Surprises From 25 Years Covering the Economy

I arrived in the Washington bureau of The Wall Street Journal shortly after the stock-market crash of 1987. Except for a stint as Berlin bureau chief, I’ve been tracking the economy from that perch ever since.

Looking back over that quarter century, four surprises stand out:

That the American middle class hasn’t done better

In a 1998 book, my colleague Bob Davis and I argued the U.S. was on the cusp of an era of broadly shared prosperity that would boost the middle class. We were wrong. We correctly saw the potential of information technology, but we expected the gap between winners and losers to narrow. It didn’t.

Output of goods and services per person has grown by about 45% since 1987. That’s substantial, but the percentage increase is only half the 90% increase of the preceding 26 years (1961-1987).

For folks in the middle, the past quarter century doesn’t look so good. The cash income of the median family, the one at the statistical middle, barely kept up with inflation. Add in health insurance and other noncash benefits, and it has risen significantly more. But here’s an arresting fact: Adjusted for inflation, the typical man who worked full-time made less in 2012 ($49,398) than his analog did in 1987 ($50,166). Because more women were educated and landed better-paying jobs, they did better: Median earnings rose 16%.

Where did the money go? Disproportionately to the best off, the best educated, the two-professional couples, the winners on Wall Street and in Silicon Valley. Technology and globalization favored the best-educated. The rise of finance paid some handsomely. Earnings of those at the top of almost every field rose faster than at the middle.

Different measures show differences in degree, but the trend is clear: The latest Census data show the share of pretax income going to the top 5% of families rose from 15.7% in 1962 to 17.2% in 1987 to 21.3% in 2012. Higher tax rates on the well-off and benefits aimed at the bottom damp the trend, but that wealth redistribution hasn’t offset inequality-widening market forces.

That China has done so well

China is an economic miracle. Lawrence Summers, the former U.S. Treasury secretary, puts it this way: When the U.S. was growing at its fastest, it doubled living standards about every 30 years. China has been doubling living standards roughly each decade for the past 30 years—and it has done so without following Washington’s playbook for development.

In 1987, the big Asian economic threat was Japan. China had demonstrated impressive growth, but few then foresaw how long that growth spurt would last. “China’s super-rapid growth has already lasted three times longer than a typical episode [in world history] and is the longest ever,” Mr. Summers said recently.

He doubts China can keep this up, and he’s probably right. But that doesn’t detract from its remarkable success: The World Bank estimates that since initiating market reforms in 1978, China has lifted more than 500 million out of poverty.

That 9/11 didn’t have a longer-lasting harmful economic impact

When the planes hit the World Trade Center and Pentagon on Sept. 11, 2001, we all knew that the U.S. would never be the same—and it isn’t. The attacks led to the wars in Afghanistan and Iraq, to government surveillance that wouldn’t have been tolerated previously and to all those airport screeners.

At the time, it looked like this added security would be sand in the gears of the economy. It has been a costly hassle, and it’s hard to tell if it was worth it: No one knows how many terrorists have been discouraged by airport and office-building checkpoints.

But looking at the whole economy, it’s hard to see Sept. 11 as a damper on productivity. Output per hour of work has risen 2.1% in the 12 years since the attacks; it rose 2.2% a year in 12 preceding years. Other factors proved far more important than the productivity drain from stepped-up security.

That the U.S. was so vulnerable to a financial shock

One of few things on which most economists and policy makers agreed in 1987 was that the U.S. would never be threatened by anything resembling the Great Depression. We were too smart to let that happen again. The 1987 stock-market crash reinforced that; the lasting economic harm was minor. So did the Asian financial crisis of 1997 and the bursting tech-stock bubble in 2000.

The Federal Reserve became convinced—and convinced a lot of others—that mopping up after a financial crisis was better than trying to prevent one.

That was wrong. The 2007-09 financial crisis shattered the illusion that the U.S. had a well-regulated or well-managed financial system or that it could absorb a financial hit. The entire financial system, it turned out, was a house of cards resting on a faulty assumption that house prices across the country would never fall.

Great Depression 2.0 was avoided, thanks to aggressive government policy, but the economy suffered the worst recession since then. At 7%, unemployment today remains at levels once seen only in recessions. And until the system is tested again, no one can be certain that changes in regulation and business practices are sufficient to avoid a repeat.