Recession Fears, Retirement Woes, Plague America's Middle Classes
WASHINGTON -- Amid growing fears of economic recession or worse, America's workforce is struggling to cope, and neither the recently-passed stimulus package nor the Federal Reserve's rate cuts will fix what ails the nation's shaky situation, said former Secretary of Labor Robert Reich. "None of these fixes will help much because they do not deal with the underlying anxieties now gripping American voters. The problem lies deeper than the current slowdown and transcends the business cycle," Reich wrote recently in The Financial Times. Now a professor of public policy at the University of California at Berkeley and author of Supercapitalism, Reich contends that beyond the big picture of Wall Street's ebbing stocks and its banks' growing losses on subprime mortgage bonds a greater malaise has finally hit America's middle classes--with nothing less than an alarming thud.
Middle-class families have "exhausted the coping mechanisms they have used for more than three decades to get by on median wages that are barely higher than they were in 1970, adjusted for inflation," he maintained. Workers earn less now than they did 30 years ago, adjusted for inflation, yet have maintained a lifestyle that belies their income. The reckoning has been postponed thanks to women returning to the workforce (now 70% of women with children now work full-time) and by working longer hours, longer weeks and two-job household income.Finally, the last available coping mechanism was tapped: borrowing. In the real estate boom time, Americans cashed in on home equity, using their homes like piggy banks, Reich said. With the credit crunch and the subprime debacle crashing home values, that last available lifeline is now gone.
Nouriel Roubini, professor of Economic and International Business, Stern School of Business, New York University and author of a Global EconoMonitor says it's no longer a question of if America is in a recession; it's far worse than that. "All indicators point to a severe recession," said Roubini. "The issue right now is not anymore whether the U.S. will experience a soft landing or a hard landing but rather how hard the hard landing will be. To understand the Fed actions one has to realize that there is now a rising probability of a 'catastrophic' financial and economic outcome, i.e. a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe. The Fed is seriously worried about this vicious circle and about the risks of a systemic financial meltdown," Roubini maintains.
Credit unions, of course, have historically benefited from a flight to safety and may experience a new wave of membership growth from this uncertainty, thus the CU philosophy of safety and soundness, shared responsibility, thrift and responsible growth may be a welcome message again.
Still, Richard Curtin, director of the Reuters/University of Michigan consumer sentiment survey agreed with Roubini that the economy had already entered a recession. Citing data from The Conference Board, he said, "This is no ordinary recession. The aftereffects will last much longer than the typical downturn. Consumers must take more drastic steps to stabilize their finances in the midst of high fuel and food prices, stagnant incomes, and record debt," Curtin said. The report finds the rising wealth gap will be painful for the middle class more than wealthier Americans." Growing income inequality has insulated higher income groups to a greater extent than ever before," the report said.
Edwards' Two Americas
Interestingly, whereas political pundits postulate that former presidential candidate John Edwards' populist approach failed him in the campaign, yet most credit him with raising the economy to the top of the campaign agenda. His citing of the widening income gap, the lack of healthcare for more than 45 million Americans, job security and retirement issues is now topic number one for Hillary Clinton and Barack Obama. Republican contender John McCain relies more on national security and the war in Iraq, but promises to extend the Bush tax cuts, making them permanent and would offer corporate tax rebates to stimulate job growth.
The $168 billion stimulus plan has passed to mixed reviews, with the glass half-full believers hoping that the $300-$1,200 checks will be spent rather than used to pay down debt (households with children will get an additional $300 per child). Businesses spending may gain from the tax breaks for equipment.
It may be hard for people to resist spending, given recent behavior, but there is always a tug from the constant barrage of bad news to help them keep their wallets slammed shut. Unemployment jumped in December and January's report of 18,000 job losses came as a shock. Thus, economists remain mixed on how much boost the plan will have and how long it might last. One more point of concern is that, in order to pay for the rebates--estimated to cost about $117 billion over the next two years--the government will have to borrow more money, enlarging the budget deficit.
Global Insight economist Brian Bethune projected the economy will rebound in the summer and grow at a 3.4% rate as the rebate checks boost consumer spending, then taper off to 2.7% in the last quarter. Mark Zandi, chief economist at Moody's Economy.com echoed a similar outlook for the stimulus. "This is going to provide a very important and measurable boost to the economy in the second half of this year," he said. The Federal Open Market Committee's continued rate cutting (another is expected when it meets in March) will help to keep the recession short, he said. "We are not out of the woods yet and the risks remain very high because of the widespread problems in the financial sector," Zandi said.
Over the Rainbow?
There is no similarly optimistic view on the retirement horizon, however. The national retirement risk index concludes that "Retirement security for an aging population is one of the most significant challenges facing the nation," according to the Center for Retirement Research at Boston College. The study by Alicia H. Munnell, director, Anthony Webb, research economist, and Luke Delorme, research associate, shows that even among the best prepared--the early boomers--35% are at risk of not being able to maintain their lifestyle. The younger boomers face the loss of defined benefit plans and extended Social Security age restrictions.
Because lifespans have extended and with savings rates at zero and debt rising, it's a given that boomers will not retire as their parents did, but will keep working years longer. That's probably good, as The Urban Institute Work and Retirement Study surmises that delayed retirement "would ease the labor shortage created by an aging population. It would also allow them to extend retirement savings, reducing the years over which Social Security, pensions and other wealth are spread."
And since Americans will have to work longer, The Urban Institute cites studies that it brings the benefit of improved physical health, as 97% of employed adults over 70 say they enjoy going to work. That may offer solace to many, but another overall picture offers a boomerang. The Journal of the American Planning Association paper, "Aging Baby Boomers and Generational Housing Bubble: Foresight and Mitigation of an Epic Transition," by Dowell Myers and SungHo, posits that the 78 million baby boomers who have driven up housing demand since they started buying in the '70s may face a dilemma when they want to sell those homes for retirement income. There will be a relatively smaller and less advantaged generation to buy those high-priced homes.
This could signal the end of the postwar era of planning and reverse the gentrification trend, lower demand for low-density housing and boost the emphasis of compact development. A new wave of urban planning could result, the study found.