For instance, more than 6.7 million Americans have lost their jobs from the beginning of the recession through the end of July. The Bureau of Labor Statistics projects the number of unemployed will jump north of 7 million when job loss for August is tallied. Overall, the nation’s unemployment rate stands at 9.4 percent, which translates to about 14.5 million Americans out of work, 5 million of which on a “long-term basis” — meaning they’ve been jobless for more than six months. Factor in other brutal stats on basics like mortgage foreclosures, and the economic misery index has reached an all-time high for many.
This creates enormous pressure for policy-makers to do something about these problems, right now. Certainly, government ought to take appropriate steps to help families weather this economic storm. Proven initiatives like extending unemployment insurance benefits, for instance, would be effective, while new approaches for helping unemployed Americans stay in their homes and maintain health-care coverage would be welcome. That said, focusing solely on the economic horrors that have resulted from this recession won’t ultimately fix the real problem in the U.S. economy. That’s because high unemployment, mortgage foreclosures and the other recession-based uglies are merely symptoms of our nation’s biggest economic flaw, not its cause.
To be clear, I’m not talking about the immediate causes of this recession. We all know the subprime mortgage industry collapsed, leading to a crash in major financial markets that for too long were creating too many risky, designer investments that got sold and resold with little to no equity supporting them. When that house of cards collapsed, it brought the rest of us down with it. But even if the Obama administration eliminates the worst abuses in mortgage, financial and capital markets through appropriate regulation, the fundamental flaw I’m concerned about will remain in the American economy.
See, the real long-term problem with the U.S. economy isn’t something sexy or arcane like derivatives, but rather basic and structural: Think wages — specifically the wages earned by the 80 percent of working Americans who aren’t management. The U.S. economy depends, more than anything else, on their ability to purchase stuff. In fact, consumer spending is two-thirds of the U.S. economy. Of course, to spend money, workers have to actually earn money. There’s the rub. Most working Americans don’t earn adequate wages, especially when wage growth is compared to productivity growth over time.
The promise of the American dream is pretty simple. If you work hard, you’ll be rewarded. Your income will grow, and you’ll be able to afford putting a car or two in the garage and a kid or two through college. For a while, that promise was kept. According to the Economic Policy Institute, from the end of World War II until the late 1970s, the real, inflation-adjusted income growth for most U.S. workers doubled, which seems fair, since productivity also doubled over this period. Beginning with the late 1970s and continuing through 2008, however, all that changed. Sure, worker productivity continued to grow impressively — 70 percent during this period — but real wages didn’t, increasing just 7 percent over that time. That’s an average real wage increase of just two-hundredths of one percent per year, for 30 years, for most workers. Woo hoo!
This trend worsened during the Bush administration. From 2000 through 2008, worker productivity increased by a whopping 23.6 percent. Meanwhile, wages barely kept pace with inflation for 80 percent of America’s workers. In fact, purchasing power declined for many, as real median family income for working-aged households (i.e., headed by someone under 65 years old) was $2,000 less in 2008 than when George W. Bush took office. Not surprisingly then, wages also declined as a percentage of the nation’s GDP during Bush’s administration, from 49.2 percent of GDP in 2000 to just 45.9 percent in 2008. If instead of declining, wages as a percentage of GDP had held constant at 2000 levels, America’s working families would have earned $470 billion more in calendar year 2008.
Now there’s a stimulus that’d generate lots more consumer spending. Also, think of the credit card debt and mortgage foreclosures that could have been averted if productive American workers were simply paid a fair wage for their work. Yes, it makes sense to implement policies that will help people get through the worst of this recession. Long-term, however, the U.S. economy will continue to struggle unless national labor policy encourages businesses to begin paying workers higher wages that better reflect their productivity.
Ralph Martire is executive director of the Center for Tax and Budget Accountability, a bipartisan fiscal policy think tank.