Why a great economy doesn’t feel so great
John Williams, president of the Federal Reserve Bank of New York, describes the economy “strong.” CNN says it’s “soaring.” Vice calls it “great,” and the Washington Post labels it “good.” I myself have referred to it as a “boom.”
But others wonder how this strong, great economy can be soaring when wages aren’t rising very quickly.
Meanwhile, my Bloomberg Opinion colleague Stephen Gandel notes that most Americans’ wealth hasn’t gone up during this boom. Most middle-class Americans keep their wealth in their houses, while the rich tend to put more in the stock market. But stocks have seen the bulk of the gains since President Donald Trump took office.
Even real estate isn’t doing so well for ordinary Americans these days, since the foreclosures of the housing bust and tighter lending standards have shifted housing wealth from the middle class to the rich.
And that’s just what’s happening recently. Over the longer term, Americans have been suffering from steadily falling mobility. Only about half of 30-yearolds now make more money than their parents did at a similar age.
How can things be booming when average Americans are treading water? The answer has to do with the way economists think about the economy. In both their formal models and their mental ones, economic performance is divided into two very different components – macro and micro. That divide has seeped into popular language and punditry, occasionally causing unnecessary confusion.
In simple terms, the basic story economists tell goes something like this: Over the long run, economic prosperity is determined by the march of technology and the quality of human institutions. These combine to drive the growth in productivity, which measures how much output the economy can create for a given set of inputs. They also determine how what the economy produces gets distributed – technology can reward some skills and devalue others, while the government can redistribute wealth and privilege certain occupations over others.
Various subfields of economics deal with the gritty details of things that are thought to affect productivity – taxes, public goods, economic development, education, health, research and development, financial markets, etc. Increasingly, these fields – which comprise a majority of what economists study – are grouped together under the name of microeconomics.
In the short term, economists believe, the business cycle can cause fluctuations around the longterm trend. When a financial crisis, tight monetary policy or some other shock causes aggregate demand for goods and services to fall, businesses stop investing and lay off workers. The ensuing recession causes a mismatch – offices and factories sit empty, while workers who could fill those offices and factories stay at home playing video games. The downturn doesn’t last forever, but in the most severe situations it can persist for as long as a decade. The branch of economics which deals with this sort of temporary phenomenon is called macroeconomics.
Since the Great Depression, economists have gotten used to referring to macroeconomic conditions as “the economy.” Recessions and booms dominate the public discussion. When a large share of workforce is employed, people say “the economy” is good, even if productivity is slow, mobility is stagnant and inequality is increasing.
Economists and commentators are calling the economy “great” because that’s what they’re used to doing. They just mean that most people have jobs. This standard terminology ignores the question of how much those jobs pay, or which classes of society reap the gains.
Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.