Politicians aren’t the best place to go to get an assessment of economic data: they have incentives to overstate the positives and the negatives alike in ways that distort the true picture of how typical Americans are doing.
For instance, with major US stock indexes at record highs in the wake of a massive corporate tax cut, President Donald Trump is almost constantly heralding the strength of the domestic economy. While Democrats such as Rep. Alexandria Ocasio-Cortez dismiss the stock records and argue economy is a rigged game benefiting the wealthiest only.
But both pictures of the economy leave out critical facts. It’s true that wage growth has generally accelerated and many indicators of labor market health are the strongest they’ve been in two decades, but there are also still problems in how the gains are distributed. There’s plenty of room to critique both fundamental inequities and acknowledge that things are better for typical workers now than they have been in a long time.
Stocks at record highs is a good sign for the economy
Publicly-traded US equities are now worth a total of $34.8 trillion dollars, a record and an increase of more than 300% since the lows back in 2009.
If ownership of the equity market was equally distributed, the strength of the stocks would be much more clear-cut good news.
Unfortunately, the distribution of equity market ownership is extremely lopsided: the top 1% of the wealth distribution owns more than half of the total household exposure to the equity market, versus less than 1% owned by the bottom half of the distribution.
While this would indicate the “rigged system” that Ocasio-Cortez is highlighting,there may be some indirect benefit to workers if the stock market performs well. Whether the stock market is the economy or is not the economy is not a new debate, but the basic argument is intuitive.
If stocks are rising, there must be some combination of falling discount rates and rising expectations for the growth of corporate cash flow. The former can be a bit complicated, and the latter isn’t necessarily a sign that the economy is picking up, but often is.
For instance, a recent analysis conducted by Bloomberg showed $36 billion in bottom-line benefit to major banks from 2017’s Tax Cuts and Jobs Act. Bank stocks rising to reflect that windfall would not tell you much about the economy.
But a huge move higher for stocks at the end of a recession or economic rough patch might be another story, as investors rationally expect recovering activity to result in higher revenues and therefore higher profits from large companies.
Put another way, the stock market moving higher is a good sign that US businesses as a whole are doing well, and when US businesses are doing well, the broader economy usually is too.
Good news in wages, but inequality persists
While the stock gains are good news, they are quite derivative. So it’s reasonable to say that stock market gains don’t have much direct impact on the well-being of typical people, and Ocasio-Cortez is correct to identify wages as a key metric of economic vitality for workers.
Income inequality is just as much of a problem as wealth inequality. As shown in the chart below, measures of income inequality have been rising steadily since the mid-1970s, and while they may have been rising slower in recent years the basic trend of higher income concentration has not reversed.
But while there is persistent inequality across the income distribution, wages also point to an improving economic landscape for many people.
The best measure of wages, which adjusts for changing demographics and composition of industries, is the Bureau of Labor Statistics’ Employment Cost Index (ECI). The ECI which measures wages and salaries is up 3% versus the year before as of the third quarter of 2019, more than twice as fast as the post-crisis lows in 2010.
The distribution of wage gains has also improved along with the aggregate growth rate. Nick Bunker, an economist at Indeed, put together the chart below which helps show how much things have improved for Americans with lower wages.
While higher-wage industries are seeing hourly earnings growth just a bit better than 2% versus a year ago, the lowest-wage industries are catching up with wage growth north of 4%.
There are also record low numbers of workers who don’t have a job or want to work more. The chart below shows the total number of unemployed workers, workers who have left the labor force but want a job, and workers who are working part-time because they can’t find full-time work all as a ratio of the total labor force plus those not in the labor force but wanting a job.
In plain English: the broadest, most comprehensive possible measure of unemployment is extremely low, an unmitigated good thing.
If we want to understand and properly address the failures of both equity and efficiency in our economy, an honest assessment of the economy’s current backdrop is necessary. And that backdrop is clear: things are pretty good, but could get much better for those beyond the highest tier of wealth and income.
This is an opinion column. The thoughts expressed are those of the author(s).