A lost decade for U.S. economy, workers

[Mr. Big Dog 10,747]

Let's not do that again.

A lost decade for U.S. economy, workers

Economists, policymakers will be chewing on lessons of the Aughts for years

By Neil Irwin

The Washington Post

For most of the past 70 years, the U.S. economy has grown at a steady clip, generating perpetually higher incomes and wealth for American households. But since 2000, the story is starkly different.

The past decade was the worst for the U.S. economy in modern times, a sharp reversal from a long period of prosperity that is leading economists and policymakers to fundamentally rethink the underpinnings of the nation's growth.

It was, according to a wide range of data, a lost decade for American workers. The decade began in a moment of triumphalism — there was a current of thought among economists in 1999 that recessions were a thing of the past. By the end, there were two, bookends to a debt-driven expansion that was neither robust nor sustainable.

There has been zero net job creation since December 1999. No previous decade going back to the 1940s had job growth of less than 20 percent. Economic output rose at its slowest rate of any decade since the 1930s as well.

Middle-income households made less in 2008, when adjusted for inflation, than they did in 1999 — and the number is sure to have declined further during a difficult 2009. The Aughts were the first decade of falling median incomes since figures were first compiled in the 1960s.

And the net worth of American households — the value of their houses, retirement funds and other assets minus debts — has also declined when adjusted for inflation, compared with sharp gains in every previous decade since data were initially collected in the 1950s.

"This was the first business cycle where a working-age household ended up worse at the end of it than the beginning, and this in spite of substantial growth in productivity, which should have been able to improve everyone's well-being," said Lawrence Mishel, president of the Economic Policy Institute, a liberal think tank.

Sobering reality

The miserable economic track record is, in part, a quirk of timing. The 1990s ended near the top of a stock market and investment bubble. Three months after champagne corks popped to celebrate the dawn of the year 2000, the market turned south, a recession soon following. The decade finished near the trough of a severe recession.

But beyond these dramatic ups and downs lies an even more sobering reality: long-term economic stagnation. The trillions of dollars that poured into housing investment and consumer spending in the first part of the decade distorted economic activity.

Capital was funneled to build mini-mansions in Sun Belt suburbs, many of which now sit empty, rather than toward industrial machines or other business investment that might generate economic output and jobs for years to come.

"The problem is that we mismanaged the macroeconomy, and that got us in big trouble," said Nariman Behravesh, chief economist at IHS Global Insight. "The big bad thing that happened was that, in the U.S. and parts of Europe, we let housing bubbles get out of control. That came back to haunt us big-time."

The housing bubble both caused, and was enabled by, a boom in indebtedness. Total household debt rose 117 percent from 1999 to its peak in early 2008, according to Federal Reserve data, as Americans borrowed to buy ever more expensive homes and to support consumption more generally.

'Risky behavior'

Consumers weren't the only ones. The same turn to debt played out in commercial real estate and at financial firms. It resulted in a corporate buyout boom that often produced little of lasting value. It is a truism of finance that for businesses, relying heavily on borrowed money makes the good times better but the bad times far worse. The same thing, as it turns out, could be said of the nation as a whole.

The first decade of the new century was an experiment in what happens when an economy comes to rely heavily on borrowed money.

"A big part of what happened this decade was that people engaged in excessively risky behavior without realizing the risks associated," said Karen Dynan, co-director of economic studies at the Brookings Institution. "It's true not just among consumers but among regulators, financial institutions, lenders, everyone."

The experiment has ended badly. While the stock market bubble that popped in 2000 caused only a mild recession, the housing and credit bubble has had a much greater punch — driving the unemployment rate to a high, so far, of 10.2 percent, compared with a peak of 6.3 percent following the last such downturn.

The impact of the real estate crash has been broad. Among middle-income families, 69 percent owned a home in 2007, more than four times the proportion owning stocks. And as the housing meltdown cascaded through credit markets, the banking system was buffeted, rocking the whole financial system on which the world's economy rests.

Economists and policymakers will be chewing on the lessons of the Aughts for many years to come; the events of the past two years alone are enough to launch a thousand economics dissertations. If past periods of economic trauma are a guide, this research will yield a deeper understanding of how to manage the economy.

The Great Depression of the 1930s led to new insights about the impact a financial collapse can have. The primary lesson — espoused by Ben S. Bernanke as an academic before acting on it as Fed chairman — was "Don't let the financial system collapse."

The Great Inflation of the 1970s brought a rethinking of what drives inflation, such that economists now put a premium on maintaining the credibility of central banks and keeping inflation expectations in check.

The lessons of the Bubble Decade are still being formed. At the Federal Reserve, the major lesson that top officials have taken is that bank regulation shouldn't occur in a vacuum; rather than monitor how individual institutions are doing, bank supervisors should try to understand the risks and frailties that the banking system creates for the economy as a whole — and manage those risks.

Fed leaders have been more skeptical of the idea that they should routinely raise interest rates to try to pop bubbles. "I can't rule out circumstances in which additional monetary policy actions specifically targeted at perceived asset price or credit imbalances and vulnerabilities" would be advisable, Fed Vice Chairman Donald L. Kohn said in a recent speech.

"But given the bluntness of monetary policy as a tool for addressing developments that could lead to financial instability, the side effects of using policy for this purpose, and other difficulties, such circumstances are likely to be very rare."

And the question of how Washington can prevent a recurrence is an overarching theme in the Obama administration's efforts to overhaul the financial system and support growth through investments in clean energy and other areas. "One of our challenges now," President Obama said in November, "is how do we get what I call a post-bubble growth model, one that is sustainable."

The financial crisis is, for all practical purposes, over, and forecasters are now generally expecting the job market to turn around early in 2010 and begin creating jobs. The task ahead for the next generation of economists is to figure out how, in a decade that began with such economic promise, things went so wrong.

© 2010 The Washington Post Company

[AlHayatZween 2]

interesting read...

[DEDixon 39]

"it's what happens when you let the GOP experiment"

LOL, unfortunately, changes that allowed much of what happened to happen were made during the clinton administration.

[DEDixon 39]

"Capital was funneled to build mini-mansions in Sun Belt suburbs, many of which now sit empty, rather than toward industrial machines or other business investment that might generate economic output and jobs for years to come."

i still say, these mini mansions should be taxed at a higher rate. anything over a normal sized home should be taxed at a higher rate - call it a green tax since these monsters have to be heated and air conditioned. maybe a tied taxing system would work, say normal rates for sq ft 0 to 3000, 3001 to 4000 pays a certain percent more, etc.

[DEDixon 39]

"it's what happens when you let the GOP experiment"

and let us not forget, the house and senate have been in the hands of the dems since 2006, nearly half the decade.

show me where any dem with any influence did anything to sound the alarm.

this little statement of yours ""it's what happens when you let the GOP experiment" really speaks volumes to how partisan you are. i see fought on both sides of the political isle. neither side stood up to protect the average joe for no politician ever wants to stop anyone from spending, stop the average joe from going to the mall and average joe might start caring about who is in washington. politicians don't want any eyes or minds on washington so they let the spending continue.

[Danno 1,228]

The GOP's experiment if you ask me was :Spending and Acting like Democrats.

Isn't that way we threw them out?

Obama has now picked up where they left off and is following the same path... full speed ahead.

People; We are a nation in decline, face it.

[lostinblue 1,989]

During the boom years everyone wanted to be in the stock market. You had the tech bubble go bust and people found out that a real estate investment was great. You pay no taxes on any profit if you used it as a residence. People were making lots of money (tax free) off the real estate boom. So what you are saying do away with the home as a tax haven ? That would have prevented this past bubble correct. I am talking you cannot deduct anything in dealing with a home. Do away with the interest deduction ect. People look at a home as an investment rather than a residence.Thus raising the price of a home and having 3-4000 sq ft homes being built. I have read people have homes that are 25-30 % larger than their parents homes built in the 50's and 60's. Look at all the carbon that is used in these large homes . You think the carbon tax crowd is willing to move into a 900 sq ft home to save the earth.

[DEDixon 39]

The GOP's experiment if you ask me was :Spending and Acting like Democrats.

Isn't that way we threw them out?

Obama has now picked up where they left off and is following the same path... full speed ahead.

People; We are a nation in decline, face it.

true, only the chinese can stop us and what are the chances of that?

i guess this is why we keep our nukes, at least no one can take us over when that day comes, when the chinese does say, no more loans.

i'm 47 so selfishly, i'm hoping the spending will continue, at least until my last day on planet earth. i'm all for spending these days.... open the vault!

[DEDixon 39]

During the boom years everyone wanted to be in the stock market. You had the tech bubble go bust and people found out that a real estate investment was great. You pay no taxes on any profit if you used it as a residence. People were making lots of money (tax free) off the real estate boom. So what you are saying do away with the home as a tax haven ? That would have prevented this past bubble correct. I am talking you cannot deduct anything in dealing with a home. Do away with the interest deduction ect. People look at a home as an investment rather than a residence.Thus raising the price of a home and having 3-4000 sq ft homes being built. I have read people have homes that are 25-30 % larger than their parents homes built in the 50's and 60's. Look at all the carbon that is used in these large homes . You think the carbon tax crowd is willing to move into a 900 sq ft home to save the earth.

LOL!

[웃 910]

This is absurd. Did you forget this was a global crisis? This decade was more like the lost decade for DEVELOPED NATIONS and a superb decade for emerging markets:

The Decade of Emerging Markets

Out of 73 country equity indices that we track (that go back to the start of 2000), just 17 are down during the current decade (starting 1/1/2000). Unfortunately, the US and five of the other G-7 countries are included in the group of 17 losers. The Ukraine has been the best performing country this decade with a gain of 1,445%. Russia has been the best performing BRIC country with a gain of 711%. Canada has been the best performing G7 country, while Japan has been the worst. From a stock market standpoint, we saw emerging markets emerge in a big way this decade, as developed nations stumbled pretty much across the board. The table below should act as a useful reference as we get set to leave the 2000s and enter the 2010s.

***Funny the G7 countries are all at the bottom***

Here's 2010s GDP growth estimates led by China, Indonesia, Singapore. Using your partisan logic we should copy their political system because it seems to be working best

Most countries did shitty this decade. Illustrated with these 10 year stock charts based on country. MOST countries are either right were they were 10 years ago, or slightly behind...

USA

LONDON

NETHERLANDS

SPAIN

TAIWAN

SHANGHAI

BRAZIL (exception)

Those Mexicans must have a well run country, look at this beautiful chart for last decade

Edited January 2, 2010 by Confucian

[Gary and Alla 3,696]

we need to keep the GOVERNMENT out of the economy, not just one or the other political party. Leave it alone.

[Nina~ 431]

we need to keep the GOVERNMENT out of the economy, not just one or the other political party. Leave it alone.

Because big corporations do such a wonderful job of regulating themselves... R I G H T!!!

[peejay 327]

You pay no taxes on any profit if you used it as a residence. People were making lots of money (tax free) off the real estate boom. People look at a home as an investment rather than a residence.

If I remember correctly, that little gem was the doing of Slick Willy before GWB even got into office.

If I also remember correctly, GWB tossed out the notion of eliminating the interest deduction for homes altogether, but it got nowhere.

Really...to tell the truth I haven't seen much out of the Democrats to even judge whether they are any better than the Republicans. We basically live in a corrupt 2-party system where the only thing that changes is which party gets to screw the People. Money prevails and the politicians of both stripes are monkeys dancing to the tune of the organ grinder that feeds them. In the mean time they spin a tale that they are really out to serve the People. Ha! Could'a fooled me!

[DEDixon 39]

quote: "Here's 2010s GDP growth estimates led by China, Indonesia, Singapore. Using your partisan logic we should copy their political system because it seems to be working best"

very good point above.

still on this subtitle: it's what happens when you let the GOP experiment

yeah, it was the repubs, only the repubs, this mess belongs to the repubs, the G O P !!!! hahahahahaha LOL!!!!!!

mr. big dog, give it a rest dude. partisan partisan partisan partisan partisan partisan partisan

are you one of those that want dem rule forever and ever and ever? one party politics? wonder where that would get us?

sorry, i'm feeling immature today.

[DEDixon 39]

If I remember correctly, that little gem was the doing of Slick Willy before GWB even got into office.

If I also remember correctly, GWB tossed out the notion of eliminating the interest deduction for homes altogether, but it got nowhere.

Really...to tell the truth I haven't seen much out of the Democrats to even judge whether they are any better than the Republicans. We basically live in a corrupt 2-party system where the only thing that changes is which party gets to screw the People. Money prevails and the politicians of both stripes are monkeys dancing to the tune of the organ grinder that feeds them. In the mean time they spin a tale that they are really out to serve the People. Ha! Could'a fooled me!

this is so true!

dems spend no matter who is in office or power.

the only time repubs are against spending is when dems are in office or power.

both parties are spending, just on different things. all the spend is to buy votes. the dems are buying votes full time, the repubs are buying votes when they are in office.

it is kind of funny that a lot of repubs think repubs are fiscally conservative, they are not!!!