The Great Stagnation Myth

The American middle class has just suffered a "lost decade." Even before that, three decades of frozen wages — threatened by technology, globalization, and market-driven policies — "hollowed" it out. Economic growth in the United States pales in comparison to China. The "Great Stagnation" has arrived.

The problem with the narrative of our economic decline, Brookings economist Scott Winship writes in a new Breakthrough Journal essay that has already received notice from Tyler Cowen and Reihan Salam, is that it focuses too much on diminished rates of economic growth and too little on the actual gains that have been made over the past couple generations. The result is a misleading and counterproductive picture of our economic health.

The truth is that Americans of all classes have grown materially richer every decade since the postwar era. "Even after the Great Recession," Winship writes, "we live in larger houses and own more cars than previous generations. Our homes are cluttered with all manner of gadgets, electronics, and appliances. Air-conditioning and air travel, once considered luxuries, are now available to virtually all of us.

"If our obvious material affluence seems difficult to square with various narratives of economic decline," he continues, "that's because it doesn't."

Economists of all stripes contrast our current economic trajectory with the boom years of the 1950s and 1960s, when living standards were buoyed by high rates of growth. We can return to rapid growth and widely shared prosperity, many progressives argue, by replicating postwar Keynesian policies.

But the comparison misses the mark. The lower growth rates of today are a function of the slower metabolism of large economies, not the stagnation of American capitalism. We have still been growing richer — with gains in absolute wealth that are similar to those of the 1960s — only at slower rates.

"To fixate on the diminished rate of growth," Winship writes, "is to jealously compare ourselves not to Americans in the 1960s, who were poorer than we are and whose living standards improved less than ours did, but to Americans living today in some parallel universe, where growth rates did not decline."

The discourse of economic decay is not only inaccurate, Winship warns, but also risks undermining efforts to meet the needs of the poorest among us. It stokes worker anxiety and is "as likely to inspire selfishness as generosity among voters," he writes. "Perhaps most troubling, the focus on growth rates misdirects our attention from the minority who are struggling to the broad majority who are doing well."

In his response, Cowen writes that he still views slower rates of growth as "tragic": "People one hundred years out would be much worse off, relative to exponential growth, and their ability to fix the environment or elevate poor countries to wealth, also will be much lower. In essence economics would be surrendering the gain it won from the victory over Malthus."

Cowen also rejects the idea that economic growth — if not absolute gains in wealth — inevitably slows as nations become richer. "Most importantly," he writes, "I think high rates of economic growth will resume, at some (unknown) date in the future. ... The Great Stagnation is a temporary slowdown in growth, not the permanent end of new ideas."

If Winship's view of the economy is unsettling for some, its consequences for social policy may be far more so. The political implication, Salam writes in National Review, is "deeply unattractive to the Right and the Left, as it implies that a large set of Americans (the middle class as well as top earners) ought to make greater sacrifices to ameliorate the phenomenon of stickiness at the bottom, i.e., the relative lack of absolute upward mobility from those born into the poorest income quintile."

We welcome further debate over "The Affluent Economy" and invite your responses — we'll publish the best at The Breakthrough. Stay tuned as well for a rebuttal by Winship in the coming weeks.

-- The Editors

Photo credit: (left) Dorothea Lange/Library of Congress