Boom2Bust.com

Quotes For The Week

A hat-trick of quotations for you…

The rejection of the package is good because it shows that some people in the U.S. are still sane. A bailout will not buy the U.S. a way out. The government is less powerful than markets in fixing this mess.

-Marc Faber, in a September 30 phone interview with Bloomberg

Sometimes I think we need to put out an ad: “No, we don’t have any more jobs than you do.”

-Jodi Royal-Goodwin, the redevelopment agency director for Reno, Nevada, in response to an influx of homeless people coming to the city looking for jobs

Altogether, we have had eight years of no gains in real median wages, flat stock market returns, and minimal net new jobs. Despite what you have heard, after adjusting for debt spending, population growth and realistic adjustments to the GDP deflator, there have only been 3 or 4 quarters of GDP growth since 2005. If you adjust for military, government and minimum wage positions – i.e. jobs funded by tax payers and jobs that don’t pay anything - there have been absolutely no net new jobs. Bush’s largest gains have been with inflation, oil and food prices, debt, trade deficits, bankruptcies, foreclosures, and healthcare costs. If an assembly of the world’s leading economic strategists were to design the most destructive economic disaster possible, they could not match the results of Bush’s tenure. Even the most loyal Bush supporters will admit he has been an absolute disaster – that is if they’re being honest.

-Mike Stathis, Managing Principal of Apex Venture Advisors and author of America’s Financial Apocalypse, in a Market Orackle (UK) piece from September 14

Poll: One-Third Of Adults Surveyed Think U.S. In Depression

It’s a recession when your neighbor loses his job; it’s a depression when you lose yours.

-Harry S. Truman, 33rd President of the United States

The “D” word is making a comeback. USA Today’s Mindy Fetterman wrote today:

In a sign that anxiety is growing, 33% of 1,011 adults surveyed over the weekend by USA TODAY and Gallup said the economy already is in a depression (though by economists’ measures it is not). Just 12% said that 10 months ago…

Seventy-three percent said U.S. financial troubles will get worse before they get better. They expect their taxes to go up, and many worry about affording retirement or maintaining their standard of living. Nearly half worry about their homes losing value; 20% are seriously looking at taking money out of the stock market…

Trust is shifting from stocks and real estate to federally insured bank CDs. And nearly 30% have postponed, or are thinking about postponing, a big purchase. Almost half of those with jobs are more worried than before that the Wall Street crisis will mean their pay or benefits will be cut.

Displaced Great Depresssion kids
Bakersfield, California (1935)

Source:

“Poll on the economy: Americans gloomier, for now”
Mindy Fetterman
USA Today, September 29, 2008

Say Goodbye To Your Pay Raise

Think you’re getting a raise in 2009? Think again. According to the Wall Street Journal’s Sarah Needleman last week:

Despite the weak U.S. economy, employers nationwide are expected to raise workers’ salaries next year at the same rate as they did this year, a new survey shows. But the increase may be offset by rising inflation rates and lower 2008 bonuses tied to company performance.

Rank-and-file workers can expect to see their base pay rise by an average of 3.5% in 2009 — the same amount they received this year, reports Watson Wyatt Worldwide Inc., a global human-resources consulting firm. High performers are projected to fare better, gaining an average of 4.4% in base pay, while mediocre performers are likely to see their paychecks increase by 2% or less…

But even with a 3.5% raise, most workers will likely find that extra cash consumed by rising costs for everything from food to gasoline. The latest report from the U.S. Labor Department showed inflation rising at a brisk 5% in June — more than the raise most employees will receive in 2009.

“Inflation has crept up to a pace where even your better-performing employees won’t make up the difference,” says Laury Sejen, global director of strategic rewards consulting at Watson Wyatt. “They’re going to be losing ground relative to inflation.”

Quicksand Scene, “Blazing Saddles” (1974)

The situation looks even worse if you’re like me and don’t buy the government’s inflation data. On May 22, MarketWatch’s Rex Nutting noted that PIMCO’s Bill Gross discussed the flawed data in his June “Investment Outlook” on the PIMCO website. Nutting wrote:

Gross argued that inflation rates in the rest of the world have averaged nearly 7% over the past decade, while the U.S. official inflation rate has averaged 2.6%. “Does it make any sense that we have a 3% to 4% lower rate of inflation than the rest of the world?” Gross wondered…

The consumer price index is being understated by at least 1% per year because of these factors, Gross said. And if inflation is understated by 1%, then gross domestic product has been overstated by that same 1%. Other critics have put the error much higher.

Other critics like John Williams, an economic consultant who publishes the monthly newsletter Shadow Government Statistics. Ted Rall noted in a Yahoo! News piece last week that Williams calculates inflation is actually running at an annualized rate of 9.95%, when you factor out all the tinkering that’s been done to the data over the years.

But what about bonuses? The news isn’t much better. Robert Trumble, professor of management at Virginia Commonwealth University and director of the Virginia Labor Studies Center in Richmond, told the Journal that bonuses tied to company performance will likely be significantly less this year than last. He said:

Bonuses are definitely going to be down. The economy as a whole is down and most [bonuses] are performance-related.

Sources:

“Inflation May Offset Pay Increases in ‘09”
Sarah E. Needleman
Wall Street Journal, July 25, 2008

“U.S. inflation understated, Pimco’s Gross says”
Rex Nutting
MarketWatch, May 22, 2008

“RECESSION, YEAR 8”
Ted Rall
Yahoo! News, July 24, 2008

Despite Falling Prices, Homes Are Still Unaffordable

Yesterday, the newswires were reporting that the decline in U.S. home prices accelerated in February, falling a record 12.7% in the past year for 20 key cities, according to the Case-Shiller home price index released Tuesday by Standard & Poor’s. David M. Blitzer, chairman of the index committee at Standard & Poor’s, went so far as to say:

There is no sign of a bottom in the numbers.

Despite the recent drop in prices, homes are still unaffordable for the average American family. Craig Guillot for Bankrate.com wrote back on April 17 that:

…the median price in many markets is still out of reach for a median-income family, according to “Paycheck to Paycheck: Wages and the Cost of Housing in America,” a study by the Center for Housing Policy, or CHP, in Washington, D.C.

Comparing housing costs in 210 metropolitan areas with the wages earned by workers in 60 occupations, the study found that homeownership is often unaffordable for workers in each of the five-fastest growing occupations — registered nurses, retail salespeople, customer-service representatives, food-preparation workers and office clerks. Registered nurses, who typically have high salaries, were unable to purchase a median-priced home in 108 of the markets.

“Even with the housing downturn, the drop in prices still just isn’t enough for many workers in traditional backbone occupations to afford houses,” says Rebecca Cohen, a CHP research associate.

Guillot noted:

Between 2000 and mid-2007, the median home price soared 64.9% to $229,200. The median income, meantime, rose just 16.6%. For would-be buyers, the math doesn’t work.

Back on April 16, Peter Hong of the Los Angeles Times talked about a recent study conducted by Chapman University’s Anderson Center for Economic Research which forecast further double-digit declines for Southern California home prices. Hong wrote:

A typical Los Angeles County family would have to spend 48.6% of its annual income on mortgage payments and property taxes to afford a median-priced home, the Chapman study concluded. Historically, the mean expenditure for a home in L.A. County has been 35.7% of income.

For affordability to return to that historic mean, home prices in Los Angeles County would have to fall more than 20% further, said Anderson Center director Esmael Adibi…

Sources:

“Home prices fall record 12.7% in past year, Case-Shiller say”
Rex Nutting
MarketWatch, April 29, 2008

“Average Joe still can’t afford a home”
Craig Guillot
Bankrate.com, April 17, 2008

“Foreclosure glut further depresses housing prices”
Peter Y. Hong
Los Angeles Times, April 16, 2008

When Martin Feldstein Talks, Smart People Listen

No— Martin Feldstein was never affiliated with E.F. Hutton. Rather, Dr. Feldstein is the George F. Baker Professor of Economics at Harvard University and the outgoing President and CEO of the National Bureau of Economic Research, which is the group that determines whether or not the U.S. economy is in a recession. Ros Krasny from MarketWatch caught up with the former economic advisor to President Reagan in Florida last week. Krasny wrote on Friday:

The United States is in a recession that could be “substantially more severe” than recent ones, National Bureau of Economic Research President Martin Feldstein said on Friday.

“The situation is very bad, the situation is getting worse, and the risks are that it could get very bad,” Feldstein said in a speech at the Futures Industry Association meeting in Boca Raton, Florida.

“There’s no doubt that this year and next year are going to be very difficult years.”

Like an ominous storm cloud off the Florida coast, Krasny added:

Feldstein said the downturn could be the worst in the United States since World War Two.

Not good, folks. Dr. Feldstein explained his gloomy forecast for the U.S. economy. He believes the federal funds rate is headed down to 2%, adding that lower rates alone will not revive economic activity. The reason: a lack of liquidity in the credit markets. The economist said that in the global credit markets “there is a lack of confidence leading to a lack of liquidity… without credit creation, we can’t have economic growth.” He added that the combination of monetary and fiscal stimulus, along with a falling dollar, “will help to dampen the magnitude of the downturn but won’t be enough to sustain an expansion.”

All of these dire warnings, and still the NBER hasn’t declared an official recession yet (not like I’m in a hurry to hear it). MarketWatch’s Rex Nutting wrote yesterday that:

Although the official word won’t come for months, the economic data now available show that the recession probably began in December.

Four of the five indicators watched most carefully for signs of a break in economic growth are now trending lower.

It’s only a matter of time before the semi-official recession judges at the National Bureau of Economic Research meet to confirm it. They’ll wait a few months in case the trends that now seem so clear are revised higher.

According to MarketWatch’s Washington bureau chief, the four indicators that are trending lower include:

• Employment- Most important. Payrolls peaked in December and have now fallen for two consecutive months, with private-sector payrolls falling for three months in a row. The annualized growth rate over the past three months is negative 0.1%, down from 1% growth a year ago.
• Incomes- Second-most important signal. The annualized growth rate over the past three months is negative 0.8%, down from 4.7% growth a year ago.
• Industrial Output- Flat since July. The annualized growth rate over the past three months is negative 0.7%, down from 3.6% growth a year ago.
• Business Sales- Peaked in October. The annualized growth rate over the past three months is negative 3.7%, down from 4.1% growth a year ago.

The final indicator used by the NBER in determining a recession is the Monthly GDP Estimate produced by Macroeconomic Advisers. Nutting pointed out that it’s the only one of the five major indicators that’s still in positive territory, where the annualized growth rate over the past three months is 4%, up from 1.8% growth a year ago.

Sources:

“U.S. faces severe recession: NBER’s Feldstein”
Ros Krasny
MarketWatch, March 14, 2008

“Recession began in December, signposts say”
Rex Nutting
MarketWatch, March 17, 2008

The Great American Con

In the early days of Boom2Bust.com, the amount of material I encountered on a daily basis which was pertinent to the blog’s focus (educating/warning about a coming U.S. financial crash) was more than manageable. In fact, there were days when a lot of the material that came across my desk was way too Pollyannaish (being absurdly optimistic and good-hearted, believing in a good world where everything works out for the best all the time) instead of being realistic. My how things have changed. Now, I’m backlogged with bad news. And it seems that everywhere I look, Americans are changing their tune on the economy:

• Results from a USA Today/Gallup Poll of 1,025 American adults released today show 76% think we are in a recession.
• Results from a CNN/Opinion Research Corporation poll of 1,000 American adults released Monday show 74% believe the United States is now in a recession.
• A poll of 51 economists published last Thursday by the Wall Street Journal show 71% believe the economy is in recession.

Just this morning, U.S. Treasury Secretary Henry Paulson told NBC’s “Today Show” that:

We know we’re in a sharp downclimb and there’s no doubt that the American people know that the economy has turned down sharply. So to me, much less important is the label that’s placed on it today. Much more important is what we do about it.

It appears the three bears are getting the better of the “Goldilocks” economy. In fact, all this negativity reminds me of that movie “Kelly’s Heroes” and the exchange between the characters Oddball (Donald Sutherland) and Moriarty (Gavin MacLeod):

ODDBALL: Why don’t you knock it off with them negative waves? Why don’t you dig how beautiful it is out here? Why don’t you say something righteous and hopeful for a change?
MORIARTY: Crap!

While many would attribute the “negative waves” to a downturn in the business cycle, I read a brilliant piece this morning by Larry Elliott, economics editor for The Guardian (UK), which offered an alternative explanation for our economic woes. One, which Elliott argued, is rooted in the centuries-old conflict between the “haves” and “have-nots.” Yesterday he wrote:

But if you are at the top of the tree, the years since the last recession in 2001 has been a veritable golden age. Salaries for executives have rocketed and profits have soared, because the productivity gains from a growing economy have been disproportionately skewed towards capital…

For ordinary Americans, though, it has been a different story. Real wages have been growing slowly; at just 1.6% a year on average over the latest upswing, well down on the experience of earlier decades. Business, of course, needs consumers to carry on spending in order to make money, so a way had to be found to persuade households to do their patriotic duty. The method chosen was simple. Whip up a colossal housing bubble, convince consumers that it makes sense to borrow money against the rising value of their homes to supplement their meagre real wage growth and watch the profits roll in.

As they did - for a while. Now it’s payback time and the mood could get very ugly. Americans, to put it bluntly, have been conned. They have been duped by a bunch of serpent-tongued hucksters who packed up the wagon and made it across the county line before a lynch mob could be formed.

“See ya, wouldn’t want to be ya…”

Responding to those in the Pollyanna camp who still believe a recession can be averted, Elliott said:

The debate now is not about whether the US is in recession but how deep and long that recession will be. Super-bears have started to say that this is perhaps “The Big One”, by which they mean the onset of a new Great Depression. The need to rescue Bear Stearns has done little to still those voices.

As the economics team at HSBC recently pointed out, there has been a “catastrophic breakdown” of trust, and when that has happened in the past - the US in the 1930s, Japan in the 1990s - chucking extra money at the banks in the hope that they will start lending again proves ineffective.

Sources:

“Poll finds broad pessimism over economy”
JoAnne Allen
Reuters, March 18, 2008

“Three out of four say it’s a recession – survey”
David Goldman
CNN Money, March 17, 2008

“Paulson: We’re in A Sharp Economic Downturn”
Associated Press, March 18, 2008

“America was conned - who will pay?”
Larry Elliott
The Guardian (UK), March 17, 2008

Consumer Sentiment: Half-Full Or Half-Empty?

One event. Two different interpretations. Is consumer sentiment improving, or getting worse? I’ll let you decide…

“US late Feb Reuters/Michigan consumer sentiment rises to 70.8 UPDATE”
Forbes, February 29, 2008

Consumer sentiment, as measured by the Reuters/University of Michigan index, rose more than expected to 70.8 in late February from a reading of 69.6 in early February.

Economists polled by Thomson’s IFR Markets had expected sentiment to rise slightly to 70.0 in late February…

Source: Sur La Table

“Consumer Sentiment Drops to 16-Year Low in February”
Reuters, February 29, 2008

U.S. consumer sentiment dropped to a 16-year low in February, hitting levels that usually sound the alarm bells of recession, on worries about declining incomes and rising unemployment, a survey showed Friday.

Adding to the grim view, consumers’ expectations for the future also hit a 16-year low while worries about their ability to makes ends meet and the overall economy were as bad as they have been in decades, the Reuters/University of Michigan Surveys of Consumers said.

The Reuters/University of Michigan Surveys of Consumers said its main index of consumer sentiment fell to a 16-year low of 70.8 in February from 78.4 in January.

This was the final reading for February and was the lowest since February 1992. It was up slightly from the preliminary February result reported earlier in the month of 69.6, which also would have been the lowest reading since February 1992.

“Consumer confidence remained at the same low level that was recorded during the recession periods of the mid-1970s, the early 1980s and the early 1990s,” the Reuters/University of Michigan Surveys of Consumers said in a statement.

“The minuscule gain from the mid-month reading did not alter the basic fact that the extent of the recent decline has consistently been associated with a subsequent recession period,” it added…

Americans See Real Earnings Fall

This past Wednesday, Associated Press business writer Ellen Simon wrote “Workers see inflation-adjusted earnings fall 1.2% for year” in USA Today. Simon reported that inflation-adjusted earnings for the average American worker have fallen 1.2% over the last year, according to the Bureau of Labor Statistics. Higher food and fuel costs have contributed to this erosion in purchasing power, she said. According to the BLS, real earnings (earnings adjusted for inflation) fell in 8 of the last 13 months and were down 0.5% in January compared to the previous month. Dean Baker, co-director of Washington-based research group the Center for Economic and Policy Research, said:

A lot of people have lost a huge amount in their homes, jobs aren’t being created at a rapid rate and wages are falling behind inflation. Workers, in this environment, can’t keep up their consumption. It’s bad for them as far as their living standards, but this is also a serious source of drag on the economy.

Baker told the AP reporter that a consumer pullback in spending could offset Washington’s economic stimulus plan, “But we’d be in even worse shape without it,” he added.

According to Ms. Simon:

Average weekly earnings were $592.74 in January, or roughly $30,800 a year. While that’s about $1,000 a year more than workers averaged in January 2007, inflation has increased at a rate of 4.3% for the same period, outpacing the 3.2% earnings gain.

At the same time, I am not a fan of the “official” consumer price index (CPI) measure because it was heavily manipulated over time (especially during the Clinton administration), with methodological changes that understate inflation. I prefer using the “traditional” measure of inflation (pre-Clinton), which can be calculated by adding 7% to the “official” CPI number (per John Williams’ Shadow Government Statistics), and leaves us with “real” inflation of around 11.3%. This high rate of inflation could explain why I am encountering comments like the following on a much more frequent basis in my everyday research:

I’m confused, everybody keeps telling me the economy is great and I’m not suffering by paying 50% more for my food, clothing and everything else while my pay stays the same. Who should I believe, all those experts or my empty bank account?

-Reader comment, USA Today, February 22, 2008

Wall Street’s Happy Holidays

“He’s making a list, checking it twice. Gonna find out who’s naughty and nice…”

I’m not referring to the jolly old fat man with the red suit and beard here. Instead, I’m talking about your boss and those in management, as they determine who will be receiving a year-end bonus. A long time ago (in a galaxy far, far away) bonuses were given out in recognition of an employee’s contribution to the organization. It used to be the greater the contribution, the larger the bonus (theoretically). Nowadays, as more managers are afraid to withhold bonuses from employees who may not deserve them in the first place, equal bonuses (usually as a percentage of salary) are given out across the board, thereby removing an essential financial incentive in the workplace. Bravo. Even worse, in some cases the “bonuses” that are distributed aren’t bonuses at all. Instead, they are really just cost of living adjustments. In stark contrast to the situations these poor souls are facing, it’s party time on Wall Street. Ironically, in a year when investment bank stocks plunged 45% in value, Wall Street bonus checks rose an average of 14% from last year, according to the Associated Press last Friday. Dean Baker, Co-Director of The Center for Economic and Policy Research (CEPR), noted in TruthOut on Christmas Eve that Morgan Stanley’s stock is down almost 20%, Lehman Brothers stock is down a bit more than 20%, and Citigroup’s stock price is down almost 50% from the beginning of the year. Baker said:

With a year like this, you might have expected that most of the Wall Street gang would be waking up on Christmas morning to find lumps of coal in their stockings. But, that’s not the way that the modern economy works… In a year in which tens of millions of families are struggling to pay their heating bills and hang onto to their homes, it seems that Santa still has a soft spot for the folks who cut deals on Wall Street.

Still, unless you’re a stockholder, it’s really none of your concern. However, Main Street might have a problem with the other reason why Wall Street is especially festive this holiday season. Baker explains:

Of course, it’s not just the shareholders who are generous with the Wall Street crew. All of us, as taxpayers, have done our part to ensure that these folks have a happy holiday season. In particular, we deserve thanks because we gave hedge and equity fund managers a special tax break that allows them to pay a much lower tax rate than workers like firefighters and schoolteachers. The fund managers’ tax break allows some of the richest people in the country to pay a tax rate of just 15 percent on their earnings, as compared to the 35 percent tax rate that they would face if they had to pay taxes like ordinary workers.

Congress did consider eliminating the fund managers’ tax break this year, but a determined lobbying effort saved the day. The fund managers told Congress that if they had to pay the same taxes as everyone else, their hundred million dollar salaries would not give them enough incentive to work. Undoubtedly some sizable campaign contributions made this argument more compelling to members of Congress.

One of the leaders of this lobbying effort was Peter Peterson, an investment banker with the Blackstone Group, a private equity firm that earned Peterson and other partners billions when it went public this year. Mr. Peterson is primarily known for having spent much of the last fifteen years arguing for cuts in Social Security and Medicare for people like schoolteachers and firefighters. When arguing for these cuts Mr. Peterson routinely asserts that he does not need his Social Security. With the tens of millions in tax breaks he gets from the government, this is surely true.

I sure hope Mr. Peterson has fire sprinklers in his home, because I have a feeling his local fire department may get “lost” should a fire ever break out…

Everyone smile and say “Medicare”

Is A Republican President Really Better For The Economy?

In the December 11 article “Economists Say Recession Risk Is Climbing,” the Wall Street Journal talked about some of the findings from its latest survey of economists. When asked which presidential candidate would be best for the economy, only half of the 52 economists participating in the survey responded. The Journal reported that 35% of respondents chose Rudolph Giuliani, 19% chose John McCain, and 15% picked Mitt Romney as the candidate who would be best for the U.S. economy. Hillary Clinton was picked by 8% of economists participating in the poll, while 4% chose John Edwards. Ron Paul, Michael Bloomberg, and Alan Greenspan each got a write-in vote. Alan Greenspan?

I’m not surprised that the survey results showed economists felt a Republican White House would be best for the U.S. economy. I’ve always heard that the economy performs better under a Republican president. Even when I was an undergraduate student at the University of Illinois at Urbana-Champaign in the early nineties, some of my classmates said that it was a shame that President Clinton and the Democrats were reaping the benefits of economic policies instituted by President George H.W. Bush’s administration. So tonight, I’m going to explore the claim that Republican administrations are “best” for the U.S. economy.

I call to your attention a study done in December 2006 by Elliott Parker, Ph.D., who is a Professor of Economics at the University of Nevada-Reno. Using data from the U.S. Department of Commerce’s Bureau of Economic Analysis, Dr. Parker first compared the economic performance of Republican and Democratic presidencies from 1929 through the end of 2005. He found that the Real GDP Growth Rate (annual average) was 1.9% for Republican administrations and 5.1% for Democratic administrations during this time. Real GDP Growth Rate Per Capita was .7% for the Republicans and 3.8% for the Democrats. However, the professor pointed out that the years comprising the Great Depression and WWII should probably be excluded from the comparison. So economic performance from 1949 (end of Truman administration) to 2005 was compared, which showed Real GDP Growth Rate (annual average) under Republican administrations now stood at 2.9% and Democratic administrations at 4.2%. Real GDP Growth Rate Per Capita was 1.7% for the Republicans and 2.9% for the Democrats. These results prompted Dr. Parker to conclude that “the economy has grown significantly faster under Democratic administrations, and more than twice as fast in per-capita terms.”

The University of Nevada-Reno economics professor also uncovered the following while conducting the economic comparison between Republican and Democratic presidential administrations from 1949 to 2005:
• Unemployment Rate- Republicans 6.0%, Democrats 5.2%
• Change In Unemployment Rate- Republicans +0.3%, Democrats -0.4%
• Growth of Multifactor Productivity- Republicans 0.9%, Democrats 1.7%
• Corporate Profits (share of GDP)- Republicans 8.8%, Democrats 10.2%
• Real Value of Dow Jones Index- Republicans 4.3%, Democrats 5.4%
(in logarithmic growth rates)- Republicans 2.8%, Democrats 4.4%
• Real Weekly Earnings- Republicans 0.3%, Democrats 1.0%
• CPI Inflation Rate- Republicans 3.8%, Democrats 3.8%

Regarding the question of statistical significance, Parker noted:

The differences in growth, unemployment, and the corporate profit share are all statistically significant, and support the argument that the economy may actually perform better under Democrats. The differences in weekly earnings, stock market growth, inflation, and multifactor productivity all favor the Democrats as well, but these differences are not statistically significant.

Addressing the claim heard back in my college days, Dr. Parker also tried to account for a lag effect. He said, “It is a reasonable argument that economic performance early in a new administration is likely to be the result of policies followed by the prior administration.” Therefore, he tested whether lagging the effect of the administration on growth might support the argument that the economy actually performed better under Republicans. The professor found that even with up to four years of lagged effects, there was no evidence that the economy performed better under Republicans.

Dr. Parker drew the following conclusions regarding the claim that Republican presidencies are “best” for the U.S. economy:

But we can reasonably conclude that these government statistics provide evidence that directly contradicts the argument that the economy does better on average under Republican administrations. With lagged effects and other causes considered, the difference may be insignificant, but the economy may actually perform worse under Republicans.

NOTE: For more on this topic, see September 10, 2008, post, “Are Democrats Or Republicans Better For The U.S. Economy?”

Real Wages Stagnating In Goldilocks Economy

Self-interested parties like to claim that the U.S. economy has been healthy these past few years- not too hot, not too cold. In addition, we’ve been told that wages for American workers increased during this time as a reflection of productivity gains in the Goldilocks economy. However, my own observations (and research) tell of a different story. On Monday, the non-partisan Economic Policy Institute issued a report showing that after rising in the second half of the 1990s, most American workers’ real wages have stagnated in the 2000s- especially since 2003. The term real wages refers to wages that have been adjusted for inflation, in contrast to nominal wages or unadjusted wages. While productivity jumped almost 20% since 2000, the real median hourly wage of workers rose just 3% over the same period. Since 2003, productivity has risen only 5%, while the median hourly wage has fallen 1.1%. The Washington, DC-based think-tank says that, “Most workers have relatively little to show in terms of real wage and income gains over this recovery.”

And what does the future have in store? The Institute had this to say:

More downward pressure on wage growth is likely. The recent slowing of productivity growth and rising unemployment are likely to place further pressure on most workers’ real wages in the near to medium terms.

So next time someone tells you that wages in the American workplace have been rising, you’ll know they’re not talking about real wages. And regarding the Goldilocks economy? In the version I was told as a child, Goldilocks was eventually eaten by the three bears.

Cartoon courtesy of www.gaspirtz.com