Column: Why sunny views of the economy are misguided
I was sitting in the audience at the annual meeting of the American Economic Association in San Francisco last month when Harvard economist Martin Feldstein, adviser to presidents and presidential hopefuls and mentor to numerous crème-de-la-crème economists, expressed his views on the current state of the U.S. economy.
“Fortunately, the U.S. economy is now in very good shape. We’re essentially at full employment with the overall unemployment rate at 5 percent and the unemployment rate among college graduates a remarkably low 2.5 percent… Looking ahead, the growth of GDP in 2016 will be limited by the absence of excess capacity in the economy rather than by a lack of demand. Household spending will support real domestic growth of 2 percent or perhaps more, because real earnings are rising at 2 percent, house prices are increasing even faster in real terms and employment prospects are good.”
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One should ask which universe Professor Feinstein inhabits.
Let’s first look at the employment situation. Consider full-time jobs: There is no indication that we’re in “very good shape” there. Counting from November 2007 — just prior to the recession — to December 2015, only 728,000 more people are usually working full-time, according to the St. Louis Federal Reserve. Of course, as you can see from the graph below, many people who lost their jobs during the recession were eventually reemployed and back working full time.
During this time, however, the population was growing. About 80,000 new people enter the labor force every month, and the labor force has increased by some 3.7 million since the recession began. In other words, only 728,000 of the 3.7 million can be accounted as usually working full-time. So what are the other 3 million doing?
It appears that a good portion of them are working part time. The number of people who usually work part time has increased by some 2.6 million since November of 2007. Additionally, a total of 6 million workers are part time for economic reasons; that is, they would like to work full time, but can’t find full-time jobs. Does that seem like fortune has smiled on us?
No wonder people are discontented. The median income of part-time workers is $246 per week — for an individual, that’s barely above the poverty line. Moreover, there are many people who are so discouraged that they don’t even bother looking for a job, and as a result, they aren’t even counted as unemployed. To be considered officially unemployed, one must have looked for a job in the past four weeks. That’s the statistician’s sleight of hand: find a reason to exclude the unemployed from the unemployment statistics. The difficulty of finding a decent job is why the number of prime-aged adults in the labor force between the ages of 25 to 54 is down by 3.7 percent since 1999. Some 4 million people have dropped out of the labor force; these millions are clearly too young to have retired and likely dropped out due to frustration. That hardly leads one to infer that “employment prospects are good.”
The U-6 underemployment rate, at 9.9 percent of the labor force, is still high. That amounts to some 15.6 million people who cannot find full-time employment. Add the 4 million who have dropped out of the labor force, and you end up with approximately 20 million adults who are frustrated with the labor market. And that does not include those who are working at or near the minimum wage. And let’s recognize that minorities are hurting much more. The underemployment rate among blacks is 16 percent, and among Hispanics, it’s 13 percent. That means that one out of six African-American adults are not working full time for a lack of jobs. Moreover, the share of the officially unemployed who were jobless for longer than a year was still 22 percent at the end of 2014. So there are plenty of people for whom employment prospects are miserable. These numbers reflect the pain and suffering in the U.S. economy today much better than the official unemployment rate of 5 percent.
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Professor Feldstein’s next claim is that “real earnings are rising at 2 percent.” I suppose they are, but averages are notoriously misleading, as they put excessive weight on the obscene earnings of millionaires. They are not good indicators of the well-being of the people on Main Street. Median weekly real earnings of hourly and salaried, full-time workers have increased by a paltry $5 between 1979 and 2015. That’s not a typo! That’s five bucks, albeit in 1983 dollars. Converted into today’s money that becomes $12, and in large part, because women’s earnings have increased. Men’s earnings decreased in the same time interval by $76 dollars (in today’s money). That’s the kind of progress we’ve had since Professor Feldstein was an adviser in the White House of Ronald Reagan.
There is precious little evidence to support Professor Feldstein’s sunny view of the economy — unless, of course, you are in the top 1 percent of income earners. While the rest of the population scrapes the bottom of the barrel, the top 1 percent of income earners has increased their income by a walloping 3.9 percent per annum for 32 years (from 1979 to 2011). Compared to the bottom 20 percent of the population, they’ve increased their income from a factor of 21 in 1979 to a factor of 51 in 2011. One has to consider that it is one thing to be poor among the poor and an entirely other feeling to be poor amidst the conspicuous consumption of the superrich. That is why there is so much malaise in the economy — malaise that Professor Feldstein missed. GDP growth is irrelevant if the benefits accrue primarily to the 1 percent, and there is no indication at all that this distribution will change any time soon. Rather, the “hollowing out” of the middle class will continue.
Moreover, Professor Feldstein might be right that GDP will grow at 2 percent this year, but the labor force will also grow by 0.6 percent. So on a per capita basis, growth will be just about 1.4 percent — about 1 percent less than during the last four decades of the 20th century. That is an indication of a permanent slowdown in economic activity.
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Finally, Professor Feldstein does not think there is excess capacity in the economy. He is clearly wrong: There is plenty of underutilization and not only of labor, but also of capital. The capacity utilization rate in industry is 77 percent, which is very low by historical standards. That simply means that 23 percent of the industrial capital stock is idle. Clearly, plenty of slack remains in the economy.
There is no reason for the Panglossian view of the economy. In spite of GDP growth, in spite of earnings growth, in spite of job creation, the economy can only be characterized as Krugman has, as a “sour economy.” The jobs that have been created are chiefly part-time jobs, and GDP growth is not trickling down to the masses. That is why subjective evaluations of economic well-being are probably a more reliable reflection of the welfare of individuals as they really experience the economy. Richard Easterlin has shown that Americans’ happiness index has been declining for decades even before the financial crisis. Moreover, according to the Gallup Poll at the time of writing, 57 percent of the population is said to be thriving, 40 percent reveal that they are struggling and another 4 percent are suffering. These polls seem to mirror the state of the economy more accurately than Professor Feinstein’s conjectures. Roughly half of the population is doing quite well… and the other half? Well, they have to make do somehow. As economists Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi asserted in their 2010 book, “Mismeasuring Our Lives: Why GDP Doesn’t Add Up,” “one of the reasons that most people may perceive themselves as being worse off even though average GDP is increasing is because they are indeed worse off.”