The Strange Case of American Inequality

BERKELEY – Unless something goes unexpectedly wrong in 2014, the level of real per capita GDP in the United States will match and exceed its 2007 level. That is not good news.

To see why, consider that, during the two business cycles that preceded the 2007 downturn, the US economy’s real per capita GDP grew at a 2% average annual pace; indeed, for a century or so, the US economy’s real per capita GDP grew at that rate. So US output is now seven years – 14% – below the level that was reasonably expected back in 2007. And there is nothing on the horizon that would return the US economy to – or even near – its growth path before the 2008 financial crisis erupted. The only consolation – and it is a bleak consolation indeed – is that Europe and Japan are doing considerably worse relative to the 2007 benchmark.

The US economy’s annual per capita underperformance in 2014 will thus amount to $9,000. That means $9,000 per person per year in consumer durables not purchased, vacations not taken, investments not made, and so forth. By the end of 2014, the cumulative per capita waste from the crisis and its aftermath will total roughly $60,000.

If we project that forward – with nothing visible to restore the US to its pre-2008 growth path – at the annual real discount rate of 6% that we apply to equity earnings, the future costs are $150,000 per capita. If we use the 1.6% annual real discount rate at which the US Treasury can borrow via 30-year inflation-protected Treasuries, the future per capita costs are $550,000. And if we combine the costs of idle workers and capital during the downturn and the harm done to the US economy’s future growth path, the losses reach 3.5-10 years of total output.