ECONOMY AUGUST 23, 2011
This article is a contribution to 'Is There Anything That Can Be Done? A TNR Symposium On The Economy'. Click here to read other contributions to the series.
Between the ugly political standoff in Congress over the debt ceiling and the wild fluctuations of the stock market, it has been a tumultuous last few months in the United States. The Eurozone countries, for their part, aren’t faring any better, facing an angry public, bailouts, and an uncertain future for monetary union. And yet, despite the gloom on Wall Street and elsewhere, many fundamental aspects of the U.S. economy are improving, albeit slowly. The most likely outcome is that the U.S. will experience an extended period of below-average, yet hardly catastrophic growth—that is, unless politicians and the electorate draw the wrong conclusions from our situation and find a way to mess it up.
While the announcement by the National Bureau of Economic Research that the recession ended in June of 2009 is often ridiculed as being out of touch with reality, there actually has been limited progress over the last two years. Real GDP per capita has grown by 3 percent from the depths of the recession and the net worth of households has rebounded from $51 trillion in 2008 (down from $64 trillion) to $58 trillion in the first quarter of 2011. The unemployment rate has declined by one percentage point, although it remains stubbornly high, hovering around 9 percent. Real personal consumer expenditures are slightly higher than before the recession; and consumer savings have bounced back from 2.2 percent of personal income in 2005-07 to 5.2 percent in 2008-10. Still, this is a far cry from the 8-10 percent level that existed from 1958-1985, and consumer spending must be balanced against the news that, between 2001 and 2007, there have been virtually no gains in median household income.
The economic pain is real, but not as widespread as many believe. The maximum fall in real GDP per person was just 6.3 percent, while median income fell by just 4.4 percent. Certainly, America has too many people living at or near the poverty level. Yet, there has been relatively little increase in these numbers: According to the latest Census report on incomes in 2009, the share of the population in poverty and the share of the population below twice the poverty line have each gone up by just two percentage points since 2007. This is also reflected in the share of people describing themselves as “poor” or “lower middle class” in various Pew polls, which has also increased by just 2 percentage points (from 26 to 28 percent).
Put together, what do these numbers mean? The lack of positive economic momentum, the deep problems of many Eurozone economies, and the shift of focus from stimulus spending to cutting the federal deficit raises the fear that we are heading into another recession. But while a double-dip is a possibility, very high unemployment—over 11 percent—remains an unlikely scenario. Indeed, the most likely outcome is continued slow growth, with perhaps a few isolated quarters of small negative GDP growth, while the unemployment rate edges down by tenths of a percentage point every two months. Currently, the consensus median economic forecast is for the unemployment rate to be between 8.0 and 8.5 percent by the November 2012 elections. As the economy regains its footing, GDP growth will return to 3 percent, but the unemployment rate is unlikely to go below 6 percent (the low rate of the 1990s). Forecasters differ on when we will reach this point—perhaps two, three, or four years from today.
It is thus reasonable to conclude that we are experiencing a period of slow growth somewhat similar to the “lost two decades” of economic growth in Japan. The Japanese navigated these years with surprisingly low levels of political and social upheaval. Japan experienced very low growth, but their standard of living was so high that, for the vast majority of Japanese, it wasn’t a life-altering period. Although such a situation is obviously not ideal, it’s worth remembering that Japan has retained its position as a global powerhouse and maintained its high standard of living. That said, the political consequences of slow growth and stagnation for the next several years in the United States are likely to be different than they were in Japan.
The U.S. economy is perfectly capable of dragging itself out of this rut, but that’s not to say that politicians won’t hinder its ability to do so. The bruising battle over the debt ceiling and the ugly politics over public sector unions in Wisconsin are only the most recent manifestations of the schisms in American politics and society that the recession has deepened. While the need for greater government action to increase economic growth is evident, Congressional Republicans are sure to block any large response. The Tea Party’s leverage over the GOP is high because they have successfully challenged incumbents and won primaries—something that liberals have only dreamed of doing in the Democratic Party. And because they have been demonstrated to be ruthlessly effective, it is safe to expect more political standoffs in the future.
The 2012 elections, for their part, are being billed as a decisive showdown over the question of the proper size and role of the government, but this battle is likely to be fought to a standstill with the end result being more divided government. Indeed, it is very unlikely that there will be a resounding Democratic victory repudiating Republican “extremism.” So the future looks to be one filled with nasty political fighting, in which we will be testing the limits of how much a dysfunctional political system can undermine a modern, advanced economy.
Stephen Rose is a Research Professor at Georgetown University’s Center on Education and the Workforce. He is the author of Social Stratification in the U.S. and Rebound: Why America Will Emerge Stronger from the Financial Crisis.