Today’s Good Times Conceal Lurking Economic Troubles


(Bloomberg Opinion) -- Americans these days tend to make a distinction between the long-term and short-term state of the economy. When we talk about “the economy,” we typically mean unemployment, economic growth, asset prices and short-term wage growth -- what economists refer to as the macroeconomy. By these measures, the U.S. economy is doing quite well. But the longer-term picture is much less rosy.

The best thing about the economy at the moment is that almost everyone who wants a job has one or can find one. The employment rate for Americans who are mostly too old to be in college but too young to be retired is higher than it was before the Great Recession, and only a bit more than one percentage point lower than the all-time high reached in the heady days of the late 1990s:

Today’s Good Times Conceal Lurking Economic Troubles

This tight labor market is finally leading to  wage increases for workers at the bottom end of the pay scale. Even though overall earnings growth has been sluggish — partly due to the global productivity slowdown — low-wage workers have seen decent gains:

Today’s Good Times Conceal Lurking Economic Troubles

Minimum wage hikes in some states and cities have contributed to this happy trend, but most of  the gain can be traced to the vibrant economy. Partly as a result of rising wages, poverty rates are at record lows.

Asset prices have recovered as well. Stock returns mostly benefit the wealthy, who own most of the stocks. But the rebound in housing from the post-bubble depths is providing some relief for many middle-class families:

Today’s Good Times Conceal Lurking Economic Troubles

All of these positive short-term trends are probably why only 11% of Americans rank the economy as the country’s most pressing problem compared to 86% in 2009 during the depths of the Great Recession.

But in terms of longer-term trends, things are not so favorable. Even though wages are going up at the bottom, overall income inequality is very high by historical standards and has continued to rise during the recovery. A look at longer-term trends shows just how long wages at the bottom would have to grow to meaningfully reduce the inequality that built up in the system during the past four decades:

Today’s Good Times Conceal Lurking Economic Troubles

Meanwhile, despite the partial recovery in housing prices, those at the bottom of the wealth distribution have a long way to go before seeing their American dream return:

Today’s Good Times Conceal Lurking Economic Troubles

When coupled with slower productivity growth the rise in inequality means that Americans have a much lower chance of earning more than their parents than did previous generations:

Today’s Good Times Conceal Lurking Economic Troubles

A few years of strong growth and rising wages isn’t going to fix these longer-term issues. And when the next recession inevitably comes, many of the gains in employment, low-end wages and middle-class wealth probably will vanish. Today's temporary gains may mollify the American electorate but it won’t change the structure of the underlying system.

And that system should have been fixed a decade ago, during the depths of the Great Recession. The panic and anger over high unemployment, plummeting home values and waves of foreclosures should have been harnessed to make structural reforms to reverse the long-term forces that cause inequality and unfairness.

That’s exactly what Franklin Delano Roosevelt did in the 1930s. Inequality had reached astonishing heights in the decade that preceded the Great Depression, with 10% of the population taking in almost half of the nation’s total income and the wealthiest 1% of families holding about half the wealth. Much of the country lived in poverty, especially the elderly. So in addition to attacking the Great Depression the New Deal also addressed those fundamental issues. It strengthened unions and created Social Security, as well as imposing stern financial regulation and hiking taxes on the wealthy to very high levels.

Despite paying lip service to the idea that a serious crisis should never go to waste, President Barack Obama failed to replicate FDR’s deep reforms. Some changes were made, including Obamacare and the Dodd-Frank financial reform but top tax rates remained low in historical terms, the financialization of the economy was not reversed, labor wasn’t strengthened and minimum wage policy was unchanged. Historians will long argue how much of this was due to political timidity, Republican intransigence, the filibuster or the effectiveness of the Federal Reserve in mitigating the severity of the crisis. But the fact remains that the U.S. has enjoyed a cyclical recovery but no structural transformation.

So the U.S. economy is locked in much the same pattern as before the recession -- a cycle of boom and bust for ordinary Americans, with smoothly rising prosperity for those at the top. Breaking that cycle may require another economic crisis coupled with bolder leadership.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

©2020 Bloomberg L.P.

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