What Happened to the "Feel Good" Economy?

From the collection #INET2017

One of the conundrums in regard to the recent US midterm elections is the apparent disconnect between the improvement in the unemployment rate—which has dropped below 6 percent—and the fact that so many Americans continue to feel so disillusioned about the economy. In reality, this election was not about the unemployment rate per se or what any economist says about how the economy is doing. Rather, it was about how Americans feel the economy is doing. The fact is that most Americans do not believe the economy is doing better. Specifically, they do not think their personal economy has yet recovered.

Why is this the case? According to Professor Steve Fazzari and Barry Cynamon of the St. Louis Fed, prevailing trends towards greater inequality continue to skew the benefits of a growing economy to a smaller and smaller number of people. Indeed, Fazzari and Cynamon go further: Rising inequality reduced income growth for the bottom 95 percent of the income distribution. This is not a new trend. It began around 1980, but that group’s consumption growth did not fall proportionally. Instead, most accumulated more debt in order to sustain their lifestyles and prevent further erosion of their living standards. The rise in debt coincided with three other causal trends. First, the suppression of real wages which meant that consumption expenditure could really only be maintained by accessing credit; second, the rise of the financial engineers and their elaborate and usually fraudulent or misleading marketing schemes, which forced more debt onto the naive households; third, the increasing tendency for national governments to pursue fiscal surpluses, which further squeezed private purchasing power and promoted the credit binge.

All of these factors help to explain why the Great Recession was so devastating for so many people, as well as providing a sound rationale as to why these inequality trends persist in its aftermath. Income inequality has a snowballing effect on the wealth distribution: top incomes are being saved at high rates, pushing wealth concentration up; in turn, rising wealth inequality leads to rising capital income concentration, which contributes to further increasing top income and wealth shares. Which leaves much of the population with an ability to generate adequate demand, thereby explaining why the economic recovery remains relatively tepid and why the “feel good” factor remains so elusive.

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