Crunch
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Crunch

Why Do I Feel So Squeezed? (and Other Unsolved Economic Mysteries)

Jared Bernstein

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Crunch

Why Do I Feel So Squeezed? (and Other Unsolved Economic Mysteries)

Jared Bernstein

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About This Book

Is Social Security really going bust, and what does that mean to me? If I hire an immigrant, am I hurting a native-born worker? Why does the stock market go up when employment declines? Should I give that homeless guy a buck? What's a "living wage"? How much can presidents really affect economic outcomes? What does the Federal Reserve Bank really do? And even when some pundits say the economy's sound, why do I still feel so squeezed?If you'd like some straight answers, premier economist Jared Bernstein is here to help. In Crunch he responds to dozens of questions he has fielded from working Americans, questions that directly relate to the bottom-line, dollars-and-cents concerns of real people. Chances are if there's a stumper you've always wanted to ask an economist, it's solved in this book.Bernstein is fed up with "Darth Vaders with PhDs" who use their supposed expertise to intimidate average citizens and turn economics into a tool for the rich and powerful. In the pages of Crunch, Bernstein lays bare the dark secret of economics: it's not an objective scientific discipline. It's a set of decisions about the best way to organize our society to produce and distribute resources and opportunities. And we all can, and must, participate in these decisions. "America is a democracy, " he writes. "And in a democracy all of us, not just the elites and their scholarly shock troops, get to weigh in on biggies like this."To not weigh in, Bernstein insists, is a profoundly political act, one with damaging consequences. Our economy will be only as fair as we can make it. In this lively and irreverent tour through everyday economic mysteries, Bernstein helps us decode economic "analysis, " navigate through murky ethical quandaries, and make sound economicdecisions that reflect our deepest aspirations for ourselves, our families, and our country.

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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 I’m not happy about that, it is affirming, because it is, in my view, the great, unanswered economics question of our time.
It’s 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 I’ve tried to convey in the answers I offer below, is that something is “off” 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 it’s 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. We’re stuck in a house and a neighborhood we thought we’d have grown out of by now, with a school to which we’d rather not send our kids. And while we’re 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! . . . unemployment’s historically low! . . . inflation’s down!
How do I know this? Because I’m a regular on CNBC’s Kudlow & Company, a show that focuses largely on stock and bond markets. It’s 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, “more global liquidity,” 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. They’re both right.
I’m 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 family’s purchasing power—its inflation-adjusted income—is actually down over their beloved economic boom, they can’t hear me.
Why not? Well, like they say, denial ain’t just a river in Egypt. It’s a place to which lots of economic elites retreat so that they can avoid the tough question, what’s 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.
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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
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Partly due to the jobless recovery that lasted until mid-2003 (I discuss recessions and recoveries later on), the typical working-age house-hold’s 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.
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After falling steeply in the latter 1990s, the share of the population that’s 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
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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 basket—health care, child care, college tuition, housing—have been growing much faster than the overall average of all prices taken together.4
That’s a lot of numbers, but let’s not gloss over them. Over the course of this highly touted economic expansion, poverty is up, working families’ real incomes are down, and some key prices are growing a lot faster than the average.
Now, I know you don’t hear about such numbers every day—instead, you hear about the stock market every hour. But these statistics are not secret.
It’s obviously important to document the facts, but it’s also useful to look beyond the statistics to people’s 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 (ABC–Washington 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 “to make ends meet,” up from 35 percent a few years earlier.5
Remember—this is a critical part of the story—the 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 hadn’t been seen in over 30 years. The unemployment rate was low in 2006–07, 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 ’03 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 it’s because you are squeezed. Most of the indicators that matter most to us in our everyday lives—jobs, wages, mid-level incomes, prices at the pump and the grocery store, health care, retirement security, college tuition—are coming in at stress-inducing levels, but gross domestic product (GDP), our broadest measure of the economy’s health, explained later, keeps on truckin’.
Something’s wrong, something fundamental. Not Third World–poverty 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 it’s been on the rise for decades. It’s at the heart of the squeeze, and it’s 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 “mechanisms” 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 it’s 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 that’s 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 won’t 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 don’t have the smarts and skills to cash in on the opportunities we’re creating.
The education mantra is a clever framing because (a) it rings true— you’re always better off with more education, and (b) it subtly puts the burden on you. The message is, “The opportunities to get on the right side of the inequality tide are there, if you’re smart enough.” If you’re not, well, then, either smarten up and join the parade or stop whining. As one U.S. Treasury official put it, “If the country . . . is going to undergo economic growth, then the population has to be able to take advantage of opportunities.”7 Or, as President George W. Bush elliptically put it, “We have an economy that increasingly rewards education and skills because of that education.”8
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, I’ll assert that inequality is no longer being driven by the highly skilled pulling away from the rest of the pack. Yes, you’re far better off with a college education than without, but that degree won’t 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 “big skills get big rewards” story just doesn’t cut it today. To understand what’s behind today’s inequality, something to which I devote considerable time in the coming pages, you’ve 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 ceiling—the CEOs and the holders of large capital assets—are able to steer the bulk of growth their way. Then, using their political connections, they’re 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 us—those who sit down with a modest stack of chips—are 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 productivity’s been great and unemployment’s low. The squeeze is on, and we won’t 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?
I’ve 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 it’s 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. I’d been running some new simulations on my macro-model, but nothing was converging, so I figured I’d close up my spreadsheet and find a corner in some dark speakeasy to lick my wounds.
That’s when she walked in. She had a neckline as low as the Nasdaq in ’01, curves like sine waves, and a dress tighter than the global oil supply. She had my attention even before she pulled out two reports I’d seen that very morning.
“I’m sorry to barge in on you like this,” she said in a voice that gave my calculator a power surge. “I didn’t know where else to turn.”
“You came to the right place, doll,” I said. “I see you’ve got the first-quarter GDP report, along with the new compensation results.” I’d been puzzling over these numbers all day, but what, I wondered, could this tall glass of cool water want with them?
“That’s right,” she purred. “I need to know why GDP is up 4.8 percent, the strongest quarter since 2003, yet real wages are falling.” Yeah, I thought, you and everybody else who works for a living.
“Why the interest?” I shot back. She didn’t look like a Democrat.
“I wish I could tell you. But I work for some powerful people”—now I knew she wasn’t a Democrat—“and they’d be very upset if they knew I was here.”
“Why me? Why don’t you ask your powerful friends to explain why the economy’s racing ahead but leaving working stiffs behind?”
She got kinda sulky, and I kinda liked it. “They wouldn’t know where to look. What’s worse, most of them think it’s great when wage growth decelerates because with no inflationary pressure from labor costs, it means the Fed can take a powder on rate increases.”
“Tell me about it, sister. I’ve been leaning on Bernanke for months on that point, but he doesn’t return my calls.”
Needless to say, I took the case. I wasn’t sure what game Little Miss Conflicting Reports was playing, but I figured I’d play along for now.
Fact is, I’d been asking the same question myself. Every quarter we seemed to be getting great news on top-line statistics—GDP, productivity, profits—yet the typical worker’s real earnings were down 2 percent over the recovery. Guys like me don’t 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 didn’t have any answers. As of the first quarter of 2006, their compensation had lagged inflation for three quarters running.
This was more serious than I’d thought. Whatever was driving a wedge between overall growth and living standards, it was reaching pretty high up the pay scale. I wasn’t sure what mess I’d gotten into here, but it was time to confront the doll that got me into it.
I caught up with her in her...

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