Yesterday, the WSJ featured a piece explaining how the economy’s “stuck in neutral.” Today, it features “reasons for economic hope,” including repaired balance sheets, the shale boom, reduced health care inflation, and falling budget deficits.
So, which is it?
At this risk of being a little too folksy, I think the gear shift analogy is a good one (with the caveat that standard transmissions are a dying breed; I recently needed my 23-y.o. assistant to park my car for me, but this highly capable young man had no idea how to drive a stick).
If we think of the gears as points of real GDP growth, the US is more in second gear than neutral (i.e., we’re puttering along at around 2%). France is in neutral, the UK maybe shifting from neutral to first. The Euro area as a whole is in reverse, with Italy and Spain driving backwards pretty fast.
The problem here is that while the above list of positive developments from today’s sunnier WSJ assessment is a good one, and every forecast I’ve seen has us growing faster pretty soon, the job market, even with recent gains, still remains slack. And as long as that’s the case, it will be tough to accelerate to higher gears.
If you match up the GDP forecasts to the unemployment rate—i.e., you apply basic rules of thumb about how much the economy’s growth rate should help to lower the jobless rate—you’d expect that for the rest of this year and next, we’ll probably shave about one or two tenths off of the unemployment rate each quarter. For example, the Fed, GS, and economy.com all forecast the unemployment to be about 6.6% by the last quarter of next year.
Then there’s distribution. Protracted unemployment is a big reason why growth has flowed upwards. The real income of the typical household is down 5% over the recovery, corporate profitability is near an all-time high, the real S&P index is up 60%, and the compensation share of national income—the stuff working people depend on—is at a 50-year low.
So again, which is it?
Frankly, I’m worried. We’re definitely doing better than Europe, but we have a problem they don’t: structural inequalities are more deeply embedded in our economy than their economies. So, especially with the President about to hold forth on a pro-middle-class economic agenda, it’s not enough to cite positive macro trends without considering whether they’re reaching the broad swath of households whose economic prospects have been disconnected from growth for many years.
We may shift into higher gears, but if we’re zipping along through gated neighborhoods in a Ferrari with no passengers from the bottom 99%, we’ll still be in trouble.
In other words, moving my folksy analogies from cars to arts-and-crafts, now is the time to get out the policy glue that can reconnect growth and middle-class prosperity. And that’s what I expect to hear from the President later this week.
I know Congress won’t be receptive, and that’s deeply unfortunate. But that shouldn’t stop him from articulating his economic vision, nor from explaining to the American people what we should be doing if our politics were functional.