The Truth About Our Economy
Here are some distressing facts that need to change immediately. Understanding them and how they interrelate is step one to changing them.
Average weekly take-home pay, expressed in today’s dollars, was $770 in 1966. It’s $720 today. That’s 50 years of cumulative negative real (inflation-adjusted) wage growth. Earnings per hour tell the same story. The American Dream, in which each generation has a higher living standard than the previous one, lives and dies with these statistics. And they show the Dream fading before our eyes. There is one way to restore it: by radically and intelligently changing the course of economic policy.
Today, the U-6 unemployment rate — the government’s most comprehensive unemployment measure — is 10 percent. That’s far lower than the 17 percent unemployment rate recorded at the peak of the Great Recession. But it’s still extremely high – over two-fifths higher than the 7 percent rate recorded in 2000 — the best rate on record. It’s the rate we should be targeting.
Unemployment rates are cold numbers that tell us nothing about the underlying human tragedy of being out of work. There are now six million Americans who want a job and don’t have one. That’s enough adults to fill up Chicago and Los Angeles put together. Each of the 6,000,000 is one of your children, one of your parents, one of your brothers, one of your friends, one of your neighbors, one or your acquaintances or simply one of your many fellow Americans you’ve yet to meet. Or they are you, if not today, then tomorrow.
Here’s the bottom line. Nine years after the Great Recession began and seven years after it ended (when the economy started re-growing, albeit from a very low level), we still have a huge missing-jobs problem. And for many, if not most of those with jobs, we have a huge bad-jobs problem – jobs that don’t pay enough.
Real Median Family Income
This measure of economic wellbeing has shown some improvement, albeit meager. Real (inflation-adjusted) median family income has risen by only 10 percent over the past 30 years. Moreover, this increase is due to households working harder and longer, since they aren’t earning more per hour. Extra work can take many forms – more hours per day, more days per week, fewer or shorter vacations, second jobs, becoming a two-earner couple, postponing retirement and other work adjustments needed to keep up with the ever-rising bills. American families are doing all these things to make ends meet. But it comes at a real cost – more time spent working and less time spent with one’s family.
Saving and Investment
In the early ‘50s, our nation saved and invested 15 percent of national income. Today we save and invest just 4 percent. Low investment means lower growth in labor productivity (output per hour worked). And lower productivity growth means lower real-wage growth. In the fifties and sixties, labor productivity grew at 2.8 percent per year. Since 1970, it’s grown at 1.9 percent per year. That’s a one-third drop.
Inequality is alive and well in America. As I’ll explain, the fiscal system has dramatically limited its severity. But anyone who Googles Mr. Trump’s yacht or Secretary Clinton’s Wall Street speaking fees knows we increasingly live in a two-class society.
Even worse, inequality is on the rise. Average household real income of the top 5 percent grew 38 percent over the last quarter century. That’s four times the growth recorded by the other 95 percent. Over the same period, the wealth share of the richest 5 percent rose to 63 percent from 54 percent. Meanwhile, the poorest half of Americans own a mere 1 percent of total net wealth.
Labor-income inequality is also significant and increasing. The college-wage premium has increased 75 percent since the mid ‘60s. Today’s college grads earn twice what those with only a high school diploma receive. This speaks to the loss of our middle class. Roughly 70 percent of our children never graduate college. So if the poor represent 20 percent of the population and the rich 30 percent, that leaves 50 percent in the middle class. But if, hypothetically, all the rich have four-year college degrees, that leaves no one in the middle class with a college diploma. And the growth in the college-wage premium leaves the middle class close to the poor in terms of what they earn.
Another driver of inequality is the recent decline in labor’s share of national income. Labor used to receive about 77 cents out of every dollar produced. In recent years, that share has dropped to 73 cents. This may be the harbinger of even more redistribution from workers to owners of capital. Economic models in which smart machines compete directly with labor, which is increasingly the case, have one strong prediction – a decline in labor’s share of national income, which is the sum total of all the wages and asset income we receive.
Immigration has been a major topic in the Republican Presidential debates. But the discussion has been remarkably disconnected from the facts. Notwithstanding the suggestion that illegal immigrants are overrunning our borders, there are and have been more illegal immigrants leaving our country than entering it. Indeed, over the last decade, roughly 1 million more illegal immigrants have left our country than have entered it. This is tribute, in large part, to our immense, decades-long effort to secure our borders. We still need to work extremely hard on border enforcement to eliminate illegal entry to our country. But we shouldn’t presume nothing has been accomplished.
The real issue with immigration is legal immigration. We are adding 1 million legal immigrants to the population each year. The great majority are unskilled. This isn’t hurting investment bankers or the software engineers at Google. This is hurting low-skilled U.S. workers. It’s the last thing we need if we are trying to restore our middle class.
Legal immigration is also fueling a veritable population explosion. Unless we reduce legal immigration, our population will rise by one-third – over 100 million people – in just 45 years. That’s the current population of the Philippines. Most of these additional people will locate in the nation’s major cities. Driving in our major cities at peak hours is already a major challenge. With one-third more people, driving in our major cities may be like driving in Manila – an experience I don’t recommend.
America’s population explosion has far-reaching implications for wage growth, jobs, productivity growth, public services, infrastructure, congestion, public transportation, the education system, agriculture and our nation’s ability to reduce its carbon footprint. Yet, neither Secretary Clinton nor Mr. Trump seem aware of the great demographic changes we have underway. It’s one thing to consciously let your population explode. It’s another to do so with no planning for the consequences.
I’ve talked to many people about this issue. Most argue that the country has plenty of space, that the Midwest has been emptying out, and that the country could easily accommodate twice the number of annual immigrants. My fear is that what happens when other countries have experienced rapid population growth will happen here. People will move primarily into existing urban areas that are already highly congested. Egypt’s three-largest cities including Cairo represent far less than 1 percent of its land mass. But they contain a quarter of that country’s population.
I needn’t tell you our education system is failing our children. Here’s the report card. One in five of our children fail to graduate high school. This places us in 22nd place among developed countries with respect to graduation rates – below the average of all 36 developed countries in the OECD. As noted earlier, 70 percent of our children don’t attend or finish a four-year college. Our ranking based on college completion rates is 19th among OECD countries. Our high schoolers rank 27th in math on the PISA (Program for International Student Assessment) test. They rank 20th in science and 17th in reading.
The World Economic Forum ranks the United States 48th in quality of mathematics and science education. Sixty-nine percent of our public school students in fifth through eighth grades are taught mathematics by someone without a degree or certificate in mathematics. Ninety-three percent of them are taught the physical sciences by a teacher without a degree or certificate in the subject. We rank 27th among developed nations in the proportion of college students receiving undergraduate degrees in science or engineering. Finally, we graduate more visual and performing arts majors than engineers.
Since I’m a professor, grading is a standard part of my job. In looking at these facts, I’d give our educational system a D. And I’d give my generation a failing grad for letting this happen.
Federal Reserve Policy
The Federal Reserve is an independent branch of our government and needs to remain that way. This means that Fed needs to reach its best judgments in setting policy and stick to them no matter what elected officials and other outsiders think. That said, the Fed can benefit from considering alternative opinions about its actions.
In that spirit, let me suggest a few things for the Fed to consider. In 2007, the sum total of all the money the Federal Reserve had printed since its founding in 1913 was $850 billion. Since 2007, the Fed has printed an additional $3 trillion!
Printing money at an astronomical rate to pay government bills is the kind of behavior one would expect from a third-world country. Fortunately, the vast reliance on the printing press has not yet kicked off inflation. The reason is that the Fed has been and continues to bribe the banks not to lend out the newly printed money either to businesses or households. Instead, the Fed is paying interest to the banks to keep this money on reserve at the Fed.
So far the policy has worked. Inflation has been extremely low. But if monetary conditions return to the norms of the early 2000s, we’ll see prices quickly rise by, and yes this is no typo, 300 percent! Such an outcome would spell hyperinflation.
Again, the Fed has to make its own choices. But a monetary policy sold to the public as quantitative easing has actually been a super high-risk policy to ease Congress’ and the Administration’s burden of collecting taxes to pay its bills. If the Fed was really interested in stimulating the Congress it wouldn’t be rewarding the banks for not making loans.
The good news is that the current chair of the Fed, Janet Yellen, has brought what I view as reckless money printing by her predecessor to an end. But she is still paying interest on reserves and keeping interest rates abnormally low. I’d recommend a gradual but major change in both policies. Higher interest rates will help the elderly enjoy the level of retirement income they spent their lives saving to achieve, and their increased spending will in turn help stimulate the economy.
If the “quantitative easing” were really a clear-cut winning formula, the Fed should purchase all $13 trillion of government debt remaining in the hands of the public. Indeed, it should encourage Congress to cut all taxes to zero, have the Treasury borrow every penny it needs and then have the Fed print up trillions of dollars more to buy up the newly issued bonds.
This would be the height of irresponsibility. But such a policy, albeit, at a smaller scale, is exactly what the Treasury and Fed have pursued for most of the last decade. And, following the Fed’s example, the Bank of England, the European Central Bank, and the Bank of Japan has engaged in much the same policy placing their countries at considerable risk for future inflation.
Turning the Corner
Why has the American economy been dead in the water for so long? There are many smoking guns and we’re not going to pin down which one is producing the most smoke. Second-rate education is certainly high on my list. So are our miserable saving and investment rates. Competition with foreign workers, competition with machines and competition with low-skilled immigrants, especially in low-skilled jobs have also done a number on American workers.
But the government has also played a major role in discouraging employment and lowering wages by confronting small businesses with the massive red tape I discussed above and large businesses with rates of corporate taxation that are far higher than in other developed countries. Yes, corporate tax collections are very low due to myriad loopholes. But our corporate income tax, while collecting precious little revenue is, nonetheless, producing huge incentives for companies to operate outside the U.S.
Another job killer is our long-standing decision to have our employers oversee our healthcare, saving and financial investment decisions via employer-provided healthcare and retirement plans. Our employers are not our friends, they are not our parents, and they are not our government. They should not be deciding what healthcare we receive, how much we can save on a tax-sheltered basis, how and with whom we invest our savings and, thanks to these decisions, what we pay in taxes. The business of America’s businesses should be just that, business. It’s time we have our companies get back to their jobs – hiring, investing, and, yes, making money. My plans to fix Social Security, healthcare and the tax system will, as a byproduct, do precisely this. The economic impact, in conjunction with the reforms themselves, should prove dramatic.
Finally, let me point out that the largest recession in the postwar period – the Great Recession, from which we are still very much recovering – did not need to happen. Wall Street and politicians were in bed together, and the result was a disaster for Main Street. Chapter 10 provides a simple means to make Wall Street permanently safe for Main Street.