The end of 2017 inspired a good deal of understandable economic boasting among political officeholders as different as President Donald Trump and Gov. Mark Dayton.
And why not? On the whole, and on the face of it, the economic news across America and in Minnesota seems as upbeat as it has in a full decade — a challenging time darkened by the Great Recession and the reputedly Not-So-Great Recovery that followed.
Politicians may have had little enough to do with turning things around, but can a rooster be faulted for bragging about the dawn?
The stock market has soared, with the many unnerving storms of Trump’s first year in office seeming only to fill investors’ sails. Unemployment is low nationally, and in Minnesota — as Dayton touted at the cusp of his final year in office — joblessness dropped well below the national rate to just 3.1 percent last month, the lowest in 17 years and a level reflecting uncomfortable worker shortages.
On New Year’s Eve, the Star Tribune’s panel of distinguished local investment gurus predicted, almost uniformly, another bullish year ahead. A year earlier, they had been rather too pessimistic.
To be sure, that’s actually a useful reminder that economic events are hard to predict. I would feel remiss not to mention more worried voices in our midst — notably longtime Minnesota economist Ed Lotterman, who writes for the St. Paul Pioneer Press and other papers. Lotterman fears that we have reinflated unsustainable asset price bubbles both on Wall Street and in the countryside, along with other hazards. We dismiss such concerns at our peril.
Anyway, a good news/bad news theme seems to fit the moment. One of the most widely lamented riddles of recent years has been the bad news of “sluggish” growth in workers’ wages persisting despite the good news of that steadily declining unemployment rate.
A tighter market for labor should, in theory, eventually produce more competition for workers and hence smartly higher wages — but this hasn’t happened, we’re told, in the Not-So-Great Recovery.
Theories to explain the disconnect are plentiful, from the competitive pressures of globalization and automation; to mismatches of worker skills and employer needs; to denunionization and low capital investment; to health care costs and occupational licensing excesses, and many more. Many of these problems are real and require real remedies.
But last fall Timothy Taylor on his Conversable Economist blog drew attention to a rather different theory — that wage growth has not been sluggish lately, but in fact has been faster than in any business cycle since Jimmy Carter was president.
The key to the contradiction lies in the difference between “real” wages — adjusted for inflation — and “nominal” wages, which can jump in raw numbers when inflation is high without making everyday life the least bit more affordable.
Taylor cited a September report from the Hamilton Project at the Brookings Institution titled “Thirteen Facts about Wage Growth” and suggests that researchers Jay Shambaugh, Ryan Nunn, Patrick Liu and Greg Nantz have “resolved” the “short-term mystery” of sluggish wage growth.
Shambaugh and company show that since the end of the Great Recession, average hourly earnings, adjusted for inflation (“real earnings”), rose on average 0.82 percent per year. That was faster than wages rose during recoveries of the 2000s (0.31 percent) or 1990s (0.71 percent) — and much faster than the wage growth workers enjoyed in the 1980s recovery (when real wages actually fell 0.37 percent annually).
Now, admittedly, almost all of this feels wrong. The 1980s and ’90s are widely remembered as somewhat more prosperous, go-go times, and were experienced that way by many Americans. As noted, the apparent slowness of progress has gotten more attention lately.
The Brookings scholars’ explain this mainly by noting that the unusually low inflation of recent years “generates a starkly different story for nominal wage growth.”
In fact, ignoring the effect of inflation completely inverts the wage-growth picture of recent decades. In unadjusted dollars, the report shows, wages rose fastest in the 1980s expansion and slowest in the Not-So-Great Recovery since 2010.
But in terms of actual purchasing power, those ’80s raises were much smaller than they seemed, while today’s “sluggish” growth is more vigorous than it appears.
All this reveals in part the simple power of inflation (or its absence) to distort perceptions. Few of us carry inflation calculators around as we go about our daily lives, or systematically study the pattern of prices we pay. But we notice how many more dollars are — or are not — being added to our paychecks. So the unusually low inflation of recent years has, in this view, obscured considerable gains in actual well-being.
Another complication is inequality — the much-discussed fact that wage gains have long been unequally distributed, with earnings among the best-paid 20 percent of workers (and up) rising much faster than the rest.
An additional piece of mixed good news noted in the Hamilton Project report is that during the latest recovery, inflation-adjusted wages for the lowest-paid 20 percent of workers have risen quite sharply, driven partly by hikes in minimum wages.
On the other hand, wage growth continues to lag for what might be called lower-middle-class earners — essentially the “working class” whose legitimate discontents, economic and otherwise, have rocked American culture and politics.
Truth is, to prolong the good-news/bad-news two-step, another whole section of the Brookings study deals with the longer-term trend in overall wage growth, which is not an upbeat story.
Looking at the whole 44-year period since the post-World War II boom ended in 1973, average hourly wages, adjusted for inflation, rose just 10 percent. That meets anyone’s definition of sluggish progress, and it goes a long way toward explaining America’s loss of confidence and ever-more bitter and unconstructive political debate.
But nothing is gained by letting what good news there is remain a mystery.
D.J. Tice is at Doug.Tice@startribune.com.