Is the U.S. Economy Really in Good Shape?


The noted Harvard economist, Martin Feldstein, says in yesterday’s Wall Street Journal, that “The U.S. Economy Is in Good Shape.”
Capture0The reasons are that:

  • We are essentially at full employment with an overall unemployment rate of 4.9% and 2.5% among college graduates.
  • Real income (after government transfers and federal taxes) is up 49% between 1979 and 2010 for households in the lowest income quintile. Real income is up 40% between 1979 and 2010 for households in the middle three income quintiles.
  • The 70% decline in the price of oil since early 2015 will eventually have a positive impact on U.S. economic growth. The fall in gasoline prices alone has increased annual household spending power by more than $1000 per household. When consumers start spending this money, it will have a large impact.
  • The Fed’s quantitative easing program has led to artificially high stock prices which now are coming down as the Fed begins to raise short-term interest rates. The U.S. economy is strong enough to withstand this shock. It would be a mistake for the Fed to abandon its December forecast of four rate increases in 2016.

I would refer to Mr.Feldstein’s analysis as a somewhat rosy scenario. It ignores our low labor participation rate, our high (U-6) underemployment rate of 9.8% and the historically slow 2.2% growth of our economy since the end of the recession almost seven years ago.
Mr. Feldstein goes on to say that “the American economy does face long term problems.  High on the list is the large and growing national debt, rising from less than 40% of GDP before the recession to 75% now and heading to more than 80% in ten years.  But the big uncertainties which now hang over our economy are political, with presidential candidates threatening to raise taxes, increase fiscal deficits and pursue antibusiness policies.”
Conclusion. What Mr. Feldstein is really saying is that our economy is in satisfactory shape right now but that we must attend to its long term threats to make sure that things do not turn sour.  What the presidential candidates are saying in this respect is not encouraging.

Follow me on Twitter:
Follow me on Facebook: