The winner economy and the loser economy
Just what do America's large multinational corporations have to do with the US
economy? Very little, judging by the data.
Item: Final sales of domestic product rose by 3.8% (without adjustment for
inflation) from the second quarter of 2010 to the second quarter of 2011. Sales
of S&P 500 corporations rose by 10%.
Item: Employment in the S&P 500 corporations rose by 10.6% between 2009 and
2010, to a total of 18.666 million. Total employment in the United States rose
by 0.7% over the same period, to 130.26 million. Employees of the S&P 500,
that is, comprise less than 8% of total US employment, and their
employment pattern bears no resemblance to the aggregate.
Item: Profits of S&P 500 corporations rose by 19% between the second
quarter of 2010 and the second quarter of 2011. Nominal GDP (gross domestic
product) of the US rose by 3.7%.
Item: 47% of S&P 500 sales are overseas.
Item: Americans with no college-level education have an unemployment rate of
9.9% and (which is much more revealing) a labor-force participation rate of
just 61%. Americans with some college education have an unemployment rate of
8.6% and a participation rate of 70%. And Americans with a bachelor's degree or
more have an unemployment rate of 5%, but a participation rate of 76%. Huge
numbers of less-educated Americans, that is, don't ''participate'' in the labor
force because there is nothing for them to do. But Americans with a college
degree (as devalued as those degrees are) have little unemployment and a very
high rate of ''participation.''
America, as I observed last week (The
people's Ponzi scheme, Asia Times Online August 15), imported $6
trillion of the world's savings between 1998 and 2007. That great migration of
capital employed an army of construction workers, mortgage bankers, retailers,
lawyers and others dragged along by the tide. Real estate tax collections
surged along with home prices and local governments grew fat and hired legions
And the construction boom kept less-educated Americans (and a great many
immigrants) occupied. The construction industry has imploded, local governments
have laid off 400,000 workers since August 2008, and countless service firms
have disappeared. Nothing will bring them back.
Given the magnitude of the bubble that had to be popped, the outcome actually
is encouraging. Most Americans with a college degree barely can add and
subtract and compose a business letter, and most of them rode the bubble in
various capacities. Yet despite the collapse of many white-collar professions,
the unemployment rate of college-educated Americans remained around 5%. That
testifies to the flexibility of the American economy and the resourcefulness of
The other encouraging fact is that portions of the US economy that did not
participate directly in the bubble - established corporations with a global
presence - have done extremely well in a virtually zero-growth environment.
Their 19% increase in profits came both from increased sales and better profit
margins. A smidgen of the profit growth came from the falling dollar (which
magnifies foreign earnings), but not too much. Corporate America managed to
show strong profit growth even while the aggregate economy was dead in the
In short, the non-bubble portions of the US economy are doing perfectly well,
thank you. The railroads and airlines are carrying more freight, the airlines
are carrying more passengers, and exports are up by nearly 20% over a year ago.
It is pointless and confusing to speak of overall economic performance, because
there are two quite different economies to consider: one that is doing
reasonably well in the world market and one that still must be scraped from the
ceiling. It is just as meaningless to speak of a double-dip recession as it was
to speak of a recovery a year ago. Some parts of the economy remain profoundly
depressed and will languish for years if not decades, while other parts are
functioning perfectly well. Which outweighs the other in the aggregate numbers
is of interest to no-one but the macroeconomists.
A number of economists, including Nourel Roubini, opined a year ago that
America had two economies, one of which was recovering and another that was
not. But they pointed to the wrong distinction, namely between personal
consumption (which then appeared to recover) and capital investment, which
remained moribund. The error here, as usual, stemmed from thinking in terms of
aggregates in the GDP tables. These aggregates mask a more fundamental
Perhaps we should think about America the way we think of an emerging market,
except that America is submerging instead. The Chinese have warned for years
that they are two countries, a First World country on the seacoast and a Fourth
World country in the interior. We know that India has two economies, a small
modern one and a vast backward one, and we are not particularly concerned with
the GDP of impoverished rural people (if indeed we could measure it). We want
to know what Tata Industries or Reliance Industries are up to.
China and India have become a dual economy because a portion of their
population has clambered up into prosperity; America has become a dual economy
because a portion of their population has tumbled into destitution. But the
fact that larger American corporations have had a strong recovery should
reassure us that America is capable of a broader recovery.
For the moment, investors will not buy an 8% earnings yield on the S&P 500
even while 10-year Treasury yields trade around 2%. They are all the more
reluctant to take risks on startups, which in the past 40 years have accounted
for more than two-thirds of job growth. The right combination of economic
policies could revive the startup engine, albeit slowly and fitfully. Lower
taxes on corporations and capital income and less oppressive regulation
(especially US President Barack Obama's health care mandates for businesses)
would help. So would a rational immigration policy that favored entrepreneurs
and highly skilled professionals.
Spengler is channeled by David P Goldman. Comment on this article in
Spengler's Expat Bar
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