A few days ago President Obama made what the press have been referring to as a major ‘gaffe’ when he said during an interview that “the private economy is doing fine.” Republicans pounced, painting the President as ‘out of touch’ and declaring the statement symptomatic of his inability to lead the nation out of its severe economic crisis. The administration couldn’t backtrack fast enough—within hours Obama himself was repudiating his own words—the private sector is ‘not fine’ he said later that same day.
Funny thing is, he was right in the first place—the private sector has been doing fine. Find this hard to believe? Over the past two years real private sector output has increased by about 5%, while private sector employment has increased by 3.5% even as unemployment has dropped by 2 percentage points to 8.2%. Industrial production has increased by 9%, corporate profits have climbed by 16% and the S&P 500 is up by 25%. These numbers aren’t great, or even good, but they can be reasonably classified as ‘fine’.
And yes, the biggest weakness in our economy today continues to stem from the contraction of the public sector, which has shaved .7% off of growth in the last two years even as government employment has shrunk by 4.4%.
It’s understandable that politicians want to tell us that our lives are less satisfactory than they could be—and that they hold the key to unlocking nirvana. Unfortunately, this rhetoric is coming from other voices as well. Paul Krugman, the Nobel Prize winning economist has written in his New York Times column that this is a ‘terrible’ economy, and that the United States is mired in a depression type episode.
Depression? Seriously? In the great depression unemployment hit 25%. Today it stands at 8% and falling. While that may be higher than we like, the average unemployment rate in the nation during the 1975 to 1985 era was 7.7%. No one refers to that period of time as a depression. And despite the decline in the labor force participation rate from 66% to 64%, its still higher today than it was then.
And what of the “lost” wealth? The Federal Reserve’s just released Survey of Consumer Finances shows that median household net worth declined by 40% from 2007 to 2010—to levels not seen since the early 1990s. Sounds like a depression type episode—until you understand that the important number here is not what happened in 2010, but rather what was happening in 2007 when the national asset bubble was at its peak. The wealth people thought they had in 2007 wasn’t really there. Our homes weren’t worth that much, nor were those AAA mortgage backed securities that so many investors were putting their money into, nor was commercial real estate, or the myriad of other assets that make up the asset base of American households. Feeling bad about that “lost” wealth is the mental equivalent of feeling bad about the passing of your invisible friend.
As for the drop in household net worth between 2007 and 2010 to levels not seen since the 1990’s—bear in mind that the financial recovery had not fully taken hold in 2010. As already noted the equity markets, bond markets, and even the housing market has recovered some since then, likely pushing current levels of wealth towards more appropriate levels.
Of course the consumer is suffering—right? After all, many ‘experts’ keep telling us that the problem in the United States today is a lack of consumer spending. This in turn is often referred to as a balance sheet downturn, where the deleveraging of U.S. households is the core of the problem. Do these ‘experts’ ever bother looking at statistics? Consumer spending today makes up 71% of U.S. GDP, higher than it was in 2007 when it was 70%, and higher than it was in 1997 when it was only 67%. Moreover, savings rates are still far too low. And while all that consumer debt is a problem in some ways, the major decline in interest rates over the last decade has meant that the burden of carrying that debt as a percent of household income has dropped to levels not seen since 1992.
I honestly believe that these egregious comparisons to 2007, the height of the asset bubble, sit at the heart of much of the national self-pity that we seem to be indulging in. There is little doubt that the 2008-2009 recession was a bad downturn, and even more importantly, unlike past deep downturns, this time there was no post-recession bounce. Instead, the U.S. economy has grown at a sub-par rate since the recession ended, with the ‘fine’ growth in the private sector being offset by the losses on the public side.
But even here, we have to maintain a sense of context. According to 2011 statistics from the World Factbook, the United States still ranked 12th in the world in per capita output after adjusting for differences in purchasing power. As for the 11 nations above us, they include Bermuda, Qatar, Singapore and even the Falkland Islands—no wonder the Argentinians want those Islands back so badly—none of which can be compared to the massive and diverse U.S. economy. If we limit the list to the top 30 nations in terms of size—a group which represents 85% of the world economy—who sits at the top? None other than the United States. And even this isn’t good enough, since we continue to consume more than we produce—as evidenced by the enormous trade deficit we continue to run (currently at 4% of national output).
For the rest of the world, watching us go through these spasms of self-pity the reaction must lie somewhere between bemusement and anger. For me personally, I find the entire episode disheartening. Things are not great in the U.S. economy and many individual households continue to struggle. But then again, we really should have expected as much. The U.S. economy has seen two massive asset bubbles in the last 15 years, leaving it misaligned on numerous levels. Add to this the enduring issues that come from the integration of information technology, which is having a massive long-run impact on low-skilled workers, and it is easy to understand why today’s slow growth rates will continue for a while as we work through this period of transition—very much like the nation experienced in the late 1970s and early 1980s.
Also, for me, the first step in dealing with all this is to truly recognize that there is no one thing or one person to blame, nor does any politician or political party have a quick solution for fixing these problems. The second thing is to take a step back from the trends and understand that while things may not be as great as we’d like, the large majority of us still enjoy the best standard of living on the planet. This means that we do have the resources to help those who are suffering.