NY Times, April 9, 2008
Economic Scene
For Many, a Boom That Wasn’t
By DAVID LEONHARDT
How has the United States economy gotten 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.
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 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, at least not for as long as the
government has been keeping records. 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 United States passed the
test in a way that arguably no other country ever has. It became, as the
cliché goes, the richest country on earth. Now, though, most families
aren’t getting any 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 that will be released Wednesday,
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 a half century of polling.
The causes of the wage slowdown have been building for a long time. They
have relatively little to do with President Bush or any other individual
politician (though it is true that the Bush administration has shown
scant interest in addressing the problem).
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
work force. In recent years, the cost of health care has aggravated the
problem, by taking a huge bite out of most workers’ paychecks.
Real median family income more than doubled from the late 1940s to the
late ’70s. It has risen less than 25 percent in the three decades since.
Statistics like these are now so familiar as to be almost numbing. 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 to feel confident
about that conclusion.
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. Pat
Buchanan went around preaching a kind of pitchfork populism during the
1996 New Hampshire Republican primary — and he won it.
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 postwar period didn’t just happen. They were the
product of a deliberate program to build up the middle class, through
the Interstate highway system, the G. I. Bill and other measures.
It’s easy enough to imagine a new version of that program, 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 United
States 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. (South Korea and a couple of other countries have passed us,
while Japan, Britain and Canada are close behind.)
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 programs 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 favorable to high-income
workers at the same time that they — and they alone — have received
large pretax 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 recessions inevitably
bring their own pay cuts, my guess is that the problem will look even
bigger by the time the next president takes office.
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