How quickly we forget the roaring nineties and the sense of nearly universal optimism engendered by the end of the cold war and the longest period of uninterrupted economic growth in our nation’s history. The madness surrounding the “New Economy” and predictions of unending economic prosperity seem to have reached their peak in 1999 with the now infamous book Dow 36,000 by James K. Glassman and Kevin A Hasett, which boldly proclaimed, “The stock market is a money machine: Put dollars in at one end, get those dollars back and more at the other end [. . .] The Dow should rise to 36,000 immediately, but to be realistic, we believe the rise will take some time, perhaps three to five years” (22).
As it turned out, of course, the Dow peaked in January of 2000 at just over 11,300 before falling precipitously, bottoming out just three years after Glassman and Hassett’s book was published at 7,286. More recently it plunged even lower, hitting 6,547 in March 2009. Of course the stock market is nothing if not unpredictable, and so this historic miscalculation is an excusable, though none-the-less fascinating and colossally epic fail.
The realization that economists are coming to is that the predictions for the new economy were based on a fundamental flaw in our understanding of how technology would impact the job market. The consistent increases in productivity brought about by the successful integration of technology into the economy have not resulted in the uninterrupted economic boom many economists predicted, which is forcing them to take another look at some of our most basic assumptions.
The economic stimulus is a case in point. Congress, Ben Bernanke, and President Obama poured close to a trillion dollars into the economy in the form of stimulus, following the model for economic growth established in the post-depression era by the New Deal and WWII in which massive government spending pulled our economy out of the great depression. Although it was designed to unfold too slowly to create the immediate results many voters were looking for, the stimulus package is working at some level. The stock market has rebounded to over 10,000, consumer spending is on the rise, productivity is up, the GDP is increasing, and the ailing financial system has been stabilized.
There is one major economic indicator that has not improved, however, and that is going to create serious problems for the Democrats in November. That indicator, of course, is unemployment. Due to the bizarre way in which this rate is calculated, the feds pegged unemployment at around 10% for the last three months of 2009, though the real number of unemployed and underemployed is probably closer to 20%. It’s not a surprise to anyone who has studied economics that unemployment growth is lagging behind other indicators, but that hasn’t stopped Rush Limbaugh and the Republicans in Congress from pouncing on Obama and proclaiming the stimulus a failure.
The stimulus is not a failure, but unemployment is not going to improve any time in the near future and unfortunately the unsophisticated American electorate is about to be taken for a ride by politicians and pundits who are going to manipulate that for their own ideological ends. Liberal pundits will argue that unemployment always lags behind other indicators, which is true, but it’s not true that in past recessions unemployment lagged as much as it has (and will) during the recovery from the Great Recession.
The connection between productivity and unemployment is often debated, but over the last sixty years sudden increases in productivity have always meant that workers were busy (and making money), which almost always results in companies hiring more help. This pattern first emerged in 1950 when a surge in productivity caused unemployment to drop 33% after an impressive quarter in which productivity growth reached 14.6% due to the 1950’s post-WWII economic boom. A similar scenario unfolded in the early 1980s when during a deep recession productivity growth suddenly hit 9.6%, giving companies a flush of income which allowed them to hire new employees; by the end of the third quarter of 1983 unemployment had fallen a full one percent, and it continued to decline rapidly and consistently for the next two years. Ditto for the first quarter of 2000, when productivity growth of 9.4% resulted in an almost unbelievably low unemployment rate of 3.9% just two months later.
Based on this analysis, it’s obvious why economists of the late nineties predicted that the productivity gains of the new economy (productivity is up 65% since 1970) would create jobs and lead to sustained economic growth. So why did the recent boom in productivity: 6.9% and 8.1% in the second and third quarters of 2009—a dramatic change from the 1.8% average of the two previous years—not cause a drop in unemployment? Unfortunately, it seems, that the answer lies in an aspect of the new economy that has been largely overlooked.
Think about it. How many jobs that were viable career options just a decade ago are now disappearing? And I’m not just talking about factory jobs that are being lost as automation and outsourcing increases. Travel agents have been replaced by websites; airline ticket agents have been laid off as airlines move to e-tickets; real estate agents are being bypassed by buyers and sellers who use the web.
Distributors, once a key middle-man in the economy, are being replaced by complex computerized distribution systems like the one Wal-Mart employs, which no longer requires white collar professionals to sell and distribute products to retail outlets, but instead employs underpaid blue collar workers without benefits to drive forklifts while a computer places the orders and keeps the cheapest products available flowing into stores.
Tech support and customer service has been outsourced along with white collar engineering jobs. The post office has completely stopped replacing employees who quit or retire. Teachers and professors are being asked to facilitate online classes that can be run at much lower cost with higher student to teacher ratios. Illegal downloading has gutted the music industry and new software has made DIY recording relatively easy, eliminating thousands of high paying recording, editing, production, marketing, and distribution jobs in a rapidly disappearing industry.
Journalists are being replaced by bloggers. Locally owned businesses are being replaced by huge chain stores which replace upper-middle class local owners with lower-middle class managers with no health insurance coverage. The art of professional photography, which at one time was so marketable because of the difficulty of getting a decent shot with an old-fashioned film camera, has been rapidly eroded by digital cameras that show you the picture instantly, allowing you to get the shot you want without paying a professional for it.
All of this seems great on an individual basis. We now can get whatever music we want whenever we want it. We can have Uncle George photograph our wedding instead of paying a professional photographer thousands of dollars. We can buy cheap crap at Wal-Mart instead of high priced quality goods from local retailers. We can buy or sell a house without having to pay a commission. All great things. But the side of it all that we tend to ignore is that the more middlemen you take out of the economy, the fewer middle-class jobs there will be out there that don’t require a college education.
The new economy is turning out to be all about the further stratification of wealth. We used to say that the rich get richer and the poor get poorer back when the wealthiest one percent of Americans was earning just 10% of all pretax income. Now that the same one percent receives close to 22% of all income, the real impact of the new economy is becoming strikingly clear. Increased worker productivity and the disappearance of the middleman has been a great thing for stockholders and corporate CEOs, but it’s kicking the middle class in the ass and will continue to do so for the foreseeable future. So if you’re wondering why jobs aren’t coming back despite economic growth, look no further than the computer on which you’re reading this for free right now.
To succeed in the New Economy, one must have a talent/education that isn't replaceable by cheap labor or technology. The American economy is becoming an economy of ideas particularly in the engineering and scientific sectors. We can't compete in manufacturing of technology, but we can in the creation of technology. The crazy thing about this recession is that it hit a certain demographic much harder than others, as all do, I suppose. The middle class is being redefined, so that it's not as obvious that it's completely gone.
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