The Great Deformation (118 page)

THE HES COMPLEX:

BONANZA OF DEBT-FINANCED JOBS

The HES complex accounted for 1.1 million, or just under 40 percent of the 3 million jobs recovered after the recession bottomed. These were actually new jobs not born-again ones, meaning that the only true post-recession employment growth was embodied in the 27,000 per month gain of HES jobs. And that figure, in turn, represents the continuation of a long established trend. During the seven years ending in December 2007, about 4.7 million HES jobs were created, or about 50,000 per month. That trend continued right through the Great Recession. While part-time and breadwinner jobs disappeared by the millions, the HES complex hardly skipped a beat, generating new jobs at a rate of 35,000 per month right through the eighteen-month shakeout.

A larger theme thus emerges. When the Fed went fully in the tank for Wall Street around the turn of the century, its excuse was that financial repression was a necessary tool to comply with the “maximum employment” component of its dual mandate. But that is a smoke screen to justify the Fed's levitation of risk assets and continuous coddling of Wall Street speculators.

The actual jobs data show that if the monetary central planners have been trying to create jobs through the roundabout method of “wealth effects,” they ought to be profoundly embarrassed by their incompetence. The only thing that has happened on the “job creation” front over the last decade is a massive expansion of the bedpan and diploma mill brigade; that is, employment in nursing homes, hospitals, home health agencies, and for-profit colleges. Indeed, the HES complex accounts for the totality of American job creation since the late 1990s.

Some details on the internals of the HES complex provide needed perspective. In September 2012, for example, there were 6.4 million jobs in ambulatory health care alone; that is, physicians' offices, outpatient care centers, and home health agencies. That was more jobs than in the nation's
entire construction industry (5.5 million) and far exceeded nondurable goods manufacturing including food, beverages, paper, chemicals, plastics, and petroleum products (4.5 million).

On top of these ambulatory care jobs there were 8 million in hospitals and nursing homes and nearly 14 million in education from kindergarten through university. In all, the 30.7 million jobs posted for the HES complex on 2012 election eve represented a 27 percent expansion of the job count from when George W. Bush took the oath in January 2000 promising to rejuvenate capitalist prosperity.

Health and education are important social and economic functions, but their role as the sum and substance of the nation's jobs machine also engenders obvious questions of sustainability and financeability. The 6.5 million new jobs in the HES complex since January 2000, in fact, amounted to 2.3X the total number of new payroll jobs over the past twelve and three-quarter years.

What was lurking behind this anomalous trend was the pull of financing from the state, not the flourishing of enterprise and invention on the free market. Direct government financing of medical entitlements and private business outlays spurred by deep tax subsides (i.e., tax excludable employer health benefits) accounted for virtually all of the HES sector growth. These fiscal inputs, in turn, largely represented borrowed funds.

Federal spending for Medicare and Medicaid, for example, had grown from $300 billion in 2000 to $800 billion by 2012, or nearly double the rate of nominal GDP growth. Having gone from a modest surplus to a $1.2 trillion deficit during the same twelve-year time frame, it was evident that the robust growth of federal health spending and the consequent bonanza of new jobs, on the margin, had been deficit financed.

In fact, had the federal health-care boom been financed properly out of current taxation there would have been an offsetting reduction in demand elsewhere in the American economy, meaning less output and jobs in those sectors. The same was true of the single most important category of education spending: the job count in nonpublic higher education had risen by nearly 45 percent during the twelve-year period, and there was no doubt whatsoever as to the source. During this same interval student debt outstanding had exploded from $150 billion to $1 trillion, meaning that the for-profit diploma mills became flush with tuition revenues and soaring payrolls.

Again, had the huge expansion of higher education been funded out of family income and taxes rather than new public debt, there would have been an offsetting reduction elsewhere in the economy. Households would
have had less to spend on, say, restaurant meals or mall visits or home improvement projects.

So the Fed's cover story that it was busy fostering job growth is even more specious than it initially appears. What was actually happening was that Washington's fiscal machinery financed 42,000 new jobs per month in the rapidly expanding HES complex during the last twelve years. Since the Fed and other central banks were “open to buy” unlimited federal debt at inordinately low, pegged yields, fiscal financing of the HES complex did not crowd out other current spending; it just burdened future taxpayers.

From a paint-by-numbers perspective, these HES gains were just enough to offset the 35,000 breadwinner jobs lost each month during the same twelve years. Yet since all jobs are not created equal, there can be little doubt that this statistical swap left the Main Street economy badly impaired in terms of income-earning capacity and the true ingredients of economic prosperity.

This juxtaposition has especially adverse implications for future economic growth because there are virtually no productivity gains in the health and education sectors. Instead, health and education output in the GDP accounts is essentially a reflection of inputs, and labor is the preponderant constituent of the latter. The heavy flow of labor into the HES complex thus drags down average productivity and sharply dilutes the overall growth capacity of the American economy.

At bottom, the fundamental thrust of bubble finance has been a tidal shift of economic activity and employment to the HES complex. The Fed's dollar trashing and massive balance sheet expansion (that is, bond buying) has enabled fiscal financing to a nearly unlimited extent; this surge of artificially financed demand, in turn, has drafted millions of jobs into the HES complex that would otherwise not exist.

This channeling of economic activity to the HES complex camouflaged a reality that was never hinted at in any of the triumphal pronunciations by the monetary politburo; namely, that the payroll of the American economy has been shrinking outside of the HES complex for more than a decade. But indeed it has. In January 2000 there were 106.6 million jobs in the American economy outside of the HES complex, but by September 2012 that figure had shrunk to 102.8 million.

For all practical purposes, therefore, a decade of Fed money printing and Wall Street coddling has hollowed out the Main Street economy, backfilling it with fiscally financed expansion of the HES complex. Needless to say, the health sector does not create new wealth; it consumes it. And given the vast public monopolies which dominate most of education, the net
returns in that sector are debatable as well. In any event, with the federal government now coming hard upon the limits of Peak Debt, a continuation of the last decade's faux prosperity centered on robust expansion of the HES complex is virtually impossible.

BORROWED RECOVERY ON BORROWED TIME

The Fed's post-crisis money-printing polices gifted Wall Street speculators, as intended, but they also delivered an utterly botched recovery on Main Street. The latter was thinly disguised by an uptick in the conventional cyclical markers: purported “green shoots” like jobs, consumer spending, and inventory rebuilding. Wall Street economists touted this smorgasbord of traditional signposts, contending that even if halting and subpar they added up to another conventional business cycle recovery.

Nothing could have been further from the truth. Beneath the paint-by-numbers simulacrum of recovery espied by Wall Street was a drastic lapse into “borrow and spend” that was a veritable affront to economic rationality. By September 2012, the American economy was fifty-seven months past the late 2007 peak, but there was no rejuvenation of its capitalist engines—just a tenuous bounce in the spending accounts that was plainly unsustainable and unhealthy.

Personal consumption expenditures, as indicated, had risen by $1.2 trillion during that five-year period. Yet $625 billion, or half of this modest gain in PCE—the preponderant 70 percent sector of the GDP—had been financed with transfer payments. This was literally off the historical charts: transfer payments had never previously financed even 20 percent of the five-year gain in PCE after a cyclical top.

Worse still, the sources of consumption spending outside of these government subventions were equally cockeyed. Another $330 billion came from wage and salary disbursements from the service sector, consisting heavily of fiscally driven gains in the HES complex. Thus, behind the tepid expansion of consumption—averaging just 2.4 percent annually in nominal terms during the five years—was a massive amount of federal borrowing, not an organic recovery of incomes.

Indicative of the flagging condition of incomes is the data for wage and salary disbursements to workers in the breadwinner economy. At the peak of the second Greenspan bubble in December 2007, these jobs generated about $3.4 trillion of annualized wages and salaries. Five years later that figure was only marginally higher, having risen by just $70 billion. In other words, wage and salary disbursements in these core sectors of the American economy had amounted to only 6 percent of the $1.2 trillion gain in
consumption spending, and had actually shrunk by 7 percent after adjustment for inflation.

Likewise, there had also been only a trivial gain of $25 billion over that five-year period in the other major source of private income; namely, the $3.4 trillion accounted for by proprietors' profits, rental incomes, and interest and dividends. These accounts were also down by about 8 percent in real terms, a five-year shrinkage that had never before occurred in the postwar era.

The $7 trillion core of the American economy's income ledger has thus plateaued. The sum of proprietor's profits, rents, and financial income plus breadwinner wages rose by a trivial 1.4 percent during the five years after the December 2007 bubble peak, and has accounted for less than 8 percent of the PCE growth during that span.

This, too, was freakishly off the historical charts, as is evident in the comparable figures for the five years after the late 2000 cycle peak. During that period these same core income components grew by $1 trillion, not $100 billion, and they accounted for 50 percent of the gain in PCE, not 8 percent. In short, the historical income-based recovery of consumption spending had now been replaced by a modest rebound coming mainly from the fiscally supported periphery.

The American economy was thus still in a debt-push mode, but was losing traction rapidly. During the five-year period ending in September 2012, and notwithstanding the massive fiscal medication after the Wall Street meltdown, PCE grew at only a 0.7 percent annual rate after accounting for inflation. This was a sharp fall from the 3 percent annual rate during the preceding five-year period, and the source of this deceleration was not hard to identify; namely, there was no more MEW; the home ATMs had gone dark.

Not surprisingly, the failure of core income components to recover was echoed in other key macroeconomic performance variables. As indicated previously, fixed business investment in plant, equipment, and software is the sine qua non for long-term economic growth and health, but the anemic rebound that began after June 2009 had already rolled over by the third quarter of 2012.

This was a startling development because it meant that capital spending was now retreating even though it was still 7 percent below its peak of five years earlier in constant dollars. Needless to say, there was no historical parallel. Five years after the 1981 peak, for example, real fixed business investment was up by 11 percent and even after the modest 2001–2002 downturn real business investment rose by 5 percent during the next half decade.

MAIN STREET IN THE FED'S POTEMKIN VILLAGE

Five years into the Bernanke bubble the Main Street economy was still languishing. In all of the previous postwar cycles the prior top had been substantially exceeded sixty months later, but this time there had been no gains in breadwinner jobs, business investment, or the core components of national income. Even the consumption accounts were stagnant. They appeared to have gained new ground only because they had been puffed up with borrowings from future taxpayers that had been intermediated through transfer payments and expansion of the HES complex.

To be sure, the latter had been enough to trigger a spurt of inventory replenishment, especially in sectors like autos where a drastic liquidation had occurred in late 2008 and early 2009. In turn, that fueled an associated boost to rehiring and capital stock replacement. Yet the vicar himself was at a loss to explain the tepid multiplier effects from the initial rounds of re-stocking goods and variable labor, lamenting that a newly invented condition called “escape velocity” seemingly remained just out of grasp.

The reason the Main Street economy refused to follow the Keynesian script, however, could not be found in the texts of the master or any of the vicar's uncles. The Keynesian catechism has no conception that balance sheets matter, yet Main Street America is flat broke, and that is the primary thing which matters. In fact, half of the nation's households have virtually no cash savings and live paycheck to paycheck (or government check), and most of the remainder are still too indebted to revert to borrowing and spending beyond their current stagnant and often precarious paychecks.