Flickr/Kyle Wegner. Some rights reserved.
In recent months, not a single day has gone by without reports of America’s impressive bounce-back and strong GDP growth. Financial experts and TV hosts have been very eager to emphasize surging stock market indexes and what good this brings to the world’s largest economy. Talk show guests have been underlining the strength of US economic crisis management, while pointing their fingers at Europeans who are just muddling through. More often than not, leading European voices appeared to agree.
Who would blame them? The US annualized GDP growth has reached 2.8% in this year’s third quarter – quite impressive when compared with the comatose 0.1% registered by the Eurozone. On the market front, Twitter’s IPO in November was a success even to the casual observer: at the end of the first trading day the company's valuation peaked at $30 billion. Buyers of its stocks could cash as much as 70% in profit if they sold just 24 hours later. So, if the economy is growing and the stock market is booming, surely the recovery must be unquestionably here!
Or is it? What does recovery stand for? Should we cheer GDP growth and stock market performance, or should we rather look at household earnings, job quality and levels of poverty? What does really count, abstract statistics or people's incomes, jobs?
To dispel confusion, let us dig into this question a bit more by looking at two distinct groups of measurements that economists - and increasingly often politicians - invoke to describe movements within an economy.
On the one hand, we have the macro or headline indicators, such as GDP growth, average incomes, overall unemployment levels and stock market indexes. While these remain useful to describe things in general, they are too abstract to trace more profound social and economic realities and are thus, well, slightly irrelevant to judge whether a real recovery is taking place.
Take GDP growth for example. It is difficult to imagine recovery without GDP expansion, but it is equally difficult to deduce from a simple GDP growth figure alone where recovery is coming from and how sustainable it is, if at all. We encounter a similar problem when looking at the overall level of unemployment, which fails to tell us what kinds of jobs are being created and what kind of earnings they generate. In the case of stock market performance, we are stuck with more of the same. While growth in index values might reveal a return of confidence among the investors, it does not tell us why this is the case (bubbles, anyone?), who is holding the instruments that are growing in value and how growth will be reflected in the real economy or in average Joe’s savings and investments.
On the other hand, we have a series of more micro indicators that trace income changes across various segments of the population, type of jobs being created, levels of poverty, or shifts in wealth distribution. These - and numerous similar - indicators help us to assess the recovery better, since they unveil the effects of economic movements on people’s lives. In short, without looking at the micro side of the story, we risk leaving aside unwanted effects of the recovery and even advocating policy solutions that ultimately do more harm than good.
Of course, the choice of indicators reveals to a large extent the ideological stand we adopt. If we over-emphasize the generic measurements, we fail to show care for underlying movements that might in fact be detrimental for those most in need. We might thus fall into the trap of being obsessed with greater GDP growth figures, while neglecting the fact that incomes for the vast majority of the population are actually decreasing. However, if we leave GDP growth aside and look at whether the earnings of the lower-income households have increased, we might learn more. In fact, we might actually learn whether policy choices are delivering real results for the vast majority of the population, or just for the selected few. The choice of what we observe will largely define what we see.
Who has really recovered?
Let us now look at two quite distinct narratives of recovery in the US, starting with the macro story. By the end of 2011, the US GDP had already recovered to its pre-crisis size from 2007. Similarly, the three main stock market indexes (NASDAQ-Composite, S&P 500, Dow Jones Industrial) have also recovered the lost ground. In fact, by the end of 2012 all three had risen to levels higher than in 2007. They have not stopped climbing since then. NASDAQ is currently hovering almost 50% higher than six years ago, S&P 500 around 20% and Dow Jones 18%. Exports and imports have also recovered and surpassed the levels from 2007 - and so have corporate profits. Last year, the financial sector registered 50% higher profits than in 2007, while profits of the non-financial sectors were up by 20%. Looking at these figures alone, one can hardly disagree with those observers claiming that the recovery in the US is in full swing.
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However, nothing could be further from the truth. True, GDP had climbed back to its 2007 level already two years ago, but it did so with eight million less people employed. More importantly, the fact that the level of unemployment has dropped from its high of 9% in 2009 to today's 7.3% merely reflects (or hides?) the fact that a large number of people have left the job market and that a large portion of newly employed had to settle for part-time jobs and lower salaries. The pool of people that at present involuntarily work less than 35 hours a week includes almost eight million Americans, which is twice as many again as in 2006. In parallel, the rate of labor market participation has decreased significantly, dropping from 66% at the end of 2007 to less than 63% today. The pace of shrinking is slowly decreasing, but there are still three million people who believe it makes no sense to actively look for a job. Sure, there are multiple factors behind this, but the dismal state of the economy is the most powerful among them. The severity and long-term negative effects of the current labour market conditions have recently led The Washington Post to label the state of affairs “a massive human tragedy”.
If we take the (involuntarily) underemployed and those who have left the job market into account, the real number of unemployed Americans doubles - from 11.2 million to more than 22 million. This represents 12% of the working-age population. Eurozone unemployment is 12% : overall EU unemployment is 11%. It is worth noting though, that the US does unquestionably better in terms of youth unemployment, which is in line with the overall unemployment level. However, the differences among various ethnic groups remain large. For example, the unemployment level among African-Americans is about twice as high as among white Americans.
A limited welfare state
When considering the impact of the above statistical movements, the fact that the welfare state in the US is considerably less generous than in Europe should not be dismissed lightly. The US does not have free public healthcare in place - even after the introduction of Obamacare - and most of its best universities, private and public, are ever more expensive, so ultimately unaffordable for many. Due to budgetary cuts, public education is in a shameful state.
Without venturing deeper into the merits and pitfalls of this transatlantic divide, we can draw two simple conclusions from it. First, the volatility of earnings in America is much more important than in Europe, since earnings secure access to healthcare and education. Second, for the same reason, detrimental effects of greater income volatility will in the long run be more profound in America than in Europe, as they will further increase income inequality and social segregation.
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Let us then look at how the "recovery" in the US is reflected in paychecks. The picture here, again, looks grim. First, the number of people living below the official US poverty line ($11,400 annual income for a single person) has increased from around 37 million at the outset of the crisis to 46.5 million at the end of 2012, representing 15% of the population. Despite the "recovery", the poverty rate has been stuck at this level since 2010.
Second, the number of people that receive supplemental nutrition assistance - better known as Food Stamps - has grown from 26 million in December 2007 to 47 million today. Such a staggering increase was not enough to prevent a cut of $5 billion to the programme's budget amid the across-the-board sequester slashing.
Even those somewhat luckier individuals that have either retained their jobs during the crisis, or even got new ones, have few reasons to celebrate the announcement of the "recovery". The US median household income (i.e. an artificial point that splits the households in two groups: the upper 50% that earn more than the median and the lower 50% that earn less) is eight percentage points lower than it was in 2007. But more importantly, while those in the highest income brackets (the top 1% and the top 0.1%) have already recovered to levels from six years ago, the real incomes of the "bottom" 90% dropped 12% between 2007 and 2009 and then dropped a further 2% between 2009 and 2012.
During the current "recovery" the income inequality in the US has shot to historical highs, whereby the top 10% take home 50% of all income (incl. capital gains) each year. More than 50% of employed Americans now earn less than $30,000 a year - a figure that in the land of plenty evaporates quickly amidst rent payments and expenses for schooling, heating, groceries, car loans and cable TV. The figures for wealth distribution are even more disturbing than those for income distribution.
These trends fly in the face of the fact that growing inequality is also often quoted as one of the main reasons behind the current economic crisis. In fact, even the US Congress Joint Economic Committee concurred in a 2010 report that "stagnant incomes for all but the wealthiest Americans meant an increased demand for credit, fueling the growth of an unsustainable credit bubble." Sadly, Congress has done close to nothing to reverse the trend.
The dogs bark, but the caravan goes on
Applauding the current "recovery" in the US is thus at best misleading, even if we were temporarily to put aside other inconvenient indications of misery, such as the fact that by summer 2012 four million Americans have lost their homes, or that more than six million Americans have been forced to declare bankruptcy since the start of the crisis. It would also probably be inappropriate to emphasize that the Federal Reserve continues to purchase $85 billion of bonds every month, in order to improve the financial system's liquidity and keep the economy on morphine. Truth to be told, it does not have much of an alternative.
In the meantime, the dysfunctional US Congress has failed to pass a federal budget every single year since 2009 and has pushed the US repeatedly towards the precipice of debt default. The same Congress has shown a disastrous inability to govern by allowing indiscriminate budget cuts to ravage through the public finances and by pushing the government into a shutdown, causing real economic harm and hardship. To no one's surprise, it now "enjoys" a pitiful 9% approval rating.
However, the most tragic feature of the "recovery" is that memories of the Great Depression of the 1930s have all but faded. Back then, President Roosevelt recognized the extreme human suffering and built a solid welfare state in response - something that, along with the eventual economic recovery, made an incredible surge in prosperity possible. This is what underpinned the emergence of a strong middle-class, making the American Dream a reality for millions of households and inspiring people the world over. Sadly, over the last decades the wave has turned in the opposite direction. America has embarked on the path of growing income disparities, residential segregation and decreasing social mobility. The response to the current crisis so far has brought no change in direction, quite the contrary. The crisis has increased income inequality, also due to loose monetary policy that has directly benefited the already wealthy.
For a long time, political elites in the US have either been busy idling on the margins or actively working to further defund social programs. In the meantime, the average American's life has continued to deteriorate. In fact, it is the misery of the millions of unemployed and working poor that best depicts the (bleak) reality of American "recovery”, not the growing GDP or stock indexes.
Yet, last week things might have started to change. To the surprise of many, President Obama declared in unequivocal terms that the defining challenge of contemporary America is how to make sure that its economy “works for every working American,” and that inequality needs to be scaled back. In practice, his speech was a fully fledged admission that the much lauded “recovery” is a myth.
Obama’s inequality narrative has not grown in a vacuum. Liberals in the US have for a long time now been arguing that growing inequality deserves greater attention, but they were often muted by excited talk about how a growing economy will fix things. This fairy tale has partly been strengthened by the somewhat naïve and misleading praise of the US recovery voiced by Europeans. For a long time, abstract and anonymous statistics have been used and abused for an ideologically biased account.
It is now time to face reality. Policy makers and pundits on both sides of the Atlantic should refrain from applauding a false recovery and stop looking for solutions in wrong places. Instead, they should begin – as Obama just did – to seek ways of securing a broad-based income recovery. Because that is the only recovery that really counts.
NOTE: An earlier version of this article was published in the Slovenian newspaper Večer on 16 November 2013.