Goldilocks and the Bear Market

The economy grew at an impressive rate of four percent in the second quarter of this year, according to a government report released on Wednesday. But the stock market promptly tanked. The Dow lost more than 317 points Thursday and another 70 points Friday.

What gives? Financial markets like it when the economy grows fast enough to signal that the recovery is continuing -- but not so fast that labor markets might tighten and workers get more bargaining power to get raises. Markets also worry that if the economy grows too fast, the Federal Reserve might pull back from its policy of low interest rates.

Not to worry, brave investors. The Labor Department weighted in with a report Friday that the economy added only 208,000 more jobs in July, down from the June performance. The number of long-term unemployed was basically unchanged. Likewise the rate of labor force participation. And the percentage of people employed remains stuck at 59.0 percent.

The actual unemployment rate actually rose slightly, to 6.2 percent, as more workers looked for jobs than the economy provided jobs. The Economic Policy Institute calculated that the real unemployment rate, counting part-time workers seeking full-time jobs and people out of the labor force who want work is 9.6 percent. So actual raises are still a long way off.

Some Wall Street analysts like to call this a Goldilocks Economy -- not too hot, not to cold, but just right. What they have in mind is the combo of modest growth, low interest rates, and no pressure whatever on labor costs (also known as people's wages.)

Thanks to this blend, the stock market keeps going up, despite the fact that family earnings are flat. Despite a few bumps, like last week's losses, the economy is likely to continue to be good for investors, lousy for working families.

In other words, it's Goldilocks for the investor class, and cold porridge for regular people. This is the underlying dynamic explored in Thomas Piketty's celebrated book, Capital in the Twenty-First Century: Returns to capital keep growing faster than returns to everyone else, and so income inequality becomes more extreme.

So, is this our future? Can nothing be done so that economy growth -- four percent in the second quarter of 2014 -- doesn't keep going disproportionately to the rich?

In fact, plenty could be done. We might change the ground rules to enforce labor laws, as President Obama has begun to do with a series of executive orders on government contractors.

We might also have a massive public investment program to create good jobs, shift to a greener economy, and rebuild crumbling infrastructure. That idea is unfortunately outside mainstream debate. Meanwhile, Republican governors, business elites, and court rulings keep pummeling unions.

What's distorting the division of who benefits from GDP growth is not economic. It's political -- the result of policies that serve elites at the expense of ordinary people. And until our politics changes we will keep reading about a Goldilocks economy of modest growth, all of it captured by capital and none of it by working people.

Goldilocks, let's recall, was a fairy tale.

Robert Kuttner is co-editor of The American Prospect, a senior fellow at Demos, and a professor at Brandeis University's Heller School. His most recent book is Debtors' Prison: The Politics of Austerity Versus Possibility.

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