TIME Economy

The 3% Economy

Yes, 3% growth is better than 2%. But, for most Americans, it’s actually more worrisome

A little over three years ago, I wrote a column titled “The 2% Economy,” explaining how a recovery with only 2% GDP growth, no new middle-class jobs and stagnant wages wasn’t really a recovery after all. Like everyone, I hoped that once growth kicked up to about 3%, middle-class jobs and wages would finally revive.

But we’re now in a 3% economy, and I’m writing the same column. Only this time, the message is more disturbing. Growth is back. Unemployment is down. But only a fraction of the jobs lost during the Great Recession that pay more than $15 per hour have been found. And wage growth is still hovering near zero, where it’s been for the past decade. Something is very, very broken in our economy.

It’s a change that’s been coming for 20 years. From World War II to the 1980s, according to data from the McKinsey Global Institute, it took roughly six months after GDP rebounded from a recession for employment to recovery fully. But in the 1990–91 recession and recovery, it took 15 months, and in 2001 it took 39 months. This time around, it’s taken 41 months–more than three years–to replace the jobs lost in the Great Recession. And while the quantity has come back, the quality hasn’t. The job market, as everyone knows, is extremely bifurcated: there are jobs for Ph.D.s and burger flippers but not enough in between. That’s a problem in an economy that’s made up chiefly of consumer spending. When the majority of people don’t have more money, they can’t spend more, and companies can’t create more jobs higher up the food chain. This backstory is laid out in an interim Organisation for Economic Co-operation and Development report cautioning that poor job creation and flat wages are “holding back a stronger recovery in consumer spending.” If this trend is left unchecked, we are looking at a generation that will be permanently less well off than their parents.

There are so many signs of this around us already. The decline in August home sales–a result of wealthy cash buyers and investors stepping back from the market–shows how what little recovery in housing we’ve seen so far has been driven by the rich; anyone who actually needs a mortgage has been slower to jump in. The real estate recovery too is very bifurcated, with much of the gains concentrated in a few more affluent, fast-growing cities. (Plenty of places in the Rust and Sun Belts are still underwater.) While overall consumer debt is down, it is still high by international standards, and student debt is off the charts. When I asked one smart investor where he expected the next financial crisis to come from, he said, “Student debt.” Interest rates on tuition loans are high and fixed, and the loans can’t be refinanced, meaning they’re a trap that’s hard to escape. And student debt continues to grow fast. History shows that the speed of increase in debt, more than the sheer amount, is a predictor of bubbles. By that measure, student debt is blinking red: it has tripled over the past decade and now outstrips credit-card debt and auto loans.

It’s easy to understand why. Much of the population is desperately trying to educate its way out of a terrifying cycle of downward mobility. But students are fighting strong structural shifts in the economy. While technology-driven productivity used to be what economists said would save us from jobless recoveries, technology these days removes jobs from the economy. Just think of companies like Facebook and Twitter, which create a fraction of the jobs the last generation of big tech firms like Apple or Microsoft did, not to mention the multitude of middle-class positions created by the industrial giants of old.

And we’re just getting started: consider the outcry in certain cities over companies like Zillow, Uber and Airbnb, which are fostering “creative destruction” in new sectors like real estate, transportation and hotels. McKinsey estimates that new technologies will put up to 140 million service jobs at risk in the next decade. Critics of this estimate say we’re underestimating the opportunities that will come with everyone having a smartphone. All I can say is, I hope so. What’s clear is that development isn’t yet reflected in stronger consumption or official economic statistics.

What I do see is growing discontent with the economic status quo. In my 2011 column I wrote, “It’s clear that the 2% economy heralds an era of even more divisive, populist politics–at home and abroad.” Ditto the 3% economy. Witness outrage over displaced lower-income workers in the Bay Area, or the fact that the Fed is keeping interest rates low in part because gridlock has prevented Washington from doing more to stimulate the real economy, or the Treasury Department’s new rules limiting American companies’ ability to move outside U.S. tax jurisdiction. Whatever number you put on growth, a recovery that doesn’t feel like a recovery is, yet again, no recovery at all.

TIME Workplace & Careers

1 in 5 U.S. Workers Say They Were Laid Off in Last 5 Years: Poll

New York Job Fair Offers Services For Chronically Unemployed
People stand in a line that stretched around the block to enter a job fair held at the Jewish Community Center (JCC), on March 21, 2012 in New York City. John Moore—Getty Images

Total of 30 million say they received pink slips since 2009

One in five American workers say they have lost their jobs at some point within the last five years, according to a new survey that reveals that the recession, which technically ended in 2009, has continued to rattle the labor market.

The survey findings, released by Rutgers University’s John J. Heldrch Center for Workforce Development, exposes the lingering costs of lay-offs, both for those who cannot find work and those who have. Nearly 4 out of 10 laid-off workers say they spent more than seven months searching for a new job and nearly half of those who managed to find work said their new job was a step lower on the payscale.

Regardless of employment status, two-thirds of all adults in the survey say the recession negatively impacted their own standard of living, but the workers that took the hardest hits to income and savings were those who had been unemployed for a period longer than 6 months, whose struggles the authors called “among the most persistent, negative effects of the Great Recession.”

 

TIME Economy

Clinton Says Corporate Tax Rate He Approved Needs to Change

Bill Clinton
Former President Bill Clinton speaks during a breakout session at the Clinton Global Initiative , on September 23, 2014 in New York City. John Moore—Getty Images

President Bill Clinton says it’s time to revamp the corporate tax rate that he signed into law during his tenure as the nation’s leader.

Speaking at the 10th annual Clinton Global Initiative conference Tuesday, Clinton discussed the issue of so-called corporate “inversions” — the practice of relocating a company’s headquarters overseas to take advantage of a lower tax rare.

Clinton told CNBC’s Becky Quick that the U.S. Treasury Department is doing what it is legally obligated to do, which is collect what money is due under American law. The real problem needs to be solved on the floor of Congress, and it demands a bipartisan solution, he said.

“We’re bailing water out of a leaky boat,” Clinton said. “This is practical economics and practical politics.”

The Treasury announced new measures Monday to stem the tide of corporations buying foreign companies in order to move abroad and take advantage of lower tax rates. Thirteen such deals worth $178 billion have been announced this year, according to Dealogic. A couple examples include Burger King’s purchase of Canada-based Tim Hortons and Medtronic’s nearly $43 billion deal to buy Irish medical-device maker Covidien.

When the current 35% corporate tax rate was signed into law in 1993, it was on par with other nations around the globe. Many of those foreign rates have since lowered their corporate tax rates, setting the scene for the current tax inversion-friendly environment. For example, Canada’s corporate tax rate is between 11% and 15%, and Ireland’s is about 12.5%.

Now the U.S. is one of the highest corporate tax rates globally, and that just won’t work anymore, Clinton said. The U.S. legislature has failed to review the standard corporate tax rate in relation to other nations since the mid-1990s — and that could continue to affect the nation’s competitive stance.

Clinton shied away from labeling tax inversions either patriotic or non-patriotic, dodging one of Quick’s questions. But he did say he believes that the corporate tax rate can be lowered while closing existing loopholes and still allow the government to collect the same amount of tax revenue.

Clinton praised American companies such as Corning and Dow Chemical. Both, he said, have focused on keeping jobs in the U.S. He also praised Alibaba Group CEO Jack Ma, whose company just launched the largest initial public offering ever late last week.

Clinton praised Ma’s approach to business: He focuses first on customers, then employees and shareholders third, Clinton said of Ma.

This article originally appeared on Fortune.com

TIME Innovation

Five Best Ideas of the Day: September 22

1. A global transformation from a carbon-based economy to a cleaner, more sustainable energy future will create jobs and add wealth.

By Christiana Figueres and Guy Ryder in Project Syndicate

2. Antibiotic resistance causes 23,000 deaths and two million illnesses every year. Concerted government action is necessary to fight the crisis.

By the Editorial Board of the Washington Post

3. China can improve its global standing and U.S. relations by joining the fight against Islamic State.

By Dingding Chen in the Diplomat

4. The economic future of manufacturing is to be an incubator of innovation: “where new ideas become new products.”

By Nanette Byrnes in MIT Technology Review

5. In the future, a book could be a living thing.

By Wendy Smith in Publisher’s Weekly

The Aspen Institute is an educational and policy studies organization based in Washington, D.C.

TIME technology

Alibaba Founder Jack Ma’s Other Big Job

Alibaba Chairman Jack Ma
Jack Ma, chairman of Alibaba Group Holding Ltd., in Hong Kong on Sept. 15, 2014. Brent Lewin — Bloomberg / Getty Images

The Alibaba IPO will set a record, but the company's founder has focused on China's environmental problems

Friday’s Alibaba initial public offering will officially be the largest in U.S. history: the Chinese e-commerce giant is raising $21.8 billion with its stock debut.

But Alibaba’s billionaire co-founder Jack Ma — though a major presence on the IPO circuit and a major beneficiary of it, standing to gain hundreds of millions of dollars from the stock — isn’t just focusing on his company and its earnings. In fact, last May he stepped down from his position as CEO. (He’s still the company’s chairman.) He is, as Victor Luckerson spelled out earlier this year, not your typical tech honcho. Rather, he’s a former English teacher who doesn’t code and loves the soundtrack to The Lion King.

He’s also one of China’s most important environmentalists, as Bryan Walsh explained in a 2013 TIME profile of Ma:

But as entrepreneurs get older–Ma, 48, says he is “old for the Internet”–they start to slow down, look around. What Ma saw was a country paying an environmental price for rapid development. His father-in-law developed liver cancer, a disease Ma–and some scientists–connects to the terrible water pollution that is now common in much of China. Ma saw the skies in Beijing and other Chinese cities grow foul with pollution. On a trip to the countryside near his hometown of Hangzhou, he saw that a lake in which he had nearly drowned while swimming at age 13 now barely came up to his ankles. Farmers told him that they were so afraid of the poisoned soil, they wouldn’t eat some of their own produce. “I knew something was very wrong,” Ma told TIME during a recent interview in Santa Monica, Calif. “This is serious–and we have to make people pay attention to it.”

Now Ma is making it his mission to get China to pay attention to its environmental mess. On May 10, he stepped down as CEO of Alibaba, though he’ll retain a strategic role with the company. The next day he took a new job, as chairman of the China board for the Nature Conservancy (TNC), one of the richest environmental groups in the world. TNC has generally been U.S.-focused, but the sheer size and influence of China ensure that global environmental and climate issues will increasingly be decided there. If China is going to change for the greener, it will need local champions. Ma has volunteered.

Read Bryan Walsh’s full 2013 profile of Jack Ma here: From Gold to Green

TIME stocks

4 Things Alibaba’s IPO Tells Us About a Changing World Economy

An employee is seen behind a glass wall with the logo of Alibaba at the company's headquarters on the outskirts of Hangzhou, Zhejiang province
An employee is seen behind a glass wall at Alibaba's headquarters on the outskirts of Hangzhou, China, on April 23, 2014 Chance Chan—Reuters

The Chinese e-commerce giant launches one of the largest stock-market debuts in history — and points the way to our economic future

The story of Alibaba has already become legend. Fifteen years ago, Jack Ma, a former English teacher, and his co-founders set up their Internet company in an apartment in the Chinese city of Hangzhou, not far from Shanghai. Today, Alibaba’s online shopping sites in China — mainly Taobao and Tmall — handle twice as much merchandise as Amazon. The company’s initial public offering on the New York Stock Exchange will bring in a haul of some $21.8 billion — bigger than Facebook’s — and values Alibaba at $168 billion — four times more than Yahoo.

When Alibaba’s shares start trading Friday, history will be made. And not just in the world of tech or stock markets. Alibaba’s IPO represents some much bigger trends shaping the world economy. Here are four things the IPO tells us about our economic future:

1. More and more of the world’s most prominent companies will be from the developing world.
We still have this image of China as one big factory floor where millions of poor people slog away on assembly lines churning out cut-rate toys, clothes and electronics. Sure, there are still factories like that, but ever more that low-cost manufacturing center guise is becoming the Old China. The world’s most populous nation is developing so rapidly that it is already producing companies that are major players in all sorts of industries. Lenovo is now the largest PC maker in the world, while Huawei is challenging the best of the West in telecom equipment.

Alibaba takes this trend to an entirely new level — out of manufacturing and into the realm of technology and services. Ma and his executive team have created a company that can be named in the same sentence as tech titans like Facebook and eBay. And Alibaba is not unique. Shenzhen-based Tencent, which operates the popular WeChat messaging service, is yet another Chinese Internet firm with global potential. The fact is the most powerful companies in the U.S. and Europe will increasingly have to contend with Chinese companies exploding onto the world stage. And China may be in the lead among the world’s emerging economies in this trend, but it is not alone. India has produced some IT firms that can compete with the world’s best, such as TCS and Infosys.

2. Emerging markets are creating blue chips.
Ever since the idea of investing in the developing world became popular in the early 1990s, there has been a line drawn between these “emerging markets” and the more established bourses of the U.S., Europe and Japan. Emerging markets were supposed to be riskier, where only the bolder of investors would dare tread, compared with the supposedly more trustworthy and less volatile options in New York City and London. The Alibaba IPO shows how that great wall is breaking down. That a company based in a town like Hangzhou can raise more money in its IPO than one based in Menlo Park, Calif., (Facebook) shows that investors are starting to treat firms from the developing world on par with those in the developed world. Of course, the stigma staining companies from China and elsewhere won’t go away overnight — Chinese companies that have listed in New York City have had a sad history of accounting disasters. But going forward, your stock portfolio is going to hold more companies with addresses in Shanghai, Mumbai, Istanbul and São Paulo.

3. Consumers in the developing world will rule the world.
The story of the global economy since the end of World War II has gone something like this: capitalizing on better transport and communications technology, world production shifted en masse to poor countries from rich countries like the U.S. Factories replaced rice paddies in South Korea, China, Indonesia and elsewhere, which then shipped the mobile phones, computers and sneakers manufactured there to store shelves in the U.S. and Europe. The billions of people in these poorer nations couldn’t afford much of the stuff they made.

Now the global economy is “rebalancing.” Consumption in the U.S. and Europe is constrained by weaker job prospects and stagnant wages, while disposable income in China and other developing nations is increasing in leaps and bounds. That is making consumers in these countries the new engine of global economic growth. If the U.S. consumer dominated the 20th century, the Chinese and Indian consumer will control the 21st.

Alibaba is a prime example of the power of these new, emerging consumers. In 2013, Chinese shoppers bought $248 billion of stuff on Alibaba’s retailing websites. Compare that to an estimated $110 billion worth of good purchased on Amazon — globally. Increasingly, it will be companies that sell to households in Beijing, New Delhi and Jakarta that will dominate global consumer industries.

4. Your next job may be at a Chinese or Indian company.
Jack Ma has said that he plans to use some of his multibillion haul from the IPO to expand Alibaba’s presence in the U.S. and Europe. This, too, is part of a trend. Companies from developing markets are becoming more important investors around the world. According to the American Enterprise Institute, Chinese companies have invested more than $500 billion around the world since 2005 — with the U.S. the top destination.

And as companies from China, India and other emerging economies become ever bigger and bigger global investors, they will become bigger and bigger global employers. Firms like Lenovo, Huawei, carmakers Geely and Tata, appliance maker Haier and a host of others already employ thousands between them around the world. Going forward, you might just find your best job opportunity is at a company like Alibaba, based in China, rather than a firm in New York City, Paris or Frankfurt.

MONEY The Economy

China is Slowing. What If Its Housing Bubble Bursts?

Even if the real estate market in the world's second-biggest economy were to collapse, the repercussions may not be bad as you think.

While global investors covet China’s growth — as evidenced by the buzz surrounding Alibaba’s IPO — the Chinese economy is actually slowing down.

In 2013, the world’s second largest economy grew at an annual rate of 7.7%. By 2015, according to a recent report by the Organization for Economic Co-Operation and Development, that will drop to 7.3%. Meanwhile, the U.S. economy’s growth rate is projected to increase by almost one percentage point.

What’s going on? Well, China’s industrial production gains in August slowed to their lowest level since 2008 and retail sales growth declined by a few percentage points year-over-year.

Perhaps most important, the nation’s newly built home prices only grew by 2.5% in July, after surging by 10% at the beginning of the year.

The notion of a housing crisis in an economy more than three times the size of France brings back flashbacks of 2008 and probably a few chills down every investor’s spine.

“A property price crash in the world’s second largest economy would have global implications,” says Wells Fargo Securities economist Jay Bryson.

But those global implications wouldn’t be as worrisome as the U.S. housing collapse six years ago, per Bryson. Here’s why.

The Worst Case

To play out this thought experiment you have to assume that at some point in the near future China’s home prices will experience a decline on the order of what the U.S. experienced over the past decade. (Bryson played out this scenario in a recent report.)

Currently, residential investment makes up a pretty decent portion of the Chinese economy – about 10% of nominal GDP. To put that in context, that ratio was closer to 6% for the U.S. in 2006.

So housing is a big deal in China. If they experienced a value decline like we did, Bryson estimates that would lop off about one percentage point of growth. But the pain wouldn’t stop there.

A collapse in housing prices would result in fewer construction jobs – estimated at around 60 million people in urban China. Jobless workers would spend less, which means that those goods and services the now-unemployed construction workers would normally purchase would not get bought.

If out-of-work construction workers reduce their spending on food and entertainment, the businesses that produce that food and entertainment will make less money and then some of their workers may face unemployment too. Since my spending is your income, lower spending means people have less money in their paychecks, and the nation’s GDP suffers.

Moreover, if housing goes in the tank, banks will see losses, which means they’ll tighten credit, resulting in fewer loans for people to start businesses.

Let’s not forget the actual homeowners. If home prices fall, homeowners’ equity declines as well. (See: Sell, Short). And when people’s chief asset is suddenly worth a lot less, they’re not going to spend as much on other, discretionary items. “Although the lack of data makes it impossible to quantify the wealth effect in China, researchers have found that there is a statistically significant direct relationship in the United States between changes in wealth and changes in consumer spending,” per Bryson’s report.

Lower demand from China means that countries which sell goods to China (think Chile and Australia) will sell less stuff. As corporate profits are squeezed, a global bear market may result.

“Although China may not be as important to global economic growth as the United States, the global economy clearly would not be immune to a major property market downturn in China,” says Bryson.

The Not-So-Bad Case

Freaked out? Breathe deep and take solace in the fact that despite this potentially harrowing dénouement, the world probably wouldn’t endure another global financial crisis. And that’s thanks to responsible Chinese borrowers.

Chinese households usually have to put a lot more money down – 30% on their first home, up to 60% for an individual’s second – than Americans. So if prices were to decline substantially, Chinese homeowners would be in a much better position than Americans back in 2007 to deal with the crisis. For example, household debt-to-disposable income has grown substantially in China since 2007, but it’s still about one-third the size of U.S. households back in 2007.

The world will also feel less of a pinch. When mortgages started going bad in the U.S., foreign financial institutions lost close to $750 billion of the more than $2 trillion in write-downs resulting from the crash. That was because foreign banks owned a lot of U.S. mortgage-backed securities. Not so here. “Chinese mortgages are generally held by Chinese financial institutions in the form of whole mortgages.” So if prices were to drop, Chinese banks would suffer while U.S. one’s most likely wouldn’t.

Lastly, the Chinese government wouldn’t sit on its hands while its economy came crashing down. Beijing’s debt-to-GDP ratio is around 15%, so it has a lot of room to recapitalize its banks if needed.

So what’s an investor to do?

“I don’t lose sleep at night worrying about China, nor should other people,” says Bryson. “But they may want to keep an eye on it.”

MONEY Economy

The Takeaway from the Latest Fed Decision

Federal Reserve Chair Janet Yellen.
Fed chair Janet Yellen says the Fed isn't shifting gears… yet Susan Walsh—AP

Interest rates are going to stay low for a while longer. But the Federal Reserve is thinking about what comes next.

Updated September 17 at 4:40 pm

It’s come to this: The market is obsessed with two magic words and a bunch of tiny dots.

Federal Reserve watchers have long been attuned to the subtlest cues from central bank officials—people used to look at the size of Alan Greenspan’s briefcase for clues—but this has been an unusually big week for minutiae. In anticipation of the Federal Open Market Committee’s 2 p.m. announcement of its latest decisions on monetary policy, markets were waiting to see if the committee would again use the phrase “considerable time” to describe how long it would hold the key short-term interest rate near zero.

They did. Here’s the statement:

The Committee continues to anticipate… that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time…

That’s a relatively dovish signal, suggesting that rate hikes aren’t coming soon. Stock investors pushed prices a bit higher in the hours after the announcement, with the Dow closing at a record high of 17,156. But bond prices declined, with the 10-year Treasury bond yield ticking up to 2.164%. (Bond yields rise when prices fall.)

That may be because there was an asterisk to the “considerable time” language. The Fed also released a statement laying out the steps they’ll take to “normalize” interest rates when it’s time. Message: We aren’t doing it yet, we aren’t doing it right away, but we wanted to let you know we’re thinking about it.

Investors were also closely watching the “dot plot,” a chart showing where different Fed officials think interest rates will land in the coming years and over the long run. The dots didn’t change in a big way since June—most Fed officials want to keep interest rates where they are this year, but see them rising in 2015 as (presumably) the economy improves. Slightly more officials see 2015 as the “lift-off” date for rates than did in June.

The real story is how strongly opinions differ—those dots are pretty spread out after 2014. Fed chair Janet Yellen is widely considered to favor stimulative monetary policy, but this shows that she has to work with a much more hawkish group within the Fed that wants tighter money sooner, to prevent a surprise return of inflation. Right now, though, inflation is below the Fed’s 2% target.

Screen Shot 2014-09-17 at 2.07.46 PM
SOURCE: Federal Reserve

These little signs have taken on outsized importance for two reasons. First, the Fed has played an unusually large role in supporting the (not-so-strong) recovery, by keeping short-term rates as low as they can go since the crisis days of late 2008, and then by buying up trillions of dollars worth of bonds as part of its unusual “quantitative easing” program. Second, investors in both stocks and bonds have been betting that this status quo is only going to change at a measured pace. This seems to have been confirmed.

This story was updated to reflect the market reaction to the Fed announcement.

TIME Money

Occupy Wall Street Just Made $4 Million of Student Loan Debt Disappear

All the students whose debts were abolished went to the for-profit Everest College

An Occupy Wall Street campaign says it has abolished almost $4 million in student loan debts, in a Tuesday announcement marking the third anniversary of the Occupy protests that brought renewed attention to the issue of income inequality.

The Rolling Jubilee Fund, an initiative of the Occupy movement, has been accepting donations and buying up student loan debt for pennies on the dollar from debt collectors, and then forgiving the loans altogether. The group has spent about $107,000 to purchase $3.9 million in debt, organizers said.

The debts were held by students who attended Everest College, a for-profit institution part of the Corinthian Colleges network. The fund called Everest College a “predatory” institution that is helping fuel the $1.2 trillion in total student loan debt in the United States.

“We chose Everest because it is the most blatant con job on the higher ed landscape,” the organizers said. “It’s time for all student debtors to get relief from their crushing burden.”

The debt belonged to 2,761 people who had taken at loans at Everest College. The group is only able to purchase private student debt, not the majority of outstanding U.S. student debt that’s backed by the federal government. Corinthian Colleges told CNN it stands by the “high-quality” education it provides and denied charges of predatory lending.

TIME Economy

Watch How California’s Drought Will Affect Your Wallet

California’s drought means higher food prices for Americans.

The West Coast has been in a persistent drought for the past 15 years. California, which grows more than 200 different crops, is being hit the hardest. This year, about 500 million of acres of California’s land is expected to be taken out of production. The consequence: higher produce prices for all Americans.

Timothy Richards, a professor of agribusiness at Arizona State University, conducted research that predicted that 10 to 20 percent of California’s crops could be lost. On top of that, the threat of a megadrought, which can span over two decades, could result in a major economic crisis.

 

 

 

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