As Dow surges, many left behind

As Dow surges, many left behind
By William Neikirk
Tribune senior correspondent
Copyright © 2006, Chicago Tribune
Published October 4, 2006



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 jobless rate was a low 4 percent. The "new economy" of young entrepreneurs energized markets with new tech companies that didn't turn a profit. Nobody seemed to care, and excesses piled on top of excesses.

And then the bubble burst, followed by the Sept. 11, 2001, 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 finally has surpassed its old closing high of 11,722.98, ending Tuesday at 11,727.34, thanks to an amazingly resilient economy driven by higher productivity and profits, lower tax rates and, crucially in recent weeks and days, a sharp decline from record oil prices. The Dow also set an intraday high of 11,754.55.

In current dollars, the economy is more than a third larger than six years ago, with gross domestic product, or annual output of goods and services, exceeding $13 trillion. Joblessness 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 until recent weeks.

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, home construction has tumbled, and prices generally have softened. Some fear 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 U.S. has become a bigger debtor to the rest of the world, and the nation is selling off its assets, such as corporations once owned by Americans and highways built with taxpayer funding.

Globalization has intensified, but there is no longer as much protest about it.

"The losers are growing in ranks," said Diane 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?"

She and Jared Bernstein, an economist for the Economic Policy Institute, said evidence shows 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 rose little 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," he said.

While people on Wall Street celebrate rising equity values, Lee Farris, 51, of Boston, doesn't see anything at all equitable about today's economic climate, in which an income gap has opened up between the affluent and the less affluent, including many in the middle class.

Farris, an organizer for United for a Fair Economy, a non-profit group that fights against economic inequality, said she has $20,000 in savings, chiefly in individual retirement accounts, and that she's counting on Social Security and home equity to finance her retirement.

Her roof leaks and, she said, "the prices to fix it are literally through the roof. I am going to have to go get a bank loan" to cover the cost, which could run as high as $30,000.

The organization's executive director, Meizhu Liu, said people measure the economy's success by gross domestic product and stock market values without looking at the income gap.

"The current philosophy of giving more and more to the rich and then have it trickle down has not proved to be working well," she said.

The Economic Policy Institute and the Center on Budget and Policy Priorities echoed government studies with a report this year on the income gap.

The report said while incomes of the poorest 20 percent of families grew by 19 percent over the last 20 years, the incomes of the richest 20 percent of families rose by 59 percent.

Since 2000, the structure of the U.S. economy is shifting more and more toward services, as the industrial sector, especially the automobile industry, is in trouble.

"The industrial sector is just sort of fading away," said Barry Bosworth, economist at the Brookings Institution, a Washington think tank. Competitively speaking, he said, other countries have challenged the U.S. because "American labor costs are too high, and American management has shown itself to be too poor."

On the other hand, Bosworth said some companies in the industrial sector, such as General Electric Co., have transformed themselves by emphasizing more services.

Yet Carl Tannenbaum, chief economist at LaSalle Bank in Chicago, said that despite the country's heavier debt load, income gap, trade deficit and housing problems, the U.S. economy has remained very adaptive.

One example, he said, is the growth since 2000 of hedge funds and private equity.

"These new sources of capital have become significant players in a lot of markets," Tannenbaum said.