Silent Depression

Economic Growth and Prosperity Part Company

Do traditional indicators of economic prosperity mean average Americans are doing well? Probably not.

John Miller

This article is from the July/August 2002 issue of Dollars and Sense: The Magazine of Economic Justice available at

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This article is from the July/August 2002 issue of Dollars & Sense magazine.

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In the spring of 1992, President George Bush was riding high after a war in the Middle East. The U.S. economy, according to traditional economic measures, was nearly a year into an economic recovery. But most people were complaining that they felt worse, not better, off.

"Silent Depression," published in Dollars & Sense in April 1992, explored their complaints. The article took its title from the contention of economist Wallace Peterson, a dyed-in-the-wool Keynesian, that the U.S. economy has been haunted by a "silent depression," unrecorded in the economic logbooks that chart the expansions and contractions of the traditional business cycle. The article showed that, as Peterson suggests, the return of economic growth in the early 1990s had failed to improve the living standards and purchasing power of workers and their families. Worse yet, the policies of then-President Bush did nothing to spread the benefits of economic growth beyond the well-to-do.

As the U.S. economy recovers from the 2001 recession—a shorter and shallower recession than the one that occurred a decade ago—the same concerns are before us. Economic expansion no longer delivers better economic times to most workers. And on top of that, today's President Bush seems even more determined than his father to reserve the benefits of that economic growth exclusively for the super-rich.

—John Miller

Lee Sliwinski is a 50-year-old unemployed factory worker in Wyandotte, Michigan. He drove a forklift for 20 years at the Firestone wheel-rim factory about 10 miles south of Detroit. And he was making a pretty good wage—$10.50 an hour—when Firestone laid him off along with 600 other workers during the 1982 recession. Since then, Sliwinski told the Wall Street Journal, he has gone on welfare twice, lost another factory job in the auto industry, and finally about four years ago landed a job as a janitor. It paid less—$8.50 an hour—in 1988 wages. Then the current recession hit, and about a year ago Christmas he lost that job as well.

For many Americans, Sliwinski's story is all too familiar. Downward mobility in the 1980s. Layoffs followed by lower paying jobs. Unemployment. To these people and many others, the current economic slump looks nine feet tall.

All this has left economic pundits scratching their heads. If you analyze the economy solely by traditional economic measures, it is not in a recession at all. Last year the economy grew, if not by much, in three quarters out of four. Has the U.S. economy entered some reverse wonderland where the traditional definition of recession—two consecutive quarters of negative real growth—has lost its meaning?

Perhaps it has. Since 1973, argues Wallace Peterson, a Keynesian macroeconomist at the University of Nebraska, a "silent depression" has haunted the U.S. economy, unrecorded in the economic log books that chart the recessions and expansions of the traditional business cycle. The 1980s, and now the 1990s, have shown that economic growth and improved productivity do not automatically translate into improved living conditions and purchasing power for most workers and families. Despite economic growth in the last decade, workers' standard of living has deteriorated and income inequality has worsened.

Forty-two economists surveyed by the Wall Street Journal have predicted the economy will "recover" in the second half of 1992. By traditional standards it may. But how many people will it help? Most economists, like Robert Reischauer, director of the non-partisan Congressional Budget Office, expect only a modest snap-back that will barely improve life for most workers. Even after the recovery begins, some large corporations have already stated they will continue to slash wages and lay off workers.

And that's the problem. Unless companies invest in their labor force, they won't improve innovation and productivity. And without those improvements, true economic recovery won't happen. Stagnation—slow growth and deteriorating living standards—may well be the hallmark of the 1990s economy.

Unconventional Recessions

The current recession, which began in July 1990, has already lasted four months longer than any other recession since World War II. Despite its length, conventional measures suggest the recession has been more mild than deep. Output, as measured either by Gross Domestic Product corrected for inflation or industrial production, has dropped off only half as much as it did in 1982. And as of January, the official unemployment rate has barely exceeded 7%, well below the double-digit levels of the 1981-82 recession.

But these figures mislead us on the depth of economic stagnation. Over time, the unemployment rate has increasingly underestimated the number of people unable to find full-time work. The number of people forced to work part-time is nearly as high in this recession as in the deeper 1982 recession. And unemployment is widespread. One out of four households had at least one person out of work during the last 12 months, reports the Conference Board, a business research organization based in New York. As Alan Greenspan, chair of the Federal Reserve Board, says, "Don't look at [official unemployment rates] and say that everyone is in good shape because clearly they are not."

Unlike previous recessions, this recession has hit service and white-collar workers, including middle-level managers, in sizable numbers. For instance, more than half a million sales workers have lost their jobs. In contrast, during the 1981-82 slump, the economy actually added more than three quarters of a million white-collar jobs.

Because this recession follows an equally long period of slow growth, output measures also mislead us. The back-to-back years of recession and slow growth paint an alarming picture of stagnating output. Since 1988, the— economy has grown an average of less than 1% per year—the second slowest period of growth sustained over any three-year period since World War II. Only the back-to-back recessions of 1980 and 1981-82 registered a worse growth record.

And the economy's financial institutions are more fragile today than at any time since the Great Depression. Record levels of debt and bankruptcy propel this recession. A decade of corporate mergers and buyouts, the overbuilding of commercial real estate, households struggling to maintain their spending, and persistent budget deficits have pushed the economy deeper in debt. Outstanding nonfinancial corporate debt grew from 30% of Gross National Product (GNP) in 1980 to 39% of GNP in 1990. The typical consumer now carries over 90 cents of debt for every dollar of after-tax income, a postwar high. Despite repeated promises from the Reagan and Bush administrations to balance the federal government's budget, the gross federal debt practically quadrupled from 1980 to 1991.

Record debt has meant record bankruptcies—well beyond even 1982 levels. Business failures in the 1980s doubled compared with earlier in the postwar period. The agency in charge of insuring bank deposits, the Federal De/posit Insurance Corporation (FDIC), predicts between 200 and 240 banks will fail in 1992. That's more than five times the number in 1982. And more than one million families declared bankruptcy over the last two years, about twice the number who went belly-up in the 1982 recession.

Even the architects of the policies that led to the financial excesses of the 1980s now recognize the serious problems of today's economy. "A national day of reckoning for a decade of deficit drenched excess is upon us" warns David Stockman, Ronald Reagan's first budget director, "bringing a painful retrenchment that could burden the economy through the mid-1990s."

An Unnoticed Divorce

But according to economist Peterson, economic growth and prosperity parted company some 19 years ago. The real income of the average worker or family is no greater today than in 1973, even though the economy grew in all but six of the intervening years. And for Peterson, when real income stops growing, the economy is depressed, even if the official figures indicate otherwise.

In the boom years from 1947 through 1973, real weekly earnings and real median family income grew along with the economy. From 1973, the peak of postwar prosperity, to 1982, real weekly earnings improved somewhat, then fell. They dropped sharply in the 1982 recession, and continued falling during the 1980s expansion. Today, real weekly earnings are some 19% below the 1973 level. Median family income, corrected for inflation, is no higher than it was two decades ago, even though almost 20% more families rely on two incomes instead of one. The expansions have not reduced poverty rates to the same degree either. While the 1960s expansion made the poverty rate fall 7.4 percentage points, the 1980s expansion made it decline by only 2.4 points.

Slower growth and greater income inequality launched this silent depression. Slower growth begins with smaller productivity gains, says Peterson. Slower productivity growth means less competitive U.S. corporations and less generous paychecks for U.S. workers. He points to overblown military spending that ate up 60% of federally funded research over the last two decades, leaving few research funds to work directly toward improving the productivity of the domestic economy. Since the mid-1970s, the United States has ranked last in productivity growth among the major industrialized countries.

The deindustrialization of the United States helped to increase inequality. Since World War II, manufacturing employment—jobs with more organized workers and higher wages—fell from over one-third of U.S. nonfarm jobs to less than one-fifth. The service-sector jobs replacing them paid less well. Added to this, productivity in service industries grew at only one-quarter the rate of manufacturing during the 1980s. Higher wage disparity within service industries has also contributed to income inequality. Altogether, nearly 90% of the new jobs created during the 1960s and 1970s paid middle-income wages. During the 1980s, just over one of every three new jobs did.

These employment trends kept middle- and low-income wages in check, and, along with tax cuts for the well-to-do, combined to redistribute income and wealth toward those at the top during the 1980s. Almost 80% of families—those who depend almost exclusively on wage income—saw their real income fall while their taxes increased. For the top 1%, after-tax income more than doubled.

The corporate response to slower growth hasn't helped. It's only made things worse for most workers. The 1982 recession initiated an era of corporate restructuring that profoundly shifted the balance of class power in the United States against labor. Anti-worker public policy allowed employers to slash wages, canceling out workers' share of subsequent productivity increases during the latter half of the 1980s. Real wages stagnated through 93 months of economic growth.

Restructuring has intensified again during the current downturn. General Motors, IBM, and Digital Equipment Corporation alone will sack more than 100,000 workers in the next three years and close plants across the nation. These retrenchment programs aim to return corporate profitability by keeping labor costs down. To meet their retrenchment target, several blue-chip corporations, like Digital and IBM, have abandoned long-standing no-layoff policies.

Good News for Whom?

The Wall Street Journal regards the cost control wrought by these retrenchment programs as the "good news' of the recession. As the "Journal sees it, lower labor costs should boost the international competitiveness of U.S. corporations. U.S. labor costs have in fact declined. Among the 14 leading industrial countries, only the United States showed a decline in labor costs per unit of output from 1985 to 1990. By 1990 the average hourly compensation for U.S. production workers had fallen from highest to sixth. Norway, Germany, Italy, Canada, and France all paid their production workers more.

Several political economists, like the Massachusetts Institute of Technology's Paul Osterman, regard corporate retrenchment policies as the most alarming news of the recession. These policies violate the innovative industrial relations adopted by some high-tech corporations. Applying a middle-management salary model to all workers, these corporations promised lifetime employment in exchange for workers relinquishing some prerogatives around work rules and embracing rapid innovation in their work. Retrenchment and massive layoffs have ended this Japanese-style collaboration.

According to Osterman, while retrenchment will cut costs, it will also slow innovation in U.S. corporations and compromise their international competitiveness. One especially despondent political economist dubbed these retrenchment policies the "Haitian road to development."

Those who would stay the course have plenty to be despondent about. Unless corporations and government reverse these retrenchment policies, they will lengthen the silent depression. According to a Wyatt Management Consultants survey of executives reported in the New York Times, service-sector layoffs—especially in airlines, retailing, and state and local government—will continue after the recession ends and well into 1993. Even when service industries revive, the overexpansion and slow product9ivity growth of the last decade will still take their toll. The Bureau of Labor Statistics projects that service companies will create jobs at only half the 1980s rate. Nonetheless, these industries will produce practically the only new jobs in the 1990s, according to labor experts. Unemployment rates will likely hover above 6% for years, long after the recovery begins.

Loose Money, Tight Times

The Fed hasn't pulled a magic cure out of its old bag of tricks either. The current recession has showcased the limits of monetary policy as a cure for economic stagnation. Since the recession began, the Fed has lowered the discount rate—the rate of interest it charges commercial banks to borrow money—an unprecedented 15 times. It now stands at 3.5%. But the mountain of debt accumulated in the 1980s and record levels of bankruptcies have blocked the Fed's ability to revive economic growth through these channels.

Conventional wisdom claims that changes in monetary policy take about six months to work their magic. Lowering the discount rate should bring down long-term interest rates (such as the rates on 30-year Treasury bonds) and inject more money into the economy, thus stimulating investment and pumping up consumer spending. If monetary policy worked, the economy would freshen just as Bush's general election campaign gears up.

But monetary policy has not worked so far. Despite the Fed's interest rate cuts, as of January, the money supply has barely grown. Since the beginning of this recession one standard of the money supply—M2, the sum of all currency, checking accounts, and some savings and money-market funds—has grown more slowly than in any recession in the past three decades.

Another nasty hangover of the 1980s excesses, bank failures, has absorbed much of the increased money supply. When the FDIC closes a bank and bails out depositors, depositors at healthy banks withdraw money to buy the Treasury securities or to pay the taxes needed to fund the bailout, shrinking the money supply. As the FDIC bails out more failed banks, this drag on the economy will increase.

The credit crunch, brought on by nervous lenders, has also stymied the Fed's loose money policy. Even though banks can now acquire money at a lower cost, they are reluctant to lend. Bush blames this credit crunch on overly cautious banks and bank regulators. But banks, at least those still standing, have good reasons to hesitate: debt and bankruptcy. Banks still carry loads of bad loans on their books, particularly from commercial re/al estate. Nearly half of the banks' $77 billion in past-due loans in 1990 were real-estate loans. Declining property values have shrunk the collateral insuring their still current loans.

Nor have lower interest rates spurred corporations to invest in new projects. Corporations are balking at new investments. According to the Commerce Department, manufacturers plan to reduce capital spending by 0.5% in 1992—the first drop since 1986.

Nor are consumers spending more. Homeowners have profited from lower interest rates by refinancing home mortgages at lower rates or from automatic decreases in monthly payments on adjustable-rate mortgages. But this has not stoked spending. Consumption, which accounts for about two-thirds of spending in the economy, has already fallen in real terms further during this recession than during the early 1980s. Consumers who have spare cash are paying off their debt rather than buying.

Some still maintain the Fed is not acting boldly enough. Interest rates corrected for inflation, the rates that matter to borrowers, are still higher than in 1989 and than at the recession troughs of other postwar business cycles. At the same time interest rates have fallen, so has inflation. In fact, real interest rates are three percentage points higher than during the 1960s and early 1970s—the last period of real prosperity.

Many economists and most politicians believe that even a bolder monetary policy will not by itself revive economic growth. Most say more government spending and taxing is necessary to promote growth. That economists and politicians have rediscovered public spending as an economic tool is hopeful. Their actual policies, however, are insufficient to counteract stagnation.

The Democrats have wrapped their several tax cut and spending packages in the rhetoric of tax fairness and middle-class populism. But these modest proposals cannot counteract the 1990s muddle. The Bush plan includes more explicitly pro-business propositions and pro-wealthy tax cuts and credits. It will do even less to fuel growth. Ann Richards, liberal governor of Texas, described the Bush plan as a Brylcreem Budget—"a little dab will do you." Unfortunately, a mere dab of fiscal ointment cannot turn around a stagnant economy.

A Loud Answer to the Silent Depression

But government is not powerless. It could lay the groundwork for a cure to the current recession and bring the silent depression to a close. A dose of old-fashioned public investment and genuinely progressive taxation is the best strategy for reviving economic growth and recoupling it with improved living conditions.

Public investment needn't be a make-work proposition. We need to repair our crumbling infrastructure, from roads and bridges to water and sewer systems. Economist Robert Heilbroner believes the United States ought to increase infrastructure spending by about 50%, or $100 billion, next year. Governments at all levels vastly underfund human services. National health care could safeguard workers' physical health while better funded education could augment their skills. These changes would also improve the lot of most workers and families.

Public investment would also improve economic productivity over the long term. Economist David Aschauer says in a report written for the Washington-based Economic Policy Institute that restoring public investment to then levels of the 1950s and 1960s would do more to increase private-sector profits and productivity than an equal amount of private investment.

But improving productivity won't mean fuller paychecks and better lives for most workers unless corporate America abandons its anti-worker retrenchment policies. If we are to restore the U.S. economy's competitiveness, companies will have to experiment with cooperative industrial relations that genuinely empower workers, push innovation, and increase productivity, experiments they have not tried to date. Improving workers' wages and work life is the better hope for sustaining economic growth.

While these programs might get the economy going again, the federal government must use tax policy to spread widely the gains of renewed growth. So why not take the Democrats up on their rhetoric and actually soak the rich? For instance, merely increasing the top U.S. income tax bracket from 31% to the international average of 47% would generate well over $15 billion in tax revenues. At the same time, lowering payroll taxes on wages would make sure that these tax changes were not a drag on the economy. Both changes would go a long way to giving more people a piece of the benefits of economic growth.

A sweeping program of public investment funded by the rich will help counteract the current recession. In the long run, such a change has the promise of both righting the economy and undoing social wrongs. With those changes, the 1990s could witness the return of prosperous growth. Without them, economic stagnation will continue and workers and families will suffer through the third decade of silent depression.

John Miller, a Dollars & Sense collective member, teaches economics at Wheaton College.

Resources: Wall Street Journal, 4 April 1991; Benjamin Friedman, "Financial Implications of Economic Prosperity," Challenge, March/April 1992; Wallace Peterson, The Silent Depression, 1994; Robert Pollin, "Destabilizing Finance and the Recession," Challenge, March/April 1992; Paul Osterman, Employment Futures, 1988.
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