Masters of the Obvious

Somewhere along the line keeping your corporate and political policies based on reality got to be out of vogue.

Which is why when someone speaks up to talk about the poor quality of the Emperor's new clothes- or economic agenda- it's worthy of notice. So here, for your consideration, and for academic purposes only is:

The Joyless Economy
The New York Times
December 5, 2005
by Paul Krugman


Falling gasoline prices have led to some improvement in consumer confidence over the past few weeks. But the public remains deeply unhappy about the state of the economy. According to the latest Gallup poll, 63 percent of Americans rate the economy as only fair or poor, and by 58 to 36 percent people say economic conditions are getting worse, not better.

Yet by some measures, the economy is doing reasonably well. In particular, gross domestic product is rising at a pretty fast clip. So why aren't people pleased with the economy's performance?
Like everything these days, this is a political as well as factual question. The Bush administration seems genuinely puzzled that it isn't getting more credit for what it thinks is a booming economy. So let me be helpful here and explain what's going on.

I could point out that the economic numbers, especially the job numbers, aren't as good as the Bush people imagine. President Bush made an appearance in the Rose Garden to hail the latest jobs report, yet a gain of 215,000 jobs would have been considered nothing special -- in fact, a bit subpar -- during the Clinton years. And because the average workweek shrank a bit, the total number of hours worked actually fell last month.

But the main explanation for economic discontent is that it's hard to convince people that the economy is booming when they themselves have yet to see any benefits from the supposed boom. Over the last few years G.D.P. growth has been reasonably good, and corporate profits have soared. But that growth has failed to trickle down to most Americans.

Back in August the Census bureau released family income data for 2004. The report, which was overshadowed by Hurricane Katrina, showed a remarkable disconnect between overall economic growth and the economic fortunes of most American families.

It should have been a good year for American families: the economy grew 4.2 percent, its best performance since 1999. Yet most families actually lost economic ground. Real median household income -- the income of households in the middle of the income distribution, adjusted for inflation -- fell for the fifth year in a row. And one key source of economic insecurity got worse, as the number of Americans without health insurance continued to rise.

We don't have comparable data for 2005 yet, but it's pretty clear that the results will be similar. G.D.P. growth has remained solid, but most families are probably losing ground as their earnings fail to keep up with inflation.

Behind the disconnect between economic growth and family incomes lies the extremely lopsided nature of the economic recovery that officially began in late 2001. The growth in corporate profits has, as I said, been spectacular. Even after adjusting for inflation, profits have risen more than 50 percent since the last quarter of 2001. But real wage and salary income is up less than 7 percent.

There are some wealthy Americans who derive a large share of their income from dividends and capital gains on stocks, and therefore benefit more or less directly from soaring profits. But these people constitute a small minority. For everyone else the sluggish growth in wages is the real story. And much of the wage and salary growth that did take place happened at the high end, in the form of rising payments to executives and other elite employees. Average hourly earnings of nonsupervisory workers, adjusted for inflation, are lower now than when the recovery began.

So there you have it. Americans don't feel good about the economy because it hasn't been good for them. Never mind the G.D.P. numbers: most people are falling behind.

It's much harder to explain why. The disconnect between G.D.P. growth and the economic fortunes of most American families can't be dismissed as a normal occurrence. Wages and median family income often lag behind profits in the early stages of an economic expansion, but not this far behind, and not for so long. Nor, I should say, is there any easy way to place more than a small fraction of the blame on Bush administration policies. At this point the joylessness of the economic expansion for most Americans is a mystery.

What's clear, however, is that advisers who believe that Mr. Bush can repair his political standing by making speeches telling the public how well the economy is doing have misunderstood the situation. The problem isn't that people don't understand how good things are. It's that they know, from personal experience, that things really aren't that good.

Since shortly before Thanksgiving, gasoline prices have been returning to their pre-Katrina levels, which has led to an increase in Chrnistmas spending at bargain retail outlets.

But it's not like no one noticed the price gouging didn't stop until the CEOs of the major American oil companies got hauled before Congress to testify- excuse me, "clarify" exactly what was going on with prices.

What's the real cause of the joylessness of the Wrecovery outside of the corporate boardroom?

It's quite simple. You'd figure an economist would savvy it the same way a scientist would savvy the conservation of matter and energy.

In a new book, "Ahead of the Curve" (Harvard Business School Press, 2005), Mr. Ellis argues that the economy's direction is easier to divine than many people think. Cast aside the recession obsession, look beyond the torrent of confusing data each week, he says, and you can often tell what the economy's next move will be. You still won't know when the next recession is coming, but neither do Mr. Greenspan or Wall Street's prophets.

In 2006, Mr. Ellis says, the economy will probably slow more than most forecasters predict, for the same important reason it has typically slowed at other points in the last 40 years: weak wage growth.

The forecasters polled in a regular survey by the Philadelphia Fed say they think that the economy will expand 3.4 percent next year, down from 3.6 this year. To Mr. Ellis - who is also the founder of Blue Tulip, a chain of gift and paper stores in the Northeast - 2 percent growth might be more likely.

"We're probably past the peak," he said.

The key to his system is paying attention to people's paychecks and comparing them with inflation. These checks receive less attention than the unemployment rate or job growth, but they are far more important to the economy...

But let's be honest with ourselves. Economists outside academia working for political and corporate interests generally understand this kind of thing. It's just very hard to stay employed if you talk about it very much.