The Robust, No Good, Excellent, Terrible Recovery

Why America Has a Two-Track Economy
Depending on where you live, your education and job, things are either pretty great or pretty bad.
Bloomberg, September 27, 2018




Which of these two scenarios describes the U.S. economy?

No. 1. The economy is better than ever: The stock market is near a record high, wages are rising, there are more job openings than applicants, household wealth has hit a record, gross domestic product is growing briskly, house values have recovered from the bust and consumer confidence is back — and so is America!

No. 2. Real Americans are suffering: Inflation-adjusted wages are stagnant or even declining, economic mobility is nonexistent, gasoline is getting expensive as oil prices rise, labor force participation rates are stuck at levels not seen since the late 1970s, health care is brutally expensive and getting more so, and rents have been rising. There is a looming retirement crisis coming, as households have too little savings, and pensions are underfunded — the average American is getting crushed!

In reality, this binary choice is a false construct and both of these scenarios are very true. But who you arewhere you liveyour job and educational background very much determines which of those two descriptions you relate to more. And while there has always been a divide between rich and poor, it has grown especially acute during the past decade.

In broad terms, since 2010 the U.S. has seen a modest, post-credit crisis recovery slowly taking hold. True, there has been lots of very encouraging economic news, especially during the past five years. But it has been lumpy and unevenly distributed by geography, industry and educational attainment. Even the gig economy hasn’t worked out as hoped, with many workers being paid much less than needed to support a family.

There are more than enough economic data series for dishonest commentators to cherry pick one in support of their biased positions. My preference instead is to look at the big picture to try to discern why we have such a bifurcated economy.

The usual suspects — globalization, automation and the shift to service industries — have all been picked over. So let’s try to consider this in terms of historical shifts. I have four theories worth exploring:

No 1. The credit crisis changed everything: The financial crisis was so large and all-encompassing that even now it’s hard to grasp its import. It revealed enormous stresses that weren’t readily apparent before. You can draw a straight line from weak wage gains to rising home-equity withdrawals and from rising real-estate prices to aggressive home refinancing.

After the crisis, many families were forced to honestly recognize their own financial situations. Even though real wages had been mostly flat for decades, the easy credit made it possible for millions of people to pretend otherwise. It’s a social and psychological stress event when people must accept that, despite working long and hard, their living standard is falling. This is as true for hedge funds as it is for middle-class families.

No. 2. The decline of unions: Unions once guaranteed the middle-class good jobs at a living wage. The trade-off was increased labor costs for companies and higher-priced manufactured goods for consumers.

That was then. Membership in labor unions has been falling since the 1950s. As of 2017, just 10.7 percent of wage and salary workers in the U.S. belonged to a union; that is half of what it was in 1983. The share of unionized workers in the private sector is even lower, at 6.5 percent.

A turning point in the fate of unions came when President Ronald Reagan fired striking members of the Professional Air Traffic Controllers Organization. A number of states, especially in the South, passed laws making it harder for unions to organize. As union membership declined, so did the ability of workers to win pay increases from employers.  This ties in to the next point.

No. 3. Rewarding capital instead of labor: We can point to the Reagan, Clinton, Bush and Trump administrations for various changes to the tax code that were much friendlier to capital than to labor. Capital gains taxes fell, as did the top income-tax brackets. Policies that were extremely shareholder friendly were also put into place. Although income inequality has been rising for decades, these four administrations had an outsized impact.

Despite huge increases in output and productivity during the past six decades, an increasingly smaller share of those gains have been falling to workers. Although household income rose during this period, much of the gain can be attributed to the rise of the two-income family, as large numbers of women entered the workforce.

No. 4. The vast American middle class was a historical aberration: My pet thesis, admittedly not particularly one well-supported by data, is that the broad sharing of so much of the nation’s wealth was an anomaly, the result of an unusual confluence of forces that sprang from the Great Depression and World War II. It was a one-off that couldn’t resist powerful historical forces.

Let’s back up a bit. During the feudal era and early stages of capitalism, much of the population was impoverished and either engaged in agriculture, and later on, factory work; above that was a small cohort of craftsman, shop owners and merchants; above that was an even smaller class of nobles and royals — and later on, industrial magnates — with fabulous wealth at their disposal. Extrapolate that to the present, and we have the working poor, the middle class, and the professional class — all in a similar, pyramid-shaped wealth distribution.

The Great Depression wiped out much of the wealth of the richest Americans. Then, after World War II, 16 million American soldiers returned home. The GI Bill gave them a chance to get a college education; pent up postwar consumer demand meant manufacturing jobs were plentiful and well-paying. Most of the rest of the world was in ruins at the time so there was little competition for U.S. industry. From the American perspective, all seemed good.

Or it was until mean reversion began to rear its head. These postwar factors faded during the following decades. Eventually, the economy returned to its prewar stratifications.

The U.S. economic expansion is both robust and weak, broad and narrow, higher and lower than before the financial crisis. How these economic gains have been distributed is likely to have an impact for decades to come.


I originally published this at Bloomberg, September 27, 2018. All of my Bloomberg columns can be found here and here


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