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
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.
Question of timing
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
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.
With luck, lessons
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
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.