The New Normal: What to Expect of Our Economy
THE NEW NORMAL is an expression, and a condition, we may have to get used to . . . or so many economists are now telling us. And for millions of Americans, even ostensibly good news is providing little to cheer about. Our Sunday Morning Cover Story is reported now by Martha Teichner:
The timing was ironic . . . The announcement on Monday that the Great Recession is over.
Just as President Obama got an earful at a Washington, D.C. town hall meeting broadcast on CNBC.
"My husband and I have joked for years that we thought we were well beyond the hot dogs and beans era of our lives, but quite frankly, it's starting to knock on our door and ring true that that might be where we're headed again," said Velma Hart, who described herself to the president as "one of your middle class Americans."
Hart dared to say what a lot of Americans are thinking: "Mr. President, I need you to answer this honestly, is this my new reality?"
Call it what you like . . . the new reality, the new normal. If you're middle class, the answer is probably yes. The debt-driven boom we came to think of as normal isn't coming back any time soon.
University of Maryland economics professor Carmen Reinhart says, "We are dreaming if we think the solution is a quick one.
Reinhart co-authored "This Time Is Different," an 800-year survey of financial crises.
"Recoveries from severe financial crises have historically not been swift," she told Teichner. "It's not a matter of months; it's not a matter of even a couple of years."
Reinhart and her husband Vincent, a resident scholar at the American Enterprise Institute in Washington, recently compared major global meltdowns since the 1929 stock market crash.
"The message was basically pretty grim," Vincent Reinhart said, "that economies after a big financial crisis that we just went through tend to grow about a percentage point slower than in the previous decade, and that the unemployment rate tends to be much higher, for an entire decade.
"Typically, in a business cycle we get back to the same economic path we were on - people get their old jobs back, or nearly their old jobs. But this time around, very much like the Great Depression, we are not going to be able to go back on the same road."
Former Clinton Labor Secretary Robert Reich, in a new book, points out another ominous parallel between the Great Depression and the Great Recession: its cause.
"More and more of the income that was generated by the economy went to the people at the top," Reich said.
In the last century, there were only two years - in 1928, just before the great crash, and then again in 2007 - during which the richest 1% were taking home nearly a quarter of the entire income of the nation.
"The typical CEO is up to 350 times the salary and benefits of the typical worker," Reich said. "Last year, when most Americans were suffering, the top 25 hedge fund managers each earned one billion dollars.
"A billion dollars would pay the salaries of something like 20,000 teachers," he said.
That wage inequality, Reich argues, is at the heart of our economic woes, and to fix things we need to pay those teachers and the rest of the middle class more, not less, so they can spend enough to kick-start the economy.
And yes, that means higher taxes for the rich.
"The economy depends, 70 percent of demand, on consumers," Reich said, "and those consumers are essentially the middle class. People who are very rich, they spend a much smaller proportion of their income."
In the partisan battle over the future of the Bush tax cuts, Republican Sen. Mitch McConnell said, "No recovery will take place if we impose new taxes on the people we need to create jobs."
Reich disagrees . . .
"We provided a huge tax cut to the rich, and nothing trickled down," he said. "After 2001, median wages actually dropped."
The top tax rate is now 35% . . . if the Bush tax cuts are allowed to expire, 39.6%.
For the record, under President Eisenhower, a Republican, the top rate was 91%. Really, middle class wages were rising - and the rich actually got richer.
"Henry Ford understood this," said Reich. "He paid his workers $5 a day at the Highland Park Model-T plant. That was about twice as much as the typical worker was earning. He said, 'You know, I'm going to make a lot of money because my workers are going to earn enough that they can turn around and buy the Model-Ts they're making.'
"And you know something? Henry Ford was right."
Getting anybody to buy anything lately has been a challenge.
New York Fashion Week just ended. Some of the collections were colorful, many were less edgy . . . more classic, according to fashion analyst David Wolfe.
"Right now, we are going back to the idea of investment clothing," Wolfe said. "You don't want to buy something disposable, because it ends up costing you too much money."
In a recent Pew Research Center survey, more than 6 out of 10 Americans (62%) say they've cut back on their spending since the recession began in December 2007. A major casualty: the housing market.
And here's where American ingenuity comes in.
In 2007, just as the recession hit, Blu Homes of Waltham, Mass., started manufacturing what it calls the "Anti-McMansion" - a line of high-quality modular homes.
"We saw this opportunity coming where, you know, there was a crash in the housing market and, you know, all the McMansions were coming down." Yes, she did say "opportunity."
Units can be customized with the click of a mouse. They literally fold up, so they can be trucked to homesites.
"We've sold about 25," she said. "I expect to do about 30 this year, about 60 next year, and probably tripling or quadrupling."
That's meant 30 new jobs already at the factory in Springfield, Mass., where - with the unemployment rate over 13% - the old jobs are gone.
"There are always, you know, phoenixes that come out of the flames and that come out of the downfall of the economy," said McCarthy. "And we felt like that. That was a real fire in the belly of Americans, to want to live differently."
A couple of hours from Phoenix, Ariz., you can see what possibility looks like in the aftermath of the Great Recession . . . 350,000 solar panels covering 200 acres of desert, producing enough electricity to power 6,000 homes.
Rob Gillette is CEO of First Solar, one of the ten fastest growing companies in the U.S., according to Fortune magazine.
"Over the last five years, First Solar started and went public and had a handful of million of revenue. And this year, we'll be $2.6 billion in revenue."
First Solar makes, installs, and manages solar energy systems worldwide. At its U.S. manufacturing plant in Perrysburg, Ohio, it employs 1,200 people and expects to hire more.
"I talked to a few that used to work on the line for Jeep or Ford, and now they work for us," Gillette said.
The stock market closed the week up, on encouraging news about the economy. Right now, the "New Normal" is shorthand for hard times.
But, times change . . .
"Before we get too fatalistic, our market economy has historically proven to be pretty resilient," said Vincent Reinhart. "We have opportunities for technological progress and productivity growth that can pull us along. So, we'll get over it. And ten years from now we will be more resilient and better able to take advantage of good things that could happen."
For more info:
BluHomes.com
firstsolar.com
Article: "After the Fall" by Carmen and Vincent Reinhart
"After-Shock: The Next Economy and America's Future" by Robert Reich (Random House)
"Spend Shift: How the Post-Crisis Values Revolution Is Changing the Way We Buy, Sell, and Live" by John Gerzema & Michael D'Antonio (Jossey-Bass)
"This Time Is Different: Eight Centuries of Financial Folly" by Carmen Reinhart & Kenneth Rogoff (Princeton Univ. Press)