How Eroding the Middle Hits Economic Growth

Since my article on Monday about the narrowing of the customer base for midtier restaurants, retailers and other consumer-oriented businesses like hotels and casinos, much of the discussion has focused on what that trend says about whether and how the American middle class is indeed shrinking.

While that issue is important, a less obvious fact is that the shift of income to the wealthiest Americans can reduce consumption over all, according to many economists, and therefore economic growth for everyone â€" poor, middle and rich, too.

Alan B. Krueger, a Princeton economist who was a top economic adviser in the Obama administration from 2009 to 2013, estimates that had the shift in income gains to the wealthiest earners since 1979 been more uniformly distributed, annual consumption would be $400 billion to $500 billion higher today, equal to about 3.5 percent of gross domestic product.

To be sure, some skeptics will say that Mr. Krueger has a dog in the political hunt as a former official in the Obama White House, which has made inequality and opportunity a key talking point. But some economists on Wall Street, hardly a bastion of left-wingers, tend to agree with Mr. Krueger’s take.

Guy Berger, United States economist at RBS, says the divergent trajectory of richer and poorer consumers has most likely sapped the broader growth rate of consumer spending in recent years. That, in turn, is one reason that economic growth since the end of the Great Recession has compared so unfavorably with previous recoveries.

Since the end of 2009, consumer spending has risen by 2.4 percent annually, Mr. Berger noted, compared with nearly 3 percent annually in the middle of the last decade and 5 percent a year in the late 1990s boom.

“It isn’t that we are not back to where we were in the 1990s,” he said. “We’re not even back to where we were in the mid-2000s.”

A Report’s Real Message: It Wasn’t About Health Care

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.

Only in Washington could the following occur: the Congressional Budget Office releases a dense, technical report wherein it tweaks its estimates of how labor supply will be affected by the health care act over the next decade … and the whole town goes nuts.

Not only that, but in our mass nuttiness, we missed the actual message from that potboiling page-turner also known as the Budget and Economic Outlook, 2014-2024.  That message had almost nothing to do with the Affordable Care Act.  It was instead a stark warning about the damage to our fiscal outlook from diminished economic growth, jobs and incomes.

First, let us dispose of the Affordable Care Act silliness, at least among ourselves (as much as I’d like to, I can’t stop the warring parties down here from their predictable responses).  Those who want to bash the health care act argue that it’s a job killer, and thus they latched onto the budget office’s estimate that there will be “a decline in the number of full-time-equivalent workers of about … 2.5 million in 2024.”

Sounds like a job killer, right?

Wrong.  There’s a difference between workers (labor supply) and jobs (labor demand).  The budget office bent over backward to make this distinction, claiming that employers’ demands for workers will not change much at all because of the health care law.

So what do you get when there’s less labor supply around stable labor demand?  A tighter job market. 

The economist Dean Baker uses Congressional Budget Office numbers to make this point:

“If hours fall by 1.5 to 2.0 percent, but compensation falls by 1.0 percent, then compensation per hour rises by 0.5-1.0 percent due to the ACA. If this is bad news for workers then someone must have been enjoying the new found freedoms in Colorado or Washington State too much.”

There is thus no support in the Congressional Budget Office report for the claim that the health care act kills jobs.  As the report put it, the estimated reduction in hours of work “stems almost entirely from a net decline in the amount of labor that workers choose to supply, rather than from a net drop in businesses’ demand for labor.”

In fact, as some of the fog is clearing in our benighted capital, a smidgen of clearer thinking is breaking through.  What the Congressional Budget Office is saying is that because people receiving subsidies through the health care act will see those subsidies reduced as their earnings rise, they’ll choose to work less to avoid that loss.

An editorial in The New York Times on Wednesday provides a positive view of this impact of the law, stressing that if those locked into a job because of a pre-existing condition or working more hours than they’d like in order get health coverage now have a choice to do otherwise, isn’t that a plus?

The principled conservative response to this, which I haven’t seen anywhere, is not “but it’s a job killer!”  Remember, the job still exists. The Affordable Care Act gives that job holder an option and, for some, an incentive to work less without losing health coverage. Conservatives might well object to making that choice on the taxpayers’ dime.  But there’s no model of health care reform from the left or the right that doesn’t involve a subsidy that fades out as income rises.  So this labor-supply-choice problem is endemic.

Were we to have a real debate on what the budget report is saying, we would instead focus on what to do about the truly disturbing news in the chart below.  The chart, using Congressional Budget Office data also released Tuesday, compares the office’s “guesstimates” of potential growth in gross domestic product, inflation-adjusted, made in 2007 (orange line) and most recently (blue line).  “Potential G.D.P.” is how much the economy should be expected to produce when we’re in the midst of a robust recovery with our economic resources fully deployed.

Source: Congressional Budget Office.

Clearly, something happened between these two periods that led to an economically large and significant decline in this key indicator.  What was it?

You might think, “demographics!” â€" we’re getting older, more workers are retiring, and we should thus expect slower growth.  Except that there’s little known about the age structure of the work force now that wasn’t known in 2007 when the Congressional Budget Office made its more optimistic forecast.

What happened was a huge housing bubble inflated by “financial innovation,” which brought us the great recession and the slow slog we’ve come to know as the current recovery.  At least by the budget office’s estimates, the damage from that period is now baked into the cake.

In fact, the budget office reported Tuesday that the fiscal outlook has worsened slightly, as it now expects the budget deficit over the next decade to exceed its previous forecast by 0.5 percent of G.D.P.  This increase in the deficit has nothing to do with actual fiscal policy (taxing and spending decisions that are on the books).  It is fully a function of the expectation of slower growth spinning off fewer revenues.

Actually, let me correct myself.  The decline in potential G.D.P. has a lot to do with fiscal policy … lousy fiscal policy that injected large doses of austerity into the United States economy when it clearly needed the opposite.  I believe the damage can be reversed â€" that the blue line can come up closer to the orange line â€" with much better policy that focuses on job creation, better pay and increased opportunity. If so, an added benefit of that reversal would be a much stronger fiscal outlook.

But we’ll never get there if we’re mired in foolish debates that have nothing to do with the facts of the case.

The Two Silicon Valleys

David Sawyer, via Flickr Fewer than half of first-time home buyers in Silicon Valley, including in places like Palo Alto, Calif., can afford to purchase a median-priced home, according to recent research.

Silicon Valley is booming. Job growth is so strong that the recession is a distant memory. Average incomes are up, and the levitation of technology stocks and a pipeline of initial public offerings promise more wealth to come.

“The economy is sizzling, any way you slice it, and about to get hotter,” said Russell Hancock, the chief executive officer of Joint Venture Silicon Valley, a policy organization focused on regional issues.

And yet divisions within the region are growing.

Fewer than half of first-time home buyers can afford to purchase a median-priced home, and rents are increasing faster than incomes, especially for the middle class. While whites and Asians are making more money, blacks and Latinos are falling further behind. Men with a college degree or higher make 40 to 73 percent more than women with the same levels of education. One-third of children in third grade can’t read at their proficiency level. Native-born Americans find the region increasingly inhospitable and steadily leave, even as immigrants find it irresistible and keep arriving.

“We’ve become two valleys: a valley of haves and a valley of have-nots,” Mr. Hancock said at a news conference in San Jose on Tuesday.

That was the clear message of the Silicon Valley Index, an annual report card of the region’s health that was delivered on Tuesday by Joint Venture and the Silicon Valley Community Foundation.

The report’s analysis focused on the valley itself, which encompasses the area from San Jose to San Francisco but excludes the city of San Francisco itself. But San Francisco faces similar tensions â€" just look at the city’s ongoing battles over the tech industry’s private bus fleets.

Sadly, the report’s findings are largely consistent over time. Every year, the index shows vast gaps between the rich and poor, the educated and noneducated, the native-born and immigrants. Every year, Silicon Valley’s leaders bemoan the lack of public infrastructure, the shortage of housing and the failure of the region’s leaders to work together for the greater good.

A little progress is being made. Stephen Levy, director and senior economist of the Center for Continuing Study of the California Economy, who helped with the report, pointed to a boomlet in home construction, especially around transit hubs. Permits for nearly 8,000 new residential units in Silicon Valley were granted in 2013, approaching the highest levels since 2000.

But with more than 33,000 new residents arriving in the same time frame, it’s still not enough. The public opposes most new construction, not realizing that it’s the key to keeping jobs, especially middle-income jobs, growing, Mr. Levy said. “People don’t see that connection,” he said. “They see it as somebody’s else’s problem, not their problem.”

Emmett D. Carson, chief executive of the Silicon Valley Community Foundation, was more blunt. Silicon Valley likes to think of itself as the land of opportunity â€" and it is, for many. Despite four years of a growing regional economy, however, lower- and middle-income families have made little progress.

“Rising tides do not lift all boats,” he said. “We have to be intentional as a community about addressing inequality.”

Mr. Carson and Mr. Hancock focused most of their criticism on government policy makers.

For example, the private bus systems of Google, Facebook, Yahoo and other companies exist, Mr. Carson said, because public buses stop largely at county lines. “Companies are having to make their own stopgap to take over where public policy has failed,” he said.

Jim Wilson/The New York Times Commuters in San Francisco boarded a bus last month bound for Silicon Valley.

Mr. Levy sees more construction as an answer to many problems â€" overcrowded roads, inadequate public transportation, the housing shortage and the lack of jobs. “A construction revival is the largest possible source of middle-wage jobs,” he said.

But it’s hard not to read the report, and listen to the discussion, and wonder: With all this wealth in the region, do Silicon Valley’s companies need to do more to improve the place that supports them?

As George Packer observed last year in a much-discussed article in The New Yorker, the brilliant minds that bring us Facebook’s news feed and Google’s search engine and Uber’s car-sharing often seem to live in their own virtual worlds.

Tech companies have stepped up on the job-training front, working with local community colleges to get workers the necessary technical skills for at least entry-level tech jobs. But with nearly half of Silicon Valley high school graduates lacking the required coursework to go to college in the first place, that’s a drop in the bucket.

Marc Benioff, the co-founder and chief executive of Salesforce.com, told The Wall Street Journal last week that tech companies have a responsibility to give back more to the communities in which they operate to solve pervasive problems like homelessness and transit.