— Real GDP growth (measured on a year-over-year basis) last clocked in at 2 percent, lower than recent quarters but about the average over the past few years;
— The stock market has had some tough weeks recently but is up 90 percent in real terms over the recovery (S&P 500 index); real corporate profits are up 44 percent.
If you asked an economist “how’s the economy doing?” based on those numbers, she’d probably say, “Pretty well.”
On the other hand:
— Despite low unemployment, wage growth before inflation has been stuck at 2 percent over six years of expansion (see figure above); as Steve Greenhouse reported in yesterday’s New York Times, while real wages got a recent bump from very low inflation, for too many workers, real wage stagnation has been the norm for decades;
— One of the most important single variables in any economy is its rate of productivity growth, or output per hour, a key determinant of living standards, at least on average; in the United States, that has slowed to a trend growth rate of less than 1 percent per year, compared with 2.5 percent a decade ago;
— That phrase in the last bullet is in bold because the pay of the median worker has drifted below productivity growth in recent decades, a function of increased inequality; even if productivity growth were to accelerate, there’s no guarantee that it would reach most workers.
— The growth in corporate profitability relative to wages has driven the share of corporate income going to workers to its lowest point since 1951.
— Halloween has passed, but here’s a scary graph from an important new paper showing how much potential GDP growth (the blue line) — the growth in output you’d expect with fully utilized resources — has slid since the last recession. If this is accurate — such estimates are educated guesses — then our current growth rate of around 2 percent is about the best we can do with our current set of inputs (workers, capital, technology).
So, one answer to the question “how’s the economy doing?” is the economist’s classic “on the one hand this, on the other hand that.” But do not, like President Truman, yearn for a one-handed economist because I think we can come to more solid conclusions.
First, when the forces of economic inequality are in play, the answer to “how’s the economy doing” is “whose economy are you talking about?” One economic concept you should heavily discount is this notion of “equilibrium” — one state of affairs that persistently prevails when various conditions are met. There are, instead, various states that prevail at the same time. As noted, this “profits up, wages not” recovery has lasted for years now. Even within the same industry at the same point in time, there are “high-road” (e.g., Costco) and “low-road” (e.g., Walmart — though it is improving) employers. Both have been profitable, but the former works off a model of investing in its workforce and absorbing the higher labor costs through enhanced worker productivity, while the low-roaders follow the opposite path.
We live in what is at least a dual-equilibrium economy with pockets of prosperity amid those of poverty, where, absent full employment, fairly narrow groups of workers are in high demand and the rest suffer from weak bargaining power.
Second, we have a growth problem. The potential growth figure just above is the result of a statistical exercise that basically scores the economy as hitting its speed limit if (core) inflation and interest rates are pretty stable. Well, both have been stable for a long time and at low rates. So the model figures we must be at our speed limit. It’s as if you were in a car trundling down the highway at 40 mph and you told the driver to step on it and she responded, “I’m going as fast as I can!” You would conclude she was at her speed limit.
But there were many times when she could go faster, like pretty much every time on record, according to the figure. Surely she could go faster again, right?!
Let us cut to the chase here and prove that two-handed economists can be definitive. We’ve got two economic problems: slack and distribution.
Were we to mop up the slack and get to and stay at full employment for a while, many workers would find themselves with a lot more of the bargaining power they currently lack, and that would help point more growth in their direction.
But even with very low interest rates, gobs of cheap investment capital, and fluid financial markets ready to channel said capital to productive uses, it ain’t happening. Lots of high-level thinkers are trying to figure out why not, and I’ll tell you what they are coming up with in a future post.
More pressing right now is what to do about it. The best answer I have is: If the private sector won’t generate the economic activity we need, the public sector must pick up the slack, as it were. Infrastructure investment in our deteriorating stock of public goods, direct job creation in places where jobs are nowhere to be seen even at low unemployment, quality pre-K for all 3-4 year-olds— all are great investment targets that I suspect would lower slack, raise the speed limit and improve distributional outcomes.
And…none will happen because of political constraints.
At the end of the day, the answer to the question “how’s the economy doing” is that it’s not doing near as well as it could be from the perspective of a lot of middle- and low-income people. And that’s not just an economic problem; it’s a political problem.
It so happens that there’s a contested election in the offing with lots of candidates gum-flapping about all of this. What I’m looking for is some version of this diagnosis and prescription. I haven’t heard it yet.