The New Economic Inequality

Obviously, if you have followed political news at all, you know that the electorate is grumpy. Results in polls, news interviews, and primary results show that voters are unhappy about the state of affairs. This is the common view of the international situation, primarily involving ISIS but extending to other problems like the North Korean madman and the Russian adventurist. But at the base, the concern is with our economic future. James Carville, Bill Clinton’s campaign strategist in 1992, got it right, “It’s the economy, stupid!”

But this is a bit strange. There are certainly challenges to prosperity looming, such as China’s downturn, the collapse in commodity prices, continuing and rising national deficits, and others. And of course, this is aggravated by the uncertainties generated by an election season of unprecedented unpredictability. But a calm look at all of these issues shows that this is a minor storm which our ship of state should weather easily. This is reflected in the stock market, which is a fair indicator of the main street economy if you take the long view as shown here.


The S&P 500 index is the most representative view of the U.S. stock market. It fluctuates of course, but the secular trend is obvious. Furthermore, the correlation with the Great Recession is clear, confirming the relation to the economy. If you extrapolate the line before the recession you can see that the index is already approaching where it would have been if no recession had occurred. In other words, the systematic upward trend remains intact. Our economy is prospering.

This doesn’t mean that there has been no lingering impact of the recession. The figure also graphs the consumer price index over the same period. This is quite stable, and indeed somewhat lower than the Fed would prefer. Note that there has been a substantial period during which the S&P 500 under-performs the CPI. Throughout that time, not only did households lose wealth but their incomes declined in real terms. It is not surprising that people are a bit grumpy. They see a glass half-empty.

However, different segments of the electorate see matters quite differently. Younger voters seem hell-bent on revolution, as the crowds attending Bernie Sander’s events clearly show. Older voters are far less dissatisfied. This reflects a subtle change in the U.S. economy that has great portent. In the past, older segments of our population were the poorest. The young were more prosperous and saw better future prospects. Unexpectedly, this has been entirely reversed. Look at this graph.FullSizeRenderOver the 30 years from 1983 to 2013, life has gotten much worse for those under 50 and much better for those older. Understandably, this is reflected by their choices in the current election.