The Lost Decade

Why the last 10 years have been an economic disappointment for most Americans.

As we dig out from the rubble of the financial sector’s collapse, it’s common to hear analysts fret that the United States may now be facing a Japan-style “lost decade.” Throughout the 1990s, after its real estate and stock bubble burst, Japan struggled with low growth for more than 10 years. It emerged from the decade shrunken and sapped of confidence, with very little to show for a large amount of government spending and near-zero interest rates.

 I’m not particularly concerned that the United States is in for a lost decade. Our political and financial leadership reacted much more quickly than Japan’s did, and the U.S. system, for all its faults, processes failure quickly.

More importantly, we’ve already had our lost decade. When 2010 dawns in several weeks, it will bring down the curtain on a decade—the oughts—in which a great deal and not much at all happened, economically and financially speaking. In fact, a startling number of contemporary indicators are at or below the levels at which they stood 10 years ago.

Let’s start with the single most important economic number: jobs. Over the past 10 years, job creation has been extraordinarily weak. In September, on a seasonally adjusted basis, there were 108.5 million private (nongovernment) payroll jobs in the united States—almost precisely the number there were in June 1999. (To see the data, go here and then check “nonfarm private.”) In the past decade, in other words, the private sector hasn’t created a single job. That’s awful, especially when you consider that the population grew 9 percent during those years, from 282 million in 2000 to 308 million today.

The stock market performed like somebody running on a treadmill. A lot of energy was expended to travel the tiniest of distances. As this depressing 10-year chart of the S&P 500 shows, stocks went precisely nowhere in the past decade, despite all the efforts to help the market, from slashing capital gains and dividend taxes to keeping interest rates extremely low to bailing out just about everyone.

Meanwhile, Americans seem to have lost their interest in investing. Between 1992 and 2000, the percentage of households owning mutual funds doubled, from 24.4 to 49 percent. And between 1992 and 1999, the percentage of Americans owning equities—either through mutual funds or as individual stocks—rose from 36.7 percent to 47.9 percent. To build on that impressive growth, in this decade, George W. Bush made the “Ownership Society” a theme of his presidency, suggesting that investing in securities could be the solution to everything from Social Security’s long-term insolvency to the health care crisis. But Americans largely ignored these calls. According to the securities industry’s Equity Ownership in America 2008 report, the proportion of the population that owned stocks or bonds fell from 57 percent in 2001 to 48 percent in 2008. And in 2008, 45 percent of U.S. households owned stocks—inside retirement programs and in brokerage accounts—down from 49 percent in 1998.

Investors may have been turned off by the market’s poor performance. Or it may be that Americans didn’t have much leftover cash to deploy into the stock market. Incomes were basically stagnant during the decade while the costs of vital goods and services—education, health insurance, energy—spiked. The latest report from the Census Bureau on income, poverty, and health insurance is full of interesting data that show that median household income in 2008, at $50,303, was below where it was in 1998. The same report shows (see Table B-1 on Page 44) that both the number and the percentage of people living below the poverty line rose, from 11.9 percent in 1999 to 13.2 percent in 2009.

Many factors explain the sluggish performance. Globalization, the continuing information technology revolution, and the offshoring of manufacturing and service jobs kept employment in check. But at root, it turned out that the policies enacted by the folks running the system—low interest rates, cutting taxes aggressively, disempowering unions, empowering Wall Street, deregulating the financial system—just didn’t work as advertised. Meanwhile, policymakers neglected some important areas that can help support financial stability—such as health insurance. Between 1999 and 2008 (see Table C-1, Page 59 of the census report), the population of the United States rose 9 percent, but the uninsured population of the United States rose 19.5 percent.

There were a few areas of progress. Partisans of the decade’s economic policies liked to hold up the rise in homeownership as a success. Instead of buying stocks, Americans were buying McMansions and condos. And as these census data on homeownership rates show, the housing and mortgage bubble boosted the homeownership rate, which peaked at about 69 percent in 2006. But while stocks and bonds are bought mostly with cash, homes were purchased mostly with debt. And what leverage giveth—higher homeownership, lots of jobs tied to real estate—leverage taketh away. Once the housing market peaked in the summer of 2006 and foreclosures started to mount, the homeownership rate declined. Today, it stands at 67.6 percent—almost precisely where it was in the fall of 2000.