In 1990 Stanford economist Paul Krugman wrote a superb primer on U.S. economic policymaking in the 1990s that he called The Age of Diminished Expectations. In it he argued that the most important problem facing the United States was a slowdown in long-term economic growth. As usual Krugman got his economics right. But his description of the mood of America in the 1990s was wrong. Instead of bringing their expectations into line with the economy's lower productive potential, Americans have been in continual denial, lashing out at foreign competition, immigrants, the poor, minorities, declining values, and above all, big government as the source of their problems.
In The End of Affluence, Jeffrey Madrick follows in Krugman's footsteps with a lucid, well-documented portrayal of America's economic plight. Madrick's central thesis is that America has entered a new era of slow growth that requires a radical change in mindset. While his message is not original, it certainly warrants repetition, since so few Americans have taken the implications of slow growth to heart, and no one has yet come up with a complete explanation for why it has happened and a full prescription for what should be done about it. Madrick's book is interesting chiefly for its description of the disease. But his analysis of the disease's origins is faulty, and his prescriptions are weak.
THE TWO-PERCENT DISSOLUTION
For over a century after the Civil War, the U.S. economy grew at a yearly rate of 3.4 percent. For the past two decades, by contrast, the pace has been almost a full percentage point slower. For over a century, growth was driven by output per worker that was rising two percent annually, enabling real wages to grow at a similar rate. This "two-percent solution" was the key to the American Dream. The miracle of compound interest resulted in wages that doubled every 35 years, and so, for over a century, each generation lived twice as well as its predecessor.
As Madrick notes, the achievement of the
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