Jared Bernstein: Crunch: Why Do I Feel So Squeezed? (And Other Unsolved Economic Mysteries) (2008, Berrett-Koehler)

(p. 9):

Something's wrong, something fundamental. Not Third World-poverty fundamental, nor 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 th 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.

On the measurement of poverty (pp. 38-39):

The official thresholds were based on food costs of low-income families in the mid-1950s. Surveys showed that these families spent about a third of their income on food, so we simply tripled the value of the "economy food plan" (the cheapest nutritionally adequate food plan derived by the Department of Agriculture) for a given family size.

Amazingly, with very few changes and with adjustments for inflation, this remains the official poverty measure to this day. Food consumption represents a much smaller share of family budgets than was the case 50 years ago (its average share has fallen by about half), while housing, transportation, and health care, for example, constitute larger shares. Simply updating the official thresholds for this change alone would lead poverty thresholds (and poverty rates) to be much higher today.

But there's a deeper problem with the official approach: As living standards rise for the rest of society, those deemed poor by a fixed income level that is adjusted solely for price changes will fall behind the rest of us. Back in 1960, the official poverty threshold for a family of four was about half the typical (median) income for a four-person family. Today, it's around 30 percent of the four-person median.

(p. 50):

When too many economic resources are held by too few, when the benefits of growth elude broad swaths of working families, opportunity itself becomes a rare commodity, out of the reach of the majority. Too much inequality precludes a meritocracy. We see this most clearly in educational opportunity, where college-completion rates for high-score poor kids are about equal to those of low-score rich kids.

(pp. 51-52):

There have never been signs of greater effort in periods of high levels of inequality. If anything, the opposite has occurred, as the have-nots drop out of a game they perceived to be rigged against them, and the haves, content that the game [is] rigged in their favor, chill by the swimming pool (that's just snark -- the rich work a lot, but their effort is uncorrelated with inequality). Some interesting behavioral research has shown that the inequality incentive structure does have one noticeable impact: It leads insiders to cheat more, because they figure the system is tilted their way anyway, so who'll notice if they cut a corner? Call it the Halliburton effect.

A recent variant of this "greed is good" motif has been applied to college attendance. Some prominent economists, including Nobel laureate Gary Becker, claim that high inequality sends a market signal to high school grads that they should attend college. They even go so far as to oppose progressive tax changes as a move that would dampen people's incentives to get more education. Raising taxes on wealthy people, in their model, would be advocating "a tax on going to college and a subsidy for dropping out of high school."

(pp. 77-78):

That's the what. Here's the why: Recessions result from some shock to the economic system. As of this writing, the last recession hit in March 2001 and was the result of the bursting of speculative bubbles in financial markets and IT (information technology) investment. Investment is a key components of GDP, and when it headed south in late 2000, it triggered a recession that was quite mild in GDP terms, though acutely felt on the jobs side. Once we got that recession out of our system, a housing bubble inflated and then burst circa 2007, and this too put a hurtin' on the economy.

(p. 97):

I wrote about this (d-)evolution in my last book, under the heading of YOYO economics. That's an acronym for "You're on your own," and it embodies a political philosophy that got us in our current mess. Under YOYO economics, the sole plan to meet any economic challenge we face, from globalization to health care, is a tax cut, a private account, and a solid push off the plank into the deep and murky waters of competitive market forces, where "you're on your own" to sink or swim.

Operating in this mode leads its proponents to oppose worthy ideas that strengthen the diminished bargaining power of most working persons -- ideas like minimum wages; a level playing field for those who would organize unions; a universal, nonmarket-driven approach to health care and pensions; progressive taxes; and less porous safety nets. Each of these ideas strikes at the heart of YOYOism, as they seek to pool the risks of economic insecurity over large groups of people, while unifying less advantaged groups under a WITT ("We're in this together") agenda.

(p. 99):

Let's consider how it works. The sweat from the brows of today's workforce generates the wealth that helps to fund the economic security of those who came before us. (OK, I only break a sweat at the office when the AC goes down, but you get the point.) At the same time, when those of us at work today finally call it a day, we will leave behind an economy that is a lot more productive than when we found it. The investments we made, in both human and physical capital, will help the next generation create yet more wealth. And yes, we will skim some of that wealth off the top -- that is, we tax some of that income -- for Social Security, as did our forebears.

The key point here is that Social Security solves an intergenerational problem -- the natural dependence of those whose working years are behind them on the working-age population -- with an intergenerational solution: the transfer of a portion of today's wealth to today's retirees.

(pp. 115-116):

Most economists are pretty hawkish about the deficit, meaning they're against it. The main reason is, they worry that the big gorilla in the room -- the government -- will gobble up all the savings in the room, leaving too little for the private sector. This gobbling, they fear, will push up interest rates -- the cost of borrowing money -- and depress productive investments in the private economy. They call this phenomenon crowding out, as Uncle Sam swaggers into the bank, elbows his way to the front of the line, and borrows all the capital in the vault, leaving nothing for the rest of us.

Not an unreasonable hypothesis, but recalling principle #3 from crunch economics, many of the simple, sensible, logical economic relationships don't always play out in the way you'd expect. What with all the moving parts -- and in this case, with globalizaiton hugely boosting the supply of capital available for borrowing -- evidence for the crowding-out hypothesis is surprisingly elusive.

So, with moderate deficits, it's pretty unlikely that you'll see any upward pressure on interest rates associated with your mortgage, car loan, and so on.

(p. 142):

Factory workers who go over to th services usually lose a lot. We're often talking here about moving someone from a high-productivity, unionized job with high-tier wages and fringes to a sector that's less productive, has much less collective bargaining, and has a much wider dispersion of compensation. Recent research into the consequences of layoffs reveals that just under three-quarters of reemployed factory workers suffer a real pay cut, and for 40 percent, it's a cut of at least 20 percent.

(pp. 145-146):

Those of us who bemoan "protectionism" need to recognize that for the first time in years, poll results reveal a majority of people worried that the next generation won't do as well as they did. One representative poll from March 2007 found that 69 percent of respondents said the "American Dream" will be harder to reach for the next generation. Reporting on exit polls from the 2006 midterm elections, the New York Times wrote: "In exit polls on Election Day, fewer than one in three people said they expected life for the next generation of Americans to be better than life today." A Pew Research Center poll from 2006 found that half of the respondents worried that children growing up today will be worse off than people are now.

(p. 165):

This puts us on a collision course with the power principle. It's tough to get to the inconvenient truths regarding the potential damage of inaction when deep-pocketed interests are relentless in their pushback. If you want to swim in these waters, never forget this immortal sentence from Upton Sinclair: "It is difficult to get a man to understand something when his salary depends upon his not understanding it." Junk science and its purveyors appear to be pretty deeply embedded in government. Even the venerable Smithsonian Institution, reacting to fears "that it would anger Congress and the Bush administration," recently altered an exhibition on climate change to inappropriately inject some doubt into the mix.

(p. 177):

We've been fed a very divisive political gruel for the past few decades, and it has served to empower many mean-spirited, greedy people. They have revealed themselves to be incapable of recognizing that some problems -- and health care is the best example -- are more efficiently solved by collective cooperation than by individuals competing. The glaring failures of their "You're on your own" philosophy are becoming clear in many areas of our political life, from Middle East policy to taxes, globalization, and health care. With that, their influence appears to be waning.

(p. 181):

The next PPP comes from research that shows the following: College-completion rates are about the same for smart, poor kids as they are for -- hmmm . . . how shall I put it? -- less-than-smart rich kids. About a third of low-income kids with test scores in the top tier complete college. That's about the same share for rich kids with low test scores. Again, I suspect I don't need a lot of research to drive this point home. While it's true that few even upper-income kids pay the sticker price for college, the real costs of tuition have been surpassing income growth, and that's average income growth. For those at the low end, college is increasingly out of reach. This, as much as any problem I've raised in this book, is a pure violation of what we ought to be about in America. As a result, college-completion rates are now rising considerably more slowly than they did even in recent years.