America's Phony Lost Decade

Is America headed for a "lost decade" of meager growth like Japan suffered during its banking and real estate meltdown in the 1990s? That's the big debate right now on Wall Street. Yet, in Washington, the common wisdom holds that America is already waist deep into a lost decade, one marked by stagnating wages, growing income inequality, and deteriorating economic fundamentals. That has been the liberal narrative of the Bush years, and now some conservatives have begun to buy into the critique. "Even before the Wall Street crisis, the American economy had underperformed from the point of view of the average worker," former Bush speechwriter and pundit David Frum wroterecently.

At best, this narrative is historical fiction. Take the bit about wage stagnation. Indeed, the real average hourly wage for workers, as calculated by the Labor Department, is just 1.2 percent more than it was at the end of 2000. Yet many economists, including those at the Federal Reserve, think the government is overestimating inflation by nearly a full percentage point. If true, then workers have actually seen wages rise by about 10 percent since 2000. And you don't even have to tweak the inflation data if you combine wages, salaries, and benefits, as does economic analyst Ed Yardeni. Doing that, he finds that workers are 11 percent to the better since January 2001.

Consumption equality. Of course, averages may mask growing income inequality, where middle incomes are flat, lower incomes falling, and higher incomes surging. And assuredly there are loads of data showing that people with high-skill, high-education careers (like engineers and attorneys) and careers that benefit from globalization (NBA players, CEOs) have been raking it in.

But how rich you are depends on both how much you make and how much the goods you buy cost, note economists John Romalis and Christian Broda of the University of Chicago. And they recently found that official income inequality statistics fail to take into account that lower-income Americans tend to consume more inexpensive, Asian-produced goods. The China price doesn't rise as fast as the Prada price. In short, Wal-Mart bargain hunters have a lower inflation rate than the reality-show celebrities pillaging the stores on Rodeo Drive. Those differing inflation rates negate "almost all the rise in [wage] inequality," says Romalis.

Now, none of this upbeat number crunching about the '00s means the next president won't inherit a lousy short-term economic situation. But the long-term fundamentals continue to be solid. The World Economic Forum recently ranked the U.S. economy as the world's most competitive, thanks to our innovation, flexible labor markets, and higher education. (Our biggest weaknesses included tax rates—numero uno—and an inefficient government bureaucracy.) Those high-return assets, along with what economist Tim Kane calls our "entrepreneurial culture," give America what the Japanese call sokojikara, or "deep strength." And that reserve power—along with some timely financial action by the bailout firm of Paulson & Bernanke—is why America won't have a lost decade.