U.S. President Barack Obama speaks during the Let Freedom Ring Commemoration and Call to Action to commemorate the 50th anniversary of the March on Washington for Jobs and Freedom at the Lincoln Memorial in Washington, D.C.
What if there are no structural flaws? What if the market is working as it is supposed to?
That’s certainly the evidence in the U.S. from the last two years. Over this time, the benefits of economic growth have been shared more widely.
In 2015, median U.S. household incomes rose by 5.2 percent. That was the fastest surge in percentage terms since the U.S. Census Bureau began keeping records in the 1960s. Women living alone saw their incomes rise by 8.7 percent. Median incomes for American Hispanics rose by 6.1 percent. Immigrants’ incomes, excluding naturalized citizens, jumped by over 10 percent.
The numbers for 2016 have just been released by the U.S. Census Bureau, and the trends are pretty much the same. Median U.S. household income rose another 3.2 percent, after inflation, to its highest level ever. The poverty rate fell some more. The share of national income going to labour is now rising, while the share going to capital is falling.
The evidence from the past two years strongly supports those who have argued all along that income has not decoupled from productivity. A wide range of economists, including Martin Feldstein, Stephen Rose, Edward Lazear, Joao Paulo Pessoa, John Van Reenen, Richard Anderson of the St. Louis Fed, and a team from Goldman Sachs, have produced studies showing wages tracking very predictably with productivity.
If anything, wages are a little higher than you’d expect from looking at the productivity and inflation numbers alone.
The problem of the American middle-class squeeze, in short, may not be with how the fruits of productivity are distributed, but the fact that there isn’t much productivity growth at all. It’s not that a rising tide doesn’t lift all boats; it’s that the tide is not rising fast enough.
For those interested, Shawn Sprague has a good summary of the data at the U.S. Labor Department’s “Beyond the Numbers.” He shows conclusively that during this recovery we’ve endured a historically low labour productivity growth rate of 1.1 percent. By some estimates, if productivity increases had kept pace with the mid-20th-century norm, median incomes would be US$40,000 higher than they are today.
Today politics is polarizing to the populist left and the populist right. But if productivity is the problem, what we actually need is a resurgence of the moderates. The moderate-left policies of Barack Obama must have had something to do with the middle-income gains of the last two years. Moderate Democrats can plausibly argue that government should not be interfering in the markets, but it should be addressing the inequalities that are the result of deeper social forces. There is still a yawning gap dividing the median Asian-American household, which makes US$81,000 a year; the median white household, which makes US$65,000; and the median African-American household, which makes US$39,490.
Moderate Republicans can argue that while government should be active in boosting human capital, and in helping rural America, most of what’s needed is more dynamic capitalism—more trade, more immigration, more free competition, fewer regulatory burdens, more growth.