As the pie gets smaller, appetite for strife grows

THE BALTIMORE SUN

We are not making the pie any bigger.

Stripped to its essentials, this is the economic message we should take to heart from recent reports on state and local budget crises, continued sluggish real estate markets and an economy that may be emerging from a recession but is hardly poised for robust growth.

And when the economic pie does not get any bigger, we spend our time in increasingly bitter and divisive fights over how to reapportion slices from that pie. Doesn't this describe the tone of legislative activity in Washington and our state capitals?

We don't seem to fight very much, however, or perhaps even to comprehend matters, when it comes to making the pie grow bigger, or, in economist-speak, promoting real, non-inflationary growth.

In a nation that so strongly emphasizes winning and progress, it may simply be difficult to get very far with what is essentially a negative message: We are losing.

However, unless individuals begin in large numbers to believe this is true, and to act on this conviction (assuming their leaders present them with some meaningful options), the hole we're digging will only become deeper and harder to escape.

Now, in textbook terms, economics always involves the allocation of scarce or at least finite resources. But the limitations of our economic choices become painfully clear after several years of slow growth, smaller incomes for working people and reduced levels of government services.

On an individual level, understanding the relative decline of the U.S. economy would seem easy enough. Personal income for the entire country has been rising steadily, from $2.26 trillion in 1980 to $4.65 trillion last year, but this doubling was hardly a sign of prosperity.

Much of the increase can be chalked up to the effects of inflation. And even when the economy was growing, a lot of the new income was flowing to second and third wage-earners in a household. On an individual level, things are worse.

Real hourly wages, adjusted to eliminate the impact of inflation, peaked in 1973. Hourly wages that year averaged only $3.94, compared with $10.03 an hour last year. But stated in constant, 1982 dollars, the real wage in 1973 was $8.55 an hour and has declined steadily over the years to $7.54 an hour last year. Average weekly pay, stated in those same, 1982 dollars, was $315 in 1973 but only $260 last year.

Over this period, out-of-pocket payments for all forms of taxes were up sharply. Reagan-era cuts in individual tax rates haven't helped middle-income taxpayers very much. Meanwhile, taxes are up substantially for Social Security, gasoline, "sin" items and a host of local and state levies.

Faced with declining real incomes, families responded with a combination of cash-raising options, including sending more wage-earners into the work force and increasing their use of borrowed money.

In 1970, jobs were held by 60.4 percent of working-age people, a group that includes those in the work force plus people who aren't seeking employment. But this so-called labor participation rate has risen steadily during the past 20 years. Even with population gains, the participation rate set another record at 66.4 percent last year.

This tide of new employees has helped sustain household income but also has had some negative, unanticipated side effects, including reduced parental involvement with kids and a corresponding increase in child-care needs.

As political analyst Kevin Phillips so persuasively argued last year in his book, "The Politics of Rich and Poor," the 1980s witnessed a dramatic skewing of income and wealth in favor of the rich.

Aided by President Reagan's tax policies and bull markets in stocks and real estate, the average real income of the wealthiest 1 percent of U.S. families rose 50 percent between 1977 and 1988 (to nearly $405,000), he reports, while the averages for the top 5 percent were rising by 23 percent (to $166,000) and those for the top 10 percent were up 16.5 percent (to nearly $120,000).

By contrast, the average family income of the poorest 10th of the nation's families actually declined by nearly 15 percent between 1977 and 1988, falling from $4,113 to $3,504. Smaller declines were reported by the next seven income deciles as well, meaning that 80 percent of all U.S. families emerged from the decade in worse shape than when they started.

Since then, the bubble has burst for real estate, and the stock market has leveled off, so perhaps the rich aren't getting that much richer these days.

However, there's no meaningful evidence that the poor aren't getting relatively poorer, either.

With all this concentration of wealth, you'd think we'd at least have the silver lining of seeing a surge in new investments and capital formation. These are vital to a more competitive economy, and they're also what rich people are supposed to do with their spare money, right?

Well, it hasn't happened. The rate of personal savings is perhaps the best single barometer of an economy's tendency to invest for its future. From 1960 to the early 1980s, the nation's savings rate ranged from 7 percent to 9 percent of disposable personal income.

That wasn't great by Japanese and German standards, but it was much, much better than the rates that followed. Ironically, when a booming stock market and strong recovery should have brought us higher savings rates, they actually went the other direction, falling to 5 percent, then to 4 percent and to less than 3 percent in 1987. Since then, they've stabilized at about 4.5 percent.

Why this strange turn of events? Well, if you've been searching for some ominous effect of the federal budget deficit, perhaps here's a "crime" you can pin on 20 years of overspending. Funding this deficit has absorbed lots of money that otherwise would have found its way into private investments that might have boosted our industrial competitiveness.

Funding the deficit has also forced U.S. policy-makers to keep interest rates relatively high, thus making investments in U.S. securities attractive to foreigners. This may have had the intended effect of having a good hunk of our deficit funded by other nations.

But high interest rates also impede business borrowing and new investment, and represent much more of a drag than can be overcome by capital raised through new stock offerings.

Pursuing more hard-headed trade policies, improving education, bolstering basic research and speeding the safe commercialization of scientific discoveries are all essential components of a re-energized, more competitive United States.

But their impacts would be outweighed by simply balancing the federal budget.

It remains unclear whether anything short of a constitutional amendment will lead Congress and the White House to mandate that the nation live within its means.

It might help if voters realized that the higher local taxes and fees they've been railing against are, in fact, the direct result of federal deficits and reduced federal support to states and cities.

It might help if powerful federal officeholders, both elected and appointed, were forced to decide that the key to keeping their jobs was to spend less money, not more.

It might help if voters were willing themselves to accept less federal spending today -- a theoretically easy call that is countered every time a federal military base is threatened with closing.

In the meantime, the pie will continue getting smaller, while the fights over access to resources get larger and more mean-spirited.

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