are US trade deficits exploding after 1997? A sudden incompetence of US workers or an accumulation of poorly negotiated trade agreements?
So much for sticky wages.
C’mon New Deal, don’t leave us hanging, it was just getting good.
What happens after tshtf? What will the horrible Repub congress do that a Dem congress would not?
For that matter what would a Dem congress do to get us out of this mess?
Mike, it’s far more likely that the Democrats would end up doing whatever their donors want.
The only salvation at this point is likely to come from the left – the Sanders faction, if it can successfully takeover the Democrats, primary the neoliberals corporate types out, and then literally be a second Roosevelt.
Otherwise, this could be very bad indeed. It’s no secret that Trump got into power in part because of economic despair. He will make it worse, but the demand for change won’t be satisfied.
Alt:
Welcome to Angry Bear. First comments always go to moderation to screen out advertisers and spammers.
The first of the baby boomers was born in 1945 so they were age 62 in 2007.
Therefore it seems very unlikely that large numbers of them would have retired before 2007.
The labor participation rate peaked at 67.3 in the first quarter of 2000. The labor participation rate had reached a new low of 66.1 in 2006.
It has fallen more dramatically since 2007 but the trend was established by 2006.
What changed after the first quarter of 2000? I believe that the answer is obvious.
After 1947 the highest peak for Labor Share was in the 4th quarter of 1960.
With that 1960 peak set to 100, Labor Share had fallen to about 96.4 by in 2000. In those 40 years the average decrease was about .09 per year.
From 2000 to 2010 Labor Share had fallen from about 96.4 to about 87. In those 10 years the average decrease was about .94 per year.
Since 2010 Labor Share is moving between 86.5 to 87.4.
So here is another economic statistic which dropped dramatically after the year 2000.