Growth and Prosperity Continue to Go Their Separate Ways
This article is from Dollars & Sense: Real World Economics, available at http://www.dollarsandsense.org
This article is from the
May/June 2014 issue.
at a 30% discount.
The big story continues to be the rapid, healthy growth that hasn’t returned since the Great Recession. ...
According to Congress’s Joint Economic Committee, average growth over the 19 quarters of this recovery has been 2.2%. ... The average for all post-1960 recoveries is 4.1%. ... The average for the Reagan expansion was 4.9%. ...
These are huge differences in foregone [sic.] prosperity. ...
The main White House growth plan is to have government borrow more money to spend more on the transfer payments that didn’t stimulate the economy the last time. ...
Americans will be receptive to an agenda to lift the middle class with growth, not redistribution.
—“The Growth Deficit” Wall Street Journal, May 1, 2014.
A growth deficit surely has been one of the hallmarks of the U.S. economy since the end of the Great Recession. But the Wall Street Journal editors must not be paying attention if they think that doubling down on the pro-rich, free-market policies initiated during the Reagan administration is going to restore “forgone prosperity” for most people.
It’s not just a growth deficit that has plagued the U.S. economy, but also an equality deficit. The economic growth there has been during “this not so great recovery,” as the Journal editors call it, has gone overwhelming to the very richest and has done less to improve the economic well-being of the rest than during any economic recovery in the last sixty years.
This is not just a matter of a single recovery delayed. Economic growth and prosperity for most people parted company some three decades ago. Chanting the Journal editors’ mantra of “growth not redistribution” will only drive them further apart, consigning all but the very rich to an economic slump that persists even during economic recoveries.
This recovery has surely been delayed. According to National Bureau of Economic Research (NBER), the nation’s arbiter of the business cycle, the Great Recession ended back in June 2009. By the official scorecard, the current recovery will hit the five-year mark this June, making it longer than the average recovery (58 months). But the economy has grown at about half of the pace of the average recovery since 1960, as the editors report, and is the slowest of all recoveries since 1950.
Some of that dismal growth record should be attributed to the severity of the Great Recession, the worst economic crisis since the 1930s. Typically, recoveries from financial crises have been protracted. That this recovery seems to conform to the historical pattern, however, is cold comfort for those waiting for the economic suffering of the Great Recession to subside.
To undo the suffering inflicted during a recession, a recovery must first create enough jobs to replace those lost in the downturn. That is admittedly a large undertaking this time around.
Still, no recovery has taken longer to replace the jobs lost in the previous recession. By this June, more than six years since the onset of the recession, the recovery will finally get back to the pre-recession level of employment. That’s longer than the four years the “jobless” recovery took to replace the jobs lost in in the much milder 2000 recession, and much longer than the then-record three years it took to replace the jobs lost in the 1991 recession.
But replacing the jobs lost in the recession is not enough to close the jobs gap. Each month, approximately 125,000 people enter the labor force in search of work. These new entrants must be able to find jobs before unemployment returns to pre-recession levels. The Hamilton Project, a policy group dedicated to restoring broad-based economic growth, calculates that if the economy were to add 208,000 jobs a month, matching the best year of job creation in the 2000s, it would still take until August 2018 to close the jobs gap.
And that says nothing of the quality of the jobs created. A study conducted by the National Employment Law Project (NELP) compared the distribution of the jobs lost during the Great Recession to those created during the recovery (as of 2012). They looked at three equal-sized groups of occupations: low-wage jobs (paying median hourly wages from $7.69 to $13.83), mid-wage jobs ($13.84 to $21.13), and high-wage jobs ($21.14 to $54.55). Their results were striking. While three-fifths (60%) of the jobs lost in the Great Recession were in mid-wage occupations, just over one-fifth (22%) of the jobs created during the recovery were in these occupations. The exact opposite held for low-wage jobs. These accounted for more than one-fifth (21%) of the jobs lost, but nearly three-fifths (58%) of the jobs created, with the biggest job gains in retail sales and food preparation.
No wonder inflation-adjusted hourly pay, for all but the top 10% of wage workers, was lower in 2013 than in 2009 (at the beginning of the recession). The median real household income in June 2013, meanwhile, was an alarming 4.4% lower, as reported by the Sentier Research Group.
For the best off, the last five years have surely not been times of forgone prosperity. Just how well have they done during the recovery? By the end of 2013, corporate profits had risen so far that WSJ reporter Justin Lahart fretted about the “The Next Problem: Too Much Profit.” What is driving profits to new record highs? “The tight lid companies have put on costs,” answers Lahart. “They’ve been slow to hire and slow to raise wages.”
It’s clear that record profits have come at the expense of wages (and jobs), judging from the profit share of Gross Domestic Product (GDP). Corporate profits now stand at 10.2% of GDP, the highest share since 1948. Meanwhile, employee compensation (wages and benefits) has fallen to its lowest share.
Stock market investors have also done quite well. Stock values have surpassed their pre-recession peaks. But this is of little help for most households. Less than one-half of households own any stock, even indirectly through retirement accounts. This tale of two recoveries has led to the greatest concentration of economic gains on record. From 2009 to 2012, 95% of income gains went to the richest 1%, those with incomes over $394,000, as economists Emmanuel Saez and Thomas Piketty have documented. That was greater than the 65% share that went to the top 1% during the 2002-2007 recovery prior to the Great Recession or even the 70% share during the 1923-1929 recovery before the Great Depression.
The Reagan recovery might have boasted a high rate of economic growth, as the Journal editors note, but that hardly suggests that Reagan’s “free-market,” pro-rich tax policies would restore broad-based economic growth.
One reason the economy grew more quickly during the Reagan recovery is that the 1982 recession did less damage than the Great Recession. Another is that, in practice, Reagan’s economic policies were more Keynesian than Obama’s. In the Reagan recovery, real per capita government spending grew twice as quickly (2.6% per year) as during the Obama administration (1.3%). On top of that, state and local government spending, adjusted for inflation and population, increased during the first half of the 1980s—while it declined between 2008 and 2012.
Nonetheless, Reagan’s anti-government, “free-market” ideology took hold, saddling the economy with jobless recoveries that benefit almost exclusively the super-rich, fail to replace middle-income jobs, and make inequality far worse. In their recent book Getting Back to Full Employment, economists Dean Baker and Jared Bernstein explain that, between the 1950s and 1970s, slack labor markets with high unemployment occurred about one-third of the time. Since Reagan, from 1980 to 2013, slack conditions have prevailed more than twice as often. And that’s made a difference for inequality. When Reagan took office, the richest 1% pulled down about 10% of the nation’s income, less than one-half of the 21.5% they get today.
The Reagan legacy includes pro-rich tax cuts that have reduced government revenues and kept government spending in check, union-busting labor relations that have eroded the bargaining power of workers, deregulation that paved the way for financialization, and “free-trade” policies that have made it easy for companies to threaten offshoring unless workers make concessions, In its most recent Global Wage Report, the International Labor Organization found that wages as a share of output in developed economies have dropped steadily since 1990. The most important drivers of the drop, in declining order, are financialization, two institutional factors (smaller size of government and declining union density), and globalization.
If those long-term trends don’t convince you that the Journal editors’ preferred policies led to the separation of growth and prosperity, consider this: In the early 2000s, we conducted a full field test of those polices under the George W. Bush administration. The result was an economic recovery that added fewer jobs than even the Obama recovery, left the economy in the throes of the worst economic crisis since the 1930s, and increased the economic chasm between the super-rich and the rest of us.
Trying those same policies again will only be a way to ensure that, for most of us, it will be not just a recovery delayed, but recovery denied.