The U.S. Economy: A 25-Year Boom—or Bust?

In the end, both the data and common sense make the bullish case.


I have been writing a lot about America's quarter-century economic boom. Now CNBC's Larry Kudlow and former Labor Secretary Robert Reich both give their two cents on the long-term performance of the economy from very different perspectives. Here is a bit of how Kudlow sees the past 25 years:

A significant paradigm shift has taken place in the U.S. economy over the last quarter century. During that time, the U.S. economy has been in prosperity 95 percent of the time and in recession only 5 percent. That is, the United States has had a grand total of only five negative GDP quarters in the past 25 years. In the prior two decades, the U.S. economy was mired in recession about a third of the time. This earlier period was a time marked by high inflation, high taxes, and overregulation of the economy. This caused the U.S. to look weak, while the Soviet Union looked strong. Clearly, things have changed. Prosperity has become the rule, not the exception...

Now it's Reich's turn:

According to new polls, the economy is the number 1 issue for American voters. But that's not just because the economy is slowing and mortgages are harder to come by. The real reason is middle-class families have exhausted the coping mechanisms they've used for over three decades to get by on median wages that are barely higher than they were in 1970, adjusted for inflation. Male wages today are actually lower than they were then; the income of a young man in his 30s is now 12 percent below that of a man his age three decades ago... The underlying problem began around 1970. And any presidential candidate seeking to address it will have to think bigger than stimulating the economy with tax cuts or spending increases. The fact is, most Americans are still not prospering in the high-tech, global economy that emerged three decades ago. Almost all the benefits of economic growth since then have gone to a relatively small number of people at the very top.

My take: Not surprisingly, perhaps, I think Kudlow plays A-Rod on this one and hits a moon-shot home run. One problem with Reich's argument is that government stats have been overstating inflation for years. Many economists on the left and right believe this. If you slightly tweak the inflation numbers for the past two decades or so, you see that real wages and income have gone up by 40 percent rather than slipped. I call this the "myth of stagnant wages." From another vantage point, a recent study from the Federal Reserve Bank of Minneapolis finds that wages for the median worker went up by 20 percent between 1975 and 2005.

What's more, critics of the economy tend to ignore benefits when figuring how well or poorly workers are being paid. By that measure, according to the Fed bank, total compensation has gone up by 28 percent. Common sense also leads one to believe Reich is wrong. If he were correct, one would expect to have seen a massive populist political backlash years ago. Instead, people keep electing presidents with fairly conservative economic views who focus on growth rather than redistribution. Where are Presidents Mondale, Dukakis, and Gephardt? But where Reich, Kudlow, and the Fed study would all agree is that America can do even better in the future if we focus on policies that enhance economic growth.