Senator Elizabeth Warren talks about how should government work and who should it work for, implying that it’s not working for the most families. President Trump talks about the growing economy with its recording setting levels of low unemployment, and while neither view is incorrect it doesn’t mean we should be sanguine about it either. The reason for their different takes on the economy is because they’re each looking at the economy from a different perspective.
Warren’s looking at the economy’s secular trend, it’s evolution over time due to changes in cultural or institutional practices. Trump is looking at the business cycle, the economy’s irregular pattern of expansions and recessions. If this distinction seems complicated, it gets worse there’s a third set of patterns called seasonal, like the Christmas buying season or the back-to-school season. Since seasonal patterns happen at the same time every year and are not affected by economic policies we statistically smooth out their ups and downs so as not to give a false impression of what is happening in the economy, these “altered” numbers are called seasonally adjusted.
If seasonal changes are the closest view of the economy, the business cycle is one step back, a slightly wider view. From this perspective President Trump is correct, the economy is expanding, not at the projected four to 6 percent, but at a 2 percent rate which is probably quite good for a mature economy like we have in the US. Our low unemployment rate is the result of a long expansion coupled with a labor force that is growing at a slower rate than the economy. But even this view does not give a good picture of where we are headed. For that we need to look at the secular trends.
Trump is focusing on the economy’s short-run performance in a somewhat superficial manner. Warren wants us to look at the impact the economy is having on families. GDP growth is the average increase in the nation’s production, not of a particular firm or industry. Likewise, the unemployment rate is just a percent of the labor force not employed. But for any particular individual you are employed or not, no one is 3.9 percent unemployed. In other words, the macro numbers are applicable to the nation as a whole, but to no one in particular.
Warren is concerned that we’re becoming two societies, one well paid and prepared for any eventuality including retirement, with the other ill paid, financially unprepared for the next recession, relying solely on Social Security for its retirement needs. Her concerns are highlighted by the fact that our per capita gross national income is $63,000 or $189,000 for the average family of three, while one in five families, last year, subsisted on less than $25,000 per year before taxes.
For Warren, there is nothing on the horizon that is going to alter the performance of the economy. She’s seen each recession end followed by a recovery and a subsequent expansion, but even at the next cyclical peak what the economic statistics made clear was that no trends had been altered. Wages continued to stagnate, the share of income going to labor continued to decline as did savings. Company-funded pensions continued to be converted to 401k’s with the retirement risk being shifted from the firm to the individual. Health care and higher education costs rose almost twice as fast as wages, with child care cost increases so crippling that many women are simply priced out of the labor market.
For her, the only solution is to change the structure of the economy. She envisions a world where the minimum wage is increased and indexed and the tax code is improved by taxing wealth and financial transactions. As the tax code changes she envisions the federal government being able to fund a universal health care system, free college educations and the elimination of most student loan debt. In addition to fiscal policy changes she would like to strengthen banking regulations by bringing back a modern day Glass-Steagall Act, revamp our antitrust allowing for the break up of the large tech monopolies and strengthening the Consumer Finance Protect Bureau.
Since 1989, the wealthiest 1 percent of Americans have added $21 trillion to their combined net worth, while the poorest 50 percent of Americans have seen their combined net worth drop $900 billion. We’ve maintained the illusion of economic progress by increasing hours worked to levels greater than our grandfathers, by employing the vast majority of married females, and pushing consumer credit to dangerous levels. Some may consider Warren too radical, but given the path we’ve been on for the last 40 years, what do we have to lose?