George Bush's Upside Down Economy

For the most part, the recent economic recovery has been a "job-loss" one. Although the economy has been growing strongly, the labor market has not. There are fewer jobs in the third year of this recovery than there were at the start of the recession – a first since World War II. Equally as disturbing as the lack of jobs is the fact that this recovery is "upside down:" profits are soaring to record heights while income growth is extremely slow.

• The normal distribution of gains is reversed in this recovery. One distinguishing feature of this recovery as compared to previous ones is a growing gap between supply and demand (demand for new products is abysmally slow, while supply growth is strong). The consequences of this sluggish demand have not been shared equally. Business profits have soared while wage and employment gains have lagged. This recovery marks the first time in history that the share of additional income that has gone to profits is larger than the share of additional income that has gone to employee compensation (wages and benefits).
• Corporate earnings are not being reinvested in jobs. The recent rise in corporate profitability has clearly not resulted in a hiring boom. The economy is hundreds of thousands of jobs short of where it was when the recession began. Compared to reasonable standards of growth, it is millions of jobs short of what would be expected. Investment, usually a leading contributor to growth, declined for nine consecutive quarters (starting with the first quarter of 2001) and only started to grow in the second year of the recovery.
• A debt-driven recovery is unsustainable. Because income growth has been slow, household consumption has been increasing through borrowing – particularly through mortgage refinancing. At some point, however, this debt burden will put downward pressure on households' ability to increase consumption. Other factors that normally contribute to growth – including government spending, rising exports and business investment – have all been stymied because of the worsening budget and dollar situations. For stronger consumption growth to continue, the U.S. economy needs faster income growth.

For more information, see Christian Weller's "Reversing the 'Upside-Down' Economy."

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