Wednesday, December 30, 2015

The U.S. Economy in the 21st Century: A Disastrous Performance

I’ve grown used to hearing Silicon Valley venture capitalists—and some tech CEOs—talk about how U.S. economic statistics don’t reflect the benefits the technology industry delivers to the U.S. economy.  It’s true that the tech industry creates jobs, income, and wealth for millions of Americans. Yet at the same time, the rise of tech has coincided with terrible underperformance of the U.S. economy as a whole.  So when I saw a senior executive at New York financial firm BlackRock joining the chorus trying to deny U.S. macroeconomic reality, I decided to gather the relevant statistics in one place to demonstrate just how bad U.S. economic performance is.

Here’s the background: since 2000, the best economic measure of Americans’ wellbeing, U.S. median household income, has stagnated. Household income determines the goods and services a family can afford to buy; it’s important to look at the entire household, since so many more women have entered the labor force over the last 40 years; finally median household income is a better measure than average income because the latter is distorted by the very high incomes of a small number of individuals.  Median income tells us how the household at the absolute middle of the broad U.S. income distribution is doing.

So how is that household doing? Figure 1 below shows how it’s doing: not good at all. After six years of economic recovery following the 2008-9 recession, median household income (in “real” terms, i.e. adjusted for inflation) is still 1.2% below its level 15 years ago, in 2000. For those of us in Silicon Valley, this is surprising. In the last 15 years, we’ve seen the rise of the Internet, the smartphone (an item owned by 58% of the U.S. population, according to this Google study), disruptive technologies that have made music and many sources of information easily available and often free of charge, as well as deep price cuts in popular consumer goods and services like computers or car services.  And yet, the average household is worse off than it was 15 years ago.

Figure 1: U.S. Real Median Income in 2015 is still below the 2000 level.

How bad is that 1.2% decline? Well, when we put it in historical context, we see it’s not just bad. It’s awful. In fact it’s unprecedented in peacetime history. Using data from the great economic historian Angus Maddison, I’ve calculated the ten-year and 15-year change in GDP per capita for every year in the U.S. from 1880 to 2003.  You can see that for the majority of this period, with the exception of the awful years of the Great Depression (1930-1939) and the upward boost of World War II production, our 10-year increase in household income tended to be around 20%-30%, and our 15-year increase was higher. In fact, for most of the 1950s, the 15-year increase was well over 40%, and for an incredible run of years from 1961 to 2002, that increase stayed close to 30%, often higher.

Those 20%-40% long-term income growth rates are the American Dream in statistical form. As a baby boomer, I grew up hearing stories from my parents about the first refrigerator their parents owned, the first time somebody on the street had a telephone inside their apartment (instead of using the one at the candy store), the first family car, the first (black and white) television, the first washing machine, etc. The list went on and on until as kids, our eyes glazed over every time we heard the stories. We knew that life was enormously better for us than our parents, and our parents knew that (except for the Depression years), life for them was enormously better than it was for their parents.

That’s not true any more. Our kids don’t face much better economic opportunity than we did as youngsters.  It’s a depressing thought.

Figure 2: Long-Term Growth Rates in U.S. GDP Per Capita, 1880-2003. Rates were above 20% for most of the 20th century.  Source: Angus Maddison.

Many tech enthusiasts deny this reality. Is it because they themselves are doing well? Is it a sort of San Francisco myopia? How can the nation be struggling when people are paying $3700 a month to rent a one-bedroom apartment in San Francisco?  Some try to argue that the economic statistics are wrong.  You can read some of their arguments in this post by BlackRock Chief Investment Officer Rick Rieder.  They argue that today’s technological achievements are so great that they aren’t captured in the statistics. Today’s computers are thousands of times more powerful than the PCs we bought in the 1980s, and the prices are not much different. Shouldn’t that translate into enormous economic improvements? Well, unfortunately it hasn’t. If our people and our companies are more efficient and productive than they were 40 years ago, then GDP per person and corporate profits ought to be not only higher, but rising steadily, and the median income statistics shows they are not.  Moreover, if you take the historical perspective, Figure 2 shows that previous technological revolutions did actually produce the economic boom that the tech enthusiasts would like to believe exists today. In 1908, Henry Ford launched the Model T Ford and, frankly, the U.S. economy never looked back.  I would call it the most important economic event in the U.S. in the 20th century. Economic growth soared as cheap, mass produced cars led to a boom in the production of cars, steel, rubber, electronics, roads, suburban housing, and a hundred other products. It’s estimated that at the peak of the U.S. auto industry, one in six Americans worked in an auto-related industry. And of course, their pay trended upwards because productivity tended to rise steadily as all those industries got more efficient.  

Some readers might protest: yes, but today, kids are leaving college with computer science degrees and going to work in tech companies at six-figure starting salaries. The problem is that for every college grad doing that, there are multiple workers leaving skilled or semi-skilled jobs where they were earning some $20-$40 an hour, and either going to work in a service sector job for half the pay, or withdrawing from the labor force altogether. Facebook is one of the most successful companies in the world with revenue approaching $20 billion a year, and yet it employs just 11,000 people.  Pew estimates that just 3% of the nation’s workforce is in the tech industry. Tech is just not big enough to do for the U.S. economy what autos (and before them, railroads) did in a previous age.

The tech enthusiasts have another argument, which is that life is not just about GDP. Modern technology is making people happier. They have a point. One could argue that dating apps are making people happier by reducing the number of lonely “singletons.” Economists have responded to this idea, by trying to construct a “Happiness” index. It uses opinion polling to try to gauge the slippery subject of people’s happiness in various countries. You can check out the 2013 edition of the Happiness study here. It was produced under UN auspices, and the authors, I’m pleased to say, include one of my former professors, Richard Layard, and one of my former economics classmates, Jeff Sachs. However, get ready for the bombshell: the study found that happiness in the U.S. actually declined between 2007 (which happens to be the year the iPhone was introduced) and 2013. 

The stagnation in median household income explains a lot of things. For example, the two most surprisingly successful presidential candidates this year have been Donald Trump on the Republican side, and Bernie Sanders on the Democratic. Both are doing well because they are appealing to the simmering nationwide dissatisfaction with economic underperformance felt by millions of Americans. Trump blames the problem on immigrants, while Sanders blames corporate and Wall Street “robber barons.” There are elements of truth in what both of them say: immigrants do make it easier for giant retailers to staff their big box stores while paying just $7.50 an hour; and the top 1% are taking a larger part of the pie than at any time in American history (and as Robert Reich points out, a far larger part than they did in the halcyon days of American economic growth, 1945-1970).

But both politicians are attacking the symptoms, not the core problem, which is that American economic growth has fallen off a cliff. The Fed, the subprime mortgage disaster, or overpaid CEOs are all trivial factors when set against the collapse in economic growth. No politician has a program that addresses this issue. What are the causes of the underperformance, and what would be a solution? That’s the subject of a future blog.

Happy New Year J

Jeff Ferry
December 2015

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