The Most Worrisome Chart in Economics Today
July 20, 2015
In terms of economic growth, the United States has basically recovered from the financial crisis and economic recession of 2007-2008. And yet, polls consistently show that average Americans either do not share that view, or believe they personally have not felt the recovery. What accounts for this discrepancy? Read on for Wonk Tank’s analysis of the variables that explain the disparity between economic summary statistics and real workforce recovery.
(Image: Cumulative Change Since End of Recession in GDP, GDP per capita, Median Wage, and Unemployment Rate. Source: Author’s Analysis of Federal Reserve Economic Data)
The strength of America’s recovery from the Great Recession varies massively depending on the metric used to evaluate it. The economy as a whole, despite the discouraging results of earlier this year, has seen fairly strong growth when measuring in terms of output growth. Real inflation-adjusted GDP has increased 13.5% since the end of the recession (June 2009, as determined by NBER), and is in fact beginning to converge on the US’s potential GDP – the government’s estimate of the output America could produce without causing runaway inflation, given a high level of utilization of factor endowments such as labor and capital. And even when controlling for population increases by measuring GDP per capita, the economy still seems to be growing at a healthy clip.
Additionally, the unemployment rate has massively dropped since the end of the recession – by about 40% as of 2015. In fact, the current unemployment rate is now essentially equal to what the Federal Reserve considers “full employment,” otherwise known as the natural rate of unemployment.
And yet the average American is not feeling the effects of the recovery, because of the last statistic in the chart above: the median wage for full-time workers, a proxy for what the average middle class American earns. Wage growth has simply not kept up with broader economic growth, and indeed has slightly fallen since the end of the recession. As a result, people in the middle- and lower-income segments of the workforce have been essentially left out of the recovery, as nearly all of income growth has accrued to the very rich.
Why is this so worrisome?
The reason this divergence in economic indicators matters so much is because it calls into question the mainstream economic consensus that has dominated fiscal and monetary policymaking for decades.
In terms of fiscal policy, the data represented in the chart challenges the Washington Consensus notion that “growth” is the goal to be pursued above all else in legislative decision-making. It shows that a rising tide does not, in fact, necessarily lift all boats – and that people at all ends of the income spectrum will benefit from increased economic production, lower taxation levels, and less government intervention and regulation.
In short, America does not have a growth problem: it has a distribution problem. And rather than focusing to nearly the exclusion of all else on growth as a policy goal, fiscal policymakers should work to enact policies that create a more equal distribution of income and resources. That means focusing on policies that disproportionately benefit the middle and lower classes like a more progressive tax code, better provision of public goods such as education and infrastructure, more affordable housing, higher wage and labor standards, and perhaps even more ambitious tax policies to curb exorbitant compensation packages for those at the top of the income ladder.
Second, in terms of monetary policy, the data above calls into question deeply held beliefs about wages and unemployment. As the unemployment rate drops, the theory goes, wages will increase because workers have increased bargaining power due to an easier ability to find other jobs. In fact, the Federal Reserve has actively used monetary policy tools to contract the money supply so that the unemployment rate does not drop too low, due to a fear that a consequent wage increase will lead to rapid cost-push inflation.
But even as the unemployment rate drops, wages are not rising and inflation is muted at levels lower than the Fed targets. This indicates that the unemployment rate is not painting an accurate picture of the labor force: people who are technically “employed” may be working part-time jobs when they want to work full-time, or working jobs for which they are over-qualified and underpaid. Additionally, as factors like the unionization rate go down, employers accrue more and more bargaining power over their employees, further depressing wage growth.
One would think the Fed would respond to wage stagnation with more aggressive monetary policy measures designed to stimulate hiring and increase the money supply grow wages, but sadly that is not the case. Rather, the Fed later this year has scheduled its first major contraction of the money supply since the recession in the form of a rate hike – indicating an institutional commitment to putting the interests of the financial sector, which profits off of making loans at higher interest rates, above those of the labor force.
The data presented above tells two important things:
- From a macroeconomic perspective, the economy is recovering. But it is not a shared prosperity; all of the growth is accruing to the already rich.
- The economic consensus in favor of policies that emphasize production growth, fiscal restraint, and tight monetary policy is not conclusive or unassailable. Based on clear empirical data, accomplishing all of those goals does not necessarily make the average American better off.
- Public policy initiatives should thus focus on equitable distributional outcomes, rather than a laser focus on growth and growth only.
Until America’s policymaking elite understands this, we will continue to be in denial about the state of the American economy – and the struggling middle class will continue to bear the consequences of such political insouciance.
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