The Economy and Mr. Bush

Wednesday, December 28, 2005

THE PAST YEAR has been remarkable for the economic disasters that did not happen. The huge U.S. trade deficit, which threatened a collapse in the dollar and a destabilizing spike in U.S. interest rates, actually delivered neither. High oil prices, which peaked dramatically after hurricanes devastated the Gulf Coast, created neither gas lines nor the wider economic fallout that many had anticipated. Instead, the U.S. economy kept growing at a rate close to the impressive 4.2 percent notched up in 2004, which many had assumed was unsustainable. All this testifies to the flexibility of the economy and the wisdom of the Federal Reserve -- though it shouldn't be assumed that the trade deficit, even bigger now than it was a year ago, will remain forever free of consequences.

Yet on one important measure, the economic news hasn't been as good. The majority of workers have not felt the benefits. The issue is not joblessness: Ten years ago economists debated whether unemployment could fall below 6 percent without triggering inflation, but in November joblessness stood at just 5 percent, down from 5.4 percent a year earlier -- a feat that the euro zone, with an unemployment rate of 8.3 percent, can only envy. Rather, the problem for workers lies in take-home pay. Wages for blue-collar manufacturing workers and non-managers in services have remained stagnant since the economic recovery began in November 2001.

Part of the reason lies in the rising cost of non-wage benefits, especially health insurance. The value of benefits received by the average civilian worker rose 5.1 percent in the year to September, and that increase followed two years in which benefit costs were roaring ahead at a rate of more than 6 percent. These increases, which outpaced inflation, help explain disappointing wages. If it costs more to provide medical insurance to workers, employers will pay themselves back by holding wages down.

But it may also be true that technology and globalization are contributing to wage stagnation; if workers can be replaced by machines or foreigners, they have limited bargaining power. In the four years since the recovery began, inflation-adjusted compensation (that is, wages plus benefits, as measured by the government's Employment Cost Index) has risen just 0.8 percent per year on average, less than in past recoveries and less than gains in productivity would seem to justify. One might expect wage gains to improve as the recovery matures and the economy reaches full employment. This may yet happen: After all, neither technological progress nor globalization prevented solid wage gains in the 1990s. But so far there's no clear evidence that the corner has been turned.

Moreover, what pay gains there have been are distributed unevenly. Educated workers have done best: In manufacturing, the compensation for white-collar workers rose 4.8 percent in nominal terms in the year to September, whereas the compensation for blue-collar workers rose only 2.2 percent. Equally, some sectors did better than others: Blue-collar aircraft workers wracked up gains of 15.6 percent, while food-store workers managed only 1.9 percent. It's a rule of political life that losers complain louder than winners celebrate, so the sense of a joyless economic recovery is compounded.

What policy prescriptions flow from this? It would be wrong to suppress variations in wage gains across the economy, since these help shift workers to the industries that need them most. But the increasing rewards for education underline the importance of the Bush administration's efforts to improve public schools, while the deleterious effects of health care inflation on wages point to the urgency of measures that could cut wasteful health spending, an issue on which the administration's agenda is confused. Finally, the signs that market forces may be making it hard for workers to win pay gains raise fresh questions about President Bush's tax strategy. Mr. Bush has cut taxes on capital, even though capital has increased its share of the proceeds from the economy; the cuts may ultimately force a compensating increase in taxes on workers, whose incomes haven't done as well. This amounts to common sense inverted. Rather than counteracting a troubling aspect of the economy, Mr. Bush's policy makes it worse.

© 2005 The Washington Post Company