Understanding the U.S. Economy 2003 IAM Legislative Conference Washington, D.C. Barry Bluestone Northeastern University Boston, Massachusetts May 21, 2003

The Manufacturing Crisis Manufacturing Employment has plummeted by 2.7 million jobs since 1997 – 1 in 7 jobs have disappeared Production workers hardest hit – 1 in 6 jobs have disappeared Primary Metals -20.6% Industrial Machinery -20.8% Aerospace-27.2%

Jobless Recovery Most manufacturing losses experienced in last two years In 1999 & 2000, U.S. economy grew by healthy 4.1% and 3.8% In 2001, recession reduced growth to only 0.3% In 2002, U.S. economy began to recover – growing by 5.0% in 1 st Quarter, 1.3% in 2 nd Quarter, and 4.0% in 3 rd Quarter. Altogether, in 2002, economy grew by 2.4% BUT... even with this “recovery”, manufacturing lost another 570,000 jobs... and unemployment has reached 6% and going higher.

Why a Jobless Recovery?

Productivity is a “Two-Edged Sword” Productivity is a “two-edged sword” –When economy is growing rapidly, productivity growth boosts wages and living standards –But when productivity grows faster than demand – layoffs result –2002 had fastest growing productivity since 1950 –Productivity now exceeding GDP growth = Rising unemployment – from 4% to 6% in last three years

An Overvalued Dollar Rise in exchange rate of the dollar from 1999 through end of 2000, followed by high valued dollar through early 2002 – Between 1996 and early 2002, dollar appreciated by 30 percent against currencies of industrialized nations –That means prices of U.S. exports were as much as 30 percent higher than similar products made abroad

Manufacturing Slaughtered –Not surprising that in 2002 alone, shipments of US factories fell by $40 billion – with exports accounting for $30 billion of the decline – With exports falling and imports growing, manufacturing employment as a share of total employment has plummeted.

Good News/Bad News Good News: The U.S. Dollar is declining –Since the beginning of 2002, the value of a dollar has fallen from 1.15 Euros to only.87 Euros. –That means U.S. products are less expensive in foreign countries. Bad News: Growth is sluggish and productivity remains high

What We Need to Do Need a big, quick stimulus package – One year tax cut for working families – Large Revenue Sharing Package for the States – Another FED cut in interest rates Need to repeal tax cuts for the rich – Repeal 2002 tax cut – Don’t pass new tax cut – Need this tax revenue to pay for social security, health care, and investments in homeland security health care, and investments in homeland security and basic research – without blowing the federal and basic research – without blowing the federal debt out of the water debt out of the water

A Model of Growth for the 21st Century

Regaining and Sustaining Prosperity Quick stimulus in short run Public investment in basic research, education, homeland security, and infrastructure in the long run

Restoring Social Equity Higher Minimum Wage Labor Law Reform to Foster Unionization Fair Trade Invest in Public Schools Universal Health Care Coverage Expand Public Goods (e.g. Transportation, Day Care, Elder Care)

What are the Prerequisites for Economic Growth? A Little Bit of History tells an Important Story

The Post-War Glory Days Rapid GDP Growth in the U.S.: 1950s: 3.9% 1950s: 3.9% 1960s: 4.4% 1960s: 4.4% 1970s: 3.2% 1970s: 3.2% Real Family Income doubles (+104%) Declining Unemployment Unemployment Rate declines to 3.8% -- Unemployment Rate declines to 3.8% Rising Incomes for Most Families

Glory Days

Why the U.S. Grew So Fast

Y= C+I+G+X-M Consumer Boom Pent up Savings & Pent up Demand Union collective bargaining gains Investment Boom Conversion to Civilian Production Government Spending Boom State & Local Spending on Urban Renewal, New Suburbs, New Regions Cold War Export Boom - Marshall Plan Import Implosion - Legacy of WWII

The End of Affluence ….. An Age of Diminished Expectations

Declining Growth Rates

Rising Unemployment

Increasing Income Inequality

So Why Did the U.S. Growth Engine Sputter in the 1970s? Oil Crisis in the 1970s Business forced to focus on energy efficiency, not new products or new technologies Corporate Myopia and Arrogance in face of new competition Little emphasis on productivity, quality, and innovation Global Competitors stepped in Imports clobbered the economy

Plummeting Productivity

Surprise, Surprise! Prosperity Regained …

So Why did the U.S. Grow Again? The New Conventional Wisdom: The Wall Street Model

Wall Street Model Weak Trade Unions kept wages and prices down Welfare Reform increased labor supply, keeping wages and prices low Tight monetary policy kept inflation under control and interest rates low Deficit Reduction/Surplus Generation raised aggregate savings rate, lowering interest rates Free Trade depressed wages, forced prices down, and kept inflation under control >>>>>> All leading to a stock market boom and new investment All leading to a stock market boom and new investment

So Who’s responsible for the new economic boom? Was it Bill Clinton … who got the deficit under control? Was it Alan Greenspan … who got inflation under control? Was it Ronald Reagan … who got government under control? Answer: None of the above.... None of the above.... Despite all the ballyhoo, the Wall Street Model does NOT explain the U.S. boom in the late 1990s

It takes a little bit of history to understand America’s new prosperity... Long Lags in Technology/Productivity Cycle

Productivity Rebound began in the 1980s

New Technologies that spurred Economic Growth Steam Engine …. 19th C. Electrification …. Early 20th C. Integrated Circuit …. Late 20th C. –Computer Hardware –Computer Software –Internet –e-commerce But each takes decades to impact productivity and growth

Where did the new technology come from for the 1990s Boom? The Missile Race following Sputnik (‘50s/’60s) The Space Race with Russia (‘60s/’70s) From Government Spending on Defense to the Private Sector in a Quarter Century It was hideously expensive, terribly wasteful, but in a peculiar way it paid off decades later So who’s most responsible for U.S. Economic Boom? Nikita Khrushchev Nikita Khrushchev

Public Sector + Private Sector Working Together Federal Government provided Basic Research funds Local, State, and Federal Government educated and trained a labor force to effectively use the new technology Private sector converted basic research to applied development.... and productivity soared.... and productivity soared

Public Investment in the 1960s, 1970s, and early 1980s... Basic Research Basic Research Education (after Sputnik) Education (after Sputnik) Public Infrastructure (Interstate Public Infrastructure (Interstate highways, airports, internet) highways, airports, internet)

But We May Sabotage Prosperity if we stick with the Wall Street model...

The Wall Street Model says... Give tax breaks to the rich so that they will invest... and drive up stock prices Cut government spending to spur aggregate savings Expand Free Trade with no conditions Weaken Trade Unions Weaken the Social Safety Net

The Stock Market Bust Do you really want to trust prosperity to the Stock Market? to the Stock Market? Recall the Wall Street Model If you live by Wall Street... you die by If you live by Wall Street... you die by Wall Street Wall Street

Importance of Public Investment Do you really want to starve government? government?