Jonathan Chait

The Real Economic Question

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Businessweek has a good rundown of the growing strength of the economy:

[T]he judgment of the financial indexes has turned resoundingly positive. The Standard & Poor's 500-stock index is up more than 74% from its recessionary low in March 2009. Corporate bonds have been rallying for a year. Commodity prices have surged. International currency markets have been bullish on the dollar for months, raising it by almost 10% since Nov. 25 against a basket of six major currencies. Housing prices have stabilized. Mortgage rates are low. "We've had a phenomenal run in asset classes across the board," says Dan Greenhaus, chief economic strategist for Miller Tabak + Co., an institutional trading firm in New York. "If Obama was a Republican, we would hear a never-ending drumbeat of news stories about markets voting in favor of the President."

Little more than a year ago, financial markets were in turmoil, major auto companies were on the verge of collapse and economists such as Paul Krugman were worried about the U.S. slumbering through a Japan-like Lost Decade. While no one would claim that all the pain is past or the danger gone, the economy is growing again, jumping to a 5.6% annualized growth rate in the fourth quarter of 2009 as businesses finally restocked their inventories. The consensus view now calls for 3% growth this year, significantly higher than the 2.1 % estimate for 2010 that economists surveyed by Bloomberg News saw coming when Obama first moved into the Oval Office. The U.S. manufacturing sector has expanded for eight straight months, the Business Roundtable's measure of CEO optimism reached its highest level since early 2006, and in March the economy added 162,000 jobsmore than it had during any month in the past three years. "There is more business confidence out there," says Boeing (BA) CEO Jim McNerney. "This Administration deserves significant credit."

I think the interesting question right now is not whether the economy is due for strong growth, but whether and when that growth will create rising living standards. The recovery from the 1991 recession took years before it began producing wage gains. The recovery from the 2001 recession basically never produced real wage gains -- essentially all the gains went into corporate profits and gains for the very rich. Moreover, there's very little consensus as to why that happened. So we have no idea to what extent growth and higher productivity will create conditions that people have any reason to recognize as real growth.

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