May 19, 2016

Industrial Poverty: The U.S. and Canada

Yesterday I gave an updated, condensed version of the concept of "industrial poverty", a new era of economic stagnation that began in the late 20th century. It gradually replaced the decades-long era of unprecedented economic expansion that began after the Great Depression.

My conclusion was that large parts of Europe are dangerously close to, or at risk of falling into, the trap of industrial poverty. This means that the era of stagnation that first made itself known in the 1980s, then spread like a bonfire in the 1990s, has gradually become the norm in Europe. Half of all EU member states exhibit three or four of the five characteristics of industrial poverty: 

  • Private consumption growing at less than two percent per year;
  • Exports being larger than 50 percent of GDP;
  • Private consumption being less than 50 percent of GDP;
  • Government revenue exceeding 40 percent of GDP; and 
  • Youth unemployment persistently above 20 percent. 

These are all measured over a ten-year period, in order to prevent temporary economic downturns from polluting the data. That said, if a recession is persistent over time it will eventually dominate the industrial-poverty measurement; when that happens - as we are seeing in Europe - it is because the recession has permanently changed the structure of the economy for the worse. That is happening in Europe right now.

The question is: can it happen here in the United States as well?

On the face of it, there is no evidence of that in the data. Here is how the United States scores on the criteria listed above, with 2006-2015 as the measurement period unless otherwise specified:
  • Consumption growth: 1.65 percent per year (affirmative);
  • Exports share: 12.5 percent (negative);
  • Consumption share: 68.1 percent (negative);
  • Government revenue share: 35.5 percent (negative), though the measurement period here is 2004-2013;
  • Youth unemployment: 15.3 percent (negative).
It would seem, then, that the United States only meets one of the five criteria for industrial poverty. At this point, therefore, we are not at risk of following Europe down the slope. 

However, there are two important points to be made about government revenue. First, the period for measurement is a bit behind the rest of the data sets, the reason being that it is difficult to obtain high-quality, continuous series of data for the consolidated public sector of the U.S. economy. The data used here comes from the Census Bureau (state and local governments) and the Office of Management and Budget (federal). The Census Bureau is two years behind in producing data for states and local governments, hence the lag. 

Secondly, and more importantly, the federal budget deficit is a significant source of funding the U.S. government sector which does not show up as such in the data. If we add annual federal deficits to the revenue of the consolidated public sector, the government-revenue share of GDP for the measurement period increases from 35.5 percent to 40.1 percent. That puts the United States just over the top for that industrial-poverty criterion.

One should be careful with this kind of comparison between deficits and regular tax revenue. Deficits have different dynamic effects on the economy than taxes, especially in recessions. That said, the deficit allows for government spending that would otherwise not have been there, thus boosting the size of government. With these points in mind, it is reasonable to include the deficit for the specific purpose of accurately accounting for the annual size of government. 

There is little reason to believe that the United States will is about to catch up with Europe on the downslope of economic stagnation and industrial poverty. For one, the private sector is solid and plays a crucial role for the economy. So long as private consumption is somewhere around two thirds of GDP the free-market base of the U.S. economy remains healthy (at least from a macroeconomic viewpoint). 

Underlying trends in youth unemployment are also encouraging. After peaks close to 20 percent during the depth of the Great Recession, it has fallen noticeably to an average of 12.5 percent for 2015. The average for the last five months of that year was actually marginally below 12 percent. 

With all this in mind, though, it is important to remember that the U.S. government is big enough to start stifling the private sector as it did in Europe from the 1970s and on. It takes a couple of years of government persistently gobbling up 40+ percent of GDP before the private sector's resigned reaction translates into visibly slower growth. Those signs, however, are not far away. GDP growth has already slowed to below three percent under the Obama administration, and private consumption is not in much better health. 

It will only take one or two major welfare-state reforms to tip the scale for the U.S. economy. We are that close to losing our distinction over the European wasteland. 

Lastly, a note on Canada. It has been frustratingly difficult to obtain recent, useful data over the five Industrial Poverty criteria. For two of the criteria, youth unemployment and government revenue, the most recent data point offered by Statistics Canada is from 2009! A comparison to Europe and the United States is therefore basically useless. Briefly, though, the Canadian economy is mostly in worse shape than the American in terms of the structure of the economy. Private-sector consumption for 2006-2015 only reached 54 percent of GDP. Exports, though, were farther from the Industrial Poverty threshold at 31.5 percent.

Overall, North America seems to be in better shape than Europe. It remains to be seen if our politicians recognize the importance of this and decide to protect and expand that difference. 

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