Why a great econ­omy doesn’t feel so great

The Fresno Bee - - Opinion - BY NOAH SMITH

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.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.