Parts to Wholes: the Socionomic Systems Nexus

Economic Situation

Dumb Money We don't need a conversation about race. At least not now. What we need is a conversation about money.  It becomes clearer by the day that this is not your grandmother's--or even Barack Obama's grandmother's--economic downturn. This time we start with a huge government deficit and record private debt, all run up when times were good and we should have been storing up acorns. This is one that begins with people losing their homes, which is usually the last act of the drama. This is one that is bringing back stagflation--that poisonous combination of economic slowdown and eroding currency we cured at a terrible cost back in 1981. When that red phone rings in the middle of the night, it probably won't be the National Security Adviser saying Osama bin Laden has struck again. It will be the Treasury Secretary reporting that markets have opened in the Far East and the dollar has become worthless. The three remaining candidates have finally given speeches that addressed the economic crisis. But the presidential campaign is bouncing into its second year inside a hermetic bubble where the discussion is mainly about itself. Who cares about the economy when there is the allocation of superdelegates to worry about?

For Many, a Boom That Wasn’t  [CHART: Stagnating Wages] The bigger problem is that the now-finished boom was, for most Americans, nothing of the sort. In 2000, at the end of the previous economic expansion, the median American family made about $61,000, according to the Census Bureau’s inflation-adjusted numbers. In 2007, in what looks to have been the final year of the most recent expansion, the median family, amazingly, seems to have made less — about $60,500. You can think of this as the most basic test of an economy’s health: does it produce ever-rising living standards for its citizens? In the second half of the 20th century, the United States passed the test in a way that arguably no other country ever has. It became, as the cliché goes, the richest country on earth. Now, though, most families aren’t getting any richer. The slowdown began in the 1970s, with an oil shock that raised the cost of everyday living. The technological revolution and the rise of global trade followed, reducing the bargaining power of a large section of the work force. In recent years, the cost of health care has aggravated the problem, by taking a huge bite out of most workers’ paychecks. Real median family income more than doubled from the late 1940s to the late ’70s. It has risen less than 25 percent in the three decades since. Statistics like these are now so familiar as to be almost numbing. But the larger point is still crucial: the modern American economy distributes the fruits of its growth to a relatively narrow slice of the population. We don’t need another decade of evidence to feel confident about that conclusion. Now, though, we appear to be out of bubbles. It’s hard to see how the economy will get back on track without some fundamental changes. This, I think, can fairly be considered the No. 1 economic project awaiting the next president. Fortunately, there is an obvious model waiting to be dusted off. The income gains of the postwar period didn’t just happen. They were the product of a deliberate program to build up the middle class, through the Interstate highway system, the G. I. Bill and other measures. It’s easy enough to imagine a new version of that program, with job-creating investments in biomedical research, alternative energy, roads, railroads and education.

Many More Are Jobless Than Are Unemployed THE unemployment rate is low. The jobless rate is high. Those two seemingly contradictory statements are especially true for American men in what should be the prime of their working lives. Those facts may help to explain the stark pessimism of Americans about the economy, and shed some light on the rise of illegal immigration as a political issue. Men in the prime of their working lives are now less likely to have jobs than they were during all but one recession of the last 60 years. Most of them do not qualify as unemployed, but they are nonetheless without jobs. But there is another rate — called the jobless rate in this article — that counts the proportion of people without jobs. To be sure, some of them do not want to work. Some are raising families on a spouse’s income, or are disabled, retired or independently wealthy. But others may be discouraged workers, who would take jobs if they thought any desirable positions were available. In the latest report, for March, the Labor Department reported the jobless rate — also called the “not employed rate” by some — at 13.1 percent for men in the prime age group. Only once during a post-World War II recession did the rate ever get that high. It hit 13.3 percent in June 1982, the 12th month of the brutal 1981-82 recession, and continued to rise from there. To be sure, employment is a lagging economic indicator, and rates higher than this have prevailed after recessions ended. But this rate has arrived at a time when the government still hopes that a recession can be averted. As can be seen in the accompanying chart, there has been a long-term decline in the proportion of prime-age men with jobs.

[CHART: Fewer Men Are Working ]

Attitudes & Reactions

Are You Better Off Than You Were Five Years Ago? For the first time in 50 years of polling, a majority of Americans believe they are stuck or falling behind, according to a new Pew Research poll measuring the attitudes of the middle class. “Americans feel stuck in their tracks,” Pew states. “This is the most downbeat short-term assessment of personal progress in nearly half a century of polling by the Pew Research Center and the Gallup organization.” According to the poll, 25% of respondents said they haven’t moved forward in life in the past five years, while a higher number, 31%, believe they have taken a step back. Still, nearly two-thirds said they have a higher standard of living than their parents. More than half of American adults, 53%, consider themselves middle-class. Pew notes that in the long-view, middle class Americans have seen economic gains, with median household incomes rising 41% since 1970. But looking at the shorter term, Pew said real median household income peaked in 1999 “making this decade one of the longest downturns ever for this widely-accepted measure of the middle-class standard of living.”

• Income Mobility How has the movement of families up and down the economic ladder changed over the past 20 years? (Superb interactive chart graphic from the NYT)

81% in Poll Say Nation Is Headed on Wrong Track Americans are more dissatisfied with the country’s direction than at any time since the New York Times/CBS News poll began asking about the subject in the early 1990s, according to the latest poll. In the poll, 81 percent of respondents said they believed “things have pretty seriously gotten off on the wrong track,” up from 69 percent a year ago and 35 percent in early 2002. Although the public mood has been darkening since the early days of the war in Iraq, it has taken a new turn for the worse in the last few months, as the economy has seemed to slip into recession. There is now nearly a national consensus that the country faces significant problems. A majority of nearly every demographic and political group — Democrats and Republicans, men and women, residents of cities and rural areas, college graduates and those who finished only high school — say the United States is headed in the wrong direction. Seventy-eight percent of respondents said the country was worse off than five years ago; just 4 percent said it was better off. The dissatisfaction is especially striking because public opinion usually hits its low point only in the months and years after an economic downturn, not at the beginning of one. Today, however, Americans report being deeply worried about the country even though many say their own personal finances are still in fairly good shape.

Only 21 percent of respondents said the overall economy was in good condition, the lowest such number since late 1992, when the recession that began in the summer of 1990 had already been over for more than a year. In the latest poll, two in three people said they believed the economy was in recession today.

• U.S. on the Wrong Track? Eighty-one percent of Americans think the country is on the wrong track, but is that really the story behind todays jobs story? David Leonhardt, of the NY Times, and CNBCs Steve Liesman share their insight.

Long-term Consequences

Trapped in the Middle Middle-class incomes have been stagnant for several years, even as the well-heeled keep doing better, and the resulting angst is coming front-and-center in Tuesday's Democratic showdown in Pennsylvania.Here and elsewhere, middle-class earnings aren't keeping up with the cost of living. Rising gasoline and food prices, health bills, child-care and education costs are leaving less to set aside for retirement. With the housing market in turmoil, even the asset many had come to count on -- the value of their homes -- is threatened.It isn't just a reflection of the current economic slowdown and rise in commodity prices: Middle-class incomes have been stagnant for several years. The well-heeled keep doing better, with the wealthiest 1% of U.S. families garnering the largest share of income since 1929. Middle-class angst is front-and-center in Tuesday's Democratic showdown in Pennsylvania between Hillary Clinton and Barack Obama. Both candidates have been repeating a simple theme: Elect me and I will revive the fortunes of the American middle class. Both Democrats offer similar prescriptions: tax cuts that would total about $1,000 per family; new tax credits for college costs; an overhaul of the health-care system to cover millions of people who are uninsured; aid to homeowners to reduce foreclosures and stricter enforcement of trade agreements. To help pay for the changes, they'd let President Bush's tax cuts for more-affluent Americans expire. Recessions often depress middle-class incomes and moods. What's unusual about these declines is that they occurred during the economic expansion that began in 2001 -- the first time that's happened during a prolonged expansion in at least 40 years. The main reason: The benefits of prosperity have gone disproportionately to the families at the very top. Online chart slideshow

The Wage That Meant Middle Class is on its way to extinction. Americans greeted the loss with anger and protest when it first began to happen in big numbers in the late 1970s, particularly in the steel industry in Western Pennsylvania. But as layoffs persisted, in Pennsylvania and across the country, through the ’80s and ’90s and right up to today, the protests subsided and acquiescence set in. Hourly workers had come a long way from the days when employers and unions negotiated a way for them to earn the prizes of the middle class — houses, cars, college educations for their children, comfortable retirements. Even now a residual of that golden age remains, notably in the auto industry. But here, too, wages are falling below the $20-an-hour threshold — $41,600 annually — that many experts consider the minimum income necessary to put a family of four into the middle class. The nation’s political leaders — Democrats and Republicans alike — have argued that education and training are a route back to middle-class wages for those who have fallen out. But the demand isn’t sufficient to absorb all the workers that the leaders would educate. Even now, roughly 15 percent of college-educated workers find themselves in jobs for which they are overqualified, the Economic Policy Institute reports, and many of these jobs pay less than $20 an hour. “The most important model that rolled off the Detroit assembly lines in the 20th century,” said Harley Shaiken, a labor economist at the University of California at Berkeley, “was the middle class for blue-collar workers.”

The Wealth Trajectory: Rewards for the Few IF there is one thing about the United States economy in recent years that is beyond dispute, it is this: It’s a great time to be rich. Yes, I know, being rich has never exactly been a downer. But today it is all the more sweet. They report that one out of every 10,000 American families has income in excess of $10.7 million. These lucky duckies number less than 15,000. Put together, they could all fit into a modest-size town. (We could call it Aspen or Nantucket.) What’s more, the superrich have been getting an increasing slice of the economic pie. In 1980, the top 0.01 percent of the population had 0.87 percent of total income. By 2006, their share had more than quadrupled to 3.89 percent, a level not seen since 1916. What accounts for rising inequality? Some pundits are tempted to look inside the Beltway for a cause, but the case is hard to make. Government policy makers do not have the tools to exert such a strong influence over pretax earnings, even if they wanted to do so. Also, the trend toward increasing inequality has been fairly steady, despite changing political winds. According to Professors Goldin and Katz, for the past century technological progress has been a steady force not only increasing average living standards, but also increasing the demand for skilled workers relative to unskilled workers. Skilled workers are needed to apply and manage new technologies, while less skilled workers are more likely to become obsolete. For much of the 20th century, however, skill-biased technological change was outpaced by advances in educational attainment. In other words, while technological progress increased the demand for skilled workers, our educational system increased the supply of them even faster. As a result, skilled workers did not benefit disproportionately from economic growth. But recently things have changed. Over the last several decades, technology has kept up its pace, while educational advancement has slowed down. The numbers are striking. The cohort of workers born in 1950 had an average of 4.67 more years of schooling than the cohort born in 1900, representing an increase of 0.93 year in each decade. By contrast, the cohort born in 1975 had only 0.74 more years of schooling than that born in 1950, an increase of only 0.30 year a decade. Because growth in the supply of skilled workers has slowed, their wages have grown relative to those of the unskilled.

Policies and Politics

McCain Confirms GOP Out of Ideas, but So Are the Democrats  John McCain has tabled an economic program that won�t rescue the economy from its mess but Senators Clinton and Obama offer little more. McCain advocates tax cuts for parents and corporations and mortgage relief for distressed homeowners, paid for by pairing nondefense, discretionary government spending and higher Medicare premiums for the well off. Cutting taxes and government outlays together won�t boost spending for U.S. made goods, increase traffic at restaurants and dry cleaners, put unemployed back to work or resurrect growth. Neither would a stronger stimulus package, because the economic quagmire is not a 1950s-style recession, caused by a temporary buildup of unsold goods precipitating shorter shifts and layoffs. Rather, it is caused by systemic malfunctions, created by wrong-headed energy, trade and banking policies, that won�t easily resolve. On important energy, trade and banking issues, McCain offers Bush redux. Clinton’s platform is a throwback to 1970s French statism, something President Sarkozy is trying to escape. Obama is offering what he does best. An Elmer Gantry campaign, full of expressions of hope but thin on policy and anything truly new. It seems elephants have long memories but few new ideas. Donkeys are endearing but even less adaptive.

Where's the bailout for Main Street? It would be hilarious that economists are still debating whether or not the economy has fallen into a recession if so many people weren't hurting so badly. If you live in the real world, you know there's a recession going on. From January 2006 through January 2007, employment grew by 2%; over the next 12 months, through January 2008, employment grew by just 0.2%. And the pain is worse than those numbers indicate. As employment growth slowed, so did wage growth, while at the same time inflation took a bigger bite out of paychecks. The rate of annual change in real wages -- pay adjusted for inflation -- turned negative in October. By January 2008, real wages were declining at an annual rate of 1%, according to the Economic Policy Institute. So if you think your paycheck isn't keeping up with the price of milk, bread, medicine and gasoline, you're absolutely right. And for many American families, this isn't a recent phenomenon. The median hourly real wage has been falling for the last three and a half years. So a family in the middle of the U.S. economic pyramid knows there's a recession going on; for some the recession has been going on for three years. And, of course, that median family isn't among the worst off. Think of this the next time that anyone, myself included, tells you that the national unemployment rate is just 4.9% and that 4.9% isn't high enough to make this a real recession: Unemployment in Michigan was running at 7.6% at the end of 2007. It's one of seven states with unemployment rates above 6%.

·         FHA as linchpin Giving the Federal Housing Administration an expanded role is central to Washington's strategy for throwing troubled homeowners a lifeline. While the White House wants to avoid moves it sees as bailing out irresponsible mortgage borrowers, observers say it's likely that lawmakers looking to be reelected this year will expand the reach of the Federal Housing Administration to keep more borrowers in their homes. The House and Senate are trying to figure out the right way to widen the reach of the Depression-era agency, with Democrats favoring a large new financial responsibility, a move that concerns conservatives. But there are areas where consensus is developing, such as helping troubled borrowers to stay in their homes by encouraging lenders to write down loan values -- a move that the Bush administration advocated last week through its targeted FHASecure program.

Rescuing the Rust Belt When the American automobile industry was the world's leader in its field, many people seemed to think that labor unions could transfer a bigger chunk of that prosperity to its members without causing economic repercussions. Toyota, Honda, and others who took away more and more of the Big Three automakers' market share, leading to huge job losses in Detroit, proved once again the old trite saying that there is no free lunch. Like the United Automobile Workers union in its heyday, unions in the steel industry and other industries piled on costs, not only in wage rates having little relationship to supply and demand, but in all sorts of red tape work rules that added costs. State and local governments in what later became the rust belt also thought that they too could treat the industries under their jurisdiction as prey rather than assets, and siphon off more of the wealth created by those industries into state and local treasuries with ever higher taxes -- again, without considering repercussions. In the short run, you can get away with all sorts of things. But, in the long run, the chickens come home to roost. The rust belt is where those rising costs have come home to roost. While American auto makers are laying off workers by the thousands, Japanese auto makers like Toyota and Honda are hiring thousands of American workers. But they are not hiring them in the rust belts. They are avoiding the rust belts, just as domestic businesses are avoiding the high costs that have been piled on over the years by both unions and governments in the rust belt regions. In short, the rust belts have been killing the goose that lays the golden eggs.

• Punching Bag Named NAFTA Discussing the trade agreement, with Jack Welch, former GE chairman/CEO and CNBCs Carl Quintanilla

Deficit Hawks Try, Try Again …..they agreed that the "first step" should be for Congress to take Social Security and government health-insurance programs -- Medicare for the aged and Medicaid for the poor -- off autopilot and set "sustainable," enforceable 30-year-long limits on growth in those programs, which today account for 42% of federal spending. With the U.S. struggling with recession and a credit crisis, and with interest rates low and a deliberate (and warranted) effort to increase the budget deficit under way, it's hard to talk about the long-run deficit. A wiser government would have tackled this during the good times; instead, politicians dug the hole deeper by expanding Medicare and cutting taxes. But this year, with the oldest baby boomers becoming eligible for Social Security, the "silver tsunami" begins. The next president can't escape this long-deferred problem. But their idea to set limits on the three big benefit programs has significant flaws. First, the budget process is a good way to implement a political consensus; it isn't a good way to achieve that consensus. The history of successful efforts to reduce the federal deficit proves that. Second, Social Security's finances are a problem, but not the big one or the hard one. The substance is easy, the politics aren't. The major driver of future federal spending is rising health costs… Third, taxes. Underlying all this is a fundamental question on which conservatives and liberals differ: How big a government do Americans want? The answer determines how heavily Americans should be taxed.

Creating an American Innovation Agenda The Presidential candidates have paid scant attention to the international decline of America's economy, and leaders already in government have paid even less, if that's possible. Meanwhile, the U.S. economy is like a jet with its passengers comfortably watching a movie, seemingly unperturbed by the silence of the engines outside, the gradual loss of altitude, and the apparent indifference of the pilots up front. America, once home to the roaring engines of the world's postwar economy, has lost a lot of altitude, sinking to 24th in world economic outlook and stability. The goal of economic competitiveness through innovation must be set at the highest levels of corporate, academic, and governmental leadership. These leaders must provide both the strategy and resources to back their positions. By necessity, the fundamental innovation strategy must be multidimensional and must address national priorities to ensure that all Americans have the opportunity to reap the rewards of a newly competitive economy. To do that, we must redirect our highly politicized national environment where Republicans are fearful of government strategy that engages the private sector and where Democrats see this as the occasion for social engineering. Such outdated predilections undermine a national agenda for innovation. Because of pressing social, economic, and security issues, six functional areas require sustained, multibillion-dollar R&D investments to stimulate innovation in both universities and the private sector through collaborations and partnerships. The priorities are: health care, energy alternatives, the environment, public transportation, homeland security, and national defense.