A time of rising inequality

Analysis

October 04, 2006|By William Neikirk

WASHINGTON -- The last time the Dow Jones industrial average closed at a record high, America was living in a giddy economic era when good times and budget surpluses seemed as if they might continue indefinitely.

It was Jan. 14, 2000, the start of another year, another century and another millennium. The economy was roaring along. The unemployment rate was low at 4 percent. The "new economy" of young entrepreneurs energized markets with new tech companies that didn't turn profits. Nobody seemed to care, and excesses piled on top of excesses.

And then the bubble burst, followed by the Sept. 11 terrorist attacks, corporate scandals, a recession, 1930s-style deflationary fears, big budget deficits, and the end to excessive optimism that former Federal Reserve Chairman Alan Greenspan once described as "irrational exuberance."

Now, six years later, the Dow has finally surpassed its old closing high of 11,722.98, closing yesterday at 11,727.34, thanks to an amazingly resilient economy driven by higher productivity, profits, lower tax rates and, crucially in recent weeks, a sharp decline from record oil prices. The Dow also set an intra-day high of 11,754.55.

In current dollars, the U.S. economy is more than a third larger than it was six years ago -- with gross domestic product, the annual output of goods and services, exceeding $13 trillion. Unemployment still is low, at 4.7 percent.

But much has changed about the U.S. economy since the boom and the subsequent bust. Inequality within American society has grown. The budget deficit is looming as a major problem as the baby boomers begin to retire. Health care costs have skyrocketed. The savings rate is negative as people go deeper in debt or use home-equity loans to pay for purchases. Energy costs have surged, although plunging oil prices recently have given the economy strength and helped boost stock prices.

At the same time, the housing market developed a bubble of its own in the past six years as the Federal Reserve kept interest rates low to prop up the economy. Now, housing construction has plunged and prices generally have softened. Some fear that the end of this bubble could sink the economy. Others disagree. Whatever the case, the economy is slowing down.

China has emerged as a major competitor, and the U.S. trade deficit is at record levels -- a situation that economist David Wyss of Standard & Poor's says can't go on forever.

The United States has become a bigger debtor to the rest of the world, and the nation is selling its assets, such as corporations once owned by Americans and even highways built with taxpayer funds.

Globalization has intensified, but there is no longer as much protest about it. "The losers are growing in ranks," said Diane C. Swonk, an economist for Mesirow Financial in Chicago. "People are being completely displaced by globalization. You can't really train them. How do you retrain a 55-year-old United Auto Worker?"

Swonk and Jared Bernstein, an economist for the Economic Policy Institute, said evidence shows that wages have stagnated. Productivity rose by 17 percent from 2000 to 2005, Bernstein said, but "the benefit has flowed to the top of those in income and wealth."

Wages have remained stagnant because ordinary workers have little or no bargaining power, Bernstein said. Even with a low jobless rate, he said, employers apparently can find enough workers. The 4.7 percent unemployment rate "doesn't represent the slack in the labor market. You will not find employers willing to bid wages up."

While Wall Street celebrates rising equity values, an income gap has opened between the affluent and the less affluent, including many in the middle class.

William Neikirk writes for the Chicago Tribune.

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