by Jeff Madrick, SCEPA Senior Fellow
The Federal Reserve's Ben Bernanke could not avoid admitting this week that the American economic recovery was faltering. GDP growth of less than 2 percent annualized in the fourth quarter was a severe disappointment. Responsible economists do not expect it to grow much faster for the rest of the year. The World Bank just forecast that it expects U.S. annual growth to remain below 3 percent through 2013.
Good thing President Obama's chief economist, Austan Goolsbee, is leaving town. His calm, conventional and well-schooled thinking apparently led to a devastating underestimation of how Americans are suffering in these times. Of course, we don't know quite how the conversation has gone in the White House. But the administration has been adopting the old Clinton strategy of admitting to no bad news if it can help it. It evinced no passion about the poor state of employment before the last election.
The bad employment data for May was a serious challenge to the administration's wishful thinking that the economy would grow at a 3 to 4 percent rate. Some of those who have met with out-of-office Larry Summers say he was still making this claim only a couple of weeks ago. Then the Case Shiller index reported that housing prices also sunk.
But that's not by any means the main problem. This is basically a jobless and wageless economy. A few weeks ago at the Harvard Club in New York City, Treasury Secretary Tim Geithner claimed that American economic policy has done well to reestablish growth. In fact, he proudly noted, on average we had done better than Europe.
In terms of GDP, that is true. In terms of the creation of jobs, it is completely wrong. The relationship between GDP growth and jobs has collapsed. It has held up better in Europe. And this is now the critical issue.
Andy Sum and his fine crew at Northeastern have recently put together a paper, not yet on the web, that documents the lack of job or wage growth. One number says it all. Since the recovery technically began in 2007, reports Sum, pre-tax profits have risen by $464 billion and real wages and salaries by $7 billion. Of all national income, profits accounted for 88 percent. That is the highest level of any recovery in the post-World War II period, and far higher than the next closest, which was 53 percent.
All this shows up in productivity gains. But economists have always alleged - and I myself typically believed - that wages would follow productivity growth. But that hasn't been happening for a long time. Something's changed, and it requires government attention.
We are mostly familiar with the inadequate creation of new jobs in this recovery, which supposedly began in mid-2009. There has been modest job growth since then, but by the key measures, there are still fewer jobs today in America than in mid-2009. The unemployment rate hovers at 9.1 percent. The number of "underemployed" workers, those looking for full-time employment but unable to find it, doubled to nearly 9 million Americans. Youth has been hit particularly hard.
Had wages risen, GDP growth could have improved, and maybe workers would not feel so bad. (The opinion surveys show their pessimism.) But wages, Sum and his group show, rose on average only barely. There are many measures of this, but both hourly and weekly earnings series show almost no increase. As Sum puts it, to repeat, a jobless and wageless recovery.
What did send GDP up was the increase in productivity. How was it achieved? As corporate apologists put it, through efficiencies. These include a growing amount of off-shoring, but they also include making employees work harder and longer—the kind of factors that don't show up clearly in the data-gathering.
Obama could lose to this crew of potential Republican candidates if he doesn't start facing reality. A new stimulus, jobs programs, and serious infrastructure investment should be on the agenda. The political realists who dominate the Beltway discourse call this naïve. The Republicans will never give it to him. At the very least, he should put the onus on them. He needs to make it clear to Americans that Republicans are holding them back by not providing the money for the programs he thinks Americans now desperately need.
Instead, austerity economics dominates in Washington, DC. This promises to be one of the great political follies in economic history, one Obama has joined. Martin Feldstein, who once advocated a strong stimulus (albeit for military spending), now writes with customary inconsistency and great ideological loyalty that taxes must be cut while simultaneously moving the budget toward balance through spending cuts. Oh, my. As we have written here before, the Bush tax cuts of 2001 presaged the slowest rate of GDP growth of any recovery and expansion since World War II, even before the recession of 2007 hit.
But this is no longer about politics alone. It is about the future of America. And perhaps about political stability as well. Americans are, for good reason, losing faith. Who knows how they will react. Young people in particular have less and less to look forward to.
The relationship between GDP and jobs and wages in America should now be a moral priority for economists. Those weighed down by old ideological and theoretical baggage have to let go. The nation needs new and innovative economic research and courageous thinking. My own view is that economists, generally speaking, failed America regarding Wall Street. That failure may be small potatoes compared to failing them about jobs.