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Why the US economy is worse than it looks
MUCH has been made lately of the hot economy, a narrative driven largely by a long run of strong jobs numbers. But this enthusiastic story line is ignoring a few disturbing structural problems that suggest that the economy is not as strong as the numbers suggest.
Under the hood, problems persist, including earnings below what families need to get by, stark inequalities in wealth and income, an increasingly jittery stock market, an affordable housing shortage, damaged fiscal accounts and slower growth on the horizon.
Wages trend is up but still too low: The tight labour market is no doubt lifting workers' wages, particularly at the bottom of the wage scale, as less-advantaged workers see their bargaining position improved. However, a few good years of rising wages doesn't make up for the decades of real wage stagnation faced by many middle- and low-wage workers. The result is that for many working families, their paycheques fail to meet their basic needs.
Consider a single parent with a couple of kids who is earning the 20th-percentile wage (20 per cent earn less; 80 per cent earn more) and whose pay could rise to US$13 per hour by the end of this year, or about US$26,000 per year, pre-tax. Subtracting payroll taxes and adding tax credits for working parents could get her up to about US$30,000.
That clears the poverty line, but it doesn't pay for decent housing, childcare, healthcare and transportation, at least not in most cities. Family budget calculators show that childcare for two kids costs about US$11,000 per year in Ohio, and more than twice that in New York. Add housing and healthcare costs, and even middle-wage earners with children have trouble squaring their budgets with their salaries.
Economic insecurity: This too-tight breathing room between what many families earn and what it costs them to live has created a widespread sense of economic insecurity, which shows up clearly in recent analysis of economic well-being by the Federal Reserve.
A fifth of white households and a third of black and Hispanic households grade their financial conditions "just getting by" or worse. And just under half of rural households grade their local economies to be "only fair" or "poor". The Fed's survey also looks at the share of adults who "would have difficulty handling an emergency expense as small as US$400".
They find that 39 per cent of adults couldn't cover an emergency expense of that amount with cash, savings or a credit-card charge that they could pay off quickly. For African American adults, that share is 60 per cent. In other words, well over half of black adults are highly vulnerable to even a relatively mild economic hit. (Economist Michael Strain is critical of this Fed data, but we think it's telling us something important.)
Though down from the years coming out of the crisis, these numbers are largely unchanged from 2017, suggesting that communities all across the country, and especially communities of colour, continue to face entrenched barriers to getting ahead even in a hot national labour market.
Surging inequality: The situation looks very different at the high end of the economic scale. Over the past decade, the nation's highest earners (the 95th percentile) saw their wages grow at almost four times the rate of those whose earnings put them in the middle of the pack (the 50th percentile). Even more remarkably, the top 1 per cent of households now hold 31 per cent of the nation's wealth (assets minus liabilities), or US$30 trillion; the entire bottom half of the nation's households hold only about 1 per cent, or US$1 trillion.
That comes to US$23 million per household for the top 1 per cent and US$18,000 in net worth per household for the bottom half. And the Trump tax cut is exacerbating these divisions, with a recent analysis by the Institute on Taxation and Economic Policy showing that in 2020, more than half the tax cut will go to the top 5 per cent of households, with only 14 per cent going to the bottom 60 per cent.
Shortage of affordable housing: Compounding these challenges is a deepening crisis in affordable housing for working families. Supply constraints are making it increasingly hard to find an affordable place to live anywhere near economic opportunity, forcing more and more families to choose between forgoing a good job and paying unaffordable rent.
The percentage of housing stock available for rent or sale has fallen sharply since the housing crash and is now as low as it has been in more than 30 years. And it is set to get worse, possibly much worse. The current annual supply of new housing units is running an estimated 300,000 below the trend for new housing demand.
The increasing shortfall of housing supply is pushing up house prices and rents, particularly in areas that offer better jobs, education and health care, as demand increasingly vastly outstrips supply. This not only holds back a large number of working families; it also holds back the entire economy.
Tax stimulus proves expensive and fleeting: The Trump administration claimed that the tax cuts would pay for themselves by jump-starting stronger and sustainable growth, but it has not turned out that way. In the absence of any meaningful boost in investment, revenue has fallen to levels far below where it should be in an economy closing in on full capacity.
And in the absence of any spending cuts to offset this loss in revenue, the tax cuts are putting us in a hole that will make it harder to address the wide range of economic and social challenges that will ultimately demand greater public investment.
The cuts contributed to faster economic growth in 2018 and 2019, adding nearly a point to gross domestic product (GDP) growth and pushing the unemployment rate below 4 per cent. However, given the failure of the cut to generate significant additional investment, it has offered more of a sugar high than any meaningful improvement in the economy. Virtually every economic forecast, except those of the White House, projects its effect to fade this year, with GDP growth falling back to about 2 per cent next year.
Worrisome signs from the stock market: While only about a third of households own stocks of any consequence, the stock market's performance can be a good indication of investors' expectations about future growth and profitability. Investors tend to buy stocks when they believe businesses will be able to sell more of what they produce at a higher price, and they tend to sell them when they fear the reverse, making market-wide movements in the stock market a useful metric for investor forecasting the health of the economy. With that in mind, investors appear to be increasingly wary of what is to come. While the market stands roughly where it was when Mr Trump signed his tax cut into law 18 months ago, it has swung wildly in recent weeks, driven in large part by concern over his escalating trade war.
The dynamics we've described - low wages, income and wealth inequality, a shortage of affordable housing, increasingly nervous investors - all create headwinds for growth. The momentum from the deficit-financed tax cut has thus far proved strong enough to overcome them, but that momentum is slowing, raising the prospect of a stalled economy still struggling with a host of deep structural problems. WP
- Jared Bernstein, a former chief economist to Vice-President Joe Biden, is a senior fellow at the Center on Budget and Policy Priorities and author of The Reconnection Agenda: Reuniting Growth and Prosperity. James Parrott is non-resident fellow at the Urban Institute and owner of Falling Creek Advisors. Mark Zandi is chief economist of Moody's Analytics.