Real Trouble

By Kevin D. Williamson

Sunday, August 07, 2022

 

Unless you happen to be a very cynical Republican office-seeker, the recent jobs numbers have been very encouraging: The unemployment rate continues to decline, and the July employment report — with its more than a half a million new jobs — was better than expected.

 

That’s all good news, but there are wrinkles.

 

One of those wrinkles is that the labor-force-participation rate — the share of Americans who either have a job or are looking for one — continues to decline. We have a growing population but a shrinking workforce — and workers’ aging into retirement explains only part of the decline.

 

The other wrinkle — a big, ugly wrinkle — is that Americans’ real incomes (“real” is econo-speak for “adjusted for inflation”) have been declining significantly for some time. Here is what that graph looks like:

 

After a big jump up in the immediate post-Covid recovery (not that we are quite entirely “post-Covid”) real wages have declined steeply — in fact, they are back down to where they were around the end of 2019, and trending in the wrong direction. Nominal wages (“nominal” meaning the number on the paycheck) have gone up, but they have gone up only about half as fast as prices, meaning that workers are worse off overall when you consider both wages and prices. Americans are working more but getting less in return for their work. They are also producing less, which is what the decline in real GDP means. The Biden administration would very much like to tell voters that we are not in a recession because of the “strong labor market,” but in reality, the price of labor has not been increasing anywhere near as quickly as the price of potatoes, to say nothing of energy. Talking up the low unemployment rate is a hollow boast when Americans are working more for less, and when so many of them have given up looking for work at all.

 

That labor-force-participation-rate decline is especially remarkable in light of the recent phenomenon of widespread “unretirement,” with Americans who thought they had retired being forced back into the workforce by rapidly increasing prices.

 

Populists on the right and on the left, from Donald Trump to Bernie Sanders, have complained that Americans’ wages have long failed to keep up with GDP growth, productivity, and other economic variables that seem like they ought to go along with higher wages. The relationship between presidents and economic outcomes is a vague and complex one, and our habit of blaming or crediting presidents for what happens to Americans’ paychecks during successive four-year periods crosses well over into superstition, but economic performance, particularly vis-à-vis real wages, inevitably has a powerful effect on the national mood and hence on the popular judgment of the president’s job performance.

 

That said, if you look at wages vs. GDP, labor productivity, and the unemployment level for the past decade, from the end of the Barack Obama years through the Trump administration and into the wobbly Age of Biden, you’ll start to see why that populist disappointment is so thoroughly bipartisan:

 

 

Growth in real wages over the years hasn’t been nothing, but it hasn’t been especially impressive, either, irrespective of which president or party occupies the Oval Office. Here’s real wages alone from the end of the Jimmy Carter administration through some very different presidents and up to the most recent figures:

 

 If we take the first quarter of 2020 as our benchmark and call it 100, then we have gone from 91 in 1979 to 97.3 in the second quarter of 2022. What that means is that as the Federal Reserve runs the numbers, American workers are in real terms making only about 7 percent more today, well into the 21st century, than they were in the last days of disco.

 

There are a number of important factors that drive real-wage performance. The urgent and critical problem right now is — unusually — one that is mostly within the power of policy-makers to manage, and that is destructive inflation, driven in part by recklessly large increases in federal spending, including covert spending in the form of government credit and credit subsidies. That latter factor is larger than you might expect: The federal government already has more than $5 trillion in loans on its books, a loan portfolio that would make it the largest bank in the world if it were a bank. Subsidized credit is the coward’s way of spending money on friends and cronies, because spending-by-lending allows you to list these subsidies as “assets” on your books rather than characterizing them as spending. The Manchin–Schumer bill advertised as reducing inflation will actually make the situation worse, by piling hundreds of billions in new lending and loan guarantees onto the federal ledger.

 

Americans’ wages have been going up a bit in nominal terms — it is inflation that has real wages declining. And inflation is something that Washington can actually do something about.

 

But the bigger picture is complex and not so easily managed. Trade increases some Americans’ wages by creating bigger markets for the things they produce, from energy to agricultural products to services. (Populists like to piss on the service industry for some reason, considering it less attractive than manufacturing even though “services” includes everything from architects to software engineers to Wall Street finance monkeys.) But trade also exposes some Americans, typically at the lower end of the income distribution, to more direct competition from lower-wage workers in relatively poor countries, which is why flip-flops are made in China and Vietnam and the Philippines rather than in Fairfield County, Conn. Investment can raise wages by making workers more productive — in the 1820s, cotton was picked by slaves; in the 1920s, it was picked by poor wage-earners; in the 2020s, it is picked by operators of high-tech machinery who can earn as much as a reasonably good lawyer does — but that increased productivity often comes from reducing the number of workers who are needed to perform a given task. Education can make workers more productive by increasing their skills, and it can raise wages by increasing the universe of job options a given worker has, but much of the extraordinary amount of money we spend on education does nothing of the kind, and at the ugly margin the ubiquity of grievance studies in higher education makes some graduates less able to advance in the world.

 

So we have seen wages and trade often move in ways that appear to be uncorrelated; we have seen increases in investment that have not always gone along with increases in real wages; and we have seen enormous expenditures on education that do not leave graduates any better off, at least as measured by income. The economy is not a game of chess to be played by masters, it is not a laboratory process that can be managed by scientific methods, and still less is it an exercise in magic in which outcomes can be improved by such fanciful inputs as empathy.

 

If policy-makers in Washington could be sure that their policies would consistently, reliably, and predictably have the desired effect, then there would be no economic issues in politics, because there would be steady growth, low unemployment, rising wages, rising profits, no recessions, no real inflation, etc. We don’t have non-optimal economic problems because people in Washington are being bought off by special interests (ones that apparently want recessions and high inflation, whomever those might be), or because they are wicked and don’t care about the good of the people. We have non-optimal economic problems because people in Washington don’t actually know what to do with any degree of specificity, because there are competing priorities, because real-world events change more quickly than policy-makers can account for, and because the world is complex and unknowable.

 

Despite all this, for some reason, the political incentives encourage those in power to lie and pretend to omnipotence rather than to tell the truth about their limited knowledge and modest real-world capabilities. But there are some things that really do work in a reliable and consistent way, and one of those is maintaining a reliable and consistent economic-policy environment. I care less about whether the top personal income-tax rate is 39 percent or 36 percent than I do about whether we can pick one and stick to it for a few decades at least, and, more generally, about ensuring that we do not undertake big and disruptive changes to the policy environment without real consensus and careful deliberation. But instead of that conservative approach, every time a party achieves a temporary majority in Congress or control of the White House, its leaders promise revolution and a radical reordering of taxes, regulations, incentives, terms of trade, and everything else they can think of. I suspect that one of the poor results of that erratic approach is documented in those disappointing charts above.

 

Maybe it will take another few decades of disappointing real-wage growth for Americans to figure out. But they can expect to be better governed once they do.