http://www.epinet.org/
SPECIAL EDITION, JANUARY 2006
The State of the Economy
The upcoming State of the Union address has revived interest in examining
how well the economy is doing, how people are faring and whether the
current policies of tax cuts have generated jobs and growth, as promised.
A number of observers seem to suggest that the economy is doing very well
and that people mistakenly believe that the economy is on the wrong track.
The facts are that trends in almost every indicator of the aggregate
'macro' economy—GDP growth, investment, payroll employment, personal
income—have been inferior in this business cycle and recovery when
measured against earlier comparable periods (see The boom that wasn't).
Moreover, the wages of workers (inflation-adjusted) fell in 2005 from 2004
levels and have been falling for several years (see Economy up, wages
down). For instance, the wage (inflation-adjusted) of the median worker
fell 1.3% in 2005. Given declining wages it is not surprising that the
typical (median) household income fell for five years in a row through
2004 (2005 income data are not yet available), poverty has risen, and
families have gone deeper into debt. Furthermore, health care costs are
taking a bigger bite out of family incomes (see What's wrong with the
economy?). The bottom line is that people do not feel good about trends in
the economy because the things that matter most to them—wages, jobs,
family income—have not been making them better off.
The administration claims that its tax cuts have led to jobs and growth.
Yet, as we have shown, GDP, investment and other trends do not support
this claim. A simpler way of showing the failure of the tax cuts to
deliver jobs is to note that private sector jobs, excluding those
generated by military or other government spending, have not increased
since early 2001 (see Sluggish private job growth indicates failure of
tax cuts). If private sector jobs have not been created in significant
numbers, how can one say that the tax cuts have worked?
There has also been some bragging about recent job creation and the
current 'low' unemployment rate. However, (see Why people are so
dissatisfied with today's economy), unemployment remains higher than the
4.0% in 2000 and today's unemployment is artificially low because of a
major withdrawal from the labor force. Job creation in this recovery lags
behind every other recovery, and the only wage growth in this decade was
based on the momentum from the 1990s recovery. That wage growth petered
out as the recession took hold and hasn't resumed more than four years
into the recovery.
Last, the administration claims that poor wage growth is the result of
higher health care costs squeezing wages. Actually, what has squeezed
wages is the huge boost in profits in recent years. Rising health care
costs cannot explain any of the following: the falling real wages of
low-wage workers (1.9% down in 2005) who generally do not have
employer-provided health insurance (47% of the entire workforce does not);
the lower compensation growth (wages and health and other benefits) in
2005 than in 2004; or the slowdown in wage growth in 2005 even though
health costs also rose more slowly relative to earlier years (see The wage
squeeze and higher health care costs).
The mission of the Economic Policy Institute is to provide high-quality
research and education in order to promote a prosperous, fair, and
sustainable economy. The Institute stresses real world analysis and a
concern for the living standards of working people, and it makes its
findings accessible to the general public, the media, and policy makers.
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