Restoring Broadly Shared PROSPERITY.

• Author: MARSHALL, RAY

DESPITE a relatively robust economy, a booming stock market, low levels of unemployment, and high business profits, the political, social, and economic gains from America's long period of broadly shared prosperity between 1940 and the early 1970s are being eroded by some strong negative trends, especially declining real wages for most workers and growing inequality of wealth and income. There is mounting evidence that these trends are fragmenting the country politically and exacerbating such serious social pathologies as crime, family disruptions, suicide, and mental and physical health problems.

Although the American economy is performing well relative to most other countries, these underlying weaknesses make it questionable that this prosperity is sustainable. Indeed, in a highly integrated global economy, sustainable prosperity depends heavily on growth in the rest of the world. It also hinges on the extent to which the U.S. takes advantage of its current good fortune to address some fundamental issues that could weaken future economic performance and create social instability.

It is not clear whether the broadly shared prosperity period was an aberration or whether there are public and private policies that could sustain growth while improving opportunities for the majority of Americans whose real incomes have not risen much, if at all, since the early 1970s. The basic premise is that the earlier shared prosperity was due to a combination of basic economic and technological trends strengthened and directed by supportive policies that caused prosperity to be shared broadly. The very different economic realities of the 1980s and 1990s are supported by national and international economic policies that cause prosperity to be shared less widely.

The most serious deterrent to sustainable prosperity is the growing inequality of wealth and income resulting from stagnant or declining real wages. Family incomes have been sustained since the early 1970s mainly by the increased employment of women. Real income losses have been particularly large for the bottom 40% of wage earners, despite improvements in the economy and relatively low levels of unemployment. Actually, low levels of unemployment owe more to slow growth in the workforce than to robust economic expansion. The recovery that started in 1991 is the weakest of any since World War II.

Widening inequality would be less problematic if, as some economists argue, it were accompanied by greater upward mobility. In that case, the good fortune of those at the top could provide incentives for those at the bottom to move up. Since growing inequality has not been offset by greater upward mobility, opportunity in America is declining across generations as well as life spans. Declining and more unequal wage mobility has become a particularly serious issue for younger workers.

The causes of the burgeoning inequality can be understood in terms of specific and more basic structural changes. The specific causes are the slowdown in the growth of productivity and total output and the absorption of a larger share of that growth by business profits and higher-income families. Productivity growth, the basic determinant of improvement in real incomes, was only about one-third as large during the 1980s and 1990s as during the 1960s and was less than half the 1870-1970 annual trend rate of 2.3%. This means that two or three times as much labor was required to get the same improvement in output as formerly. As a consequence, capital investment has slowed, as has total output of goods and services, which grew at an annual rate of two percent between 1990 and 1996, compared with five percent in the 1960s, 3.6% in the 1970s, and 2.8% in the 1980s.

Other specific factors responsible for the slower economic expansion since 1973 include the reduced rate of public investment, the shift of jobs to lower productivity services sectors, the short-run profit orientation of American companies, higher real interest rates, and rising long-term joblessness (unemployment and underemployment). The specific reasons for declining real wages include cuts in manufacturing...