1 The Big Squeeze
Why do I feel so squeezed?
As I solicited questions for this book, the one above kept coming up, in one form or another. And while Iâm not happy about that, it is affirming, because it is, in my view, the great, unanswered economics question of our time.
Itâs not that middle-class people are sliding into poverty, hunger, and homelessness, though in an economy as wealthy as ours, too many people do face those conditions. The sense I got from questioners, a sense Iâve tried to convey in the answers I offer below, is that something is âoffâ in the new economy. We hear great economic news about financial markets, prices, profits, growth, productivity, and globalization, yet many of us live with a weight of economic anxiety that our parents would not have recognized. Most of us are making progress as we age, but the path seems steeper than we might have expected, with deeper potholes along the way. For some of us, things we aspire to, like secure health care or the ability to send our kids to a good college without taking on a lot of debt, are still within our grasp, but we have to reach farther to grab them, and itâs harder to hold on.
For others of us, a bit farther down the income scale, these aspirations are fading. To our surprise, we find ourselves without health coverage, or unable to afford the premiums and co-payments. Weâre stuck in a house and a neighborhood we thought weâd have grown out of by now, with a school to which weâd rather not send our kids. And while weâre working as hard as ever, that paycheck is alarmingly thin after gas and groceries.
Not everyone feels that way. Raise the issue of the squeeze, and many economists and policymakers will excitedly (and correctly) remind you productivity is soaring! . . . unemploymentâs historically low! . . . inflationâs down!
How do I know this? Because Iâm a regular on CNBCâs Kudlow & Company, a show that focuses largely on stock and bond markets. Itâs almost infectious, the way Larry Kudlow and his guests from the world of financial markets bubble over with effusive, heartfelt praise for all those positive trends just mentioned. To them, for example, globalization means a greater supply of capital and labor, âmore global liquidity,â lower prices, lower interest rates, and a lot more people with whom to make trades. To millions of others, globalization means greater wage competition and less job security. Theyâre both right.
Iâm fortunate that these financial market mavens will at least entertain a different perspective, but no matter how many times I point out that the typical working familyâs purchasing powerâits inflation-adjusted incomeâis actually down over their beloved economic boom, they canât hear me.
Why not? Well, like they say, denial ainât just a river in Egypt. Itâs a place to which lots of economic elites retreat so that they can avoid the tough question, whatâs behind the divergence between the macroeconomy and the microeconomy, between stock portfolios and paychecks, between the view from Wall Street and the view from Main Street?
Let us begin by presenting some evidence, and then tackle that critical question.
The statistics behind the squeeze are embarrassingly easy to come by. Anybody with a mouse can stop puzzling over this after a precious few clicks.
The economy grew by 15 percent between 2000 and 2006, but the inflation-adjusted weekly earnings of the typical, or median, worker were flat (down 0.7 percent; the
median is the worker at the 50th percentile, right in the middle of the wage scale).
1 Partly due to the jobless recovery that lasted until mid-2003 (I discuss recessions and recoveries later on), the typical working-age house-holdâs income was down 5 percent, or $2,400, from 2000 to 2006.
2 Their income was down more than their wage because they found fewer available hours of work.
After falling steeply in the latter 1990s, the share of the population thatâs officially poor rose from 11.3 percent in 2000 to 12.3 percent in 2006, the most recent available data point for poverty rates.
3 While inflation overall has been moderate since 2000, as I point out below, the costs of some of the key components of the middle-income market basketâhealth care, child care, college tuition, housingâhave been growing much faster than the overall average of all prices taken together.
4 Thatâs a lot of numbers, but letâs not gloss over them. Over the course of this highly touted economic expansion, poverty is up, working familiesâ real incomes are down, and some key prices are growing a lot faster than the average.
Now, I know you donât hear about such numbers every dayâinstead, you hear about the stock market every hour. But these statistics are not secret.
Itâs obviously important to document the facts, but itâs also useful to look beyond the statistics to peopleâs own views about the economy. Such views jump around to some extent with highly visible indicators like gas or home prices, but in one weekly poll (ABCâWashington Post), more than half of respondents have registered negative impressions about the economy since the summer of 2001. Clearly, dissatisfaction with the Iraq War dominated the 2006 midterm elections, but the economy was next in line. According to the New York Times exit poll, two-thirds of voters in November 2006 reported that they were either just maintaining their living standards (51 percent) or falling behind (17 percent). By 2007, 44 percent said they lacked the money they needed âto make ends meet,â up from 35 percent a few years earlier.5
Rememberâthis is a critical part of the storyâthe cheerleaders are right, in their own narrow way. While all these unsettling poll results were coming in, the economy was expanding at a good clip and generating stellar rates of productivity growth.6 We were achieving efficiency gains at a rate that hadnât been seen in over 30 years. The unemployment rate was low in 2006â07, below 5 percent. The stock market took a dive in late 2000, but by the end of 2006 it was up 56 percent from its â03 trough. Five years into this recovery, corporate profits as a share of national income were at a 56-year high and were percolating along at a rate more than twice the average of past recoveries. Yet more than 4 in 10 told pollsters they were having trouble making ends meet.
What this barrage of percentages is telling us is that if you feel squeezed, chances are itâs because you are squeezed. Most of the indicators that matter most to us in our everyday livesâjobs, wages, mid-level incomes, prices at the pump and the grocery store, health care, retirement security, college tuitionâare coming in at stress-inducing levels, but gross domestic product (GDP), our broadest measure of the economyâs health, explained later, keeps on truckinâ.
Somethingâs wrong, something fundamental. Not Third Worldâpoverty fundamental, not blood in the streets, massive homelessness, or Great Depression fundamental. If the problem were that obvious, it would be less amorphous, less indecipherable, less of a head-scratcher.
The name of the problem is economic inequality, and itâs been on the rise for decades. Itâs at the heart of the squeeze, and itâs a sign that something important is broken: the set of economic mechanisms and forces that used to broadly and fairly distribute the benefits of growth. What âmechanismsâ am I thinking of? They are unions, minimum wages, employer and firm loyalty, global competitiveness, full employment, the robust creation of quality jobs, safety nets, and social insurance, all of which are discussed in the following pages.
The belief that growth should be fairly distributed, that the bakers should get their slice, is a fundamental economic value in America. It is, of course, not one we have always lived up to, especially for the least advantaged among us. But itâs always there, this sense that the rising tide should lift the rowboats and the houseboats, not just the yachts. When the lesser boats founder, people know it. And thatâs where we are today. Bill Clinton won an election appealing to those people in 1992, various senators and congresspeople did so in 2006, and, from what you could hear as the 2008 campaign season got under way (much too early for the taste of most of us), the Democratic presidential candidates were tapping directly into the same set of values.
Now, you wonât hear this description of our economic challenges from most op-ed writers, any presidents, or central bankers. Their answer to the inequality question comes down to one, and only one, solution: more education. They believe that the reason the economy is passing so many folks by is that they donât have the smarts and skills to cash in on the opportunities weâre creating.
The education mantra is a clever framing because (a) it rings trueâ youâre always better off with more education, and (b) it subtly puts the burden on you. The message is, âThe opportunities to get on the right side of the inequality tide are there, if youâre smart enough.â If youâre not, well, then, either smarten up and join the parade or stop whining. As one U.S. Treasury official put it, âIf the country . . . is going to undergo economic growth, then the population has to be able to take advantage of opportunities.â7 Or, as President George W. Bush elliptically put it, âWe have an economy that increasingly rewards education and skills because of that education.â8
Ten years ago, he would have been at least partly right. Today, education is neither the main cause of nor the main solution to the inequalities we face.
I deal with this in greater detail in a later chapter, but for now, Iâll assert that inequality is no longer being driven by the highly skilled pulling away from the rest of the pack. Yes, youâre far better off with a college education than without, but that degree wonât insulate you from global competition. Especially if your work can be digitized and offshored, there are highly skilled but low-paid workers in other countries with whom you now compete. The real wages of American college grads rose less than 2 percent from 2000 to 2006.
Yet, while college grads are beginning to feel the same competitive pinch that the blue-collar workers have felt for years, the share of income going to the top 1 percent of households in 2005 was, at 22 percent, higher than in any year since 1929!
Therefore, a simple âbig skills get big rewardsâ story just doesnât cut it today. To understand whatâs behind todayâs inequality, something to which I devote considerable time in the coming pages, youâve got to deal with principle #1: POWER. More so than in any recent period, those who hold a privileged position in the economic power hierarchy, the players who sit down at the poker table with a stack of chips reaching to the ceilingâthe CEOs and the holders of large capital assetsâare able to steer the bulk of growth their way. Then, using their political connections, theyâre able to ice the cake with a nice bit of after-tax redistribution, as regressive changes in the tax code funnel even more resources their way.
The rest of usâthose who sit down with a modest stack of chipsâare left trying to figure out . . . well, like it says in the title, why do I feel so squeezed?
Crunchpoint: You feel squeezed because you are squeezed. If this were just a growth problem, we could have a nice, polite discussion of ways to get productivity humming again, or how to bring down the unemployment rate. But productivityâs been great and unemploymentâs low. The squeeze is on, and we wonât be able to call it off until we deal with our inequality problem.
Before wading more deeply into the etiology of the crunch, how about a nice mystery story?
Iâve always enjoyed the noir style in films and books, where gritty gumshoes pursue mysterious ladies while snarled in deeply tangled plots. One evening, while struggling to reconcile the growing economy with falling wages, I felt unusually close to Humphrey Bogart and wrote this story. In the next chapter, I explain the concept of gross domestic product in greater depth. But itâs simply our broadest measure of economy-wide growth. I also mention Ben Bernanke, chairman of the Federal Reserve, in the story.
I was working late in my DC office. Iâd been running some new simulations on my macro-model, but nothing was converging, so I figured Iâd close up my spreadsheet and find a corner in some dark speakeasy to lick my wounds.
Thatâs when she walked in. She had a neckline as low as the Nasdaq in â01, curves like sine waves, and a dress tighter than the global oil supply. She had my attention even before she pulled out two reports Iâd seen that very morning.
âIâm sorry to barge in on you like this,â she said in a voice that gave my calculator a power surge. âI didnât know where else to turn.â
âYou came to the right place, doll,â I said. âI see youâve got the first-quarter GDP report, along with the new compensation results.â Iâd been puzzling over these numbers all day, but what, I wondered, could this tall glass of cool water want with them?
âThatâs right,â she purred. âI need to know why GDP is up 4.8 percent, the strongest quarter since 2003, yet real wages are falling.â Yeah, I thought, you and everybody else who works for a living.
âWhy the interest?â I shot back. She didnât look like a Democrat.
âI wish I could tell you. But I work for some powerful peopleâânow I knew she wasnât a Democratââand theyâd be very upset if they knew I was here.â
âWhy me? Why donât you ask your powerful friends to explain why the economyâs racing ahead but leaving working stiffs behind?â
She got kinda sulky, and I kinda liked it. âThey wouldnât know where to look. Whatâs worse, most of them think itâs great when wage growth decelerates because with no inflationary pressure from labor costs, it means the Fed can take a powder on rate increases.â
âTell me about it, sister. Iâve been leaning on Bernanke for months on that point, but he doesnât return my calls.â
Needless to say, I took the case. I wasnât sure what game Little Miss Conflicting Reports was playing, but I figured Iâd play along for now.
Fact is, Iâd been asking the same question myself. Every quarter we seemed to be getting great news on top-line statisticsâGDP, productivity, profitsâyet the typical workerâs real earnings were down 2 percent over the recovery. Guys like me donât like it when things line up that way.
I headed for the union hall, figuring some of those people might have an angle. Problem was, with private-sector unions down to 8 percent of the workforce, the hall had become a Starbucks. I got a vanilla chai latte to go and beat it.
I decided to head for the new economy, so I looked up some managers and professionals in the service sector. I found them, all right, but they didnât have any answers. As of the first quarter of 2006, their compensation had lagged inflation for three quarters running.
This was more serious than Iâd thought. Whatever was driving a wedge between overall growth and living standards, it was reaching pretty high up the pay scale. I wasnât sure what mess Iâd gotten into here, but it was time to confront the doll that got me into it.
I caught up with her in her...