Despite the doom-and-gloom economic scenario painted by presidential contender Donald Trump, Americans today are economically better off than they were 10 and 20 years ago, although the pace of improvement has slowed, write former Fed Chairman Ben Bernanke, now a Distinguished Fellow in Residence with the Economic Studies Program at Brookings, along with Brookings research analyst Peter Olson, in a blog published Wednesday.
“Life in America is good, compared to other countries and to the country’s own past, and still improving,” the authors write. “But there has been a significant slowdown in the pact of improvement that requires attention from policymakers.” Bernanke and Olson appear to be joining the call being made by other economists, including the Fed’s chair and vice chair, for the next Congress and president to adopt fiscal policies that promote growth.
Per capital GDP grew at an annual rate of 2.13% in the 1995-2007 period, then slowed to 0.42% annually from 2007 to 2015, Bernanke and Olson calculate, based on data from Stanford economists Charles Jones and Peter Klenow for the earlier period as well as data from the Bureau of Economic Analysis, CDC, Conference Board, Census and OED.
A broader measure of “economic welfare,” which, in addition to income, includes consumption, working time, life expectancy and inequality showed a similar pattern: an annual increase of 3.3% from 1995 to 2007 slowing to roughly 0.9% from 2007 to 2015.
“Economic welfare improved at quite a rapid pace over the two decades before the crisis,” the authors write, referring to the financial crisis and Great Recession of 2007-2009, driven by consumption and improvements in life expectancy.
But from 2007 on, per capital consumption slowed sharply – to an annual growth rate of 0.4% while life expectancy rose 0.5%, compared to 2.3% and 1.17%, respectively, during the previous 1995-2007 period. In addition, inequality has been growing, subtracting almost one-quarter of a percentage point from economic welfare growth in the latest period compared to a 0.16% subtraction in the 1995-2007 period.
The authors are critical of the recent Census report showing that real median household income rose by 5.2% last year, indicating a raise finally for the middle class. “The conclusion puts too much weight on a useful, but flawed and incomplete statistic,” the authors write, because it excludes “taxes, transfers, nonmonetary compensation such as employer-provided health insurance and … is based on surveys rather than more complete tax and administrative data.”
They favor instead the more comprehensive measurements put forth by professors Jones and Klenow, which include leisure time, life expectancy and economic equality as well as consumption. They found that in the early to mid-2000s, the economic welfare of the U.S., set at 100, surpassed that of the U.K. (97%), France (92%) and Italy (80%) in addition to developing economies such as Mexico (22%) and China (6.3%).
“Disappointing economic growth, including the slow improvement in consumer spending power, is the dominant reason” for the subsequent slowdown in the growth of U.S. economic welfare,” according to Bernanke and Olson.
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