On the first day of 2011, Princeton economist Paul Krugman ran an eye-opening chart in his New York Times column, illustrating the relationship between economic growth and unemployment.
The horizontal axis shows annual growth rates of real GDP [after adjusting for inflation]; the vertical axis shows the year-to-year change in the unemployment rate. “Two things are clear,” Krugman writes. “First, the economy has to grow around 2 1/2 percent per year just to keep unemployment from rising. [See the cluster of blue squares in the center of the chart where the change in unemployment ranges from 0 to -1% while GDP rises by at least 2.5%] Second, growth above that level leads to a less than one-for-one fall in unemployment, (because hours per worker rise, more people enter the work force, etc.). [People who have jobs are given more hours, and those who had given up looking for work, as well as recent graduates, join the work force.] Roughly, it takes two point-years of extra growth to reduce the unemployment rate by one point.”
When financial pundits talk about a “recovery” most mean that GDP growth will accelerate. But as Krugman points out, this does not translate into a commensurate fall in unemployment. He explains: “Suppose that US growth picks up. Even so, it will take years of high growth to get us back to anything resembling full employment. Put it this way: suppose that from here on out we average 4.5 percent growth, which is way above any forecast I’ve seen. Even at that rate, unemployment would be close to 8 percent at the end of 2012, and wouldn’t get below 6 percent until midway through Sarah Palin’s first term.” [No comment–MM]
Even If You Have A Job . . .
In 2011, even those who are employed cannot expect pay hikes that keep up with inflation. When the supply of workers exceeds demand, employers don’t feel any pressure to hand out raises. Yet, in the year ahead, many Americans will need a higher income just to run in place. The USDA predicts higher food prices in 2011, and the price of oil is already headed for $100 a barrel. (Joe Petrowski, chief executive of Gulf Oil and the Cumberland Gulf Group gives oil a 1 in 4 chance of reaching $147 a barrel by Memorial Day.) As the cost of food, utilities and transportation climb, middle-income and low-income families will feel the squeeze.
Meanwhile, health care inflation won’t begin to level off until health care reform has a chance to kick in, penalizing waste, while rewarding more efficient, higher quality care. Next year, insurers will be required to justify premium increases, but as long as the volume of unnecessary tests and surgeries grows, year after year, premiums will continue to soar, in tandem with medical bills. (See my post on overuse of stents here, and Naomi’s post on spinal surgery here.) It is also worth noting that, in California, the cost of a hospital stay has been rising by 10% a year.
If regulators put pressure on insurers, they may, in turn, question unnecessary procedures. And as Medicare changes how it pays for care, insisting on better outcomes, pointless surgeries will become less profitable. But this will take time.
Finally, thanks to the tax cut compromise that I wrote about earlier this month, the deficit will balloon in the years ahead. This, in turn, will weaken the dollar, lifting the cost of imports. The bottom line: wages will remain more or less flat, and the purchasing power of most paychecks will fall.
If you read the mainstream press, no doubt you have heard that next year, the economy will be perking up. But to most financial pundits, “recovery” means that the economy is growing, and that Wall Street investors are reaping profits. (Next year, financial gurus expect that commodities and stocks will climb, though Treasury prices are likely to fall—bad news for seniors who depend on fixed-income investments.)
But on Main Street the recession will continue. The official jobless rate may slip a bit, but real unemployment will remain high as the number of workers who have given up looking for work and no longer qualify for unemployment benefits swells. Both middle-class families and seniors living on a fixed income will need all of the help that the government can provide. If Washington fails them by trimming spending on domestic programs, unemployment benefits and so-called “entitlements” (Medicare, Medicaid, SCHIP or Social Security), more and more Americans will find themselves losing their footing on a slippery economic ladder. This is a pattern that we have seen unfold over the past 20 years: While some in the upper-middle-class slip into the middle-class, families in the middle-class become working-class, the working class become poor, and the poor become homeless. This is how the number of children living in poverty has grown, while the middle-class shrinks, and the upper-middle-class becomes increasingly insecure. What economists who came of age on Wall Street don’t seem to understand is that, over time, a recession on Main Street will catch up with Wall Street—and Washington. I’m afraid that Paul Krugman is only half-kidding when he refers to “Sarah Palin’s first term.”