Upstairs, Downstairs

August 4th, 2011 at 6:47 pm

My CBPP colleague Chuck Marr presents me with two very different perspectives on the current economy.

Here, we see dollar stores, while still turning a profit, worrying about ominous signs of strapped consumers:

In short, families are shopping more at dollar stores. But they are buying only what they need. They are picking up low-margin goods, cheaper per unit at dollar stores than places like Wal-Mart, and sold in smaller packages to let customers spread purchases out.

But at the other end of the economy, there’s this:

Even with the economy in a funk and many Americans pulling back on spending, the rich are again buying designer clothing, luxury cars and about anything that catches their fancy. Luxury goods stores, which fared much worse than other retailers in the recession, are more than recovering — they are zooming.

Wait a second, you’re saying.  I thought all the data were terrible.  How could anyone be getting ahead right now?

In fact, corporate profits aren’t just back to their pre-recession peak: they’ve surpassed it.  The  figure shows profits/GDP over the last decade (through 2011q1–most recent data point).  You can see that profits took a hit in the great Recession as did everyone else.  But you can also see their sharp recovery, a trend which stands in stark contrast to jobs and incomes of most everybody else.

(Chuck, our tax guy here at CBPP, looks at these data and concludes that the expiration of the highend Bush tax cuts remains a very good idea.)

Source: BEA

How is this picture consistent with an economy and job market hovering at stall speed?  A lot of these firms are able to sell into (and create jobs in) foreign, emerging markets, where growth has been reliably solid in recent years.  Other have found ways to squeeze productivity gains out of their incumbent workforce, able to meet current levels of weak demand without adding workers.

Something’s gotta give, folks.  It’s an economy that’s terribly weak in the middle, and that’s where most of  us live.

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8 comments in reply to "Upstairs, Downstairs"

  1. D. C. Sessions says:

    What do those profit graphs look like if you separate out the financial services sector? Does Wall Street have the same growth curve, eat all of the profit growth, or what?


  2. John says:

    You have “GPD” in your graph title – did you mean “GDP?”

    There’s really no mystery here. It’s like the nose on one’s face, it’s so obvious.

    Brad DeLong recently commented about the increase in capital spending for “equipment and software”. It doesn’t make sense to be increasing capacity when demand is so soft. The thing is, that spending isn’t being done to increase capacity – that would indeed be nonsense – only an economist who thinks technology always and only is used to increase capacity would even have such a thought: no, it’s being done to reduce costs. Information technology is called “labor-saving” for good reason.

    Seems like everyone in the world gets that – everyone, that is, except economists, who apparently think they’re smarter than everyone else, especially technologists who’ve been actually building this labor-saving technology and know full well what purposes it serves.

    This really couldn’t be simpler. Buy computers and software, lay off workers. Wash, rinse, and repeat when the next iteration of Moore’s Law sweeps through the tech industry. Net result: lower costs at each iteration. And higher profits as well.

    And all can happen this with no increase in output, in fact, it can happen with both decreased output and revenue.

    And guess what really sweetens the pot? Low taxes. Remember, taxes are on profits, not on revenues, and do the analysis, noting the incentives. Businesses figured out long ago that markets don’t expand forever; when they begin to slow, profits can still be increased by cost-cutting, and that’s where “labor-saving technology” has come in, long since.

    I guess economists don’t run businesses – or work in real businesses for that matter, where every day the average worker worries if a new wave of technology-enabled cost reductions will eliminate their job.

    Consider again that profits, productivity, and capital spending on IT have all been increasing for 3 decades, while demand for labor has tanked along with wages being flat, and most recently actually fallen. What else can explain all of that?

    I think the data proves that what businesses are doing – how they’ve managed to accumulate $2.5T in cash in a recession – is that they’ve figured out that they can use technology to reduce their most significant cost – labor – by replacing more expensive labor at every incremental opportunity with less expensive technology.

    Is this really so hard to understand?

    Please, please, Dr. Bernstein, explain in detail why economists insist on these silly, totally outdated, and ridiculously counterproductive ideas about technology. This isn’t 1900, or even 1950 – it’s 2011, for goodness sake. You guys have blogs!!! And even Keynes never used a computer, nor did any economist that predates him. Maybe it’s time for an “Economics 2.0” that has a more realistic view of the impact of information technology, because so far, I’m seeing a bunch of ostriches, not intelligent observation and analysis, in posts like this where you shouldn’t even have to ask a question – unless, of course, you’re being entirely sarcastic.

    Nothing’s gonna give. Once you folks figure out that demand for labor is simply going the way of the dinosaur, you might get around to realizing that a capitalist economy has the worst possible future in store for it, and that socialism must, once again, come to the rescue. The utopians of the 19th century figured this out – heck, sci-fi has been portraying this stuff for a century, since movies were first made.

    “From each according to ability, to each according to need.” Nothing else will work, not anymore.


    • John says:

      By the way, lest my point not be clear. This isn’t a reaction to a recession on the part of businesses. They’re not cost-cutting because demand is bad – they were cost-cutting as just another way to improve profit and now long since, it’s conventional, the modern normal. No successful business in this age doesn’t try to leverage IT for cost reduction to the maximum extent they can. But they weren’t thinking about the macroeconomic impact of it all. That’s the job of economists, and economists generally haven’t caught up to the new and ubiquitous normal.

      What country was the big dog in technology, around the time Japan had it’s balance-sheet recession? Yeah. Japan.

      There’s no mystery here, except why economists can’t see the obvious.


  3. Jim Edwards says:

    I had a strange realization today. The Republicans are right. If you give the very wealthy money, they will send it to where it will do the most good. Right now that is back to the government in the form of bonds. It’s like they are saying “Dear God take our money and fix this!” and Republicans are responding by giving them more money.

    This could provide a formula for the laffer curve/top marginal tax rate and when deficit is needed and how much. Low bond rates and low unemployment means tax the wealthy more. low bond rates and high unemployment borrow to rebound the economy. High rates and low unemployment says pay back the loans. and high and high means you didn’t do the first three.


  4. John says:

    I want you to read this article, considering what it says about conventional wisdom in businesses across the board. I.e., what purpose is being expressed here? Yep – cost reduction. Via technology.

    http://www.huffingtonpost.com/2011/08/04/new-cio-steven-vanroekel-_n_919004.html

    Right under the President’s nose, the truth that’s being ignored.


  5. The Raven says:

    Do most of you hominids live in the middle? I don’t think there’s much middle-class below age 40 or so any more. What do the numbers look like?


    • Chigliakus says:

      Anecdotes are not data, but I’m in my early 30’s and earn a middle class income. I feel like I’ve been extremely lucky in that I’ve dodged a number of layoffs, and when I did get laid off I found another good job in about a year, with less than 9 months of actual unemployment. Most of my friends and former coworkers have not fared nearly as well. I’d be interested in seeing the numbers as well.


  6. Mary says:

    I’m interested in whatever further thoughts you may have on this. Thanks!


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