For most Americans, it was the economic boom that wasn’t

For most Americans, it was the economic boom that wasn’t
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First Published: Wed, Apr 09 2008. 10 53 PM IST

Not many doors open: A shopper enters the Saks Fifth Avenue department store in New York. Tax laws in US favour high-income groups and they alone have seen high pre-tax raises.
Not many doors open: A shopper enters the Saks Fifth Avenue department store in New York. Tax laws in US favour high-income groups and they alone have seen high pre-tax raises.
Updated: Wed, Apr 09 2008. 10 53 PM IST
How has the US economy got to this point?
It’s not just the apparent recession. Recessions happen. If you tried to build an economy immune to the human emotions that produce boom and bust, you would end up with something that looked like East Germany.
Not many doors open: A shopper enters the Saks Fifth Avenue department store in New York. Tax laws in US favour high-income groups and they alone have seen high pre-tax raises.
The bigger problem is that the now-finished boom was, for most Americans, nothing of the sort. In 2000, at the end of the previous economic expansion, the median American family made about $61,000, according to the US Census Bureau’s inflation-adjusted numbers. In 2007, in what looks to have been the final year of the most recent expansion, the median family, amazingly, seems to have made less—about $60,500.
This has never happened before. In every other expansion since World War II, the buying power of most American families grew while the economy did. You can think of this as the most basic test of an economy’s health: does it produce ever-rising living standards for its citizens?
In the second half of the 20th century, the US became the richest country on earth. Most families, though, are no longer getting richer.
“We have had expansions before where the bottom end didn’t do well,” said Lawrence F. Katz, a Harvard economist who studies the job market. “But we’ve never had an expansion in which the middle of income distribution had no wage growth.”
More than anything else—more than even the war in Iraq—the stagnation of the great American middle-class machine explains the glum national mood today. As part of a poll, the Pew Research Center asked people how they had done over the last five years. During that time, remember, the overall economy grew every year, often at a good pace.
Yet, most respondents said they had either been stuck in place or fallen backward. Pew says this is the most downbeat short-term assessment of personal progress in almost half a century of polling.
The causes of the wage slowdown have been building for a long time.
The slowdown began in the 1970s, with an oil shock that raised the cost of everyday living. The technological revolution and the rise of global trade followed, reducing the bargaining power of a large section of the workforce. In recent years, the cost of health care has aggravated the problem, by taking a huge bite out of most workers’ paycheques.
Real median family income more than doubled from the late 1940s to the late 1970s. It has risen less than 25% in the three decades since. But the larger point is still crucial: The modern American economy distributes the fruits of its growth to a relatively narrow slice of the population. We don’t need another decade of evidence.
Anxiety about the income slowdown has flared at various times over the past three decades. It seemed to crescendo in the first half of the 1990s, when voters first threw George H.W. Bush out of office, then, two years later, did the same to the Democratic leaders of Congress. Then came a technology bubble that made everything seem better, for a time. Record-low oil prices in the 1990s helped, too. So did the recent housing bubble, allowing families to supplement their incomes by taking equity out of their homes.
Now, though, we appear to be out of bubbles. It’s hard to see how the economy will get back on track without some fundamental changes. This, I think, can fairly be considered the No. 1 economic project awaiting the next president.
Fortunately, there is an obvious model waiting to be dusted off. The income gains of the post-war period didn’t just happen. They were the product of a deliberate programme to build up the middle class, through the Interstate highway system and other measures.
It’s easy enough to imagine a new version of that programme, with job-creating investments in biomedical research, alternative energy, roads, railroads and education. On the campaign trail, Hillary Clinton, John McCain and Barack Obama all mention ideas like these.
But there is still a lack of strategic seriousness to the discussion, as Bruce Katz of the Brookings Institution notes. After all, the US spends a lot of money on education already but has still lost its standing as the country with the highest college graduation rate in the world.
The same goes for public works. Spending on physical infrastructure is at a 20-year high as a share of gross domestic product, but too much of the money is spent on the inefficient pet programme championed by individual members of Congress. Pork barrel spending does not add up to a national economic strategy.
Health care and taxes will have to be part of the discussion, too. Dr Ezekiel Emanuel of the National Institutes of Health pointed out to me that a serious effort to curtail wasteful medical spending would directly help workers. It would spare them from paying the insurance premiums and taxes that now cover that care.
The tax code, meanwhile, has become far more favourable to high-income workers at the same time that they—and they alone—have received large pre-tax raises. That doesn’t make much sense, does it?
It’s a pretty big to-do list. But it’s a pretty big problem. Since the economy now seems to be in recession, and since recession brings their own pay cuts, my guess is that the problem will look even bigger by the time the next president takes office.
©2008/The New York Times
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First Published: Wed, Apr 09 2008. 10 53 PM IST