Americans’ borrowing reached $13.29 trillion in the second quarter, up $454 billion from a year ago, marking a 16th consecutive quarter of increases, a New York Federal Reserve report released on Tuesday showed. The level of U.S. consumer debt was $618 billion higher than the previous peak of $12.68 trillion in the third quarter of 2008. It was 19.2 percent above a post global credit crisis low set in the second quarter of 2013, the New York Fed said. The ongoing growth in home, auto, student and credit loans has been linked with a solid labor market. The rise in indebtedness did not make it more difficult for borrowers to meet their monthly payments last quarter. The rate on seriously delinquent loans, or those that are 90 days or more past due, was 2.3 percent in the second quarter, unchanged from the prior quarter. Notably, the pace of student loans turning seriously delinquent slowed to 8.6 percent from 8.9 percent, the N.Y. Fed survey showed. “While overall delinquency rates have remained stable at relatively low levels, transition rates into delinquency have fallen noticeably for student loan over the past year, reflecting an improved labor market and increased participation in various income-driven repayment plans,” Wilbert van der Klaauw, senior vice president at the New York Fed, said in a statement.
*The amount of student loans grew to $1.41 trillion in the second quarter, up $61 billion from a year before.
*Total auto debt increased to $1.24 trillion, $48 billion above a year-ago.
*Credit card loans climbed $45 billion from a year earlier to $829 billion.
*Total mortgage debt rose to $9.00 trillion, up $308 billion from a year ago.
In the past two decades there has been a sharp drop in the share of national income going to working- and middle-class Americans. As the discontent among these workers begins to affect their livelihoods and the entire nation’s politics, policy makers must either hope the market will somehow fix wage stagnation or enact policies to reverse it. For much of the postwar period, American wage and salary earners received an average of 64% of gross domestic product. Although signs of weakness emerged in the mid-1980s, the labor share of national income stood at 64% as recently as the first quarter of 2001. Then the world changed. The labor share fell almost without interruption for more than a decade, bottoming out at 56% in the final quarter of 2011 and now resting at about 58%. More than half of this decline occurred between 2001 and the end of 2007, before the onset of the Great Recession.
A simple calculation shows the significance of the decline from 64% to 58%. If workers in 2016 had received the share of national income they averaged over most of the postwar period, their total earnings would have been $1.2 trillion higher in that year alone. This equates to an annual salary boost of more than $7,500 for each worker. The labor-share drop came as a surprise to most economists. In 1939 John Maynard Keynes wrote of the “stability of the proportion of the national dividend accruing to labour, irrespective apparently of the level of output.” Fifteen years later, American economist D. Gale Johnson found there hadn’t been a “significant secular change in the share of national income received by labor” between 1850 and 1952. A constant labor share was widely regarded as one of the basic features of modern economic growth.
But the labor share in fact has declined—and there are no signs that the market is working to reverse the drop. In the past year economic growth has accelerated and unemployment has fallen to the lowest level in two decades. This is supposed to help wage earners, but pay rates haven’t ticked up. Between July 2017 and July 2018, workers’ average inflation-adjusted earnings fell by 0.4%. The most common explanations for these developments don’t work. Many point to the decline of unions, because union workers earn more on average than their comparable nonunion peers. But private-sector union membership declined as much in the last 17 years of the 20th century as it has since 2001, when the labor-share drop began. Another explanation is the entrance of women into the workforce, as women earn less than men on average. But women’s labor-force participation rate peaked in 1999 and has declined significantly since then. Some analysts attribute a portion of the labor-share decline to changes in the scale and measurement of self-employment, but these changes can’t account for more than a third of the drop. Finally, there is no clear relationship between the labor share and capital investment.
There is a connection, however, between the labor share and globalization. In a 2013 paper for the San Francisco Federal Reserve Bank, economists Michael Elsby, Bart Hobijn and Aysegul Sahin found that as much as 85% of the declining labor share may be attributable to increased import competition, as U.S. producers respond by shifting production to countries with cheaper labor. It may be true that trade leaves countries better off in general. But this is small comfort to those who lose out, especially because the winners rarely compensate them commensurately. The promise of job training rings hollow to workers in areas dependent on industries that have been decimated by trade. A system of wage insurance would also help workers by narrowing the gap between disappearing high-wage jobs and the lower-wage alternatives that displaced workers often adopt.
But to repair the damage, policy makers will have to go further. Two options make sense. First, they could significantly expand the earned-income tax credit to bolster the incomes of workers somewhat higher up the income ladder. Second, they could implement a broader program of wage subsidies that would raise the wages of lower- and middle-income earners toward a specified hourly target. The EITC and other direct wage subsidies don’t interfere significantly with the market economy, unlike the minimum wage. But expanding them to the necessary size would require substantial new spending. Because the labor-share problem has become so large, the solution must be equally large. And because fiscal policy already is out of control, it would be irresponsible to fund the new spending with more IOUs. There is only one way to go. The high-earning Americans who have done so well in recent decades must pay higher taxes to support the portion of the workforce that is falling behind. This isn’t charity, nor is it welfare. It’s simple common sense, or self-interest rightly understood, because an economic system that fails to offer broad gains will end up with disruption.
The Bureau of Labor Statistics tallies something called real earnings, hourly and weekly earnings that take inflation into account. In January 2017, real hourly earnings were at $10.65. In July, real earnings hit $10.76. Since the tax bill was signed in December — a bill which Trump insisted would spur rapid growth in wages — inflation-adjusted hourly earnings have increased by only 0.2 percent. During Barack Obama’s second term, they increased by 3.9 percent. But that was for all employees. Looking only at production and nonsupervisory employees — that is, taking out managers, etc. — weekly earnings were down year-over-year, too. But there’s a remarkable bit of data buried in that overview: There’s a stark and ongoing split in perceptions of satisfaction by party. While Democrats were much more likely to say they were satisfied with how things are going in the United States in 2016, now Republicans are — to an increasing degree. Immediately after the 2016 election, Gallup reported that perceptions of how the economy was faring flipped among both Republicans and Democrats after Trump won. The week before the election, three-quarters of Republicans said the economy was getting worse while more than half of Democrats said it was getting better. After the election? A plurality of Republicans said it was getting better and a plurality of Democrats said it was getting worse. This is a central lesson to the political consideration of economic issues. Earnings are up, but spending power is down since last year. Views of how the economy is evolving, though, and the overall perception of how the country is faring, are linked to partisan politics. When the White House argues that its policies have led to increased economic strength or wages, the perception of that argument will be linked to party registration more than actual numbers.
During her daily press briefing, press secretary Sarah Huckabee Sanders attempted to demonstrate President Trump’s commitment to the black community by sharing some numbers about job growth during his presidency. “This president, since he took office, in the year and a half that he’s been here, has created 700,000 new jobs for African Americans,” she said. “When President Obama left after eight years in office — eight years in office — he had only created 195,000 jobs for African Americans. President Trump in his first year and a half has already tripled what President Obama did in eight years.” Those numbers, as we noted, were very wrong. Between January 2009 and January 2017, the number of employed black Americans rose from 15.5 million to 18.4 million, an increase of nearly 3 million. Under Trump, the increase has been 708,000. Trump has been in office for only 20 months, of course, but the point stands: Sanders’s numbers were way off the mark.
Surprise, surprise; despite the never-ending list of excuses, exaggerations and free-lunch promises over the past months, it turns out that the laws of economics still apply. Congress and the president have been on a massive borrowing binge; first with the Republican tax cuts and then with the bipartisan budget-busting spending bill, which together will add $2.3 trillion to the debt over the next decade, or as much as $5.1 trillion if the policies are extended. The $1.9 trillion cost of the tax cuts ($2.7 trillion if they are made permanent) — which supplanted a once-in-a-generation opportunity for true tax reform to clean up the code, provide certainty and grow the economy — were disingenuously sold as the key to such massive growth that they would pay for themselves. But the proof will be in the pudding…or in this case, the national debt. A realistic prediction of the tax cuts is they will provide a short-term boost — the sugar high that flooding a strong economy with additional money creates. But that deficit-financed boost won’t last, and it will leave us with the predictably large mountain of debt that comes with all of that borrowing.
At a panel I recently moderated in New York about our country’s unsustainable fiscal outlook, someone asked a simple question: So what? Nothing bad has happened despite immense fiscal deterioration — our debt-to-GDP ratio has more than doubled in less than 20 years, from 33 percent in 2000 to 78 percent today , and is on course to reach nearly 100 percent in 10 years and continue rising — so why worry now? These are good questions, and they reflect a precept I learned years ago: Substantive fiscal policy work is essential, but all the good policy thinking in the world won’t matter unless the politics works. Without good politics, the policies won’t be implemented. And the politics of fiscal discipline have not been effectively addressed by too many of those who are deeply concerned about our country’s economic future — including me. Panels such as the one I led bring together the converted. Now, the imperative must be to develop a political strategy, and, in that context, a narrative, that persuades the broad American public that its economic well-being depends on getting our fiscal house in order. And that, hopefully, will impel elected officials and candidates to change their approaches to fiscal matters.
On the entitlement side, reforming our national health-care system to greatly reduce what economists call “excess cost growth” would stem the rise of federal health-care expenditures and significantly reduce the fiscal gap — likely without reducing benefits. Health-care costs are 18.2 percent of GDP in the United States, compared with 10 to 11 percent in other developed economies. But we must summon a long-absent political will. The politics of all this, and whatever else might be considered, is obviously very difficult. And that goes back to the basic proposition that, while more can and should be done on the substantive side, think tanks, fiscal-policy organizations, analysts — everyone concerned with our fiscal condition and its powerful threat to our economic future — must now draw on communications and political expertise to develop a narrative and a strategy that will spur action by elected officials. Nothing short of our economic future depends on it.
In 2017, ordinary workers became no more valuable to our society than they were the year before. Normally, eight years into an expansion — with unemployment nearing record lows — one would expect to see America’s laborers enjoying hefty wage growth. But despite these favorable conditions, our nation’s working stiffs failed to make themselves more useful to their fellow citizens last year. Thus, the market — the impartial, infallible indicator of a person’s objective worth — declined to provide ordinary Americans with bigger paychecks. Fortunately for all of us, America’s elite CEOs decided to pick up the slack. In 2017, the chief executives of the 350 largest U.S. economies contributed a whopping 17.6 percent more to our collective well-being than they did in 2016 — and thus, collected an average raise of $3.3 million, according to a new report from the Economic Policy Institute. Thanks to their heroic efforts, the typical elite CEO in the U.S. now deserves 312 times as much of our collective appreciation as his (or, rarely, her) typical employee. Last year, our nation’s beautiful bosses increased their value to us all primarily by ensuring that their companies’ shares increased in value. Executive pay in the United States is typically tied to stock performance (so as to ensure that CEOs earn exactly what they objectively deserve). And in 2017, the S&P 500 increased by an amazing 14.5 percent. One could try to diminish our courageous corporate overlords’ achievement by attributing the S&P’s rise to Donald Trump’s election: With a Republican president in the White House, American firms’ tax bills were bound to decline along with their regulatory costs — thereby increasing their expected future profits, and thus, the value of their shares.
Things like maximizing shareholder value (i.e. the only accurate measure of how much good a business is doing for the world). Similarly, after Trump was elected, the titans of American industry could have collected plenty of retweets from the Resistance by denouncing his proto-fascist administration. Instead, many selflessly joined his jobs council and offered their support to his tax reform law. But even if America’s CEOs hadn’t bravely abetted the xenophobic right’s rise, they would still deserve every penny of their raises. Plenty of other countries have cut taxes and regulations in recent years. But none of their CEOs created anywhere near as much value as America’s. The U.K.’s top bosses make only 94 times what the average British worker makes; in France, that figure is 71; in Sweden, it’s a pathetic 40. America’s CEOs weren’t always so exceptionally valuable. In 1965, they earned only about 20 times what the median worker did. It took grit, guts, and decades of lobbying for our nation’s fabulous fat cats to break the labor movement, slash capital gains tax rates, and build a structure of corporate governance that rewards the pursuit of short-term market value (the only objective measure of metaphysical virtue) over all other considerations. Without those efforts, the American economy would still be unjustly rewarding interchangeable proles for their nigh-valueless labor with regular wage increases — instead of fully compensating the demigods of Davos for the gifts they’ve bestowed upon all humanity.
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