The economic mess

Every–bored-to-tears–schoolboy knows who propounded the idea of a “social contract”: Thomas Hobbes and John Locke.  The idea of a social contract on the distribution of income has formed one of the pillars of “neo-capitalism” since 1945.  However, that basic idea has witnessed several successive versions.  From 1945 to the Reagan Administration in the 1980s, the US combined high tax rates on the wealthy with the channeling of the gains in productivity to employees.  Eventually, business people pushed back against what they saw an an unfair deal.  A new social contract emerged in which much higher incomes for the wealthy were accepted so long as the real incomes for the middle class continued to rise.  (All this is just my opinion.  In all likelihood, many of my historian friends would rain-down good-humored abuse on this interpretation.)  The financial crisis and the “Great Recession” then ruptured this second version of the social contract.

In 2007-2008 we had the financial crisis and the “Great Recession.”  In 2009 we started back up the road to prosperity.  American Gross Domestic Product (GDP, OK, cue Mort Sahl here) is up 6.7% over 2007.  Per-capita disposable income rose 4.2% between June 2009 and June 2014.  Well, some of us started back toward prosperity, but not all of us did.  In June 2009 the median family income was $55,589; in June 2014 it was $53,891 (in inflation-adjusted dollars).  That’s a 3.1% decline.

How can that be?  Well, the stock market is doing very well.  If you’re the kind of person who puts their  savings  into Vanguard accounts, then your the kind of person who probably has profited from the recovery.  (On the other hand, you’re also the kind of person who took a bath in the recession.  Not that the people at the New York Times give a rip about your experience.)  If you’re the kind of person who depends on wages or salary and your home is your chief investment, there is good reason to feel like the “recovery” is a joke.  (Like a bucket of water propped on top of a partly-open door.  “Hey, can you come in here for a minute?”)  Worse still, the 1999 peak in real household income was a little higher than the 2007 (pre-recession) peak in income.  Five years into the “recovery” and we aren’t even back to the 2007 level and the 2007 level wasn’t as high as the 1999 level.  In sum, we’ve actually had fifteen years of things not working right, rather than five or seven years of things not working right.  There’s probably something in the Bible about this.

One great challenge of the day is to figure out a new version of the social contract.  There has to be a way of achieving broadly-shared economic growth.  There isn’t much political consensus about what to do.  George W. Bush and Barack Obama, Republicans and Democrats all had or have high disapproval levels in public opinion polls.  A big chunk of voters seem to have swung from supporting Obama and the Democrats in 2008 to supporting the Tea Party faction of Republicans in 2010.  The 2014 mid-terms loom next month with no certain outcome.

Saying that there is no political consensus on action isn’t quite the same as saying that professional economists couldn’t come up with some solutions.  It’s just that neither the right or the left seems much interested in listening to what they have to say.  The flight from Keynesian solutions to the recession actually was widely shared.  It is inexplicable in rational terms, especially by Democrats who were going to be left holding the bag in future elections.  Yet it happened.  Probably the same goes for constructive policies aimed at building a better American future.

Paul Krugman, “How to Get it Wrong,” NYT, 15 September 2014.

Neil Irwin, “A Crisis of Faith in the Global Elite,” NYT, September 2014.

Neil Irwin, “Why the Middle Class Isn’t Buying the Talk About a Strong Recovery,” NYT, 22 August 2014.

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6 thoughts on “The economic mess

  1. I enjoyed the post. The comparison between the 1999 levels and 2007 levels were something that I didn’t know about. I think one problem is that the economic environment is hostile toward businesses. State and federal levels keep piling on so many fees that business owners have problems staying in business, owners don’t have the cash to raise their employees’ wages, and those wishing to enter the marketplace with a new business (thus creating jobs) encounter too many obstacles to make the venture profitable. But, that’s just my view.

  2. I don’t disagree. There was an interesting panel of opinions in the Wall Street Journal a little while ago. Essentially Republican ideas for reform to promote the economy. However, NOT either mainstream politicians or Tea Party. Just some demonstrably smart people. An assault on excessive regulation and an effort to improve human capital were the common themes. Both of those make sense to me, at least as abstract concepts. Need a lot of fleshing-out. What I suspect that we’ll get in the next presidential election is “The 1 percent!” versus “Secure the border!” Or some equivalent distraction depending on what else is on the television by 2016.

    • Ahh the “1 percent” mantra. Don’t forget the “They need to pay their fair share” rhetoric. You’ve got to love the emptiness of that statement. Who is “they?” What is “fair?” Eh, who cares? Just keep shouting and touting it to get votes.

  3. Ah, a right-wing nut. Like me. No, you can’t get anyone to state what would be a “fair share.” They just want more. On the other hand, the Republicans have answered the Democratic mantra of “Tax-Spend-Elect” with their own of “Tax cut-Spend-Elect.” Well, I’ve got my own: “A plague on both your houses.”

    • Lol, I’m not sure that I’m a “right-wing nut.” I’m more of a my-professors-forced-me-to-define-my-terms-so-you-should-have-to-also kind of gal. I’m also more into logic than anything. How are we to know what’s “fair” if no one ever defines it? Why is no one defining it? Who does it benefit that the term and mantra are so nebulous? Both sides of the political spectrum fight for power simply to have power (and the money that comes with it), and I feel like the majority of both sides have abandoned the people in favor of their own selfish endeavors. Then again, what did I expect? Power corrupts.

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