According to recent Pew polls, the economy has been the hottest topic in the election season. Not only the presidential candidates but also commentators and researchers are debating whether the “Obama Recovery” is real. Some say claims of progress in economic development since the financial crisis is “peddling fiction”.
In my view, the progress of US economy is real, but several ghosts cast long shadows on its long-term growth.
The Republican candidate Donald Trump and anti-establishment groups exaggerate the bad sides of the economy, making use of the average citizens’ fears of a slowing economy and their wishes to have better lives. Their strategy works. Many Americans now say the “Obama Recovery” is illusory and give Republicans support.
If, in Trump’s words, claiming the US economy has made great progress is a kind of propaganda, being blind to the progress of the US economy is also propaganda for opponents of Obama’s policies. So admitting that the US economy is on the path to recovery, though recognizing its constraints, is simple honesty.
The data or index that opponents of President Obama use to support their opinions actually vary under changed conditions.
According to the newest Census Bureau report issued on Sept13, the poverty rate fell by 1.2 percentage points, the steepest decline since 1968. There were 43.1 million Americans in poverty on the year, 3.5 million fewer than in 2014. The share of Americans who lack health insurance continued a years-long decline, falling 1.3 percentage points, to 9.1 percent.
Middle class Americans and the poor shared the boost in economic welfare in 2015. The real median household income was $56,500 in 2015, up from $53,700 in 2014. That 5.2 percent increase was the largest, in percentage terms, recorded by the bureau since it began tracking median income statistics in the 1960s.
So the problem of a shrinking middle class may be illusory, because some statistics ignore the changing nature of the American household. Martin Feldstein, a professor at Harvard University, points out that from 1980 to 2010, the share of households consisting of just a single man or woman rose from 26% to 33%, while the share that contained married couples declined from 60% to 50%. With fewer people in a household, that same income goes much further than it otherwise would. What’s more, the traditional statistics of money income miss benefits and subtracted taxes. If these are calculated, the median household’s income rose by 45%. Adjusting for household size boosted this gain to 53%.
The so-called low labor force participation rate problem also needs to be reviewed structurally. Generally speaking, the labor force participation rate is decreasing. The rate in August 2016 is 62.8%, decreasing from its peak figure of 67.2% in January 2001. But if it is observed structurally, it would be easy to find a different scene. In terms of the labor age, the participation rate for those 25-54 years old is very high, 81.3%, a bit less than its peak figure of 84.1% in January 2001. People25 to 54 years old represent the biggest power of the US economy. The biggest decline in the participation rate is actually among those who are 16 to 19 years old, which has slipped to 35.8% in August 2016 from 51.7% in January 2001, pulling down the aggregated rate.
In addition, the updated job approval rating for President Obama is 51%, much higher than George W. Bush’s 30% at the same period. It makes no sense that more than half of Americans voted for President Obama in 2012 when their lives were turning worse. The reasonable explanation is they indeed benefit from the economy’s progress.
So we should accept the conclusion that the US economy is on the path to recovery. The gains of the US economy are fueled by forces including an improving job market, expanded health insurance, low inflation and rising wages, particularly for low-earning work crews who benefited from state and local initiatives to boost minimum wages.
But we should also admit there are risks in the long term. The three biggest challenges are:
First, the low labor productivity trend. Productivity grew at about 1.6 percent per year from the mid-1970s through the mid-’90s, then significantly accelerated between the mid‘’90s and the mid-2000s, to almost 3 percent annually. But it has plateaued at around less than 1 percent per year since 2004. Meanwhile, labor productivity in the nonfarm business sector is 0.6 percent. Although some say the slowing trend is illusory, because real output data have failed to capture the new and better products of the past decade, some serious research finds little evidence that the slowdown arises from growing mismeasurement of the gains from innovation in IT-related goods and services. Productivity is a key ingredient in determining future growth in wages, prices and overall economic output. The low productivity development trend will haunt the US economy’s long-term prospects.
Second, the Fed’s continuing unconventional monetary policy is bringing new problems. The Fed hasn’t take action in September, at least as of this writing, in order to avoid influencing the US presidential election in November. It is thus reasonable to predict the Fed will be still cautious in October. Thus, December will be the last chance for a 0-0.25 percent rate hiking. It means the unconventional monetary policy will have been implemented for 8 years, which the US has never experienced before. The Fed’s unconventional monetary boosts the US economy by giving it monetary stimulus shots, but actually, new malignant tumors are formed. The low interest rate policy allows consumers and financial institutes to invest more in the stock markets and take extra risks to produce higher profits, which create bubbles in the stock market and other asset markets. Not only that, the low interest rate reduces the cost of the government’s fiscal deficit policy -- the government feels no pressure to deal with its deficit. Such are the facts. The Congressional Budget Office is projecting a $534 billion deficit for the current fiscal year, a roughly 22% increase from a year earlier.
Third, the so-called dysfunction of the US establishment. Though the ongoing presidential election campaign brings some “chaos”, it also more openly exposes the problems besetting the US economy to Washington policymakers. The urgency to solve them is increasing. But it seems to be harder and harder for Washington to solve them. Political polarization has especially made it harder to build consensus on sensible economic policies that address key US weaknesses.
