MARCUS: The economic exorcism was successful

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Morton Marcus

 The damage done by the recession is still with us, even if the recession itself has ended. There will still be layoffs even as other workers are called back. More foreclosures will be reported because of troubles in the past two years. But sufficient evidence is available to suggest that the demon recession has left the nation’s economic body.

The bailout of large financial institutions and the massive stimulus programs were part of the exorcism ritual. It was an ugly process. Although many disapproved philosophically with the methods used, most of us accepted those potions as necessary to rescue the besieged economy.

Now, as recovery begins, we can examine the weakened body and see where the wounds were most severe. As noted in an earlier column, personal income losses were partially offset by increases in unemployment compensation. That’s how the system is supposed to work. Unemployment insurance is called an automatic stabilizer because it helps people who lose their jobs maintain a lower level of consumption without Congress’ having to debate whether such aid should be given.

Nationally, unemployment compensation between the first quarter of 2008 and the second quarter of 2009 rose $97 billion, which equaled 30 percent of the loss in wages and salaries suffered by workers. (That 30 percent held true in Indiana as well.) Thus, unless they increased their debt, workers had to cut spending and the effects of the recession spread throughout the economy.

In Indiana alone, wages and salaries fell $8.7 billion. Those who worked for themselves earned $1.7 billion less in the second quarter of this year than they did in the first quarter of last year. As they earned less, employees and the self-employed contributed $515 million less to government insurance programs (Social Security and Medicare). On top of that, employers contributed $872 million less to public and private pension and health insurance plans.

In all, earnings by workers and the self-employed in Indiana businesses fell $12.3 billion. These losses were offset slightly by a $1 billion increase in earnings by federal, state and local government workers. The increases were disproportionately higher in federal service than in the state and local sector. This may have occurred either because there were greater increases in the number of federal workers or they enjoyed higher compensation growth than state and local workers.

In the manufacturing sector, workers’ earnings fell 12 percent nationally, but dropped 18 percent in Indiana. The decline of $6.5 billion in manufacturing was 58 percent of the total loss in Hoosier earnings. It is likely this heavy blow from the manufacturing sector contributed to the state’s having a greater rate of decline in transportation and warehousing than did the nation (10.5 percent vs. 8.4 percent).

With the real estate and financial sectors at the heart of this recession nationally, it was not surprising Indiana saw lesser rates of decline in those areas. Earnings in the financial sector declined 13.7 percent nationally, but only 10 percent in Indiana. Likewise, in real estate, U.S. earnings fell 10.5 percent compared with 8.3 percent in Indiana.

This deconstruction of the economic damage caused by the recession confirms what we already knew: Manufacturing is our 800-pound gorilla. Some will argue that this fact should encourage us to diversify away from manufacturing. Get some new exhibits in our economic zoo. But what should we seek? More gambling? For Indiana, that is an endangered species, threatened by the desires of Ohio, Kentucky and Illinois to share in the dollars now enjoyed by our casinos.

The best policy is one already being pursued by state and local economic developers everywhere. Manufacturing is the key to the future as the world becomes increasingly capital-intensive, as we all have more gadgets and rely more on medical products. Man cannot live by litigation alone.•


Marcus taught economics for more than 30 years at Indiana University and is the former director of IU’s Business Research Center. His column appears weekly. He can be reached at mmarcus@ibj.com.


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