Scene-Setting for the Policy Discussion: The American Economy Stumbles

The American economy has done badly over the past generation or so.

This is not to say other economies have done better: The American economy remains among the richest in the world. However, given the economic lead America had a generation ago, it really ought to still be well ahead of the North Atlantic pack, and it no longer is.

Moreover, across most of the income distribution Americans today are little if any better off than their predecessors back in 1979, at the business-cycle peak in the Jimmy Carter presidency. Yes, today Americans have remarkable access to incredibly cheap electronic toys. But those are a small part of expenditure, and the costs of securing the standard indicia of middle-class life–a home in a safe neighborhood with good schools and a short commute, college for the children, assurance that a major illness will not lead to bankruptcy, a secure and reasonably-sized pension–have all become more costly relative to incomes. This shift is astonishing: For 150 years before 1979 Americans had confidently expected that each generation would live roughly twice as well in a material sense as its predecessor, not find itself struggling against the current to stay in the same place.

If you want a single set of numbers to keep in the front of your mind to understand America’s relative position today, you cannot do better than those in the figure below, copied from the Credit Suisse Global Wealth Report1:

The median American has only about $45,000 to his or her name, and wealth inequality as measured by the gap between the average and the median wealth is greater by far than in the typical rich country–only Sweden comes close. A generation ago it would have been ridiculous to even consider that the typical middle-class or working-class American might not lose if switched with the typical inhabitant of Australia or Italy or Japan or Finland or Singapore. It is not so ridiculous at all today. But America’s rich remain rich indeed: as Tahmi Lubby writes, with 4.3% of the world’s population America has half of those with over $50 million, and two-fifths of all millionaires.2

Over the past generation America has had a very slow pace of economic progress and has lost its economic lead as far as the median is concerned. But, as we have just seen, this does not mean that everybody thinks that they have done badly–and indeed, the people at the top of today’s American income and wealth distribution have not done badly at all. Today in America the top 1%, even more the 0.1%, and even even more the top 0.01% are vastly richer in both absolute and relative terms than their predecessors of 35 years ago. They are also vastly more powerful, politically and economically. Relative to what they reasonably might have anticipated 35 years ago, America has vastly rewarded them far beyond their wildest dreams: Modern America has been very good to them. They have at least matched in all and vastly exceeded in most dimensions what they thought life would be like were they to make it big. And they have enough wealth and derived social power to give their children and grandchildren an enormous head start vis-a-vis others.

Perhaps they have some worries as they look down the much-steeper and ever-steepening income and wealth pyramid and think about intergenerational regression toward the mean, but their children’s and grandchildren’s inherited money to be offers them a very bright set of opportunities and challenges.

But look a bit further down, below the top 1%.

The rest of the top 5% are about as rich as they might have expected. They have traded smaller houses and more burdensome commutes for more lavish vacations, cheap electronic toys, and greater social order. But the rest of the top 5% look up and recognize that being upper-upper-middle-class (or perhaps lower-upper-class) in today’s Second Gilded Age does not bring the respect from others and from oneself that they had anticipated. Lower-upper-class Americans of a generation ago were social peers within financial shouting distance of successful financiers and corporate executives. That is not the case today. And the rest of the top 5% look down, and they recognize that–unlike the top 1%–they do not have the wealth and derived social power to insulate their children and grandchildren.

And further down?

The best that we can say is that the rest of America is at best treading water relative to the same percentile slots in the income and wealth distribution a generation ago. They are no richer, more unequal, and less secure along multiple dimensions then their predecessors were a generation ago. They are vastly worse off than they themselves confidently expected thirty-five years ago that they would be today. Note that this is not just a matter of distribution: Yes, about half of the net stagnation of the 95% relative to expectations as of a generation ago is due to rising inequality. But half of it is due to slower overall growth as well.

Sam Williamson and company’s Measuring Worth website teaches an enormous amount about what our current guesses as to the long-run shape of economic growth are.3 It demonstrates the magnitude by which the American economy as a whole has underperformed not just in distribution but in raw total an-extra-dollar-for-billionaires-is-as-good-as-an-extra-dollar-for-everybody-else since the high tide and end of the Social Democratic Era, as marked by the attainment of a real (2009 dollar) level of GDP per capita of $28,694 at the 1979 business-cycle peak during the Jimmy Carter presidency:

Back in 1979 real GDP per capita was double what it had been 28 years before. And in 1951 real GDP per capita was double what it had been 28 years before in 1923. Yet 28 years after 1979 in 2007 saw American real GDP per capita not at $57,388 but $49,310.6–a 16% gap. And after 2007 things really went bad: the real GDP level right is not $68,246.2 but only $50,295.0–a 35.7% gap relative to the extrapolated 1923-1951-1979 trend.

You can claim that the coming of post industrial civilization makes real GDP an increasingly inadequate guide to even material well-being. There is some truth in that. You can claim that even proportional differences in wealth, income, and consumption nevertheless for the rich then a poor economy. And there may be some truth in that. But there is not much truth in either–certainly not enough to be happy with America’s economic performance over the past generation.

So what has gone wrong? And why?

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