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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