Politics & Ideas
The Economic Roots of American Retreat
Enduring a jobless recovery has discouraged many from supporting a robust U.S. foreign policy.
By William A. Galston
March 18, 2014 6:53 p.m. ET
A recent Pew Research Center survey finds that, by 56% to 29%, the American public says that it is more important for the United States to minimize its involvement in the Ukrainian crisis than to take a firm stand against Russian actions. Meanwhile, the latest NBC/Wall Street Journal poll finds that 57% of Americans believe the U.S. is still in recession.
These findings are related. To be sure, the American people are typically cautious about foreign entanglements, and 12 years of costly wars have intensified that caution. But something more is at work. As long as the economy remains troubled, the assertion that "it's time for nation-building here at home" will prevail against external challenges that seem less than existential.
Put simply: If the people do not believe we are strong at home, they will be reluctant to support a policy of strength abroad, reducing the ability of the U.S. to serve as the guarantor of global security.
By prevailing economic standards, the Great Recession ended in mid-2009. But there are good reasons why average Americans don't see it that way. Although inflation-adjusted gross domestic product exceeded its late 2007 peak by the second quarter of 2011, the number of jobs has not regained its prerecession level.
At the beginning of economic recoveries, hiring has typically trailed production increases. After the first seven downturns following World War II, the resumption of hiring didn't kick in until two or three months after production rose.
But then things began to change. After the 1990-91 recession ended, the lag between hiring and production stretched to 10 months; after the 2001 recession, it increased to 16 months. The current three-year gap between the start of recovery and the revitalization of employment has no precedent in the postwar era. Something fundamental has changed in the relationship between economic growth and employment gains, and the American people sense it.
There is another reason so few Americans believe that the recession has ended: The standard of living for most people has eroded. Median household income declined by 1.6% in 2008 and 2.6% in 2009. But after the official end of the recession, it continued to fall—by 2.3% in 2010 and 2.5% in 2011—before stabilizing in 2012. Analysis of more recent data by Sentier Research indicates that median household income grew only marginally in 2013.
The bottom line: As of the end of 2013, median household income was 4.7% lower than in June 2009, the official end of the recession; 6.2% lower than in December 2007, the official beginning of the recession; and 7.5% lower than in January 2000. Median household income today is barely higher than it was a quarter-century ago, in 1989.
Underlying these troubling household statistics is a fundamental shift in the structure of the U.S. economy. For decades, wages constituted about 55% of total national income. In the wake of the Great Recession, that measure has dropped to 50%. Total compensation, which includes benefits, averaged 66% during the same period. It has now fallen to only 61%. Meanwhile, the Bureau of Economic Analysis reports that after-tax corporate profits, which oscillated between 5% and 7% of GDP from 1980 through 2000, have surged to an all-time high of 10%.
During the Cold War, Americans were sustained by the belief—and the fact—that we were all in it together. And we were: In 1967, according to the Census Bureau, the top 5% of the U.S. population received 17% of national income, and so did the middle fifth. Nearly two decades later, in 1984, little had changed: The top 5% of Americans received 17% of national income, the middle fifth, 16%.
Today in the post-Cold War era, Americans have less reason to feel the we're-all-in-this-together sense of national purpose. The top 5% receives 22%, the middle fifth only 14%. If average Americans no longer believe that the economy works for them, it's hard to argue with them.
Although both political parties are split, many members of each party continue to believe in a U.S. that is engaged overseas not only economically and diplomatically, but also militarily—not to invite conflict, but to deter the kind of aggression we have seen in recent weeks.
Yet our political leaders cannot sustain the country's leading role without the support of the American people, who will not be willing to shoulder that burden unless they have a chance to improve their lives and enhance opportunity for their children. Their loss of confidence is the largest obstacle to a foreign and defense policy that reduces aggression and increases security around the world. For America's national leaders who still support such a policy, rebuilding a growing economy whose fruits are widely shared is Job One.
These findings are related. To be sure, the American people are typically cautious about foreign entanglements, and 12 years of costly wars have intensified that caution. But something more is at work. As long as the economy remains troubled, the assertion that "it's time for nation-building here at home" will prevail against external challenges that seem less than existential.
Put simply: If the people do not believe we are strong at home, they will be reluctant to support a policy of strength abroad, reducing the ability of the U.S. to serve as the guarantor of global security.
Corbis
At the beginning of economic recoveries, hiring has typically trailed production increases. After the first seven downturns following World War II, the resumption of hiring didn't kick in until two or three months after production rose.
But then things began to change. After the 1990-91 recession ended, the lag between hiring and production stretched to 10 months; after the 2001 recession, it increased to 16 months. The current three-year gap between the start of recovery and the revitalization of employment has no precedent in the postwar era. Something fundamental has changed in the relationship between economic growth and employment gains, and the American people sense it.
There is another reason so few Americans believe that the recession has ended: The standard of living for most people has eroded. Median household income declined by 1.6% in 2008 and 2.6% in 2009. But after the official end of the recession, it continued to fall—by 2.3% in 2010 and 2.5% in 2011—before stabilizing in 2012. Analysis of more recent data by Sentier Research indicates that median household income grew only marginally in 2013.
The bottom line: As of the end of 2013, median household income was 4.7% lower than in June 2009, the official end of the recession; 6.2% lower than in December 2007, the official beginning of the recession; and 7.5% lower than in January 2000. Median household income today is barely higher than it was a quarter-century ago, in 1989.
Underlying these troubling household statistics is a fundamental shift in the structure of the U.S. economy. For decades, wages constituted about 55% of total national income. In the wake of the Great Recession, that measure has dropped to 50%. Total compensation, which includes benefits, averaged 66% during the same period. It has now fallen to only 61%. Meanwhile, the Bureau of Economic Analysis reports that after-tax corporate profits, which oscillated between 5% and 7% of GDP from 1980 through 2000, have surged to an all-time high of 10%.
During the Cold War, Americans were sustained by the belief—and the fact—that we were all in it together. And we were: In 1967, according to the Census Bureau, the top 5% of the U.S. population received 17% of national income, and so did the middle fifth. Nearly two decades later, in 1984, little had changed: The top 5% of Americans received 17% of national income, the middle fifth, 16%.
Today in the post-Cold War era, Americans have less reason to feel the we're-all-in-this-together sense of national purpose. The top 5% receives 22%, the middle fifth only 14%. If average Americans no longer believe that the economy works for them, it's hard to argue with them.
Although both political parties are split, many members of each party continue to believe in a U.S. that is engaged overseas not only economically and diplomatically, but also militarily—not to invite conflict, but to deter the kind of aggression we have seen in recent weeks.
Yet our political leaders cannot sustain the country's leading role without the support of the American people, who will not be willing to shoulder that burden unless they have a chance to improve their lives and enhance opportunity for their children. Their loss of confidence is the largest obstacle to a foreign and defense policy that reduces aggression and increases security around the world. For America's national leaders who still support such a policy, rebuilding a growing economy whose fruits are widely shared is Job One.
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