At any given moment the state of any nation—and especially the state of any stable industrial democracy, where a measure of political calm and social order can generally be taken for granted—is determined largely by the state of its economy. Wars, relative military strength, terrorist attacks, natural disasters, demographic changes, social trends, election outcomes, even the results of international sporting competitions, can all contribute significantly to a country's perception of its own well-being. At times, certainly, one or more of these factors can outweigh the economy in affecting the collective sense of how the country is faring. But as any presidential candidate will tell you, for the average American citizen the most basic measure of national well-being amounts one way or another to economics. Is my income higher or lower than it was last year? Is my job more or less secure? Across the spectrum of class or income well-being is measured to a considerable degree by the question "Can I afford ... ?" Can I afford to put the kids through college? Buy a house? Put my mother in a nursing home? Pay for day care? Put food on the table? Buy a vacation home?
But as important as the economy is in determining the state of the union, it is also a problematic measure, because the "real" state of the economy does not match our collective perception of it. That is, although one could in theory deduce America's exact sense of its economic well-being at any given moment by extrapolating from each citizen's income and expenses a kind of aggregate national answer to the question "Can I afford to ... ?," that would provide only an indirect and backward-looking measure of the economy's real strength. The true condition of the economy is best seen not as a snapshot of individuals' circumstances but as the movement of deeper forces through time; economists look back for measures of what has already happened, and then use various logical assumptions to project what will happen in the future.
Obviously, the state of the economy is a somewhat relative thing; how we judge it depends greatly on what we use as a basis for comparison. Compared with 2001, for instance, last year was in some respects a good one for the economy. Compared with 1999, however, it was in many ways disappointing. And in fact the economy of 2003 was by several measures comparable to the economy of 1997. Does this mean the economy has regressed? Or that it has returned to its natural level after a period of aberration? And what, if anything, can these historical comparisons tell us about the coming years?
Although the essays in "State of the Union" cover a wide variety of topics—from the long-term federal budget deficit to the changing nature of the middle class, from the health-care-cost conundrum to the rising level of anger in American society—all these topics are ultimately bound up with (either as influences on or as derivatives of) the state of the economy. In this opening essay we aim to establish the broader context that underlies all these issues, and to provide a balanced view of the U.S. economy—not just of how it's doing today, or this year, but of the deeper structural forces that will determine our prosperity over the long term.
In retrospect, the late 1990s appear to have been a golden age produced in part by the serendipitous confluence of unsustainable factors such as the stock-market boom, the post-Cold War "peace dividend," and a consumer borrowing binge of historic proportions. (Today, three years after the stock-market bubble burst, we are still suffering something of a hangover from the excesses of that giddy era.) But as accidental as that brief golden age may in some ways have been, and as irrational as the exuberance that propelled it was, the underlying forces at work in the late 1990s were real, and they began to reshape the economy in fundamental ways. We can now begin to see the enduring effect of those forces.
In the short term—let's say the next couple of years—the majority of Americans can expect to keep improving their economic lot; however, a significant minority—mainly the newly jobless in certain old-line industries—will watch their already dim prospects darken even further. And over the longer term—let's say ten years or more—a much broader swath of the American population will have reason to be very concerned about the economic future.
Recent media coverage of the economy has focused on the troubled state of the job market. We are told that proportionally fewer adults are working today than at any time in the past ten years; that not since the Great Depression have we failed to produce an increase in the number of jobs for such a long period of time; and that median household incomes have fallen.
All this is true. Yet the overall picture that emerges from these facts is largely false. The "jobless recovery" has hardly been jobless: the unemployment rate—which stood at 5.9 percent in November—is lower than the average for the past thirty years, and is right at the threshold that most economists as recently as the mid-1990s believed was the lowest it could go without triggering inflation. Although it is true that some jobless people have given up looking for work, and are therefore no longer even counted in official unemployment statistics, about half these people are teenagers, many of whom have forsaken the part-time-job market in order to focus on schoolwork—hardly the stuff of a national crisis. In fact only 5.4 percent of those who have left the work force fit the definition of "discouraged workers" —people who have given up looking for work principally because they don't believe they can find it.
Those workers who have kept their jobs have for the most part prospered, despite the slackening of the job market. Real hourly-wage growth has continued through the recession and the recovery, albeit at a slower pace than in the late 1990s. And wage growth has been broadly distributed, meaning that most workers, including most of the middle class, have benefited. In fact, there is a wide gap between how most people feel the economy in general is faring (poorly) and how they feel they themselves are doing (quite well). A poll conducted by the Gallup Organization in August found that 75 percent of respondents rated the financial well-being of "average Americans" as "poor" or "only fair," and that 89 percent considered the employment situation specifically to be either "poor" or "only fair." (Nearly 50 percent rated it as downright "poor.") Yet when asked about their personal experiences, only 19 percent of those currently working said they were worried about being laid off, and even fewer worried about having their hours or wages reduced—the same percentage that feared these things in 1997, when the economy was booming. Another recent poll, by the Pew Research Center, found that only 35 percent of Americans disagreed with the statement "I'm pretty well satisfied with the way things are going for me financially." The percentage of Americans disagreeing with that statement has been lower only three times out of twelve since Pew first began asking about it, in 1987. Similarly, the percentage of respondents agreeing with the statement "I often don't have enough money to make ends meet" has been lower only twice—in 2002 and in 1999.