The American economy has taken the shape of an iceberg. The visible part glistens in the reflected sunlight of Donald Trump. Beneath the surface lurks a structure that might not long be capable of supporting the glistening tip.
Start with what is visible. The unemployment rate is 4.8 percent, generally regarded as full employment. The economy added 227,000 jobs in January. Sales of previously owned homes rose last month to the highest level in 10 years despite rising mortgage rates and a supply shortage. The Atlanta Federal Reserve bank estimates the economy will grow at an annual rate of 2.4 percent this quarter, up from 1.9 percent in the last quarter of 2016. The New York Fed’s survey of business activity is at its highest level in two years.
After declining for five consecutive quarters, corporate earnings in the final quarter of last year will probably prove to have increased by 4.6 percent when final data are in. Retail sales rose a healthy 0.4 percent in January, manufacturing output by 0.5 percent. The Federal Reserve Board's preferred measure of inflation is at a five-year high, putting paid to fears of deflation and prompting talk of an economy healthy enough to withstand a round of interest rate increases.
Investors who believed that Trump's election would usher in an era of lighter regulation and lower taxes, and backed that belief by buying shares, have been rewarded with gains of around 10 percent in less than four months. Fears that we are in a bubble that will burst if a gap develops between presidential promise and administration delivery are dismissed by optimists who make two arguments. First, such a gap is highly unlikely to develop, and even if Trump delivers only part of what he has promised the economy will motor along at a higher speed. Second, we are witnessing a fundamental repricing of assets to reflect the end of the Obama "progressive" era of regulations that drive up business costs and make expansion more difficult, ever-higher taxes, and expensive social experiments such as Obamacare, and the dawning of a new era of business-friendly government.
Newly minted treasury secretary Steve Mnuchin intends to drive the annual growth rate from last year's measly 1.6 percent, and what the Congressional Budget Office [CBO] reckons is our long-term growth potential of 1.7 percent, to 3 percent "or more". Whatever a share of stock was worth in the Obama years, that share—which is a claim on future corporate profits—is worth more today. In short, they say, the Trump-induced exuberance is purely rational. Others add that a synchronous worldwide expansion and healthy corporate earnings might just have more to do with the run-up in share prices than what Trump does or doesn't do.
But we do have to look beneath the data on the economy's current performance. As long ago as 1962 Michael Harrington, in a book that sold over one million copies, wrote of "The Other America," detailing the persistence of poverty in an affluent country, with the poor "sunk in a paralyzing, maiming, routine … It is as if Disraeli's famous remark about the two nations of the rich and the poor had come true in a fantastic fashion." Unless something is done, "someone can write a book about the other America a generation from now and it will be the same, or worse." It took two generations before Charles Murray, a scholar at the American Enterprise Institute, finally did. His Coming Apart is not an exact update of Harrington's conclusions, but in a similar vein. "Our nation is coming apart at the seams—not ethnic seams, but the seams of class." A new upper and a new lower class have such different values, such widely different behaviors, that we are now a nation divisible. The influential upper class lives in a cultural and economic "bubble" that increasingly shields it from contact with a powerless lower class.
Nicholas Eberstadt, a colleague of Murray's, takes it from there. He digs into the data of the unseen portion of the iceberg, and explains why the entire mass is likely to melt—and it is not because the planet is warming. Although the estimated net worth of American households and non-profit institutions more than doubled between 2000 and 2016, "Things have been going badly wrong in America since the beginning of the 21st century":
* For every man between the ages of 25 and 55 that is counted among the unemployed, there are three who are neither working nor looking for work.
* The portion of women of that prime working age who are working outside the household has fallen since 2000 and is now back where it was a generation ago, in the 1980s.
* Paid hours of work per adult civilian have fallen by "a shocking 12 percent thus far in our new American century."
* The majority of men in this "un-working army" do neither charitable work nor very much to help at home; they spend 2,000 hours per year in front of one kind of screen or another.
* The odds of a 30-year-old earning more than his parents at that same age have declined from 86 percent forty years ago to 51 percent today.
There's more, with rising opioid use being the most troubling. Add it all up and secretary Mnuchin's hope of pushing the growth rate up to 3 percent or more becomes something close to a pipe dream. Which means that the tax revenues to finance the anticipated Trump infrastructure program will not materialize, that non-workers will absorb more and more of the available public funds, and that the investors who are driving up share prices not only are buying into a price bubble, but are so unaware of what is going on as to be living their lives in Murray's exclusionary bubble.
For it is the nature and size of the labor force that will largely determine the sustainable long-term growth rate of the American economy. From the vantage point of the think-tank scholars, that rate would seem to be far more like the CBO's 1.7 percent than Mnuchin's 3 percent or better.
And yet, and yet. … Trends created by bad policies are reversible by better ones—increased incentives to seek work, decreased incentives to spend 2,000 hours watching screens, tighter disability requirements, reduced costs of geographic mobility. The list goes on, and is under active discussion in policy journals, often the first step in a policy revolution. As Matthew Continetti points out ("The New Nationalism in America" in the Washington Free Beacon), "Decades of intellectual and political activity preceded the election of Ronald Reagan in 1980. … Trump, unlike Reagan, is unable to draw from years of intellectual work and policy research. That is beginning to change."
If the bubble-dwelling elites with the power to make change happen hear the tumbrils rolling over the cobbled streets of Georgetown, the new intellectual work might, only might, result in action, as it did in 1980.