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Where The U.S. Economy Lags


Economic Trends

Where the U.S. Economy Lags

Is it becoming a low-wage nation?

Despite conditions that have "improved remarkably" since 1995, the fundamental economic situation in the U.S. still can't be considered "good." That's the conclusion of labor economists Lawrence Mishel, Jared Bernstein, and John Schmitt of the Economic Policy Institute, a liberal Washington think tank. "Although the current income boom has generated substantial improvements, by many measures of adequacy, inequality, and income, the current economy still does not match up to reasonable expectations," they write in their forthcoming book, The State of Working America 2000-2001.

The authors concede that recent signs are encouraging. The jobless rate has plummeted, inflation is low, and labor productivity--output per hour worked--has grown at about 2.5% annually since 1995. That's nearly twice the 1.4% rate that prevailed from the mid-1970s through mid-1990s. Still, U.S. compensation--wages plus benefits--has risen more slowly than in most other advanced nations during the past decade (chart). Real compensation per worker grew at an average rate of 0.7% vs. a 1.1% annual gain for the European Union and even faster rates for nations such as Britain and Sweden. "At least among the rich, industrialized countries, the U.S. has become something of a low-wage country," the authors say.

Just focusing on wages doesn't improve the picture. While productivity rose by about 20% from 1989 to 1999, "typical workers received virtually none of this increase," write Mishel, Bernstein, and Schmitt. Rather than increasing along with productivity, median real wages for men actually fell during the past decade, while women saw only a 4% gain. Their conclusion: "The U.S. economy is among the least dynamic" of the industrial countries, a far cry from the now widespread belief in the New Economy.By Charles J. WhalenReturn to top

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The Smoothing Effect of Taxes

They still stabilize the economy

Historically, the federal tax system served as an "automatic stabilizer" for the economy. The government would take a larger income share in good times, as people moved into higher tax brackets, and a smaller share in downturns. The net effect: to smooth out the ups and downs of the business cycle.

Most economists had assumed that the tax-law changes of the past three decades--in particular, the sharp reduction in marginal rates and the lessening of the progressivity of the tax system--had seriously diminished its automatic-stabilizing abilities. But a paper by economists Alan J. Auerbach of the University of California at Berkeley and Daniel R. Feenberg of the National Bureau of Economic Research suggests that automatic stabilizers are just as potent as they were in the 1960s.

Auerbach and Feenberg reckon that the tax structure automatically offsets about 8% of any unexpected change in national spending. Every $100 billion decline in gross domestic product, for example, will be met with an $8 billion increase in private spending because of reduced taxation--about the same as would have occurred in the early 1960s. With the exception of the late 1970s and early 1980s, this stabilizing effect has been constant for the past 40 years.

The authors note that "the effects of particular tax changes have tended to cancel each other out." For example, while income-tax rates have fallen--from a top bracket rate of 91% in the early 1960s to today's 39.6% top rate--the earned-income tax credit has grown in importance. The program, for the working poor, is highly sensitive to the state of the business cycle because the credits to low-income workers phase out quickly as they earn higher wages.

But there's a catch to automatic stabilizers. Because average tax rates fall in a recession, much of the extra revenue generating today's federal budget surplus may disappear if the economy slows. That may throw a huge wrench into the economic programs of both Presidential candidates, which assume large surpluses.By Charles J. WhalenReturn to top


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