January is a time to look ahead and plan. It is also an opporttunity to look back and take stock.
Paul Krugman, the Nobel Prize-winning Princeton University economist and op-ed columnist for The New York Times, contends that the United States is in a depression. He makes a distinction between a recession, a time when the economy is falling, and a depression, which is a “sustained period of really lousy economic performance and an enormous amount of suffering.”
Not many economists would agree with Krugman’s view, since the National Bureau of Economic Research (NBER) declared that the Great Recession ended three years ago. But here is the rub: There is no commonly accepted definition of a depression. Even the NBER, which is responsible for dating recessions, provides no concrete definition.
One economist who would have sided with Krugman is the late Paul Samuelson. In his classic textbook, Economics, Samuelson wrote that a depression was “a prolonged period characterized by high unemployment, low output and investment, depressed business confidence, falling prices, and widespread business failures.”
Whatever one calls this thing we’re experiencing, Krugman and Samuelson offer an apt description of the struggles of the United States economy since 2000. Economic growth, whether measured in terms of real Gross Domestic Product (GDP) or employment, has fallen tragically short of expectations.
In 2000, shortly after the NASDAQ stock market crash triggered the dot-com downturn, Wharton Econometric Forecasting Associates (WEFA), a prominent forecasting firm, produced a 20-year forecast. Similar to other national outlooks at the time, the WEFA projections reflected the optimism of the late 1990s high-tech boom. Between 2000 and 2011, real GDP was predicted to grow at a 3.2 percent annual rate and create 19.2 million new jobs. By 2011, the nation would have $15.9 trillion in real GDP (2005 dollars), 151.1 million payroll jobs and a 4.9 percent unemployment rate.
But two subsequent recessions—the Dot-Com/911 Recession and the Great Recession—and tepid growth in the interim left the economy in ruins. During this 11-year period, the economy expanded at a 1.6 percent annual rate (one-half the trend rate) and lost 400,000 jobs. In 2011, real GDP amounted to $13.3 trillion ($2.6 trillion less than forecast), payroll jobs totaled 131.4 million (19.6 million fewer than predicted) and the unemployment rate stood at 9.0 percent (nearly twice the expected rate).
Among the most dismal economic numbers were forgone real GDP and employment. Because of the underperformance of the economy between 2000 and 2011, the nation squandered $13.1 trillion in real GDP and 113.4 million job-years in employment. This loss was equivalent to shutting down the national economy for an entire year.
In most respects, the Dismal Decade was nothing like the Great Depression. During the first four years of the Great Depression, output dropped 26.7 percent and the unemployment rate climbed to 25.2 percent. After Franklin Roosevelt took office and initiated the New Deal programs, the economy took off, growing at a 7.2 percent rate between 1933 and 1940. The only interruption in the recovery was the 1938 recession, caused by a premature attempt to balance the federal budget.
By comparison, the fluctuations in the national economy since 2000 have been fairly mild. At its peak during the Great Recession, the unemployment rate reached just 10.0 percent.
Based on one critically important measure, however, the Dismal Decade fared no better than the Great Depression. In the 11 years between 2000 and 2011, U.S. real GDP managed to advance only 18.7 percent. This amount was slightly less than the 19.4 percent gain during the 11 years—1929 to 1940—of the Great Depression.
Ahead of the Curve
In spite of the tough times, there is a silver lining to this story. During the Dot-Com/911 Recession and the Great Recession, the Puget Sound region suffered greater jobs losses (4.8 percent and 7.6 percent, respectively) than the nation. But, rather than uncovering weaknesses in the regional economy, the Dismal Decade paradoxically displayed some of its strengths.
The Dot-Com/911 Recession was a two-part downturn. The region got hit hard by the high-tech tumble simply because it was—and still is—an attractive location for internet, software and telecommunications companies. The September 11 terrorist attack was an extraordinary event that inflicted little damage to the national economy but cost the region 25,000 Boeing jobs.
Prior to the Great Recession, Puget Sound jobs and population were escalating at twice the national rate. The rapid growth hoisted the regional housing market to a high level. Thus, when the housing and financial markets collapsed, the regional housing market and the broader economy had relatively far to fall. We estimate that four-fifths of the 137,000 jobs lost during the recession were directly and indirectly attributable to the construction, finance and real estate industries.
Despite two deep downturns, the Puget Sound economy has outpaced the American economy since 2000. While the difference between the average annual employment growth rate for the region (0.2 percent) and the nation (0.0 percent) is not great, it is a notable achievement considering the sizable chuckholes along the way.
It appears that the Puget Sound region may be reaching the endgame of this difficult period in our economic history. Led by Boeing, regional jobs are once again advancing at twice the national rate, resulting in a pickup in population growth and a rebound in the housing market. Except for the apartment market, housing activity still remains below normal. Nevertheless, the upturn in home sales, home prices, and homebuilding bodes well for the economy, since housing plays a key role in economic recoveries.
Barring a national recession, I am optimistic about the next few years. Between 2012 and 2015, Puget Sound jobs will increase at a 2.5 percent annual rate, while current-dollar personal income will rise at a 5.5 percent rate, according to our latest forecast. The unemployment rate will fall from 7.8 percent to 7.1 percent, and per capita income will climb from $52,496 (23.1 percent above the national average) to $59,297 (23.7 percent above). As measured by the Seattle consumer price index, the annual inflation rate is expected to stay below 2.5 percent.
Symbolic of the endgame, regional employment, following a 5½-year hiatus, will return to its prerecession level in the third quarter of 2013.
The Puget Sound Index of Leading Economic Indicators provides general support for the short-term outlook. Composed of seven leading regional economic indicators, such as the Boeing backlog-delivery ratio and help-wanted ads, the leading index slipped 0.4 percent in the third quarter of 2012. This should not be interpreted as a sign that the recovery is in jeopardy, as it is only the second decline in the past 13 quarters and follows a 1.2 percent gain in the second quarter.
As noted, the regional outlook is predicated on the U.S. economy avoiding another downturn, which is far from guaranteed. Of particular concern is the so-called “fiscal cliff.” On January 1, 2013, under current law, the Bush tax cuts were set to expire, the payroll tax deduction was set to terminate and mandatory federal spending reductions would go into effect. If the administration and Congress cannot agree to an alternative course of action, the Congressional Budget Office predicts that the nation will fall
into a shallow recession. In that event, the regional economy will experience a
slowdown, not a recession, because of its current momentum.
A Taxing Problem
But the Puget Sound region has its own tax problem. Due to an excessive reliance on sales taxes, our tax system is highly regressive. Not mincing words, the Institute on Taxation and Economic Policy concluded that “Washington has the most unfair tax system in the nation.”
The tax system is also volatile due mainly to the sales tax on new construction. During the Great Recession, the Census Bureau reported that tax revenue for all state and local governments in the United States fell from $110.80 per $1,000 of personal income in FY 2007 to $105.20 in FY 2009, a 5.1 percent decline. Concurrently, Washington state and local tax collections fell from $105.20 per $1,000 of income to $94.70, a 10.0 percent drop. The Washington effective state and local tax rate—the ratio of total taxes to personal income—was 5.1 percent below the national average when the recession began and 10.0 below when it hit bottom. Little wonder that Washington state and local governments had to toil mightily to balance their books during the downturn.
Perhaps most detrimental to the long-term economic health of the state is the inadequacy of our tax system. Adequacy refers to the ability of the tax base to keep up with the demand for public services, which historically has grown as fast as personal income. With a lid on the growth of property taxes (1 percent plus the value of new construction) and taxable retail sales expanding at only nine-tenths the growth rate of personal income, the only major tax with an adequate base is the business and occupation tax. One implication of our inadequate tax base is the periodic need to raise the sales tax rate to ensure a sufficient flow of public revenue. But this further exacerbates the regressivene nature of the tax system.
The only way out of this fiscal bind is an income tax, which nobody seems to like. Most voters fear that tax reform is just another way to pick their pockets. Some economists believe that without an income tax, the Washington economy has a competitive advantage.
But there is no reason why we cannot add an income tax to our tax system without increasing the overall tax burden. Nor should we be concerned about losing our competitive edge. With a completely different tax system—an income tax but no sales or business and occupation taxes—Oregon has grown virtually as fast as Washington. Since 1970, the employment growth rates have averaged 2.2 percent and 2.3 percent, respectively.
Tax issues aside, the Puget Sound region will prosper in the coming decade if three conditions hold: The nation avoids an economic bubble, unemployed labor is put back to work, and the region continues its longstanding trend of outperforming the nation.
The Blue Chip panel of economists forecasts that real GDP will grow at a 2.7 percent annual rate between 2012 and 2022. If gains in labor productivity (output per worker) average 1.4 percent per year, this means that employment will increase at a 1.3 percent rate. Accordingly, the nation will add $4.1 trillion in GDP (measured in 2005 dollars) and 19.3 million jobs over the 10-year period.
Our outlook calls for regional jobs to grow at a 1.8 percent annual rate, 0.5 percentage points faster than the national rate. If that comes to pass, the region will add 347,000 jobs in the next 10 years, bringing total employment to more than 2.1 million in 2022. At that time, the region will have 4.2 million residents, with $330 billion in personal income.
Why will the Puget Sound region continue to outperform the nation? It has a lot going for it.
The Puget Sound region is situated in the one of the fastest growing parts of the nation, as U.S. population continues to move west and south.
No U.S. metropolitan area has taken greater advantage of international trade than the Puget Sound region. On a per capita basis, our economy is twice as dependent on foreign exports as the nation. The Port of Seattle is a major gateway to Asia.
The region is home to a long list of recognized leaders in their industries: Boeing, Microsoft, Weyerhaeuser, Russell, Amazon, Costco, Starbucks, Nordstrom, REI, Expedia, Paccar, Alaska Airlines, Expeditors International and Group Health Cooperative.
The region is a center for high-technology activities: software development, internet commerce, medical research, telecommunications, medical device manufacturing, and aircraft design and production.
Based on census data, Seattle has been called the “Best Educated City” in the nation. It is also the home of the University of Washington, which is ranked as the 25th best university in the world by the London-based Times Higher Education magazine.
The region is known for its natural features, such as Mount Rainier, Puget Sound and the Hoh Rain Forest. It has invested in an array of cultural amenities: a symphony hall, an opera house, an art museum, a zoo, an aquarium, a baseball park and a football stadium. These amenities are not only a draw to tourists, but they also make the Puget Sound region a more attractive place to live and locate a business.
Dick Conway is a Seattle economist and member of the Washington Governor’s Council of Economic Advisors. He has copublished The Puget Sound Economic Forecaster since 1993.