Sunday, January 03, 2010

The US economy since 2000 - On balance, and for most Americans, a lost decade

Neil Irwin, writing in yesterday's Washington Post, nicely sums up the main features and legacies of what we can call, for shorthand, the Bush/Cheney economy. This graph is a good place to start.

Is that pathetic overall result for the past decade caused entirely by the economic crash of 2008-2009? Not really. Follow the red line (for the 2000s) at the bottom of the next graph (also available here) and compare that with the patterns for previous decades.

To be sure, it would be too simple to blame the bad news entirely on the policies of the Bush II administration and the pre-2007 Republican Congress, though they certainly played a big role. Many of the underlying causes go back further and deeper. They have to do with (1) the culmination of decades-term trends that have yet to be adequately, or even seriously, addressed, combined with (2) the accumulated long-term consequences of decades of disastrous policies pushed primarily by Republicans, but also by Democrats caught up in some of the same ideological illusions (and/or serving some of the same economic interests).

Irwin's piece is worth reading in full, but here are some highlights:
Aughts were a lost decade for U.S. economy, workers

For most of the past 70 years, the U.S. economy has grown at a steady clip, generating perpetually higher incomes and wealth for American households. But since 2000, the story is starkly different. [....]

There has been zero net job creation since December 1999. No previous decade going back to the 1940s had job growth of less than 20 percent. Economic output rose at its slowest rate of any decade since the 1930s as well.

Middle-income households made less in 2008, when adjusted for inflation, than they did in 1999 -- and the number is sure to have declined further during a difficult 2009. The Aughts were the first decade of falling median incomes since figures were first compiled in the 1960s.

And the net worth of American households -- the value of their houses, retirement funds and other assets minus debts -- has also declined when adjusted for inflation, compared with sharp gains in every previous decade since data were initially collected in the 1950s.

"This was the first business cycle where a working-age household ended up worse at the end of it than the beginning, and this in spite of substantial growth in productivity, which should have been able to improve everyone's well-being," said Lawrence Mishel, president of the Economic Policy Institute, a liberal think tank. [....]

The miserable economic track record is, in part, a quirk of timing. The 1990s ended near the top of a stock market and investment bubble. [....] The decade finished near the trough of a severe recession. [....] But beyond these dramatic ups and downs lies an even more sobering reality: long-term economic stagnation. [....]
=> What happened? Irwin's analysis focuses on one angle that is definitely important, though not the whole story:
The first decade of the new century was an experiment in what happens when an economy comes to rely heavily on borrowed money.
This growing tendency to go heavily into the red--not just by individual households, but also in terms of international trade balances, US government deficits, risky business and financial practices, etc.--goes back at least to the 1980s, but in the recent past it accelerated even further (And, of course, Clinton-era efforts to bring down federal deficits were abandoned when the Republicans got the White House back in 2000 and decided it was time to throw a party).

The housing bubble was the most conspicuous symptom.
The trillions of dollars that poured into housing investment and consumer spending in the first part of the decade distorted economic activity.
And furthermore:
The housing bubble both caused, and was enabled by, a boom in indebtedness. Total household debt rose 117 percent from 1999 to its peak in early 2008, according to Federal Reserve data, as Americans borrowed to buy ever more expensive homes and to support consumption more generally.
However--and this is a point too often overlooked (not least by right-wing propagandists who would like to pretend that the economic crash of 2008-2009 was entirely caused by Fannie Mae, Freddy Mac, and the Community Reinvestment Act)--all that was just one part of a bigger picture.
Consumers weren't the only ones. The same turn to debt played out in commercial real estate and at financial firms. It resulted in a corporate buyout boom that often produced little of lasting value. It is a truism of finance that for businesses, relying heavily on borrowed money makes the good times better but the bad times far worse. The same thing, as it turns out, could be said of the nation as a whole. [....]

"A big part of what happened this decade was that people engaged in excessively risky behavior without realizing the risks associated," said Karen Dynan, co-director of economic studies at the Brookings Institution. "It's true not just among consumers but among regulators, financial institutions, lenders, everyone."

The experiment has ended badly. While the stock market bubble that popped in 2000 caused only a mild recession, the housing and credit bubble has had a much greater punch -- driving the unemployment rate to a high, so far, of 10.2 percent, compared with a peak of 6.3 percent following the last such downturn. [....]
--Jeff Weintraub