The economy is moving in the wrong direction, and the household sector is about to go off the cliff, said William Spriggs, chief economist to the AFL-CIO and professor in the department of economics at Howard University in Washington, D.C.
Congress agreed last week to a two-month “cooling down period” to figure out how much federal spending it would cut, Spriggs said. That spending could result in cuts to the defense industry, which contracts to the private sector.
“You get the drift why this can’t be a good thing in an economy that’s trying to recover. We’re going to start cutting jobs – that’s moving in the wrong direction,” Spriggs said.
The number of jobs added in the United States last year is just about the same as the number of people added to the work force, creating a musical chair-like situation that leaves many people still standing, Spriggs said at an event hosted by the City Club in San Diego on Friday.
“They can’t land a job. It’s physically impossible,” Spriggs said. “Not everyone who wants to work can find a job.”
The United States added 155,000 jobs last month and 1.5 million jobs over the course of the year, but those numbers aren’t something to “jump up and down” about, Spriggs said.
Employment has at least reached the 2001 levels, but is 4 million short of the peak in 2008 and 9 million jobs short of where it ought to be, according to Spriggs.
“We’re generating jobs at 1.5 million per year. At that pace, in two years, we’re still short in getting back to 2008 levels. Two years from now is 2015 – you can understand why I’m not happy. In 2016 we’ll say, ‘Hooray, we’re back to 2008,’ and obviously there will be more people in the U.S. in 2016 than in 2008. That’s a real crisis,” Spriggs said.
People only have a certain amount of time to be active in the labor market, to increase savings and earn retirement funds, he said. And when people aren't competitive in the labor market, they are expected to live off of those savings.
“What does it mean when you go this long period and people don’t have jobs? They’re supposed to be working, making savings and retirement and they are not,” Spriggs said.
People in their 40s and 50s during 2000 and 2010 were supposed to reach peak earnings during that time, but they finished the decade with lower real earnings than at the beginning, Spriggs said.
“The crush of the housing market collapse fell on those same people. They lost the equity value in their homes. And we know that their pension funds went down,” Spriggs said. As a result, this group entering their 60s is “unprepared.”
As a result, that chunk of the population isn’t going to consume as much. Spriggs said the “whole world collapsed” because when pension funds, jobs and home values disappeared, people looked at major expenditures and saw they could save by not purchasing a car – and people stopped buying cars for three years. This caused less need for steel, glass, tires and workers – “then it starts to snowball from there,” Spriggs said.
“That’s how we got where we are – because consumption disappeared. Consumption is going to disappear because households have no endless line of getting revenue,” Spriggs said.
There is a group of people living legally in the United States that is going to be unprepared for retirement, and a “hidden economy” that is also “totally unprepared,” Spriggs said. Immigrants who have been living in the United States and working for years have been contributing to the economy by buying groceries, gas and other items.
“People who came here in the '90s are turning 50, about to turn 60, and we have no way of delivering to them Social Security,” Spriggs said.
He said some people like the idea of those people self-deporting, but that combined lost consumption is the “biggest drag on the economy.”
He disagrees with those who ask to cut Social Security.
“OK, so we have people we know who are unprepared for retirement and we’re going to cut their Social Security and that’s a winning argument because ... what? We want them to consume even less. We want them to buy even less. Where do you think the demand for labor comes from?” Spriggs said.
The demand for labor originates from people purchasing goods and services, he said.
“We’re going off the household cliff, and that’s far scarier than the fiscal cliff,” Spriggs said.