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Tell Us What You Think: What’s Wrong With the U.S. Economy? The Long Answer.

This is the second of a four-part series describing what went wrong with America’s economy and how to fix it. See Part 3 tomorrow and read Part 1: "Tell Us What You Think: What’s Wrong With the U.S. Economy? The Real Scoop"—and please leave a comment to tell us what you think. (Click the chart to enlarge.)

If the short answer is “we’re still recovering from the Crash of 2008,” the long answer is “there was obviously something wrong with the economy long before the Crash of 2008.”

There were obvious warning signs during the Bush years that should have set off alarm bells.  Most importantly, wages and middle-class family incomes were dead in the water.  The median income for working-age families started falling in 2000 and never recovered during the 2001-2007 recovery.

By virtually every measure, the economic expansion of 2001-2007 was the weakest on record since World War II.  The Bush expansion ranked dead last in terms of growth in wages and salaries, employee compensation (including benefits), jobs, the employment rate, business investment and GDP.  It was the first and only expansion on record in which the employment rate actually declined.  

But if the U.S. economy was so unsound during the Bush years, why didn’t more people notice cracks in the foundation?

The answer is the fundamental weakness of the economy was papered over temporarily by the bubble in real estate prices—for both residential and commercial real estate.  By 2006, housing prices had risen 70 percent above their historical trend level, creating more than $8 trillion in phantom bubble wealth.  It should have been obvious to everyone that this was a speculative bubble.

The bubble allowed families to maintain standards of living by borrowing against the value of their homes and going deeper into debt, but this was not a sustainable situation.  As wages and family incomes stagnated, household debt rose from $7 trillion to $14 trillion between 2001 and 2007—its highest share of the economy since 1929.  Families could not keep increasing their debt loads forever, and housing prices could not keep soaring indefinitely.  Sooner or later something had to give, and the bubble had to burst.  The Bush economy was a house of cards waiting to collapse.

Yet if the real estate bubble masked the fundamental weakness of the Bush economy, the question still remains: why was the U.S. economy so weak in the first place?  This will be the subject of our next post.

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