Why a Great U.S. Economy Doesn’t Feel So Great

Low unemployment doesn’t make up for wealth loss, wage stagnation, rising inequality and declining economic mobility.

Why a Great U.S. Economy Doesn’t Feel So Great

Low unemployment doesn’t make up for wealth loss, wage stagnation, rising inequality and declining economic mobility.

At least some of us are having fun.

Photographer: Yana Paskova/Getty Images North America
Photographer: Yana Paskova/Getty Images North America

John Williams, president of the Federal Reserve Bank of New York, describes the economy “strong.” CNN says it’s “soaring.” Vice calls it “great,” and the Washington Post labels it “good.” I myself have referred to it as a “boom.”

But others wonder how this strong, great economy can be soaring when wages aren’t rising very quickly:

Where Are the Raises?

Real hourly compensation growth

Source: Federal Reserve Bank of St. Louis

Meanwhile, my Bloomberg Opinion colleague Stephen Gandel notes that most Americans’ wealth hasn’t gone up during this boom. Most middle-class Americans keep their wealth in their houses, while the rich tend to put more in the stock market. But stocks have seen the bulk of the gains since President Donald Trump took office:

Uneven Gains

Investment accounts are rising faster under President Trump, but so is debt

Source: Federal Reserve

Data as of June 30, 2018.

Even real estate isn’t doing so well for ordinary Americans these days, since the foreclosures of the housing bust and tighter lending standards have shifted housing wealth from the middle class to the rich.

And that’s just what’s happening recently. Over the longer term, Americans have been suffering from steadily falling mobility. Only about half of 30-year-olds now make more money than their parents did at a similar age:

So Long, Economic Mobility

Estimated probability of 30-year-old earning more than parents did

Source: Equality of Opportunity Project

How can things be booming when average Americans are treading water? The answer has to do with the way economists think about the economy. In both their formal models and their mental ones, economic performance is divided into two very different components — macro and micro. That divide has seeped into popular language and punditry, occasionally causing unnecessary confusion.

In simple terms, the basic story economists tell goes something like this: Over the long run, economic prosperity is determined by the march of technology and the quality of human institutions. These combine to drive the growth in productivity, which measures how much output the economy can create for a given set of inputs. They also determine how what the economy produces gets distributed — technology can reward some skills and devalue others, while the government can redistribute wealth and privilege certain occupations over others.

Various subfields of economics deal with the gritty details of things that are thought to affect productivity — taxes, public goods, economic development, education, health, research and development, financial markets, etc. Increasingly, these fields — which comprise a majority of what economists study — are grouped together under the name of microeconomics.

In the short term, economists believe, the business cycle can cause fluctuations around the long-term trend. When a financial crisis, tight monetary policy or some other shock causes aggregate demand for goods and services to fall, businesses stop investing and lay off workers. The ensuing recession causes a mismatch — offices and factories sit empty, while workers who could fill those offices and factories stay at home playing video games. The downturn doesn’t last forever, but in the most severe situations it can persist for as long as a decade. The branch of economics which deals with this sort of temporary phenomenon is called macroeconomics.

Since the Great Depression, economists have gotten used to referring to macroeconomic conditions as “the economy.” Recessions and booms dominate the public discussion. When a large share of workforce is employed — as the chart below shows — people say “the economy” is good, even if productivity is slow, mobility is stagnant and inequality is increasing.

The Fading Shock of the Great Recession

Employment-population ratio, 25-54 years

Source: Federal Reserve Bank of St. Louis

The job market is so strong that even people on Social Security Disability are re-entering the workforce.

But this labor market upswing is relative to a long-term productivity trend that looks increasingly gloomy:

No Sign of a Productivity Breakout

Business sector real output per hour, year-over-year change

Source: Federal Reserve Bank of St. Louis

That stagnant productivity is probably a major reason wages are rising so slowly — though workers don’t always capture the gains from productivity growth, it definitely helps. Lower productivity also means less wealth available for the government to redistribute.

In other words, economists and commentators are calling the economy “great” because that’s what they’re used to doing. They just mean that most people have jobs. This standard terminology ignores the question of how much those jobs pay, or which classes of society reap the gains.

Of course, the macroeconomy and the microeconomy aren’t completely disconnected. An extended macroeconomic boom will tend to push up wages. It can even raise productivity, since it prompts companies to invest in the latest technological advances. So it’s good to keep aggregate demand strong, by not tightening monetary and fiscal policy unnecessarily.

But a good macroeconomy isn’t enough. The long-term trends of low productivity and high inequality have to be addressed. Microeconomic policy is much harder than macro, since it requires digging deep into the guts of institutions and industries, and fixing a million little things such as regulations, infrastructure, research, taxes, education and trade policy. There are rarely any big, quick, simple solutions. But the job must be tackled nonetheless, or Americans will eventually realize that a great economy isn’t so great after all.

    This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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    Noah Smith at

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    James Greiff at

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