America is Stuck in an Economic Quagmire

America is trapped in an economic quagmire.

In the United States, each worker supports 1.72 people. The dependency ratio has not been this high since the early 1980s, a time when single-earner nuclear families were a far greater proportion of the American population.

The employment-to-population ratio provides a holistic snapshot of a society’s condition, because the employment-to-population ratio shows the balance between the dependent (unemployed, discouraged workers, elders, stay-at-home parents, children, slackers and disabled) and independent. An economy with a high dependency ratio is fragile – imagine a tribe of 10 in which only 2 could hunt. A high dependency ratio places a burden on a society’s productive members, as governments seek to transfer wealth to dependents. While a social safety net is essential for advancing a society, swelling entitlements and the subsequent funding challenges can polarize a population. In extreme cases, the burden can be so great as to ignite rebellion.

America’s employment-to-population ratio began slipping as the country toppled from its economic peak reached a decade ago. The productivity gains – real gains, one might call them – of the 1980s and 1990s culminated into a massive technology bubble that eventually burst. If it weren’t for the real estate bubble of the 2000s filling the economic void, the ‘recovery’ of the 2000s would not have occurred and the pain we feel today would have occurred much earlier in the 21st century. Nevertheless, today’s employment-to-population ratio would likely be where it is regardless of the economic path. We simply don’t have the economic tailwinds of the past to support armies of workers.

Without these tailwinds, today’s unemployment rate is structural. Permanent. And the statistics confirm this.

One needs 6 hands to count the average length of unemployment, in weeks. And those who are jobless are staying jobless. With employers seeking candidates who are employed or recently unemployed, those who lost their jobs more than six months ago are effectively permanently unemployable. The structural unemployment rate has shifted higher as those unemployed for more than six months watch their skills atrophy, lose their contacts and slip into the economic void. Employers won’t touch these people with a ten foot pole.

A permanent dependency ratio of 1.72:1 is a borderline nanny state, something America clearly cannot afford as politicians battle their way through spending cuts and tax hikes. Government transfer payments are massive, but there are also many unfortunate stories about individuals and families that were rejected by a system that can no-longer afford them. In fact, many families are adopting Eastern ideals and are moving in with parents, in-laws and siblings. As unemployment drags on and government transfer payments are cut even further, temporary housing arrangements become permanent, dollars get stretched and living standards decline.

We’ve been here before. The 1970s were a period of structural stress for the U.S. economy, with high unemployment, rising commodity prices, inflation, unaffordable wars, government scandal and a bond market revolt. The sick ‘70s didn’t end simply because the decade changed. The economic illness was destroyed after it almost became fatal forcing governments around the world to reject Keynesian policies, privatize government divisions and extinguish inflation. The brutal recession that followed paradoxically marked a new era of prosperity for America.

Central bank hawkishness that triggered the early 1980s recession boosted central bank credibility and kicked off a secular decline in inflation and interest rates, which helped buoy profit margins and asset prices. Commodity production capacity began coming on-line in the 1980s lowering resource prices, providing additional secular support for profit margins and discretionary incomes. At the same time, new free-market policies introduced by Ronald Reagan and Margaret Thatcher released economic potential that was previously shackled by inefficient government bureaucracy. Add the fuel from continuous improvements in computing, telecommunications and transportation and you have an economic productivity fire that burned for 20 years.

Today, with the ranks of permanently unemployed swelling, we need another revolution in policy and technology to get back to where we once stood. The reality, however, is that we haven’t hit our crisis point to force policy change and productivity-enhancing innovation is still embryonic. (We are witnessing impressive innovation, but much of it is entertainment that benefits individuals rather than profit-seeking – and people-hiring – businesses.) We are also faced with worsening resource scarcity, driving up the cost of doing business.

Another drag on the American economy is the questionable domestic benefits of the labor arbitrage between the developed and emerging economies of the world. Free trade is theoretically a win-win, but many wonder if selling out American labor in exchange for cheap Chinese goods benefits anyone other than credit card companies. This is another major headwind for American unemployed.

Without structural changes to the American economy the quagmire remains, forcing American labor through an agonizing adjustment period. Someday we will have our crisis that forces policy change. Someday we will discover another revolutionary technology. Someday we will be sitting at the beginning of another secular disinflationary trend. Someday the gains from trade will offset the losses. But that day is not today.