Reporters apparently feel obligated to describe the economy as either good or bad. After years of calling it bad, some better-than-expected data from the last few months have caused them to switch to the good mode. In fact, there has been so much euphoria about the economy in recent months that the Republicans now want to take credit for it.
This is more than a bit over the top. The economy is doing better than it had been but is still far from the sort of economy that people should be celebrating.
To refresh memories, the economy essentially fell off a cliff in the second half of 2008 and the beginning of 2009 because of the financial crisis that followed the collapse of the housing bubble. The economy lost more than 8 million jobs from the 2007 employment peak until the trough in the fall of 2009. GDP fell by almost 4.5 percent.
Since the worst of the recession in 2009, the economy has been slowly growing and making up lost ground. Because of the slow pace of growth and the upward redistribution of income over this period, most people are still considerably worse off than before the recession began.
This can be seen most clearly with employment. If the same share of the population were employed today as before the downturn, the U.S. would have almost 5 million more jobs. The number of people employed part-time who would like full-time employment is still more than 2 million above prerecession levels, even though that number has fallen sharply over the last four years.
Furthermore, wages have been virtually flat throughout the recovery. After adjusting for inflation, the average hourly wage for all workers is unchanged over the last six years.
None of this should surprise. The basic story is a simple one: It is difficult to recover from a recession caused by the collapse of an asset bubble. The economy has had bad recessions before. In 1974 and ’75 the unemployment rate peaked at 9 percent. In 1981 and ’82 it peaked at 10.8 percent. In both cases the economy bounced back quickly from the downturn. In 1980 the economy was almost 19 percent larger than it was in 1973. In 1988 the economy was more than 28 percent larger than it was in 1981. By contrast, in 2014 the economy was just 8.1 percent larger than in 2007.
Furthermore, because of the prolonged weakness of the labor market, we have seen an unprecedented shift of income from wages to profits. As a result of the shift from wages to profits, coupled with slow growth, aggregate wages are 20 percent lower today than what had been projected for 2015 by the Congressional Budget Office in 2007, before the recession. It is difficult to see this story as one that merits much celebration.
The rate of economic and job growth picked up in 2014, but even at the pace we saw in 2014, it would take two full years to get back to full employment. This matters not only for the people who are unable to get jobs but also for those who already have jobs. They are not going to be able to secure wage increases until the labor market is considerably tighter than it is. As a result, the gains from growth are likely to continue to go largely to profits and high-end wage earners.
While the economy appears to be poised for modest progress, there is one clear threat on the horizon. There is much pressure on the Federal Reserve Board to raise interest rates, starting this year. While a Fed rate hike would not throw the economy into a recession, it would slow growth. This policy is hard to justify; there is no evidence of inflationary pressure anywhere, and there still is a huge amount of slack in the labor market.
If the Fed slows growth enough, the labor markets may never get tight enough to allow workers to get their share of the gains of growth. If that proves to be the case, then the story at the time of the State of the Union in 2016 will not be very different from the story today.
Dean Baker is a co-director of the Center for Economic and Policy Research and the author, most recently, of “The End of Loser Liberalism: Making Markets Progressive.”