Money: Who Has How Much and Why
Andrew Hacker’s new book, Money, arrives at a propitious time. With the US unemployment rate now around its lowest level in twenty-five years, inflation subdued, and stock prices high, many commentators are gushing over America’s economic performance. The contrast with languishing European economies, where unemployment rates are two and three times higher than in the US, is making the economy look all the more enviable. A characteristic recent analysis by the brokerage firm Merrill Lynch, for example, was entitled “Paradise Found: The Best of All Possible Economies.” Fortune Magazine exceeded even this optimistic appraisal when it pronounced this June that the US economy is “stronger than it’s ever been.”
The US economy is, indeed, more buoyant than almost anyone anticipated. The reduction in unemployment to about 5 percent of the American work force this summer, roughly its lowest rate since 1973, is all the more impressive because few economists believed it was possible for unemployment to fall much below 6 percent without causing more inflation. Despite a sharp slowdown in growth in the quarter ended this June, the economy has been growing at an average annual rate of roughly 3.5 percent for a year and a half, and average wages adjusted for inflation are at last rising, if only moderately.
But claims that the US economy is performing ideally, or that, according to Fortune, “these are the good old days,” are unwarranted and misleading. Consider the basis of Fortune‘s assertions. The magazine points out that real Gross National Product per capita (adjusted for inflation) is higher in the US than it was in the past. But Fortune could have made the same claim about real GNP per capita in 1987 or 1977. This measure, which is the output of goods and services per person, is almost always higher than it ever was before; it falls essentially only in recessions. In other words, by this measure, the economy is usually stronger than it has ever been.
What Fortune fails to point out is that real GNP per capita, or the more commonly used real Gross Domestic Product (GDP) per capita, has grown on average nearly one-half percent a year more slowly since 1973 than in the preceding hundred years. Despite more rapid growth recently, per capita GDP has continued to increase at the same rate in the 1990s as it has since 1973, and further adjustments to the data will probably only raise this rate of growth marginally this decade. A shortfall of one-half percent a year can make a great deal of difference. Had the economy grown one-half percent faster since the early 1970s, for example, federal tax revenues would have been so much higher that there would have been no budget deficit by the early 1990s, a time when the deficit was in actuality nearly $300 billion.
Moreover, more than 50 percent of the population now works, compared …
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