The fundamentals of the economy
Democrats must now invest the same passion and intellectual rigor in economic growth – the new crisis for America’s middle and working classes.
For roughly 75 years, America dominated the world economy, taking robust economic expansion for granted. Those days are over. If the United States doesn’t attain growth far greater than what is projected for the next 20 years, we will never attain the middle class living standards we expect; claim the leadership role we need for a safer world, or pay for the entitlement state we’ve created.
This fear that America is slipping behind is at the heart of today’s middle class anxiety. The answer is not anti-business economic populism, which won’t propel growth -- and, tellingly, landed like a lead balloon on Election Day.
The middle class is seeking a political party with constructive ideas that drive super-charged, private-sector economic growth.
This feeds into the notion that there is something fundamentally rotten in the American private sector. We’re missing that basic mojo that propelled us over the past century.
American business is wildly profitable. This is profit growth over the past 10 years:
Yes, that’s over 90 percent year-over-year profit growth at the end of 2009. Not only is that far higher than anything during the previous 10 years but it is faster growth than any period during the recession was decline. Indeed, the U.S. economy is “out of recession” primarily because corporations are doing so well.
Now, these figures are often pointed out to justify some anger at corporations or higher tax rates. I am proposing neither. I am simply suggesting that the problem with the U.S. economy isn’t that suddenly our businesses can’t compete or can’t earn money. They’re earning money hand over fist.
Moreover, this is being driven by massive gains in productivity. The productive heart of the American economy is not slowing down, it's speeding up. Here is productivity growth over the past 10 years.
The high performance of the past few years isn’t as stark as profits, but notice that we had back-to-back quarters that were higher than anything in the past 10 years. Indeed, only one other quarter even comes close.
The problem with the American economy isn’t that business isn’t profitable or that workers aren’t productive. The problem is that people are buying far less than they used to, and that means that businesses are employing fewer people.
Here is growth in personal consumption:
Now perhaps, you believe this is only prudent after our extreme overconsumption. I think this is a misreading of the period, but let’s go with it. Wouldn’t it then be nice to see us doing more investment, building more factories and the like? Unfortunately, that’s fairly tepid as well.
It’s not historically weak, but it’s not enough to make up for the drop off in consumption or to make up for the huge losses during the recession.
So business profits are strong, and workers are producing a lot when they go to work. However, buying is weak. The result is that businesses are doing more but they are doing it with fewer work hours. Here is the growth in total hours of work performed in the U.S.
This is a problem of demand. Workers are producing a lot when they work. Businesses are profitable when they sell goods and services. However, the demand for those goods and services is weak.
This is why inflation is weak.
And core inflation is even weaker:
Karl Smith is an assistant professor of economics and government at the University of North Carolina and a blogger at ModeledBehavior.com.
| November 8, 2010; 2:14 PM ET
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