NEW YORK – Economics is often called the dismal science, and for the last half-decade it has come by its reputation honestly in the advanced economies. Unfortunately, the year ahead will bring little relief.
Real (inflation-adjusted) per capita GDP in France, Greece, Italy, Spain, the United Kingdom, and the United States is lower today than before the Great Recession hit. Indeed, Greece’s per capita GDP has shrunk nearly 25% since 2008.
There are a few exceptions: After more than two decades, Japan’s economy appears to be turning a corner under Prime Minister Shinzo Abe’s government; but, with a legacy of deflation stretching back to the 1990’s, it will be a long road back. And Germany’s real per capita GDP was higher in 2012 than it was in 2007 – though an increase of 3.9% in five years is not much to boast about.
In Europe, growth appears set to return this year, though at a truly anemic rate, with the International Monetary Fund projecting a 1% annual increase in output. In fact, the IMF’s forecasts have repeatedly proved overly optimistic: the Fund predicted 0.2% growth for the eurozone in 2013, compared to what is likely to be a 0.4% contraction; and it predicted US growth to reach 2.1%, whereas it now appears to have been closer to 1.6%.
With European leaders wedded to austerity and moving at a glacial pace to address the structural problems stemming from the eurozone’s flawed institutional design, it is no wonder that the continent’s prospects appear so bleak.
But, on the other side of the Atlantic, there is cause for muted optimism. Revised data for the US indicate that real GDP grew at an annual pace of 4.1% in the third quarter of 2013, while the unemployment rate finally reached 7% in November – the lowest level in five years. A half-decade of low construction has largely worked off the excess building that occurred during the housing bubble. The development of vast reserves of shale energy has moved America toward its long-sought goal of energy independence and reduced gas prices to record lows, contributing to the first glimmer of a manufacturing revival. And a booming high-tech sector has become the envy of the rest of the world.
Most important, a modicum of sanity has been restored to the US political process. Automatic budget cuts – which reduced 2013 growth by as much as 1.75 percentage points from what it otherwise would have been – continue, but in a much milder form. Moreover, the cost curve for health care – a main driver of long-term fiscal deficits – has bent down. Already, the Congressional Budget Office projects that spending in 2020 for Medicare and Medicaid (the government health-care programs for the elderly and the poor, respectively) will be roughly 15% below the level projected in 2010.
It is possible, even likely, that US growth in 2014 will be rapid enough to create more jobs than required for new entrants into the labor force. At the very least, the huge number (roughly 22 million) of those who want a full-time job and have been unable to find one should fall.
But we should curb our euphoria. A disproportionate share of the jobs now being created are low-paying – so much so that median incomes (those in the middle) continue to decline. For most Americans, there is no recovery, with 95% of the gains going to the top 1%.
Even before the recession, American-style capitalism was not working for a large share of the population. The recession only made its rough edges more apparent. Median income (adjusted for inflation) is still lower than it was in 1989, almost a quarter-century ago; and median income for males is lower than it was four decades ago.
America’s new problem is long-term unemployment, which affects nearly 40% of those without jobs, compounded by one of the poorest unemployment-insurance systems among advanced countries, with benefits normally expiring after 26 weeks. During downturns, the US Congress extends these benefits, recognizing that individuals are unemployed not because they are not looking for work, but because there are no jobs. But now congressional Republicans are refusing to adapt the unemployment system to this reality; as Congress went into recess for the holidays, it gave the long-term unemployed the equivalent of a pink slip: as 2014 begins, the roughly 1.3 million Americans who lost their unemployment benefits at the end of December have been left to their own devices. Happy New Year.
Meanwhile, a major reason that the US unemployment rate is currently as low as it is, is that so many people have dropped out of the labor force. Labor-force participation is at levels not seen in more than three decades. Some say that this largely reflects demographics: an increasing share of the working-age population is over 50, and labor-force participation has always been lower among this group than among younger cohorts.
But this simply recasts the problem: the US economy has never been good at retraining workers. American workers are treated like disposable commodities, tossed aside if and when they cannot keep up with changes in technology and the marketplace. The difference now is that these workers are no longer a small fraction of the population.
None of this is inevitable. It is the result of bad economic policy and even worse social policy, which waste the country’s most valuable resource – its human talent – and cause immense suffering for affected individuals and their families. They want to work, but the US economic system is failing them.
So, with Europe’s Great Malaise continuing in 2014 and the US recovery excluding all but those at the top, count me dismal. On both sides of the Atlantic, market economies are failing to deliver for most citizens. How long can this continue?