In 2022, Marla, a thirty-two-year-old retail store manager in Chicago, began to feel the first signs of an economy under strain. As COVID stimulus benefits dried up and prices surged, her wages became harder to live on. Her credit card debt increased, and she fell further behind on student loan payments, all while higher interest rates made borrowing more difficult. When asked about her outlook, Marla discussed her fears for the future. Would she ever be able to own her own home? And could she afford to have kids while her economic life remained so uncertain?
Experiences like Marla’s, which were shared by millions of Americans last year, often accompany an economic downturn. But a glance at economists’ preferred benchmarks for a recession seemed to reveal an economy that was still robust. This includes strong consumption figures and the appearance of tight labor markets. And although there has certainly been an increase in financial market volatility as well as a wave of equity sell-offs and job cuts in the tech sector, key indexes do not obviously indicate an economy on the brink of a recession.
What is going on with the American economy? Why do the traditional indicators that capture the country’s economic health stand in such stark contrast to the lived experiences of so many people, including the 32 percent of American adults who are falling behind on debt payments and the 25 percent of US parents who have struggled to afford food or housing in the last year.
A closer look at the US economy reveals a country with bifurcated economic experiences. Indeed, it is ultimately America’s historically high levels of wealth and income concentration that can best explain the dissonance between aggregated economic figures and middle- and lower-income Americans’ daily realities.
Regardless of whether the United States falls into recession in 2023, the economy is clearly in a precarious state. The reliance on credit among American workers masks signs of economic distress. Poor job quality, in addition to the anti-competitive and anti-worker domination of local industries by national or multinational firms, makes labor market tightness less predictive of labor bargaining power. And the overrepresentation of the top 10 percent of American earners in the financial system makes that system deeply unrepresentative of the “real” economy.
In other words, as American inequality increases, the data that economists traditionally rely on to declare a recession becomes increasingly skewed, concealing weaknesses in the economy. And such weaknesses do exist. Worse than unsustainable, American inequality is a time bomb that will wreak havoc on the economy if it is not contained.
Glass Half Full
The National Bureau for Economic Research (NBER) is tasked with announcing whether or not a recession is taking place, and it does so by studying a diverse set of macroeconomic conditions. So far, NBER hasn’t announced that the United States is in recession. Although there was a very brief “technical recession,” defined as two consecutive quarters of negative growth, in 2022, NBER does not consider an actual recession to be taking place. During those two negative quarters, GDP was heavily impacted by volatile inventory and net export swings. Both growth and consumption have remained relatively steady.
In addition, the consensus among most mainstream economists is that the job market is robust, despite a slight cooling in recent months and waves of layoffs in finance and tech. Job openings fell in February, dropping below ten million for the first time in nearly two years. (For reference, there were seven million openings in February of 2020, just before the pandemic.) But broadly speaking, most economists agree that labor markets remain strong. The diffusion index from February similarly showed that industries were still growing, but that the rate had fallen considerably. And the March jobs report showed that job growth fell only slightly to about 230,000 while the labor force size increased, indicating a strong labor market despite signs of cooling.
The nature of US growth, consumption, and labor markets has prompted many economists and figures in the financial sector to articulate a cautiously sanguine view of the US economy. For instance Jamie Dimon, CEO of JP Morgan Chase, commented that “looking ahead, the positives are huge” and that consumer balance sheets are in “great shape.”
But general optimism about US economic dynamism is hard to reconcile with the economic realities facing millions of Americans. Recent figures point toward the damaging combination of COVID stimulus provisions ending as well as inflation, including an expected 7.9 percent increase in food prices in 2023. These elements have decreased workers’ real (inflation adjusted) wages, prompting a rise in economic distress.
One quarter of adults are now struggling with food security (food spending declined 5.5 percent from January to May 2022). Child poverty has increased, as the COVID emergency boost to Supplemental Nutrition Assistance Program (SNAP) benefits were cut for the program’s forty-two million recipients. Two-thirds of Americans continue to live paycheck to paycheck; about 11 percent are underemployed; 57 percent of Americans can’t afford a $1,000 emergency expense. Homeless shelters have seen their waiting lists double or triple. And nearly 40 percent of low income households have trouble paying for medical care.
As key signals of economic distress have risen, so too has household debt. Currently 20.5 million Americans are behind on utility payments, and 25 million are behind on credit card, auto loan, or personal loan payments. These are the highest numbers since 2009, and both mortgage and credit card debt underwent their largest quarterly increase in twenty years. In total, US household debt is currently sitting at a record $16.9 trillion. And this debt is increasingly concentrated among millennials and younger Americans.
In direct contrast to Dimon’s optimism, the current signals of distress for US households indicate worsening balance sheets and increasingly difficult economic conditions.
The Inequality Mask
Looking more closely at both data and economic history tells us a very different story than what corporate economists and bankers would have us believe. Indeed, the dissonance between widely reported macroeconomic figures and the experience of working-class Americans can be explained by three factors: first, anti-worker policies and events; second, the role of inequality in making the bottom brackets more susceptible to income shocks; and third, the use of cheap credit to supplement for income.
On the first point, over the last half-century a combination of technological change and outsourcing has eroded many middle-income jobs, leading to a polarization of wages in the United States. Meanwhile, unionization rates have fallen significantly, and many firms developed anticompetitive approaches to exerting control over local regional labor markets and suppressing workers’ ability to change jobs (noncompete agreements, for instance).
The entanglement of these elements partly explains why economist Thomas Philippon has found a rise of monopsony dynamics in US labor markets, where workers have lost economic power and experienced suppressed real wages. And so, even in a “tight” labor market that appears healthy, firm domination and anticompetitive practices make lower-wage workers’ experiences more akin to what we might see in a “loose” market, where finding work is difficult and negotiating higher real wages is a challenge.
High levels of inequality that have emerged in part from these economic shifts also mean that a majority of Americans are far too vulnerable to the risk of a sudden shock to their incomes. In 2022, such a shock came in the form of a higher cost of living due to supply-driven inflation, which spurred central banks to increase interest rates. As economic conditions worsen, millions of Americans have insufficient income and savings to weather the storm. Consequently, they struggle to make ends meet.
This is where cheap credit comes in. It has been well established by several social scientists that beginning in the 1970s, the United States underwent a substitution of World War II–era and Great Society welfare benefits in favor of access to cheap credit. This policy shift — not coincidentally occurring in tandem with a conservative backlash to civil rights and the neoliberal embrace of free-market economics — has played a crucial role in worsening income and wealth inequality, both by increasing consumption and therefore profits for corporations and by redistributing extra money from borrowers to lenders in the form of interest.
Meanwhile, it effectively “paved over” the United States’ vast socioeconomic inequalities, making it appear that Americans are capable of shouldering greater financial burdens through their reliance on debt. Economist Adair Turner shows that this has created a self-perpetuating cycle of widening inequality, where debt growth increased inequality, which forced Americans into further debt to finance their cost of living, and so on.
Understanding this history can also help explain exactly why Dimon is wrong about lower-income Americans’ balance sheets. Today, the bottom 90 percent of Americans remain net “dissavers” (debtors), while virtually all savings and capital are concentrated in the top 10 percent of households by wealth. And we are currently seeing the fastest pace of debt accumulation over a three-year period since the 2008 crash.
This erosion of worker power and rise of inequality is not just unfair; it’s damaging to the entire country. It is widely accepted now that high inequality decreases real “equilibrium” interest rates, since cheap credit becomes necessary for low- and middle-income households to finance their expenses. And this can produce a frothy and highly speculative financial system, where bubbles frequently emerge (see most of the tech sector and almost all of crypto).
As the capacity for financial risk-taking increases, the danger of financial crises grows. When recessions do happen, the vulnerability of millions of working-class Americans forces the US government to step in and effectively transmute private household debt into public debt through stimulus provisions — but the selectively limited appetite for public debt among many US federal policymakers frequently means such stimulus fails to adequately protect working-class Americans. This can help explain why economists, including those at the International Monetary Fund and Organization for Economic Cooperation and Development, have repeatedly found that inequality makes recessions deeper and longer-lasting while also limiting economic growth.
Regardless of whether the United States falls into recession, it is worth being skeptical of the explanatory power of the aggregated figures commonly reported in mainstream media. The Wall Street Journal commented on April 7 that the March jobs report “isn’t comforting to workers since they are falling behind inflation, but it’s good news for the Fed.” Given the vulnerability of millions of Americans and the tendency for high inequality to worsen recessions, that optimism appears misplaced.
In the coming weeks and months, we are likely to hear many more commentators articulating the idea that the economy is strong according to traditional metrics, ignoring the ways high inequality masks deep systemic weaknesses and risk. Rather than exhaling a premature sigh of relief, we should ask what the current regime of higher interest rates and inflation means for the families that are now struggling to pay for food and housing. And we should reevaluate our understanding of “economic health” beyond rudimentary analysis of job postings. Ultimately, we should look instead toward what matters most: whether we are building an economy where people have the opportunity and tools to live decent, dignified lives.