In fact, the glass is half full: the non-bubble parts of the US economy are functioning reasonably well. That suggests that the whole economy could function well, if the glass were not half-poisoned (if oppressive taxes and regulation did not hobble the great American startup machine).
I contrast America’s two economies in piece this morning at Asia Times Online:
- Item: Final sales of domestic product rose by 3.8% (without adjustment for inflation) from the second quarter of 2010 to the second quarter of 2011. Sales of S&P 500 corporations rose by 10%.
- Item: Employment in the S&P 500 corporations rose by 10.6% between 2009 and 2010, to a total of 18.666 million. Total employment in the United States rose by 0.7% over the same period, to 130.26 million. Employees of the S&P 500, that is, comprise less than 8% of total US employment, and their employment pattern bears no resemblance to the aggregate.
- Item: Profits of S&P 500 corporations rose by 19% between the second quarter of 2010 and the second quarter of 2011. Nominal GDP (gross domestic product) of the US rose by 3.7%.
- Item: 47% of S&P 500 sales are overseas.
- Item: Americans with no college-level education have an unemployment rate of 9.9% and (which is much more revealing) a labor-force participation rate of just 61%. Americans with some college education have an unemployment rate of 8.6% and a participation rate of 70%. And Americans with a bachelor’s degree or more have an unemployment rate of 5%, but a participation rate of 76%. Huge numbers of less-educated Americans, that is, don’t ”participate” in the labor force because there is nothing for them to do. But Americans with a college degree (as devalued as those degrees are) have little unemployment and a very high rate of ”participation.”
The problem isn’t that the economy is busted, but that parts of it are busted. But the fact that the other part is working reasonably well is encouraging.
Conclusion:
For the moment, investors will not buy an 8% earnings yield on the S&P 500 even while 10-year Treasury yields trade around 2%. They are all the more reluctant to take risks on startups, which in the past 40 years have accounted for more than two-thirds of job growth. The right combination of economic policies could revive the startup engine, albeit slowly and fitfully. Lower taxes on corporations and capital income and less oppressive regulation (especially US President Barack Obama’s health care mandates for businesses) would help. So would a rational immigration policy that favored entrepreneurs and highly skilled professionals.