2000-2021: A Lost Generation?

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?

2 thoughts on “2000-2021: A Lost Generation?

  1. In banking pure common sense dictates that there is nothing so dangerous as what might be ex-ante wrongly perceived as not-risky, but that still generates a high return on bank equity, because that is really the only area where bank exposures can grow to be humongous enough so as to create a systemic crisis… like the current one.

    Nonetheless our bank regulators decided, by allowing extraordinarily low capital requirements to banks when lending to what was perceived ex-ante as having “no-risk”, like “solid” sovereigns and triple-A rated borrowers, to give the banks an artificial extra-boost to the returns on their equity, when operating precisely in the danger area. How smart was that?

    But that also discriminated directly against those perceived as “risky” like small businesses and entrepreneurs who had to pay higher than market determined interest rates to the banks so as to be competitive with the “not-risky”.

    If the US, and the Western World do not regain the understanding of what genuine risk-taking signifies in order to move forward, their economies will stall, and will submerge rapidly.

    And yet more than three years into the crisis caused by excessive exposures to sovereigns and triple-A rated instruments, this issue is not discussed, and the same regulators who brought us the failed Basel II are now asked to produce Basel III. What is wrong with us?

    If you allow me here is a video explaining current regulatory madness it in an apolitical red and blue! http://bit.ly/mQIHoi

    If I had held regulators were just marginally wrong, 15 degreed, my arguments would be listened to. But, since I argue that the regulators are absolutely and totally wrong, 180 degrees, my arguments are being silenced.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s