A Lost Decade of Economic Growth
General Electric has always been a potent symbol for business in America. From the simple light bulb to cutting edge jet engines, the company has embodied the country's rise to dominance in the world of innovation. But like America, GE underwent a huge transformation over the past 20 years, moving further away from its traditional business of "making stuff" and pushing deeper into the world of financial engineering. Why sell washing machines when you could make more pushing subprime mortgages? Now the company's finance arm - like America - is struggling with huge losses.
Given the company's evolution, when CEO Jeff Immelt gave a speech in Japan recently about the challenges facing GE, he might well have been speaking for the U.S. as a whole. Which is a scary thought, because during that speech, he voiced concern about the future prospects of economic growth itself: "As consumers around the world get more conservative," he said, "we think that overall economic growth - not just for a year or two but even post the RECESSION - overall economic growth may be slower."
There's no question that when measured by that most common yardstick of economic performance - GROSS DOMESTIC PRODUCT - there wasn't a growth problem during the years prior to the recession. In the decade leading up to 2007, average annual GDP growth was 2.8 per cent in the U.S. and 3.8 per cent in Canada, with America underperforming its average over the last 50 years and Canada coming out ahead. But look again, and a troubling picture begins to emerge. Because rather than achieving that growth by creating real jobs and genuine wealth, many of the gains in recent years resulted from manufactured manias like the dot-com, housing and commodity bubbles. Instead of rising steadily, the market lurched about like a sailor on a bender fuelled by borrowed cash, and all the action seemed to involve either wildly overinflated assets or repackaging existing wealth. The companies that make "real" stuff, like cars and toothpaste, were largely left behind, and when you look at the indicators that really matter, like the size of people's nest eggs and the buying power of middle-class paycheques, there didn't seem to be much growth at all. In fact, Mike Shedlock, an investment adviser with SitkaPacific Capital Management and author of a popular economics blog, calls much of the last decade's rise "artificial" growth. "If you print money and spend it you're going to cause a boom, and that's what happened - it spurred all sorts of economic activity that should not have occurred."
Indeed, when you look at the indicators that directly affect people's quality of life, growth over the last decade looks downright lacklustre. This is all too evident in the dismal employment numbers seen in America. It's hard to believe, but private sector job growth in the U.S. has basically been stalled for a decade. Between June 1999 and June 2009, only 550,000 additional jobs were created, which for a country the size of the U.S. is essentially no growth at all. To put that into perspective, Canada, a country with just one-tenth the population, generated three times as many new jobs in the private sector over the same time frame. The only real lasting gains in the U.S. were in the public sector, creating the impression that the U.S. government has essentially grown the ECONOMY by borrowing money from China and using it to create new jobs in health care and education. "It shows how sharp this correction has been," says Millan Mulraine, an economic strategist at TD Securities. "We've seen close to four million people lose their jobs and most of those jobs have been in the private sector, which always tends to shed jobs fastest in a recession."
Not only that, but what growth we have seen has failed to generate much in the way of real gains for workers. Between 1997 and 2007, U.S. workers with college degrees eked out only a 3.2 per cent increase in median wages after inflation. It was a similar story in Canada, where real median wages rose just 3.9 per cent over those 10 years, according to STATSCAN. "When you take the longer term, real wage increases have not kept up," says Roger Sauvé, president of People Patterns Consulting. "For a lot of people, they just managed to keep up with inflation, but a lot of others have fallen behind."
A central tenet of growth is that workers will enjoy a better standard of living by producing more with less effort. But despite our rising GDP, that hasn't happened. Since the 1970s, leisure time in America has plunged by almost one-third, and Canadians have seen their leisure time steadily decline since the 1980s. In other words, says Peter Victor, an economist at York University and author of the book Managing Without Growth, many of the gains from productivity haven't flowed down to workers. They're just working harder to produce more stuff. "In the last 30 years the Canadian economy grew by about 140 per cent in real terms, yet a number of things didn't happen," says Victor. "We didn't have full employment at any time during that period, inequality got worse, the number of people below the poverty line didn't decline and a number of environmental problems got worse. So you can say growth really didn't deliver."
Even America's vaunted GDP growth is looking suspect. The problem is that consumers, businesses and government have had to pile on more and more debt in order to power the economy upward. For instance, in 1980 it took roughly $1 of new debt to produce $1 of GDP growth, says Eric Janszen, an economic commentator and former venture capitalist. But by 2007 every $1 gain in GDP was dependent on $5 of new debt. "Looking back, it's hard to measure how much of the growth we saw was legitimate, based on increased productivity, and how much was based on debt financing," Janszen says.
The biggest culprit by far was the real estate sector, as incredibly low interest rates drove homebuyers to pile on supersized mortgages and developers to erect endless stretches of retail space. The frenzy of construction contributed to GDP growth, but much of that gain may evaporate in the years to come. Commercial vacancy rates are nearing double-digit levels and there are roughly 18.7 million homes sitting empty in the U.S. - nearly as many homes as there are in all of Britain. Janszen figures that without the boost from the debt and real estate bubbles, America's GDP would have grown by 30 per cent less over the past decade.
Impending demographic changes may make things even worse. More workers means more growth, but the opposite is also true. One reason we enjoyed such huge gains throughout the 1950s, '60s and '70s was the influx of women into the job market, says Doug Porter, deputy chief economist at BMO Capital Markets. "We've got about as high a share of the adult population who is going to be looking for a job as I suspect we're likely to ever see," he says. As baby boomers retire, we could see the labour force shrink, dampening growth as it does.
Growth also relies on workers becoming more productive, and here again gains were easier to come by in the past. Technology continues to enable workers to squeeze more out of their workday, but that becomes more difficult to sustain over time. "There may be some diminishing returns to productivity," Porter says. "There's a limit to how efficiently you can work. After we industrialized, there were only so many easy gains to be had."
Given all of these factors, it's hard not to wonder if the rate of growth we've previously enjoyed could falter. In his book, Victor argues that growth could dramatically slow without leading to massive UNEMPLOYMENT, if people cut back on the amount of time they spend at work. Even some mainstream economists believe flat growth might have some appeal. But only to a point. "Let's face it, living standards in Canada are pretty darn high, even with the recession we've had over the past year, so there are probably an awful lot of people who would be satisfied if that didn't improve," says BMO's Porter. "But an economy is a bit like a bicycle. If it stops moving it can fall, and fall rather heavily."
And that's the fear. There are consequences to slowing growth. Not only does economic expansion go hand-in-hand with social mobility, tolerance and democracy, but it's a lot easier to pay off your debts if your GDP is rising. The U.S. is now US$10 trillion in debt, and it could never realistically repay all that money with the economic output it has today. Instead, the administration hopes to work it off, growing the economy so that the debt load gradually becomes less of a burden. (That's how Canada crawled out of its own debt crisis in the 1990s.) It's a nice theory, but it will only work if the U.S. economy can accelerate even faster than it did in the last decade. Economists are doubtful. "We could go 20 years without a full recovery," says Shedlock.
From our current position in the grip of a nasty recession, it's no wonder that things look bleak, and as things pick up, fears about our future capacity for growth may melt away. But if we've learned anything, it's that not all growth is good - and real, sustainable growth is much more difficult to attain than a series of economic bubbles. Deep in their hearts, most economists know that exponential growth can't go on forever, and eventually, the rate of growth, at least, has to slow down. Given that, by the measure of both the stock and job markets, we've just lost a decade, some fear that time has arrived.
Maclean's August 17, 2009