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Monday, December 05, 2005

Paul Krugman: The Joyless Economy

Paul Krugman looks at why there is so much discontent over economic conditions even though the numbers indicate the economy is doing fairly well:

The Joyless Economy, by Paul Krugman, NY Times: Falling gasoline prices have led to some improvement in consumer confidence ... But the public remains deeply unhappy about the state of the economy. ... Yet by some measures, the economy is doing reasonably well. In particular, gross domestic product is rising at a pretty fast clip. So why aren't people pleased with the economy's performance? ... The Bush administration seems genuinely puzzled that it isn't getting more credit for what it thinks is a booming economy. So let me be helpful here and explain what's going on.

I could point out that the economic numbers, especially the job numbers, aren't as good as the Bush people imagine. ... But the main explanation for economic discontent is that it's hard to convince people that the economy is booming when they themselves have yet to see any benefits... Back in August the Census bureau released family income data for 2004. The report, which was overshadowed by Hurricane Katrina, showed a remarkable disconnect between overall economic growth and the economic fortunes of most American families. It should have been a good year for American families: the economy grew 4.2 percent ... Yet most families actually lost economic ground. Real median household income ... fell for the fifth year in a row. And one key source of economic insecurity got worse, as the number of Americans without health insurance continued to rise. ...

Behind the disconnect ... lies the extremely lopsided nature of the economic recovery... The growth in corporate profits has ... been spectacular. Even after adjusting for inflation, profits have risen more than 50 percent since the last quarter of 2001. But real wage and salary income is up less than 7 percent. There are some wealthy Americans who derive a large share of their income from dividends and capital gains on stocks... But ... the sluggish growth in wages is the real story. ... Average hourly earnings of nonsupervisory workers, adjusted for inflation, are lower now than when the recovery began.

So there you have it. Americans don't feel good about the economy because it hasn't been good for them. Never mind the G.D.P. numbers: most people are falling behind. It's much harder to explain why. The disconnect between G.D.P. growth and the economic fortunes of most American families can't be dismissed as a normal occurrence. Wages and median family income often lag behind profits in the early stages of an economic expansion, but not this far behind, and not for so long. Nor, I should say, is there any easy way to place more than a small fraction of the blame on Bush administration policies. At this point the joylessness of the economic expansion for most Americans is a mystery.

What's clear, however, is that advisers who believe that Mr. Bush can repair his political standing by making speeches telling the public how well the economy is doing have misunderstood the situation. The problem isn't that people don't understand how good things are. It's that they know, from personal experience, that things really aren't that good.

Update: Greg Mankiw offers an alternative explanation.

Previous (12/2) column: Paul Krugman: Bullet Points Over Baghdad
Next (12/9) column: Paul Krugman: The Promiser in Chief

    Posted by on Monday, December 5, 2005 at 12:34 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (29)

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