The Economy, Viewed as It Should Be

Two years after the recession officially ended, and it still stinks.

Economic growth is slow. Jobs growth is virtually nonexistent. Consumer confidence is pitiful. If it feels like the recession never ended, it probably didn't.

Or scratch that. Maybe the past few years have been great to you. You've been gainfully employed and would have no problem finding a new job should you lose your current one.

It's actually that way for a lot of people. Economic data are reported in nationwide averages, but things get interesting when you break them out by different groups.

Take unemployment. Broken up by education level, the unemployment rate varies by a factor of four:

Source: Bureau of Labor Statistics, author's calculations.

If you don't have a high school diploma, the past three years have been wretched: Unemployment has risen from 6.9% in 2007 to 15%. Even those with some college education have been hit hard, with unemployment rising from 3.5% to over 8%. For both groups, today is recessionary by any definition.

But for those with a bachelor's degree or higher, it's relatively calm. The unemployment rate, 4.3%, is higher than it was three years ago, but only by two percentage points. Even in boom times, the overall unemployment rate is rarely as low as it is today for those with a college degree.

The same skew shows up when unemployment is broken out by age:

Source: Bureau of Labor Statistics, author's calculations.

For those in their prime working years -- age 35 and over -- today's unemployment rate is around 7%. It's the younger generation that really skews things higher. For those under age 24 (and that's really 18-24, since those in high school or younger by and large are not in the labor force), the unemployment rate is well over 20%. And since the U.S. has a fairly young population, that group does skew the national average higher.

And then there's income. Nearly all Americans have seen their real incomes rise over the past 40 years:

Source: Bureau of Economic Analysis, author's calculations.

What I find interesting about this is how even it is across groups. Yes, the highest quintile of American earners have seen their income grow faster than everyone else's, but that should be expected. More productive people will always earn more, and figure out how to grow those earnings faster than others.

But each quintile's real incomes have fallen or stagnated over the past 10 years. You don't see real income growth over the past decade until you look at the top 1% of wage earners, whose earnings have risen dramatically.

Why have incomes stagnated for so many Americans? There are an untold number of theories. One that I think plays a bigger role than most appreciate is a cyclical phenomenon where economies value capital and labor at different rates.

For most of the 1950s, '60s, and '70s, having the ability to work was all you needed to get ahead. Real wages, as I've noted before, grew faster than the stock market.

That began shifting in the 1980s, when the economy began valuing capital at much higher rates. Today, substantially all of the economy's income growth goes to the top sliver of Americans. And that sliver overwhelmingly derives their income from dividends, capital gains, and interest. From capital, in other words, not labor.

This last one, too, is interesting in how uniform it is across all income groups:

Source: Federal Reserve, author's calculations.

This chart, better than perhaps any other, helps explain why our economy as a whole is soured.

No matter how rich or poor you are, housing likely made up a large percentage of your assets in 2007. With home prices down between 10% and 60% since then (depending on region), households across the board -- essentially regardless of income -- have been devastated.

Add in the leverage that typically accompanies homeownership, and I think a more relevant question than "Why is the economy still so bad?" is "Oh my gosh, how is it not so much worse than it is?"

Fool contributor Morgan Housel doesn't own shares in any companies mentioned in this article. Follow him on Twitter @TMFHousel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (23) | Recommend This Article (29)

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  • Report this Comment On August 31, 2011, at 1:27 PM, PhulishMortal wrote:

    Interesting column, Morgan, and one that is probably doomed to be buried under a babble of comments, since it shows a more complex picture than most people want to think about. I do have one question, though: is there a breakout of the data by sector? Specifically, I'm wondering how much of the "Highest fifth" quintile in your third chart is composed of financial industry workers.

  • Report this Comment On August 31, 2011, at 1:37 PM, arizonamike303 wrote:

    The last two years have been horrible for me.

    I lost all the equity I had in my house.

    I was down to 20 hour work weeks and went through a lot of my savings just to pay the mortgage.

    My company cancelled our vacation pay, holiday pay and 401k plans.

    Don't even get me started on grocery prices.

    And then to top it all off I lost about half my portfolio in the crash earlier this month.

    But I actually still consider myself quite fortunate as I still have a job and haven't lost my house. Most people I know have neither one anymore.

  • Report this Comment On August 31, 2011, at 1:45 PM, TMFHousel wrote:

    Sorry to hear, arizona.

    "And then to top it all off I lost about half my portfolio in the crash earlier this month."

    May I ask, what were you invested in? The S&P is down less than 5% over the past month.

  • Report this Comment On August 31, 2011, at 2:06 PM, arizonamike303 wrote:

    I was invested in Bac, Jaso, Sprint ( I sure can pick em lol ) and a bunch of other stuff... and yes, I panicked and sold off at the bottom... I just started investing a few months ago and I was watching everything just evaporate right before my eyes and for all I knew it would keep plunging down and down... bought back a little since and made some back... guess I learned my lesson the hard way.

  • Report this Comment On August 31, 2011, at 2:10 PM, whereaminow wrote:

    It is amusing to see econometricians discredited for the umpteenth time. By declaring the recession over, when the "good suff" was just getting started, the mainstream econometricians humiliated themselves in the eyes of the American worker.

    That humilation was long overdue.

    Before we can ask why it is taking so long to recover, we might want to pause and ask how it came to be. Sure we can point to minimum wage laws as the likely cause for higher unemployment among teenagers and minorities. That is obvious.

    Interest rates are real things. They are the reflection of the time preference of individuals. They are not merely loan rates, although those make up a subsidiary of the time market.

    Distort this relationship through funny money dilution, lower rates below the natural rate, and you get a boom of economic activity. Everyone feels wealthier than they are.

    The crash is inevitable as the underlying real resources in the economy are unchanged, as is the true time preference of the individuals in the market. Reality comes swiftly to all but the politicians and the econometricians, who continue vainly to reflate the boom with even more funny money dilution.

    But if the cause of the phoney boom (which Morgan provides evidence to support the assertion that it was indeed an illusion) was funny money dilution, how does more that help us get on the right path?

    Plan for yourself. Do not the let the planners plan for you. They're the problem.

    David in Qatar

  • Report this Comment On August 31, 2011, at 2:11 PM, DJDynamicNC wrote:

    Things growing up in this environment have taught me:

    1) Be invested. Capital is more highly valued than labour, as Morgan just pointed out, and although inflation remains quite low in the face of our low aggregate demand, interest rates remain commensurately low, leaving the market as the best vehicle for growing asset value.

    2) Be flexible. I keep my resume constantly updated, and I rent rather than buy, so I can move at a moment's notice. I don't own a car or any other long term debt commitments other than the tail end of my student loans, and I plan to avoid undertaking any of them until it comes time to provide for the education of my children, should I choose to have any.

    3) Be diversified. I run my own business, I do freelance writing, and I have a traditional corporate career. While the traditional career is most assuredly the better part of my earnings, I could live a lot more frugally and scrape by on the first two.

    4) Vote Democratic. This is going to start a firestorm, I've no doubt, but borrow and spend waste, perverse tax cuts, gutted regulations, and ongoing wars - all a legacy from the Republicans - have been decimating the economy and the nation. It's no coincidence that the Bush decade is the one we're talking about when we discuss wage stagnation. I vote my economic interests, and as a small business owner, employee, and investor, those interests align behind the Democratic party basically every time - and I believe it's important to continue to point that out. Facts matter.

  • Report this Comment On August 31, 2011, at 2:17 PM, arizonamike303 wrote:

    Vote Democrat? I did. Hasn't done me much good yet.

  • Report this Comment On August 31, 2011, at 2:17 PM, whereaminow wrote:

    Oh dear lord, there is just nothing more intellectually bankrupt than a shill for the fake Left/Right paradigm:

    "Vote Democratic. This is going to start a firestorm, I've no doubt, but borrow and spend waste, perverse tax cuts, gutted regulations, and ongoing wars - all a legacy from the Republicans - have been decimating the economy and the nation."

    All of those things attract bipartisan support from both sides of the welfare/warfare state and have for decades. Facts do matter, and a little less party propaganda and undying allegiance to bloodthirsty murderers like the Democratic Party would serve you well.

    Just don't vote. Why risk dying in a car accident on the way to the polls for those sick clowns?

    David in Qatar

  • Report this Comment On August 31, 2011, at 2:34 PM, DJDynamicNC wrote:

    Heh, well voting Democratic is hardly a panacea, but when the choice is "all wars and tax cuts" or "mostly wars and tax cuts but also some actually sensible policies," then you settle for what you can get.

    I'd actually push for a much more progressive agenda, given the option, which is part of why I'm settling in Canada later this year. Much better fit for me, and I'm a fan of living what you preach.

  • Report this Comment On August 31, 2011, at 2:54 PM, ShaunConnell wrote:

    ...recession is when the economy is getting worse. If you're going to write about economics constantly, at least learn the lingo.

  • Report this Comment On August 31, 2011, at 3:06 PM, Barby54 wrote:

    Why not vote your conscience. Don'tleave it to a partisan house or senate to do what's best for the country. Politicians do wha'ts bestfor them, and that's what the strongst lobbyists, with the biggest pocketbooks tell them to do. Vote in those who seem to have integrity, despite the tempations. While we'll be wrong alot of the time, a term or two will tell the tale, then use the facts to oust those who don't use their voice as the voice of their constituents. Use your voice, your letters, your e-mails and your vote to guide the actions of your legislators. Inactivity is the best way NOT to get what you want.

  • Report this Comment On August 31, 2011, at 3:06 PM, TMFHousel wrote:

    Shaun,

    I've seen a lot of your comments lately. You seem to be filled with anger. Can I offer a hug? Maybe recommend a hobby?

    And the technical definition of a recession is two quarters of declining real gdp growth but, frankly, definitions don't matter.

    -Morgan

  • Report this Comment On August 31, 2011, at 3:14 PM, ShaunConnell wrote:

    I'm not angry, I'm having fun. The intellectual depth of articles I comment on is fascinatingly low. :)

    Also, you stalker.

  • Report this Comment On August 31, 2011, at 3:17 PM, OutperformOrDie wrote:

    "I've seen a lot of your comments lately. You seem to be filled with anger. Can I offer a hug? Maybe recommend a hobby?"

    Haha. I love it.

  • Report this Comment On August 31, 2011, at 3:48 PM, TMFKopp wrote:

    @ShaunConnell

    "The intellectual depth of articles I comment on is fascinatingly low."

    "...recession is when the economy is getting worse. If you're going to write about economics constantly, at least learn the lingo."

    Glad you were able to chime in with such insightful views!

    Matt

  • Report this Comment On August 31, 2011, at 3:55 PM, Squirespeaks wrote:

    I always enjoy these articles that look at things in a slightly different way. A lot has been said about the growth in wage inequality in the last 10 years. But the analysis of it has been surprisingly sparse. Who are these people that have suddenly become "super rich"? What careers/industries/sectors do they work in? How are they affected by different tax policies and the changes in those tax policies? For instance, have they found a way around the "death tax"?

    I hope someone will take up this challenge and dive deep into what the rise in wage inequality (i.e., rich getting richer, poor stagnating) really means and why it's happening.

  • Report this Comment On August 31, 2011, at 4:27 PM, daveandrae wrote:

    My portfolio's August 31st, 2011 year over year investment performance

    Asset allocation- 100% equity

    Turnover ratio- negligible

    Holdings-

    Harley Davidson- 60.55%

    McDonald's- 27.51%

    Pfizer- 23.96%

    Dow Chemical- 19.40%

    General Electric- 16.42%

    Total aggregate return-

    29.57%

    S&p 500

    15.35%

    August 31st, 2010 year over year investment performance

    Asset allocation -100% equity

    Turnover ratio -0%

    Holdings-

    McDonalds -34.24%

    Dow Chemical -16.99%

    General Electric -6.81%

    Harley Davidson -3.06%

    Pfizer (minus) 0.81%

    Aggregate total return -12.06%

    S&P 500 -3.98%

    Annualized over the last two years-

    My portfolio -

    20.81%

    S&p 500-

    9.67%

    For me, the last two years have been nothing like the August 2007-2009 period. Back then, I was levered on margin at 2 to 1, my largest holding was Citigroup, representing a whopping 30% of my portfolio, and I didn't think twice about tapping my home equity line to average down. By March of 2009, my entire portfolio was down almost 80%. from its march 2007 peak AND I was 18,000 dollars to the red, in credit card debt.

    Needless to say, I've learned a lot since then. Probably the most important of all is to stay far away from things like "credit" and "leverage".

    Finally, I would say that if you're not willing to ride a stock all the way down to zero, then you are most certainly speculating with your money.

    One of my favorite maxims is from David Sorkin, who once wrote..."good judgment, comes from bad experience."

    Amen

  • Report this Comment On August 31, 2011, at 4:42 PM, AxelDC wrote:

    Unemployment for college grads has "only gone up 2%"??? That's jumping from 2% to 4.3%, which means that it has more than doubled for professionals. That means working longer hours with fewer benefits and lower real wages because there are twice as many people looking for work.

    Sure, things really suck for the other brackets, but dismissing a doubling of unemployment by college grads as "only 2%" ignores the real impact that this increase has for even the best and brightest in the country.

  • Report this Comment On August 31, 2011, at 4:45 PM, The1MAGE wrote:

    In 2008, the economy went bad, when we were told it was bad. The company I worked for had steady sales until that day. I thought the psychology was amazing. One day people didn't have any problem with buying, and the next they did.

    Anyway back then I was trying to dig myself out of debt, and was making headway. My hours were cut, but our payments had dropped enough that it only slowed things down a little. As the economy went downhill, we were paying off another debt about ever other month, and suddenly had more money available then ever before.

    I have just started investing in single stocks this month, right after the downgrade by the S&P. The stocks I bought dropped further, so I added to my positions. And kept doing that, eventually investing about double what I had planned on putting into the market.

    The result? I am already up over 6%, and made more money in the market this month then we made at our jobs.

    Okay, yes it could all come back down tomorrow, but eventually it will be up, and sometime it will be down again, then back up.

    The big point is that regardless of what the economy is doing, that is only an average. We are not the average, but individual people with our own economies. These statistics are interesting, and help with out investing, but we need to focus on our personal economies first and foremost.

    We don't get better because the economy gets better, the economy gets better because we get better.

  • Report this Comment On August 31, 2011, at 4:46 PM, TMFHousel wrote:

    ^ The percentage change is far less important than the absolute change. If GDP growth went from 0.1% to 1%, no one would be trumpeting a tenfold jump in growth.

  • Report this Comment On August 31, 2011, at 7:32 PM, rfaramir wrote:

    "where economies value capital and labor at different rates."

    David in Qatar mentioned minimum wage laws, but are you aware of *why* such laws cause the discrepancy?

    Consider an employer with several employees doing low-value jobs that are just worth doing at the minimum wage rate (i.e., he makes a slight profit on each employee's labor). Then Congress mandates a higher minimum wage. What does the employer do?

    1) Fire all employees not worth paying for the work they do. Result higher unemployment for them, lower profits for the employer, less wealth for the members of society (whatever they were producing/servicing vanishes).

    2) Invest in capital equipment to perform the same job in a higher-intensity fashion. Result, slightly higher unemployment (fewer workers but higher-paid ones), slightly lower profits for the employer (if it were more profitable, he'd already have done this option).

    Both options make the economy worse off, not all jobs can be made to fall into category 2.

    End minimum wage laws! They hurt everyone, most of all those they are supposedly designed to help: the young, the poor, the elderly, the immigrant, the less-abled.

  • Report this Comment On September 01, 2011, at 3:59 AM, ShaunConnell wrote:

    Supply and demand are unavoidable. Increasing the price of labor increases either prices or unemployment or cuts reinvested capital which leads to either increased prices or unemployment somewhere else.

    Ignoring the laws of economics in order to "help" people doesn't work. Delusions suck, folks.

  • Report this Comment On September 03, 2011, at 11:03 AM, 123spot wrote:

    Somehow this article made me feel much better. The analysis parsing where the real problems lie gives us a refined target to maximize our efforts. Education is the key. We must educate all ages (leave no adult behind) for the work of the present and the future and let machines flip the burgers at McDonalds while people design and maintain and innovate, make a great living while working 3 days a week and enjoy 4 day weekends without back pain. Thanks, Morgan. I always seek out your articles for your insight. Spot

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