Economic uncertainty is having a tremendous ripple effect on family life. Economist Jared Bernstein knows why family budgets are being forced to stretch further. He knows how business cycles have benefited and hurt American families. In his new book Crunch: Why Do I Feel So Squeezed?, Bernstein offers an explanation for the middle-class squeeze. His take on how American families will fare in a recession comes from years of research on income inequality, trends in employment and earnings, low-wage labor markets and the analysis of federal and state economic policies.
Bernstein is traveling the country, promoting his newest book. But typically, he is in Washington, D.C., where he works as director of the Living Standards Program at the Economic Policy Institute, a nonprofit think tank. He is also the co-author of an ongoing series, The State of Working America.
Bernstein combines his background as a social worker with his newer role as an economist to get his message out that all Americans need to share in economic growth. The Miami Herald listened in on a webinar Bernstein participated in and caught up with him afterward. We asked him about the turbulent economic times and the squeeze on household budgets. He urged all Americans to understand where the presidential candidates stand on economic policy. ''The economic debate we are having in this country is one you can't afford not to understand,'' Bernstein says. ``The stakes of these debates are too high to throw your hands up and say the issues are too complex.''
Q: You have identified some serious economic stress out there. What is the middle-class squeeze?
A: Middle-class squeeze is the gap between what people earn and what they need to make their budgets. Middle-class Americans aspire to have decent homes and hope that their kids will do better than they did.
Right now, food costs are up 5 percent year over year. That's the highest rate in about 18 years or so. College tuition has been rising at a rate surpassing inflation for a long time. The rate of increase employees have to pay for health insurance they get through their jobs is rising at double digits.
Now we look at paychecks. As the job market has weakened, the pace at which compensation -- wages plus benefits -- has grown is below inflation.
At the same time, the median family income is going down. There's no universal definition of middle-class because there are different economies from coast to coast and border to border. Someone living on $100,000 in Manhattan is middle class and someone living on that in rural Alabama is above middle class.
We tend to look at the median family income. The median family income in 2007 is $500 lower than in 2000. That's another staggering observation.
Q: You assert that income inequality is a big part of the squeeze. You discovered the rich are getting richer and the rest of us aren't. Why is this happening and what is the effect?
A: The share of income going to the top 1 percent of households (including capital gains realized) is 23 percent. That's the highest share since 1928. The gap for those at the very top of the income scale and those at the bottom is wider than it has been in many decades. There's a real danger of ending up with two separate economies -- one where the benefits of growth flow to the top and the other economy where people have to eke out the kind of opportunities that the American middle class was built on.
Q: Why do you believe this recession will be different?
A: The last recession ended in late 2001 and the economy began to grow. Probably in December 2007 or January 2008, that cycle ended and we entered another recession. This is the first time on record, going back to 1937, that the typical family income failed to regain its prior peak over the course of a business cycle.
What was missing is that the last recession ended in late 2001, but we didn't start adding jobs until late 2003 and the rate of job growth was low. Remember, most families don't have investments and depend on their paychecks.
And in the past, families had something to fall back on. In this case, income was stagnant and there was much more indebtedness. It made middle-income families uniquely vulnerable to the downturn.
Going forward, I believe spending will grow more slowly. For the first time in two decades, the American consumer appears to be exhausted. It hurts to make cuts, but as a nation we were consuming beyond our means and you can't do that for too long.
Q: Is the economic safety net for American families working? What needs to happen to loosen the squeeze?
A: I think someone needs to look at programs that are supposed to kick in -- food stamps, welfare, medical assistance. How effective are they? The safety net appears to work better when the economy is strong and catches fewer people when the economy is weakened. It is not that the safety net is not there, but it is more porous than it used to be. We want it to be counter-cyclical so it would be ratcheted up when the business cycle goes south. There are too few benefits kicking in to help when people lose their jobs.
I think there need to be policy changes that speak to this challenge. I would argue three presidential candidates are talking actively and giving speeches about what I am talking about. They all have different ideas about policy agenda. I don't believe any agenda will totally turn these things around. But I do believe we can reconnect the economy's growth to the income of middle-class families far better than it has been.
Q: For most U.S. working families, how bad will it get?
A: That's unknowable. I think it will last a while because housing corrections take a long time. The recession arrived sooner in areas where the housing bubble is more pronounced and it probably is going to stay longer. Many are arguing this recession might be mild in Gross Domestic Product terms (the broadest measure of the economy's performance). But if you look at family income and jobless recovery and unemployment you would see a different story. Those mean more to a family's well being. I think we're going to see a period of a few years of stagnancy.
