Why is this cycle different from all other cycles?

Author:Sherman, Howard J.

The present expansion has lasted from the fourth quarter of 2001 to the second quarter of 2007. All beginning and ending cycle dates used here come from the Department of Commerce, which gets them from the National Bureau of Economic Research, founded by the great institutional economist, Wesley Mitchell (see National Bureau of Economic Research 2007). We compare what has happened in the present expansion with what happened on average over the last five expansions. We find slower growth, greater inequality, higher military spending, a housing collapse, and soaring oil prices, all of which are part of a pattern of dramatic new features within the same basic operation of capitalism. We also see that many of its features are influenced by the fact that the process of globalization has proceeded at a very rapid rate, so the whole global economy is tightly bound together.

Slower Growth

The average length of an expansion over the last five cycles (from the fourth quarter of 1970 to the fourth quarter of 2001) lasted 21.2 quarters. The present expansion has so far lasted 22 quarters. Therefore, the average expansion and the present expansion until the second quarter of 2007, are about the same length. For this reason, the comparison, based only on expansion amplitudes in percentage terms, is meaningful.

Systematic evidence of slower growth in the present expansion in the average annual growth of Gross Domestic Product (GDP), consumption, investment, and employment is shown in Table 1. The growth rate of real GDP was at an historic high in the expansions of the 1950s and 1960s. (The term "real" means that the dollar amounts were adjusted for inflation, making them comparable between different cycles and times.) The annual growth rate slowed in the average expansion in the period from 1970 to 2001. Table 1 shows that this downward trend has continued into the present expansion with a significant decline in the annual percentage rate of growth of GDP.

The slower growth rate of GDP is partly due to the fact that consumer spending rose more slowly in the present expansion than the average of the five previous expansions. We shall see below that the growth of consumer spending was determined by the total national income, by distribution of income between employees and capitalists, and by how easy it is to get credit. The slower growth rate of GDP is also explained in that investment spending suffered a severe decline in its rate of growth in the present expansion, compared to the average. This fact is clearer if we exclude that part of investment, called residential investment, which is really just people buying houses. In the current expansion, the annual growth rate of real nonresidential investment has been only 3.68, an even lower rate than gross investment.

The table also shows that total government spending rose a little faster in the current expansion. That may seem strange since President Bush promised to reduce government spending. His administration did reduce the rate of growth of many types of peaceful spending programs, such as No Child Left Behind (NCLB) or the State Children's Health Insurance program (SCHIP). At the same time, the Bush administration expanded military spending, mostly for the wars in Iraq and Afghanistan.

Because of the slower economic growth, the unemployment rate declined far more slowly in the present expansion than its usual rate of decline in previous expansions. In U.S. history, how many people have been out of work at the bottom of each depression? The 1890s were a period of high unemployment, rising to 18 percent in 1894, and remained high for several years. Another period of high unemployment was during the 1930s, with the highest level being 25 percent in 1933. In 1944, during WWII, unemployment fell to 1 percent. Since WWII, there have been periods of high unemployment in every recession. The percentage of unemployment at the bottom of each of the recessions from WWII to 2000 was 6, 6, 6, 7, 9, 7, 10, and 9 percent, respectively. In the most recent recession, the unemployment rate was at 5 percent in 2001 and 2005, and at 6 percent in 2002, 2003 and 2004. This is a remarkably slow recovery (this point is spelled out in detail in an excellent article by Josh Bivens and Christian Weller (2006)).

At this writing in 2008, unemployment is at 5.0 percent. Note that this official unemployment rate (from the Department of Labor) is badly understated. Anyone who works at least one hour a week is considered to be "employed," though millions of people are involuntarily working such short hours. One other reason for understatement of unemployment is that any person who is too discouraged to look for work for one month is considered to be "not in the labor force."

More Inequality

In terms of income, there are two Americas: the enormous class of employees and the tiny class of capitalists. The data on this behavior is shown in Table 2 and Figure 1. Figure 1 shows the increasing gap between all national income and employee compensation. Remember that employee compensation means wages, salaries, and benefits. The gap between national income and employee compensation consists of property income, which includes rent, interest, business profit, dividends, and retained corporate earnings. This gap has grown rapidly in the present expansion and is presented in detail in Table 2. As shown, the annual rate of growth of employee compensation declined considerably in the current expansion from the average growth in the five earlier expansions. This was due in part to the slower growth of production and employment, which further weakened the bargaining strength of employees.

All national income may be divided by definition into employee income and property income. Property income consists of rent, interest, and all profits (including corporate profits). Table 2 shows that national income rose faster than employee income in both the average expansion and the most recent expansion. The gap is larger, however, in the present expansion. The employee share of national income sinks in both the average expansion and the present expansion. We see that the employee share of national income declines at a rate of 0.23 percent per year in the last five expansions. Then it jumps to a decline of 0.42 percent per year in the present expansion.

There is an increasing gap between all income and the employee share. To whom does this other income go? By definition, income that is not employee income must be property income. It follows that the share of property income must be increasing. This can be seen in the fact that property income increased in the...

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