What Actually Happened to the Earnings of Working Americans, and What the Next President Can Do About It

The disappointment and anger many Americans feel about their economic lot has held center stage in this year’s elections.  Mitt Romney, of course, blames President Obama.  New Census Bureau data, however, tell a different story.  The economic problems facing working Americans did not begin with the current slow recovery or even with the financial crisis of 2008-2009 and the subsequent deep recession.  A new report issued last week by NDN tracks the earnings of working Americans of various ages, year by year, as they have grown older.  It shows that average working people racked up steadily-rising wages and salaries through the economic expansions of the Carter, Reagan and Clinton presidencies.  I also found that this progress stopped abruptly in the expansion of 2002-2007, when people’s wages and salaries stagnated through five years of strong productivity gains and reasonable growth.  

This new analysis recasts the significance of our current slow recovery.  As many economists have pointed out, slow recoveries are the norm when an economy suffers a serious financial crisis, whether it was the United States and Europe in the 1930s, Latin America in the 1980s, or Japan in the 1990s.  In fact, the Obama program stopped a dangerous spiral towards a second Great Depression and restored modest job gains that have far outpaced the job growth following the 2001 recession.  The economy now seems poised for stronger growth over the next four years.  The outstanding question is whether the programs offered by the President or Mr. Romney can address the forces that halted earnings progress in the 2002-2007 expansion.  The evidence suggests that Obama’s program comes much closer to that mark than Romney’s proposals. 

To answer that question, we first need an accurate picture of how Americans have really fared economically over the last two generations.  To capture people’s actual economic experience over that period, I tracked the median wage and salary earnings of various age cohorts as they aged over the last 45 years.  We followed the earnings path of working Americans age 25 in 1975 until they reached 55 in 2005, those age 25 in 1985 until they reached age 50 in 2010, and those age 25 in 1995 until they reached age 40 in 2010.  A clear pattern emerged.  The earnings of working people grew by 2.8 percent a year as they aged through the Carter expansion of 1976-1979, followed by gains of 3.2 percent per year through the Reagan expansion of 1982-1989, and then another 3.8 percent per year in the Clinton expansion of 1992-2000.   Then came the expansion of 2002-2007, which produced annual wage and salary gains ranging from 1.7 percent for those in their 20s and early 30s, to negative 1.5 percent for those in their late 40s and early 50s.  Across all age cohorts, people’s earnings progress averaged 0.5 percent per year through the Bush expansion, nearly 85 percent less than the average wage and salary gains achieved during the three previous expansions.

These findings transcend partisanship.  The policies of the Carter, Reagan and Clinton administrations all enabled average working Americans to achieve healthy wage and salary gains as they aged.  To begin, this suggests that changes in people’s marginal tax rates – down under Reagan and up under Clinton -- do not materially affect whether their wages and salaries increase as they age.  In addition, of course, earnings progress virtually stopped in the last decade, despite the Bush tax cuts.  Therefore, there is no historical evidence that the centerpiece of the Romney program, a 20 percent across-the-board cut in marginal income tax rates, will make any difference for people’s wages and salaries.

A serious program to restore earnings progress has to begin by identifying what has changed in the economic landscape, so national policy can respond effectively to an economic environment that stalls that progress.  One factor almost surely involves the budget deficit.  When deficits ballooned in the 1980s, President Reagan and Congress stabilized them, largely by ending his defense buildup and raising taxes on businesses (1982), payrolls (1983), and energy use (1984).  When deficits ballooned again in the 1990s, President Clinton and Congress moved the budget to surpluses largely through defense cuts, Medicare changes and tax increases on higher-income households.  Strong gains in wages and salaries in both decades also were crucial to curbing those deficits, by expanding the revenue base for income and payroll taxes.  By contrast, when the deficit ballooned in 2001 and 2002, and earnings stagnated, the Bush administration enacted another tax cut in 2003, increased entitlement spending for the new, unfunded prescription drug benefit, and expanded Pentagon spending for the wars in Iraq and Afghanistan.

Obama’s program seems much more likely to address this factor than Romney’s plan.  The President’s deficit proposals mirror those of Reagan and Clinton, covering defense cuts, additional revenues, and spending restraints in Medicare and discretionary programs.  By contrast, the Romney program begins with large increases in defense spending and big, new tax cuts.  In recent weeks, to be sure, he suggested that he would pare back his tax cuts to ensure “revenue neutrality.”  But he remains unalterably opposed to the revenues increases that all of his predecessors except George W. Bush used to help control deficits.  That leaves his pledge to control deficits entirely dependent on the Ryan budget.  He will have to persuade Congress and the public to accept a Medicare program reorganized around vouchers, state-run Medicaid systems with one-third fewer resources, and the deepest cuts ever seen in federal support for education, natural resources, law enforcement, export promotion and everything else.  Once again, there is no historical evidence that Mr. Romney’s approach will bring deficits under control.

Another force shaping the new economic landscape is globalization.  China’s total imports and exports, for example, jumped from $200 billion in 1994 to $500 billion in 2000 and an astounding $2.4 trillion in 2008.   Over the same years, American businesses and workers also have had to face new competition from businesses in many other countries, including India, Korea, Brazil, Mexico, and much of Eastern Europe.  This new level of competition has affected the wages and salaries of Americans, because it has made it much harder for American businesses to pass along their cost increases in higher prices.  The result is that those companies have cut other costs, starting with the wages and salaries they pay.

Globalization is not going away.  So, the only course available to ease this new pressure on the earnings of Americans is to help businesses address some of costs which rose rapidly in the 2002-2007 expansion – namely, health care and energy.  Once again, Obama’s program seems more promising than Romney’s plan.  For example, Obamacare includes numerous provisions which may help slow fast-rising medical and insurance costs.  They range from new prevention programs and active promotion of cost-effective best practices, to mandatory coverage for healthy young people.  But Romney is committed to repealing all of these reforms and would depend instead on the current patchwork of private competition which has proved unable to make a dent in these costs. 

On the energy front, both candidates pledge to expand our supplies of fossil fuels, which in recent years actually have increased substantially on their own.  However, Obama also would continue to actively promote alternative forms of energy.  Romney wants to end those efforts.  In addition, Obama says he will to continue to use new federal laws and regulations to increase energy conservation and efficiency.  For example, he raised fuel mileage standards for new automobiles, which effectively reduce unit energy costs.  Romney has suggested he would end these conservation efforts and roll back many existing regulations, undoing some of this progress in containing future energy costs.

The central economic challenge facing the next president is to restore healthy wage and salary gains for average Americans.  This challenge will not be met by cutting taxes and rolling back government.  Rather, it will take a sustained effort to address the forces which, following 25 years of steady gains, have stalled further earnings progress for the last decade.  On this basis, the President’s program offers much more promise than Mr. Romney’s agenda.