Phil Izzo had a rather dispiriting piece in yesterday’s WSJ. It reports the results of the WSJ survey of 50 economists. The key passage:
Americans’ incomes have dropped since 2000 and they aren’t expected to make up the lost ground before 2021, according to economists in the latest Wall Street Journal forecasting survey.
From 2000 to 2010, median income in the U.S. declined 7% after adjusting for inflation, according to Census data. That marks the worst 10-year performance in records going back to 1967. On average, the economists expect inflation-adjusted incomes to rise over the next decade, but the 5% projected gain isn’t enough to reach prerecession levels.
This comes as no surprise to students of economics and political economy. Indeed, I would argue that the above forecast might prove overly optimistic, given the broader demographic changes in the US and OECD, the problems of unfunded liabilities, the amount of deleveraging that is required, the instability in international financial markets, and the growing power of emerging economies.
But even if we stick with the assumption that there will be no gains in inflation-adjusted median incomes for the period 2000-2021, the ramifications could be significant.
On the policy side, it would be far easier to find a path to long-term fiscal sustainability in an economy that generates growing revenues and declining demand for income support.
On the political and cultural side, the implications could be equally important. For most of US history—and most certainly, for the postwar period—there was a broadly held expectation of growing incomes and an improved quality of life. To be certain, this expectation was dashed for much of the population, as inflation adjusted wages began to stagnate in the 1970s. But what happens when this expectation is thoroughly discredited and the vast majority of the population comes to believe that tomorrow will be no better than today—and perhaps a good deal worse?
- Will individuals assign a higher discount rate to the future?
- Will they stop investing in human capital?
- Will the decline in fertility rates accelerate?
- Will politics simply degenerate into a redistributive battle over a shrinking pie?
Or am I being overly pessimistic?