Friday, February 17, 2006

The State of the Economy

The State of the Economy

a report from the Economic Policy Institute
published Jan 2006

The upcoming State of the Union address has revived interest in examining how well the economy is doing, how people are faring and whether the current policies of tax cuts have generated jobs and growth, as promised.

A number of observers seem to suggest that the economy is doing very well and that people mistakenly believe that the economy is on the wrong track. The facts are that trends in almost every indicator of the aggregate 'macro' economy—GDP growth, investment, payroll employment, personal income—have been inferior in this business cycle and recovery when measured against earlier comparable periods (see The boom that wasn't).

Moreover, the wages of workers (inflation-adjusted) fell in 2005 from 2004 levels and have been falling for several years (see Economy up, wages down). For instance, the wage (inflation-adjusted) of the median worker fell 1.3% in 2005. Given declining wages it is not surprising that the typical (median) household income fell for five years in a row through 2004 (2005 income data are not yet available), poverty has risen, and families have gone deeper into debt. Furthermore, health care costs are taking a bigger bite out of family incomes (see What's wrong with the economy?). The bottom line is that people do not feel good about trends in the economy because the things that matter most to them—wages, jobs, family income—have not been making them better off.

The administration claims that its tax cuts have led to jobs and growth. Yet, as we have shown, GDP, investment and other trends do not support this claim. A simpler way of showing the failure of the tax cuts to deliver jobs is to note that private sector jobs, excluding those generated by military or other government spending, have not increased since early 2001 (see Sluggish private job growth indicates failure of tax cuts). If private sector jobs have not been created in significant numbers, how can one say that the tax cuts have worked?

There has also been some bragging about recent job creation and the current 'low' unemployment rate.   However, (see Why people are so dissatisfied with today's economy), unemployment remains higher than the 4.0% in 2000 and today's unemployment is artificially low because of a major withdrawal from the labor force. Job creation in this recovery lags behind every other recovery, and the only wage growth in this decade was based on the momentum from the 1990s recovery. That wage growth petered out as the recession took hold and hasn't resumed more than four years into the recovery.

Last, the administration claims that poor wage growth is the result of higher health care costs squeezing wages. Actually, what has squeezed wages is the huge boost in profits in recent years. Rising health care costs cannot explain any of the following: the falling real wages of low-wage workers (1.9% down in 2005) who generally do not have employer-provided health insurance (47% of the entire workforce does not); the lower compensation growth (wages and health and other benefits) in 2005 than in 2004; or the slowdown in wage growth   in 2005 even though health costs also rose more slowly relative to earlier years (see The wage squeeze and higher health care costs).

The mission of the Economic Policy Institute is to provide high-quality research and education in order to promote a prosperous, fair, and sustainable economy. The Institute stresses real world analysis and a concern for the living standards of working people, and it makes its findings accessible to the general public, the media, and policy makers.

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