Daniel Sutter: How’s the economy?
Is the economy booming? Economist Alan Blinder recently argued that the economy is strong despite many Americans’ claims to be struggling. Paul Krugman believes that claims of malaise reflect Republican hostility to President Joe Biden, not reality. Do the numbers validate the lived experience of struggling Americans? Statistics, at best, reflect averages across the economy. Life was not bad for my grandmother during the Great Depression, as my grandfather was a captain in the Dearborn Fire Department and never lost his job. Businesses can fail as the economy booms. Surveys reflect many Americans’ struggles. Lending Tree found 64 percent of respondents live paycheck to paycheck. Seventy percent of respondents in another survey reported being worse off now than at the start of Biden’s term. The 60-day delinquency rate on auto loans is at an all-time high, and the 90-day credit card delinquency rate is up 50 percent. But are these families just living beyond their means? Polls also find that many more Republicans than Democrats believe the economy is struggling. Perhaps Republicans believe the economy is bad because Fox News says so. I believe in an objective reality, so let’s look. Some statistics signal strength. Although up slightly, unemployment remains below 4 percent nationally, a historically low rate. Inflation has fallen from 9 percent in 2022 to 3.2 percent. And real (meaning inflation-adjusted) GDP is holding steady. We may tame inflation without a recession. But not all statistics are rosy. Low unemployment reflects, in part, a decline in the percentage of adults looking for work. Inflation remains above the Federal Reserve’s 2 percent target. Interest rates are up sharply; the 30-year fixed mortgage rate is 7.7% versus 3% when President Biden took office. Higher interest rates make homes and cars more expensive. Wages have risen but not enough to keep up with inflation. Real income began falling in early 2021 after nine years of growth and fell over 2 percent in 2022 after growing nearly 3 percent in 2018 and 2019. Some stats suggest that some Americans are struggling even more. Food and energy prices have increased 20 and 35 percent since January 2021, versus 17 percent for the overall Consumer Price Index. Lower-income households spend a higher percentage of income on these items, so their effective inflation rate exceeds the national rate. Analysis by the St. Louis Fed finds that about a quarter of households experienced no increase (or even decrease) in their nominal wages in 2022. These individuals suffered a substantial decline in real income, even before adjusting for effective inflation due to energy and food prices. The past two years have seemingly continued the divergence of the Covid lockdowns. “Zoom Class” professionals never lost their jobs and saved commuting time working from home. Service industry workers either lost their jobs or suffered the risks and inconveniences. The Biden Administration claims credit for recovery from the Covid recession, but we did not experience a typical recession. A strong economy was shut down in March 2020, like a resort community during the offseason. Reopening was all we needed for recovery. $5 trillion in Federal COVID spending and its monetization by the Federal Reserve drove the inflation requiring today’s painful high interest rates. Traditional economic statistics may now less accurately reflect “typical” conditions. Consider real per capita GDP and real median personal income. Real GDP per capita is economists’ preferred measure of prosperity, as the good things in life correlate strongly with GDP. Across time and countries, differences in real GDP per capita yield noticeable differences in living standards. In 1974, median income was 95 percent of per capita GDP. Median income increased 50 percent by 2022, a definite improvement, but GDP per capita simultaneously increased 130 percent. A 14 percent decline in average household size explains some, but not all, of this divergence. At least recently in the U.S., GDP correlates less with average living standards. The American economy is not broken. Averages always conceal considerable variation. Statistics, however, suggest that the economic pain many Americans feel is real and not just perceived. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Is Jeb Bush’s economic growth goal realistic?
Republican presidential candidate Jeb Bush says there’s “not a reason in the world” why the U.S. economy can’t grow at 4 percent annually. Actually, there are a bunch of reasons it probably can’t. Many economists say the U.S. economy is ill equipped to grow consistently at even close to 4 percent. Current forecasts put growth averaging half that rate. Any president, Republican or Democrat, would have to overcome decades-long trends that are largely beyond the control of the Oval Office. Those trends include the retirements of the vast generation of baby boomers, an exodus that limits the number of workers in the economy. Rising automation and low-wage competition overseas are among other factors. A result has been meager income growth, which has cut into the consumer spending that drives most economic growth. “It would require substantial changes in fiscal and regulatory policy that I don’t believe any president could reasonably expect to enact in one term,” said Robert Stein, an economist at First Trust Advisors who was a Treasury Department official during George W. Bush‘s presidency. In his campaign announcement on Monday, Jeb Bush said, “There is not a reason in the world why we cannot grow at a rate of 4 percent a year. And that will be my goal as president: 4 percent growth, and the 19 million new jobs that come with it.” The pledge originated from a plan by the George W. Bush Institute to achieve growth averaging 4 percent for a decade. Conservative economists defend the target as aspirational, a pledge that would leave the economy better off even if the next president fell short. “I’m less concerned about the number than the commitment to grow rapidly,” said Douglas Holtz-Eakin, an economist who has advised Republican presidential candidates and now is president of the American Action Forum. The historical odds of doubling growth from its current level are low. Only four of the 16 presidential terms since World War II have experienced annual economic growth averaging more than 4 percent after inflation, according to research published last year by Princeton University economists Alan Blinder and Mark Watson. President Harry Truman reaped the peace dividend as U.S. manufacturers helped rebuild nations devastated by World War II. The Kennedy and Johnson administrations enjoyed a boom because of tax cuts. And President Bill Clinton benefited during his second term from low interest rates and what eventually became a tech-stock bubble. There are two primary ways to increase an economy faster: add more workers or increase their efficiency so that each hour on the job generates more income. Neither factor looks spectacular enough to deliver 4 percent growth, particularly since the share of Americans working has drifted downward as the number of retirees has increased. “The demographics right now are for slowing population growth,” said Chad Stone, chief economist at the Center on Budget and Policy Priorities, a liberal think tank. The economy has 157.5 million workers, including the unemployed on the hunt for a job, according to the Labor Department. Their ranks increased just 0.3 percent in 2014, the best year for hiring since the late 1990s. When economic growth averaged about 4 percent during Clinton’s second term, the growth rate for the number of workers joining the economy averaged 1.5 percent, nearly five times higher than the current level. Because baby boomers are starting to retire, the nonpartisan Congressional Budget Office expects the rate will remain low and hinder broader growth. The CBO in January estimated that growth would average just 2.1 percent annually from 2018 to 2025. In theory, Bush as president could overcome that obstacle by welcoming substantially more immigrants in the United States. That would cause the growth rate of workers to rise much more quickly, said Michael Strain, deputy director of economic policy studies at the American Enterprise Institute, a conservative think tank. But efficiency gains — what economists call productivity — would still be a challenge. For the past seven years, productivity growth has averaged a poky 1.4 percent, according to the Labor Department. That’s nearly half its rate between 2000 and 2007. Economists say it’s generally difficult for government policymakers to unleash sudden bursts of productivity. One easy form of boosting productivity would involve government spending in infrastructure such as roads, bridges, ports and airports. Josh Bivens, director of research at the liberal Economic Policy Institute, sees these investments as the “most reliable lever” to bolster productivity. Yet he notes that a 10-year, $2.5 trillion government infrastructure program would increase economic growth only 0.2 to 0.3 percent annually. That increase would not be nearly enough to achieve consistent 4 percent growth after inflation. And the Republican presidential candidates have been committed to finding ways to shrink government’s footprint instead of introducing new spending programs. “There’s really no way,” Bivens said. Republished with permission of The Associated Press.
