The Daily Item, Sunbury, PA

February 13, 2013

Growth not enough to help middle class

By Jim Tankersley

The Washington Post

WASHINGTON — There are two kinds of middle-class Americans struggling today. There are the people who can't find work or can't work as many hours as they'd like. And there are full-time workers who can't seem to get ahead.

In Tuesday's State of the Union and its response, there wasn't much for either group — at least when it comes to their biggest problem.

Both speeches talked about the need for faster economic growth. There was a time that would have been enough. But not today.

In the past three recoveries from recession, U.S. growth has not produced anywhere close to the job and income gains that previous generations of workers enjoyed. The wealthy continued to do well. But a point of increased growth today simply delivers fewer jobs across the economy and less money in the pockets of middle-class families than an identical point of growth produced in the 40 years after the Second World War.

This erosion between growth and the prosperity of average Americas is still vexing economists and a lot of lawmakers have yet to even acknowledge the problem. But repairing this link is arguably the most critical policy challenge for anyone who wants to lift the middle class.

President Obama alluded to this breakdown in his State of the Union address. "Every day," he said, "we should ask ourselves three questions as a nation: How do we attract more jobs to our shores? How do we equip our people with the skills needed to do those jobs? And how do we make sure that hard work leads to a decent living?"

But outside of some targeted help for manufacturing jobs and some new investments in skills training, the proposals Obama offered focused comparatively little on repairing the relationship between growth and jobs, or growth and income. Obama's boldest plans included increasing the minimum wage and guaranteeing every child a preschool education. Both aim largely to boost poorer Americans and help their children gain a better shot at landing the higher-paying jobs.

The Republican response to Obama's speech did not appear to nod to the new reality at all. The speaker, Sen. Marco Rubio of Florida, declared that "economic growth is the best way to help the middle class" and offered few job-creation proposals that appeared materially different from what Republican politicians have pushed since the 1980s.

It's painfully true that the recovery under Obama has produced slower growth rates than any sustained recovery dating back to the Great Depression. That's only part of the problem. The growth that has occurred hasn't produced anywhere close to a historically "normal" level of job creation or income gains.

Nearly four years after the Great Recession ended, 12 million Americans are actively looking for work but can't find a job; another 11 million are stuck working part-time when they'd like to be full-time, or they'd like to work but are too discouraged to job-hunt. Meanwhile, workers' median wages were lower at the end of 2012, after adjusting for inflation, than they were at the end of 2003. Real household income was lower in 2011 than it was in 1989.

From 1948 through 1982, recessions and recoveries followed a tight pattern. Growth plunged in the downturn, then spiked quickly, often thanks to aggressive interest-rate cuts by the Federal Reserve. When growth returned, so did job creation, and workers generally shared in the spoils of new economic output.

You can see those patterns in comparisons of job creation and growth rates across post-World War II recoveries. Starting in 1949 and continuing for more than 30 years, once the economy started to grow after a recession, major job creation usually followed within about a year.

At the height of those recoveries, every one percentage point of economic growth typically spurred about 0.6 percentage points of job growth, when compared to the start of the recovery. You could call that number the "job intensity" of growth.

The pattern began to break down in the 1992 recovery, which began under President George H. W. Bush. It took about three years — instead of one — for job creation to ramp up, even when the economy was growing. Even then, the "job intensity" of that recovery barely topped 0.4 percent, or about two-thirds of normal.

The next two recoveries were even worse. Three-and-a-half years into the recovery that began in 2001 under President George W. Bush, job intensity was stuck under 0.2 percent. The Obama recovery is now up to an intensity of 0.3 percent, or about half the historical average.

Middle-class income growth looks even worse for those recoveries. From 1992 to 1994, and again from 2002 to 2004, real median household incomes fell — even though the economy grew more than 6 percent, after adjusting for inflation, in both cases. From 2009 to 2011 the economy grew more than 4 percent, but real median incomes grew by 0.5 percent.

In contrast, from 1982 to 1984, the economy grew by nearly 11 percent, and real median incomes grew by 5 percent.

Economists are still trying to sort out what broke those historical links between growth and jobs/incomes. Robert Shapiro, an economist who advised President Clinton on the campaign trail and in the White House, traces the change to increased global competition.

"It makes it hard for firms to pass along their cost increases — for health care, energy, and so on — in higher prices," he said. "So instead, they cut other costs, starting with jobs and wages."

Shapiro said the best way to restart job creation is to help businesses cut the costs of hiring, including by reducing the employer side of the payroll tax and pushing more aggressive efforts to hold down health-care cost increases.

Obama seems to have embraced an approach pushed by the Harvard economists Claudia Goldin and Lawrence Katz: helping more Americans graduate college and go on to high-skilled, higher-paying jobs. It's a longer-term bet. But as senior administration officials like to say, the problem didn't start overnight, and it's not likely to be solved overnight, either.