The Not-So-Good Times

August 31, 2006

Heather Boushey

Heather Boushey, August 31, 2006

Economic recovery, students of economics learn, is a time of movement from recession to expansion. Typically it is a period of rising economic growth and productivity, accompanied by significant job growth and strong wage gains. Recoveries are the good times—supposedly for all of us—and recessions are the bad times.

But, not this time. The current economic recovery hardly looks like a full-fledged recovery for most American families. Even though the recession of 2001 was relatively mild (unemployment increased from 3.9 percent in 2000 up to 6.3 percent in 2003), the recovery has been slow to gain ground.

Gross domestic product—our measure of how much the U.S. economy is producing—has been increasing at a healthy rate. But, most Americans are not seeing the benefits of this economic growth. Wages are the smallest share of GDP that they have been in the last 50 years, while profits are their highest since the 1960s.

Yes, the labor market has improved, but not enough. Employment is up, unemployment is down, and wage growth has been keeping up with inflation through 2006. But, there are 3.9 million Americans not at work today who would be if the employment rate had rebounded to where it was in 2000.

A closer look reveals just how little most American families have gained from this recovery. According to data released this week by the U.S. Census Bureau, inflation-adjusted median household income remains below where it was in 2000. For families headed by someone under age 65, between 2004 and 2005, annual income fell by $275.

Falling income cannot be traced to people dropping out of the labor market, but rather to earnings failing to keep up with inflation. Full-time male and female workers both saw their earnings fall in 2005. They’re also working more. Between 2004 and 2005, the share of women working full-time increased by a percentage point, from 58.8 percent to 59.8 percent.

Even as we’re working more, most Americans are earning less, once you take inflation into account, than they did in 2000.

Only the wealthiest among us have seen their income rise since the last economic peak. Between 2000 and 2005, income for households in the top fifth rose by 0.8 percent. At the other end of the income spectrum, since 2000, income for households in the bottom fifth fell by 5.6 percent and income for households in the second fifth fell by 3.8 percent. African American households in the bottom two-fifths of the income distribution have seen their inflation-adjusted income fall by much more—by 12.3 percent for those in the bottom fifth and 11.4 percent for those in the second fifth.

This is not what a recovery usually looks like. Low-income households have lost more income during the first five years of this economic recovery than they did in the first five years of the prior two recoveries.

Falling income for those at the bottom means that poverty is up. Just a week ago, news media were hailing the success of welfare reform’s 10-year anniversary. This week’s data, however, shows that post-2000, welfare reform’s legacy includes years of rising poverty. After falling steadily to a 20-year low of 11.3 percent in 2000, the poverty rate is now 12.6 percent. Further, in 2005, the share of Americans living at half of the poverty line—$7,860 for a single mother with two children—was 5.4 percent, exactly where it was in 1996 when the welfare reform legislation was signed into law.

When will the Bush administration wake up and realize that economic policy based on tax cuts for the very wealthy has not led to broad-based economic gains for most American families? Recently, Federal Reserve Chairman Ben Bernanke said that growing inequality is “not a good trend,” but does this mean that the administration will focus its attention on how to foster income growth for every one of us? Let’s hope so. Then, this recovery could become a footnote, rather than a new chapter of economic history.

Heather Boushey is a senior economist at the Center for Economic and Policy Research.

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