Posted by: Josh Lehner | November 6, 2020

Macroeconomic Policy Matters

As our nation gets clarity on the outcome of the election, a few economic-related items stand out. While the economy is currently digging out from a severe recession, I think many voters understand or believe that this cycle is different. It was an exogenous, or outside shock that sent the economy into a tailspin. So when some election models use the current state of the economy, or economic growth directly before an election as a predictive variable, it could overstate the expected weakness for the incumbent if today voters are gauging the economy in a broader sense given the nature of the cycle. And I think in that light it is hard to argue that Americans, and Oregonians of all stripes have not seen good economic growth in recent years. We clearly have.

This brings to mind a discussion that has been taking place in the economic twittersphere this year. Macroeconomic policy matters. It’s hard to pin down exact policy levers to generate a strong economy — most policies are about creating incentives to achieve desired outcomes, or directly supporting residents and businesses when issues arise. But as our office has said before, a strong economy works wonders, even if it cannot cure all ills. And I think in this context, the cumulative impact of the decade long economic expansion that just ended has maybe not been appreciated enough, especially the material impact it has on those who have generally been left out due an underperforming economy for much of the past 20 years.

What I mean by that is the U.S. economy had not been at full employment since the late 1990s. We had a very brief period in the mid-2000s of a decently strong economy, and then in the late-2010s an extended period of a strong economy. But in between that, the economy was downright bad to terrible. As a result, we have kind of redefined normal. From, say, 2000 through 2015, the normal state of the economy was basically income growth that kept up with inflation, but nothing more for the typical worker or household. But that all changed in recent years.

The economy, near the end of the decade long expansion, broke through that malaise after the labor market became sufficiently tight. We were finally seeing real, solid gains across the spectrum. Firms had to dig deeper into the resume pile, and cast a wider net to attract and retain workers, because most people who wanted a job, had a job. Labor was not as easy to find. The result is wages started rising. Given that wages are the only real source of income for most households, the stronger labor market where more people were working, for more hours, and at higher pay, really started to move the needle on income growth. We got so used to a weak economy, that when we finally saw a strong one, it really resonated with those most impacted. Now, whether or not one should assign credit for this process to whomever is currently holding office is a different discussion, and I digress…

So with that said, I’ll leave you with a few charts to this end. The economic expansion that begin in the summer of 2009 and ended in the spring of 2020 really did start to bear fruit in recent years.

You can see that in income growth for all parts of the state, where they are now higher on an inflation-adjusted basis than back in 2000. (Once more detailed 2019 ACS data is available, I will update our more granular regional income work.)

Looking at growth rates over 5 or 10 year periods shows just how different a strong economy delivers for the typical household than a weak one does.

And this third chart is one you have seen before, but we cannot lose sight of the fact that while large racial disparities remain, the strong economy was really delivering results for Oregonians of all races and ethnicities. Poverty rates for Black, Indigenous, and People of Color are at multi-decade, meaning multi-generational lows. That is something to celebrate, even as we realize there is more work to be done to help address ongoing disparities.

To bring this full circle, it is clear that a strong economy delivers results and puts more money in the pockets of everyday Americans. We still need public policies to help address issues, inequities, increase efficiencies, and the like. But macroeconomic policy matters considerably. Full employment matters. Americans notice when it does happen. And to paraphrase the economic twittersphere, we should try doing that!

Stay tuned. Our next economic and revenue forecast is released in a couple of weeks, Wednesday, November 18th. We will have more thoughts on the potential economic impacts of the election as we know more.


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