Less to "Goldilocks" Than Meets The Eye

by: Michael Panzner

Commentators wearing rose-colored glasses, incorrigibly bullish Wall Street cheerleaders, and apologists for the current Administration like to prattle on about how well things are going in the U.S,, but three recent articles suggest economic circumstances are not as wonderful as many would have us believe.

In "Poor among Plenty," Newsweek notes that for the first time, poverty has shifted from the cities to the suburbs.

Six years ago, Brian Lavelle moved out of the city of Cleveland to the nearby suburb of Lakewood for what he thought would be a better life. Back then, Lavelle, 38, was a forklift operator in a steel mill making $14 an hour. He had a house, a car and was saving for his retirement. Then, three years ago, the steel mill closed and Lavelle found that the life he dreamed of was just that, a dream. The suburbs, he quickly learned, are a tough place to live if you're poor. For starters, there isn't much of a safety net in his community. Food pantries, job-retraining centers and low-cost health clinics are hard to come by. He can't afford either gas or car insurance, and inadequate public transportation hurts him, too. Not long ago, he was offered a job in another suburb, "but it just wasn't doable." The commute by public bus would have taken him three hours each way.

Once prized as a leafy haven from the social ills of urban life, the suburbs are now grappling with a new outbreak of an old problem: poverty. Currently, 38 million Americans live below the poverty line, which the federal government defines as an annual income of $20,000 or less for a family of four. But for the first time in history, more of America's poor are living in the suburbs than the cities—1.2 million more, according to a 2005 survey. "The suburbs have reached a tipping point," says Brookings Institution analyst Alan Berube, who compiled the data. For example, five years ago, a Hunger Network food pantry in Bedford Heights, a struggling suburb of Cleveland, served 50 families a month. Now more than 700 families depend on it for food.

That's not to say that all suburbs are struggling. In areas such as New York and Los Angeles where the regional economies are booming, the surrounding suburbs are doing just fine. It's another story altogether in the South and Midwest. As the nation's manufacturing sector continues to contract, cities like Cleveland, Dallas and Detroit are feeling the pain, and so are the suburbs that surround them.

The suburban poor defy stereotypes about how and why people slip into poverty. Howard and Jane Pettry, of Middleburg Heights, Ohio, see themselves as working-class—just facing hard times. In December, Jane was laid off from her job at a local supermarket, and a week later Howard had a heart attack and missed a month of work from his job at a grain mill. Now Jane's collecting unemployment and they're staring at the poverty line as they struggle to pay the mortgage and the bills. "I've worked all my life and paid my taxes," says Jane. "Now we're living off credit cards. It's terrible."

Suburban poverty can also be invisible. Poor people who live in the city tend to be concentrated in subsidized housing or in neighborhoods where the rent is low, which in turn attract retail businesses that target customers with low incomes. Poor suburbanites often live in the same ZIP codes as their affluent neighbors, shop at the same stores and send their children to the same public school. And if people don't see themselves as poor, they often don't seek the help they need.

Help appears to be on the way. The new Democratic majority in Congress is trying to make good on its promise to raise the minimum wage for the first time in 10 years. Bills upping the hourly rate from $5.15 to $7.25 by 2009 have passed both the House and the Senate. But analysts at the Economic Policy Institute, a D.C.-based think tank, say that while some 4.5 million suburbanites will benefit from a minimum-wage hike, it's not enough. "It's not a living wage, it's a minimum wage," says EPI senior economist Jared Bernstein, who says there's still a yawning gap between what people earn and what it costs to live that must be addressed.

Brian Lavelle says that any help would be appreciated. It's winter and his gas bill is sky-high—$185 last month. A single dad with two kids, Lavelle is making ends meet, but just barely. "It's tough out there," he says. He never thought he'd be saying that about the suburbs.

In "This Expansion Looks Familiar," the New York Times touches upon the apparent disconnect between rosy economic data and a less than sanguine reality beyond the numbers.

It is five years into an economic expansion and most Americans are still waiting for their share. Inflation is swallowing pay raises. Businesses are hiring, but forecasters worry that the economy may be about to stall.

“If this is a recovery,” the leader of the political opposition complains, “I can hardly wait for the recession.”

This may sound like the stuff of today’s headlines. But it comes from 1996, when Bill Clinton was president and his rival was Bob Dole, the Republican nominee. The economic expansion in question, which got off to a sputtering start in March 1991, was to become the longest period of uninterrupted growth in the nation’s history.

Now, a little more than five years into an expansion that officially started in November 2001, the economy is showing remarkable parallels to the situation of a decade ago. “It’s striking how similar they are,” said Robert J. Gordon, an economics professor at Northwestern University.

The overall rate of growth has followed a trajectory almost identical to the first five years of the 1990s expansion. Now, as then, corporate profits have surged; the stock market has, too. But just as workers have finally begun to reap some of the spoils of a growing economy, many forecasters worry — as they did a decade earlier — that the expansion is running out of steam.

What is striking, considering these similarities, is how little effect the policy choices of Democratic and Republican administrations seem to have had on how both growth cycles played out.

Few economic forecasters expect the current growth cycle to have the length and vigor of the 1990s boom, which continued for 10 years from trough to peak.

Yet fewer still expected strong growth in the mid-1990s. In early 1996, forecasters polled by the Federal Reserve Bank of Philadelphia predicted that the economy would grow merely 1.8 percent that year. The economy ended up growing at twice that pace.

Average Americans were more pessimistic then than they are now. According to Gallup’s most recent snapshot of public opinion, last month 52 percent of Americans rated economic conditions as either excellent or good. In May 1996, at a similar moment in the previous expansion, only 30 percent did so.

“Consumers don’t expect a slowing economy,” said Richard T. Curtin, who heads the surveys of consumers at the University of Michigan. “According to consumers, we are going to improve.”

Given the parallels, perhaps it is not surprising that the economy is providing the same sort of political ammunition as it did 10 years ago.

“Profits are up for our companies, but where are the wage increases?” asked Senator Hillary Rodham Clinton, in an online conversation with voters last month, after announcing that she intends to run for president. “Where are the, you know, the benefits that should accrue to hard-working Americans?”

Wage increases have, indeed, been slow in coming. In December, 61 months after the economy started to grow, the wages of production and other nonmanagement workers were barely 1.7 percent higher, after inflation, than when the economy hit bottom in November 2001. Most of those gains came in the last few months.

But many people have forgotten that, initially, the expansion of the 1990s was also called a “jobless recovery,” and then a “joyless” one, when employment started growing but real wages did not. In April 1996, 61 months into that growth cycle, the hourly wages of nonmanagement workers were actually worth 0.4 percent less, after inflation, than when the expansion began.

“Now this is a real economic slowdown,” Mr. Dole said on a campaign stop in Florida in October of that year. “And I might say, it’s disastrous news for American workers and businesses and even worse news for low- and moderate-income Americans who have been squeezed and squeezed and squeezed by lower wages and higher taxes in this administration.”...

There are substantial differences, of course, in the nature of the two expansions. The early ’90s were characterized by a building bust; the current one has been supported by a housing bubble. The boom of the second half of the 1990s was underpinned by an Internet-driven investment bubble, but most technology stocks today are far below their earlier highs.

“In both situations we had overinvestment, now in housing, then in fiber optics,” said Joseph E. Stiglitz, a professor of economics at Columbia who was Mr. Clinton’s chief economic adviser from 1995 to 1997.

Mr. Bush and Mr. Clinton had very different economic priorities and will leave very different economic legacies. Mr. Clinton increased the top marginal tax rate to 39.6 percent, from 31 percent, and closed the budget deficit. President Bush cut tax rates back to 35 percent, and the deficit reappeared.

Corporate profits have swollen twice as fast, as a share of the economy, in the first five years of this expansion, under Mr. Bush, as in the same period of the previous one.

Still, policy has had less effect on the distribution of the rewards of growth than the stated goals of Democrats and Republicans would suggest.

Indeed, the share of the economy devoted to workers’ compensation shrank as much in the first five years of the 1990s expansion — to 56.3 percent, from 57.7 percent, of gross domestic product — as in the most recent five years, when it fell to 56.6 percent, from 58.1 percent.

The decline underscores the powerful impact of globalization and technological change on the American economy over the last three decades, putting strong downward pressure on production workers’ wages regardless of who occupies the White House.

No one knows how this expansion will end. In the 1990s, nearly all the gains for ordinary Americans occurred in the second half of the decade. Comparing the current point in the economic cycle with the same moment a decade ago is something like predicting the outcome of a baseball game in the sixth inning.

“If we conjecture another five years of the current expansion, I think it’s going to be another surprise,” said Professor Gordon of Northwestern. “We had a good surprise in the ’90s, but this time I think we’re in for a series of bad surprises.”

One ingredient that helped drive the 1990s expansion is missing today: the explosion of productivity that took off in the mid-’90s and lasted for more than a decade, when the investments that firms began to make in technology in the 1980s started to pay off.

“It’s kind of hard to point to anything like that now,” said Ken Matheny, senior economist at Macroeconomic Advisers. “It’s difficult to say that we’re about to have another productivity and investment boom as we saw in the late ’90s.”

Productivity grew by 3 percent in the last quarter of 2006. Still, for the full year, it grew only 2.1 percent, which is the slowest since 1997.

Even as growth has remained on a remarkably similar path in both decades, administration critics say that President Bush’s policies have weakened the economy’s longer-term prospects.

Professor Stiglitz argued that the Bush tax cuts, aimed mostly at the wealthy, opened a big hole in the budget and provided little stimulus to the economy. This forced the Federal Reserve to push interest rates very low to keep the economy afloat, he said, creating a bubble in housing.

Under a more effective fiscal policy, Professor Stiglitz said, “growth would be more broadly based and less of the economy would depend on real estate.”

Mr. Sperling suggested that the mushrooming of the nation’s trade imbalance and the reappearance of large budget deficits have not caused more damage to the economy because money flooding into the United States from China and elsewhere has kept long-term interest rates low, underpinning investment and consumption. That support, he suggested, will eventually dry up.

“We are in a moment where excess savings are coming from India and China, so perhaps it is a moment in which fiscal irresponsibility won’t have as negative short-term consequences,” Mr. Sperling said. “But it has increased the risk factor in the economy. It is still poor long-term policy.”

Meanwhile, the housing bubble has turned to bust, dragging residential investment down. Overall growth has been little affected so far, but many economists still expect household finances to weaken, cutting into consumer spending, the main bulwark of economic growth.

“Maybe we dodged a bullet, but you don’t know,” said Jeffrey A. Frankel, an economics professor at Harvard.

Finally, in "U.S., Britain Ranked Last in Child Welfare," the Associated Press details another group that seems to have lost out during the so-called boom.

The United States and Britain ranked at the bottom of a U.N. survey of child welfare in 21 wealthy countries that assessed everything from infant mortality to whether children ate dinner with their parents or were bullied at school.

The Netherlands, followed by Sweden, Denmark and Finland, finished at the top of the rankings, while the U.S. was 20th and Britain 21st, according to the report released Wednesday by UNICEF in Germany.

One of the study’s researchers, Jonathan Bradshaw, said children fared worse in the U.S. and Britain — despite high overall levels of national wealth — because of greater economic inequality and poor levels of public support for families.

“What they have in common are very high levels of inequality, very high levels of child poverty, which is also associated with inequality, and in rather different ways poorly developed services to families with children,” said Bradshaw, a professor of social policy at the University of York in Britain.

“They don’t invest as much in children as continental European countries do,” he said, citing the lack of day care services in both countries and poorer health coverage and preventative care for children in the U.S.

U.S. officials questioned the comparisons made by the study, while Britain said it failed take into account recent social improvements.

Risky ways

The United States finished last in the health and safety category, based on infant mortality, vaccinations for childhood diseases, deaths from injuries and accidents before age 19, and whether children reported fighting in the past year or being bullied in the previous two months.

The U.S. was second to worst, behind only Hungary, for its infant mortality rate of 7 per 1,000 births. The rate, a standard indicator of children's health and prenatal care, is under 3 in Japan.

The study also gave the U.S. and Britain low marks for their higher incidences of single-parent families and risky behaviors among children, such as drinking alcohol and sexual activity.

Britain was last and the U.S. second from the bottom in the category focusing on relationships, based on the percentage of children who lived in single-parent homes or with stepparents, as well as the percentage that ate the main meal of the day with their families several times per week. That category also counted the proportion of children who said they had “kind” or “helpful” relationships with other children.

The report’s authors cautioned that the focus on single-parent families “may seem unfair and insensitive” and noted that many children do well with one parent.

“But at the statistical level there is evidence to associate growing up in single-parent families with greater risk to well-being — including a greater risk of dropping out of school, of leaving home early, poorer health, low skills and of low pay,” the report said.

On average, 80 percent of the children in the countries surveyed live with both parents. There were wide variations, however, from more than 90 percent in Greece and Italy to less than 70 percent in Britain and 60 percent in the U.S., where 16 percent of adolescents lived with stepfamilies....

Both the U.S. and British governments criticized the report.

Wade Horn, an assistant secretary at the Department of Health and Human Services, said the study’s standard of measuring poverty differed from that of the United States.

Defining poverty

A family of four is defined by the U.S. as living in poverty if its combined income is less than $20,650 a year. The poverty threshold used by the report was an income of $35,000 a year for a family of four, he said.

“I think when you try to compare nations in a report like this, you tend to ignore so many other factors specific to those nations that the comparison becomes somewhat meaningless,” Horn said.

State Department spokesman Paul Denig was also critical of the report and said his department first learned of the study through the media and was not asked to provide input.

Britain said the report did not take account of recent improvements to education, health and general living standards in the country. Some of the statistics also went back as far as 2001, it said.

In general, northern European countries with strong social welfare systems dominated the upper half of the rankings. Southern European countries, such as Spain, Italy and Portugal, ranked higher in terms of family support and levels of trust with friends and peers.

It would be naive to think that these stories are free of liberal spin. Even so, these and other reports lend further credence to the idea that there is a lot less to the so-called Goldilocks U.S. economy than meets the eye.