The Collapse of Work in the Second Gilded Age

How is the U.S. economy doing these days? How are Americans themselves faring economically? These two closely related questions are central to any assessment of the well-being of our society and the health of our body politic. But these questions are more difficult to answer today than at any time in living memory.

This is not because our information-saturated era lacks facts and figures to take our nation's economic measure. Rather, it is because fundamental indicators of our country's economic outlook are far out of alignment with one another. Since the end of the twentieth century, the United States has witnessed an ominous and growing divergence among three trends that should ordinarily move together: wealth, output, and employment.

In terms of wealth creation, the twenty-first century appears to be off to a roaring start. It may look as if Americans have never had it so good and that the future is full of promise. Between early 2001 and late 2015, the net worth of U.S. households and nonprofit institutions almost doubled, rising to $87 trillion (see figure 1.1). In 2015, net worth averaged $270,000 per American — well over a million dollars per family of four. And this upsurge of wealth took place despite the terrible 2008 crash. In 2007, at the pre-crash apogee of estimated U.S. private wealth, total net worth of U.S. households and nonprofit institutions approached $68 trillion. Eight years later it was reportedly almost $20 trillion higher.

The U.S. economy also still looks like the world's unrivaled engine of wealth generation, notwithstanding the vaunted "rise of China." The Credit Suisse Global Wealth Report, for example, estimated that as of mid-year 2015, the United States possessed 34 percent of the entire world's personal ("household") wealth. China ran a distant second at 9 percent. U.S. wealth holdings also exceeded those of Europe in spite of the fact that Europe's population is well over twice as large.

The value of U.S. real estate assets is at or near all-time highs today, and U.S. businesses and corporations appear to be thriving. In the summer of 2016, the Wilshire 5000 Full Cap Price Index set a new record, with a total calculated capitalization of over $22.5 trillion. Since stock prices are strongly shaped by expectations of future profits, it appears investors are counting on the happy days continuing for some time to come.

Impressive as this upswing in measured wealth appears on paper, though, there is also an element of artificiality to it. From the 2008 crash to this day, the Federal Reserve has deliberately inflated U.S. asset values through its unprecedented and prolonged "zero interest rate" policies, interventions that are, unsurprisingly, proving difficult to unwind.

A less cheerful picture emerges if we look at macroeconomic trends. Here, U.S. economic performance since the start of the century might best be described as mediocre and its future prospects no better than guarded.

The 2008 crash brought a severe recession — the worst since the Great Depression — and the recovery has been painfully slow and unusually weak. According to the Bureau of Economic Analysis, it took nearly four years for U.S. gross domestic product (GDP) to regain its late 2007 level. By contrast, in the sharp Reagan-era slump, the recovery took just twenty-one months. Our "Great Recession" was somewhat more akin to the Great Depression, when it took seven years to get back to 1929 levels. As of early 2016, the total value added for the U.S. economy was barely 10 percent higher than before the 2008 crash (see figure 1.2).

The situation is even more sobering with respect to real per capita output. It took the United States until mid-2014 to return to its late 2007 per capita production levels. As of the first quarter of 2016, U.S. per capita output was barely 3 percent higher than it had been eight years earlier. America, it seems, has suffered something close to a "lost decade." And the snapback in per capita GDP since its mid-2009 low has averaged only 1.1 percent a year, barely half of our long-run annual per capita growth rate of 2.2 percent for 1947–2007 or 2.0 percent for 1987–2007. In other words, the U.S. economy currently is not nearly on track to return to its historic growth patterns.

Why is this recovery so much more fitful than other postwar recoveries? Some economists suggest the reason has to do with the unusual nature of the Great Recession. Downturns born of major financial crises intrinsically require longer correction periods than business cycle downturns. Others theorize that the scale of recent technological innovation is unrepeatable or that we have entered into an age of "secular stagnation" with low "natural real interest rates" consistent with significantly reduced investment demand.

What is incontestable is that the ten-year moving average for U.S. per capita economic growth is lower today than at any time since the Korean War and that this slowdown commenced in the decade before the 2008 crash. As a result, a consensus among economists has developed in recent years redefining the growth potential of the U.S. economy downward. The U.S. Congressional Budget Office, for example, suggests that the "potential growth" rate for the U.S. economy at full employment of production factors has now dropped below 2 percent a year, implying a sustainable long-term annual per capita economic growth rate of 1 percent or less.

The situation in the nation's labor force, for its part, is plainly awful (see fig 1.3). Between the start of the century and early 2016, the employment-to-population ratio ("work rate") for Americans ages twenty and older declined by over four percentage points. Postwar America has never experienced anything like this. From peak to trough, the collapse in work rates for U.S. adults in the Bush-Obama years was roughly twice what had been the country's previous worst postwar recession in the 1980s. At that time, it took America five years to regain the adult work rates recorded at the start of 1980. This time, over a decade and a half into our new century, the U.S. job market has scarcely begun to claw its way back to the 2007 work rates. As can be seen in figure 1.3, U.S. adult work rates never recovered entirely after the 2001 recession.

The country's work rates virtually...