How can these two facts coexist? Unemployment is at a 50-year low, job growth is strong, real wages are rising, the stock market’s up, the record-breaking expansion (in terms of its length, if not its strength) is in its 11th year, and consumer confidence is high. How can we simultaneously sustain an economy that is “in a very good place,” as the Federal Reserve chair described it last week, and a system this broken? If you thought functional, democratic government was a prerequisite to a high-performing economy, think again.
Here are four reasons these two factors can coexist.
The short term is more forgiving than the long term. Big economies have momentum, and it takes awhile for bad governance to turn them around. One reason is a virtuous cycle of growth: Acquisitive American consumers account for 68 percent of gross domestic product, and if all but a small percent are gainfully employed, the macro economy will post positive, near-term results.
Over the longer term, however, investment in the future matters a great deal, and recent, worrisome evidence on that front is related to the current dysfunction. Despite the corporate tax cuts, business investment has been uniquely weak, falling in real terms over the past three quarters. One explanation is the uncertainty created by Trump’s trade war, a highly problematic policy that Congress has failed even to try to block, though the Constitution gives it power to do so. In fact, such high-end tax cuts never trickle down the way their advocates promise. Our failure to address climate change, a phenomenon with huge, negative economic implications, also falls in this category of dysfunction-driven failure to invest in the future.
Just whose economy is so great? Yes, the stock market is up, but 56 percent of the value of the market is held by the richest 1 percent of Americans, up from 46 percent in 1990, while the bottom half of households owns virtually no stock at all. It’s true that real wages are up for those in the middle and even more so at the bottom of the scale, but there’s still a yawning gap between what low-wage workers earn and what they need to get by. Yes, the African American unemployment rate is at historic lows, but it’s still twice that of the white rate (6 percent vs. 3.1 percent).
Economies do not require functional democracy to grow. There are, of course, undemocratic regimes, such as China, that sustain long periods of growth. But they have a different contract with their citizens than we do: We’ll manage the growth, and you accept our control. One frightening question in this election cycle is thus how many voters will embrace this Faustian bargain: The president and his congressional enablers may be off the rails, but there’s food in the larder, so … I’m good.
It’s also the case that dysfunctional regimes can juice growth with fiscal stimulus (this works only if the central bank either cooperates or is co-opted, such that it doesn’t offset the stimulus). That certainly was the case in 2018-2019, as the Trump tax cuts temporarily boosted GDP growth. But that sugar high has faded, which is why you hear the administration planning for the next tax cut, timed for the election.
The federal government is often more about redistribution than growth. I’ve long argued that based on the virtuous-cycle dynamics noted above, presidents in good economies are like pilots in fine weather. To test their skills, they need a storm, or a downturn. In good economies, presidential policy is a lot more about redistributing growth rather than managing growth. Trump’s tax cuts were clear upward redistribution, as if the wealthy did not have enough of an advantage in the pretax economy, while the administration is aggressively ramping up its attacks on government programs that help the economically vulnerable. Today’s conservatives rail against socialism, but they practice socialism for the rich, capitalism for the poor.
So, how do government dysfunction and good economies coexist? By juicing the short term at the expense of the long term; by focusing on overall averages and ignoring inequality; by cutting an implicit deal with voters that as long there’s growth, they should ignore the destruction of long-held norms; and by the fact that dysfunction is less immediately evident in good vs. bad times.
Such trade-offs can play out for a while. But eventually, the loss of representative democracy, the failure to plan for the future and the social fissures inherent in this corrupt model will become untenable. Whatever the unemployment rate, the sooner we act to avoid that outcome, the better.