The quick way to talk about how any economy is doing is in terms of “growth”. This is just what it sounds – a measure of how much the total value of production in a country has increased in the last month, quarter, or year.
Thinking in terms of total production – more precisely, this is usually Gross Domestic Product, GDP – never tells you everything that you want to know, but it usually gives you a sense of the near term dynamics: are business prospects expanding or contracting; is unemployment going to rise further; and will people’s wages outpace or fall behind inflation?
Seen in these terms, the balance of opinion on the near term outlook for the U.S. today has definitely shifted towards being more positive. A number of prominent analysts have revised upwards their growth expectation for the second half of this year considerably – for example, the ever influential Goldman Sachs was recently expecting 1 percent growth (annualized), now they guess it will be closer to 3 percent.
“Potential” growth in the U.S. is generally considered to be between 2 and 3 percent per annum – this is how fast the economy can usually grow without causing inflation to increase. So the Goldman swing in opinion is equivalent to switching from saying the second half of this year will be “miserable” to saying there will be a fairly strong recovery.
But at this stage in our economic boom-bust cycle, is it still helpful to think in terms of one aggregate measure of output? Or are we seeing the emergence of a two-track economy: one bouncing back in a relatively healthy fashion, and the other really struggling?
Think about this in terms of individuals and the households in which they live. Some people have lost their jobs and are finding reemployment very difficult; many will exhaust their unemployment benefits soon. Others find that what they owe on their mortgages far exceeds the value of their home. And many find they have been cheated by financial products, particularly home loans and credit cards — which is why we need effective consumer protection for finance, and in a hurry.
The traditional U.S. recession remedy is: move to another, more prosperous part of the country. But nowhere is exactly booming at present. And how do you move if you can’t sell your house?
The overall numbers on outcomes by groups can get complicated (here’s a partial guide), but the simple version is: the top 10% of people are going to do fine, the middle of the income distribution have been hard hit by overborrowing, and poorer people will continue to struggle with unstable jobs and low wages.
Can the richest people spend enough to power a recovery in overall GDP? Perhaps, but is that really the kind of economy you want to live in?
The United States has, over the past two decades, started to take on characteristics more traditionally associated with Latin America: extreme income inequality, rising poverty levels, and worsening health conditions for many. The elite live well and seem not to mind repeated cycles of economic-financial crisis. In fact, if you want to be cynical, you might start to think that the most powerful of the well-to-do actually don’t lose much from a banking sector run amok – providing the government can afford to provide repeated bailouts (paid for presumably through various impositions on people outside the uppermost elite strata).
Ultimately, of course, you get lower growth. But by the time that is clear in the numbers, it may be too late to do much about it.
By Simon Johnson
This post originally appeared on the NYT’s Economix blog, and it is used here with permission. If you wish to reproduce the entire post, please contact the New York Times. The usual fair use rules apply to short quotations.