The Perils of a Jobless Recovery
As the Dow Jones industrial average peaked above 10,000 last week despite news of worsening consumer confidence and continuing job losses, the United States appears increasingly likely to return to the divisive politics of the 1990s’ “jobless recovery.” Then, extremely low interest rates drove money into stocks and brought about a largely paper economic recovery. Beyond Wall Street, jobs and wages stagnated. One result was a negative politics that even rejected a popular president fresh from a decisive military victory with the slogan, “It’s the economy, stupid!”
The early 1990s proved to be a reality check for a highly touted, supposedly miraculous economic model: leveraged buyouts, which had enabled small companies to swallow big ones. After the savings and loan collapse in the late 1980s and a stock-market crash in 1987, the economy went into reverse. By 1991, nearly 2 million Americans had lost their jobs.
Hamstrung by budget battles, a chronic deficit and war in the Persian Gulf, Washington was unable to produce confidence-building economic policies. The government’s primary response was to cut interest rates.
Cheap credit helped stem the 1990-91 recession. By early 1992, output began to rise again. Yet, confounding the hopes of leaders who insisted the country’s economy was much stronger than popularly perceived, the national mood continued to sour. Consumer confidence fell to near-record lows.
The problem was that the early 1990s recovery was initially founded on the transfer of assets from savings accounts, bonds and similar investments into the stock market. Stock prices soared, with the Dow Jones average appreciating by more than 20% during 1991-92 alone. But while this increase was good news for investors, paradoxically, it restrained job and wage growth normally associated with economic recovery.
Investors had little incentive to reward companies that boosted employment, because disappointing jobs data helped assure that the Federal Reserve would not raise interest rates. At the same time, corporate managers were under enormous pressure to show dramatic improvements to justify their companies’ higher stock values. They responded by cutting wages and laying off regular employees in favor of temporary, outside help. Procurement managers dramatically increased their reliance on cheaper overseas producers.
From a balance-sheet perspective, once moribund U.S. corporations suddenly seemed to realize enormous productivity and profit gains, all of which fed investors’ optimism. But the cost of these achievements was lackluster job growth, continued displacement of manufacturing overseas and stagnant wages. To the shock of many Americans, what was good for Wall Street was manifestly bad for the rest of the economy.
A substantial, class-based gap emerged between Wall Street and Main Street. Although U.S. domestic output grew by about 2% a year in the early 1990s, jobs remained scarce. Unemployment continued to rise, to more than 7% by spring 1992. Indeed, post-recession job growth during this period was among the slowest ever recorded. Worse still, corporate employment and procurement strategies so effectively restrained wages that most Americans’ real incomes did not rise until the latter half of the decade. Recession had given way to a joyless, troubled economy.
Historically, most Americans care little if a relatively few become fabulously wealthy as long as everyone else’s fortunes also improve. Politically significant discontent can arise, however, when a comparative handful are perceived to be winning big at the expense of the general public.
That’s exactly the perception fostered by the 1990s’ jobless recovery. Largely forgotten now in the wake of the recent boom, the period was marked by severe political discord over virtually every tax, trade and other important economic policy. Southern California exploded with civil unrest spurred in large measure by economic concerns. The media was filled with gloomy accounts of America’s supposedly irreversible decline.
Despite the nation’s newfound sense of unity in the aftermath of the Sept. 11 terrorist attacks, a jobless recovery along the lines of the one that followed the last recession could reignite a class-based, divisive politics. There is evidence that such a recovery is in the works. Low interest rates are pushing investors toward the stock market, and many share prices have become overvalued. Under such circumstances, companies have little reason to hire workers, increase domestic production or boost wages. Last Friday’s jobless data seemed to bear this out: The government reported that U.S. firms shed jobs more rapidly than at any time in the last 20 years. A protracted period of paper profits mixed with sluggish employment may well ensue. As a result, there are several areas in which domestic conflict could re-emerge.
One is trade. The consensus in Washington today is that free-trade agreements and even massively one-sided exchanges with non-market, politically antagonistic countries like China are a good thing for the country. They make the U.S. more efficient, allow consumers to buy high-quality goods at cheap prices and liberate U.S. workers from the drudgery of the “old” manufacturing economy.
Yet, this consensus became possible only because the millions of manufacturing and middle-class jobs that U.S. trade policies diverted abroad were replaced, at least by the mid-1990s, with service, retail, government and similar employment. Domestic job growth makes free-trade policies acceptable. But when jobs and wages stagnate, as in the early 1990s, these policies are frequently excoriated as rigging the economy for the wealthy at the expense of middle and working classes.
A second potential area of renewed conflict is the role of government in the economy. In the early 1990s, state, local and federal governments struggled to define the right mix of intervention and laissez-faire policies in response to the jobless recovery. The debate was highly ideological. Tepid employment and wage growth, for example, stimulated demands among labor unions for greater worker protection, layoff restrictions and the expansion of unemployment benefits. Others contended that disproportionately lucrative stock-market returns should be heavily taxed to fund programs for the less privileged.
Pro-business advocates responded by blaming excessive regulatory and legal burdens for their inability to create more jobs. Encouraging the very rich to become even wealthier through stock investments, moreover, was said to put resources into the hands of the nation’s most productive citizens. Far from unfairly rewarding such individuals, the economy, and everyone else, would be far better off.
Similarly divisive economic-equity issues are already bubbling to the surface in Washington. The federal economic-stimulus package has been stalled by conflict between those who want a broad-based package that provides universal tax relief and those who want tax cuts and incentives that improve corporate finances. The tenor and substance of this debate closely tracks the political conflicts of the early 1990s.
Our political leadership needs to build on our current national unity and will to craft policies that will help correct the stock-driven wealth and employment unbalances likely to emerge in the near future. This would assure that our newfound national commitment isn’t derailed by needlessly divisive class conflicts. Absent such foresight, America may squander an opportunity to forge an enduring social consensus out of the pain of the current recession.
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David Friedman, a contributor to Opinion, is a Markle senior fellow at the New America Foundation.
