I have been spending a great deal of time recently developing an analysis of the U.S. economy, which I presented at Commonwealth’s National Conference. The key issue for everyone is jobs and employment. Why has the recovery been so slow, what can we do to make it better, and when can we expect it to get back to normal?
First, let’s define normal. During the past 20 years, normal has come to mean an unemployment rate of around 5 percent, job growth of 150,000 per month or so—enough to absorb the average population increase—and productivity growth that enabled incomes to rise and the average person to improve his or her life over time.
Or so we thought. It turns out that, when you look at the numbers, the average household income was supported by a number of unsustainable trends, which have run their course.
The first trend was the rising labor participation rate. This has been widely lauded as a good thing, and in many ways it was. What drove it, however, was mixed. One factor was the growing proportion of the population in the prime working years. During the past 30 years, this group has included the parents of the baby boomers, the boomers themselves, Generation X, and the millennials. Naturally, as more of the population wanted to work and was of an age to do so, employment rose.
Another factor, less natural and good, was economic necessity. As real incomes stagnated, in order for standards of living to improve, families had to do more work. Multiple jobs became more common, the stay-at-home mom became the exception rather than the rule, and rising incomes meant rising workloads for everyone.
The final major factor—and one that turned out to be neither natural nor good—was the increasing availability and acceptability of debt. Consumer borrowing skyrocketed during the period. Credit cards and housing loans allowed people to buy now and pay later. In fact, if you look at economic growth in the 1990s and 2000s and remove the spending from home equity loans, you end up with recessions that we did not have. Cheap and easy debt allowed demand to grow in a sustained way to an unsustainable level, which supported more employment.
And then it collapsed—with consequences we’ve been living with for the past four years. Consumers are paying off debt and not borrowing more. Demand for many goods has collapsed. No one really expects it to revert to pre-crisis levels because it is clear that we as a society had been living beyond our means. And, although the federal government has stepped into the gap, that is not sustainable either. The national economy has been downsized by the consumer and will have to be downsized by the government.
Which brings us to employment and jobs. Just as consumer and business demand has largely declined, employment has also declined. So the question really is: Even if we understand what has happened and why, what does this mean for the future?