Economic Trends
By Gene Koretz
Why Americans Grow Apart
Economists have been paying a lot of attention recently to "social capital," a concept popularized by Harvard University political scientist Robert D. Putnam in the book Bowling Alone. Social capital refers to bonds of trust and mutual concern that arise through volunteering, socializing, and taking part in organizations such as church and civic groups, bowling leagues, PTAs, and professional associations.
Research suggests that social capital pays off in myriad ways--promoting the transmission of new ideas, improving children's education, enhancing the efficiency of labor and capital markets. Putnam and others find that many activities that build social capital have been declining in the U.S. for several decades.
What's behind such declines? While Putnam blames TV and the aging of the civic-minded generations born before World War II, a study by Dora L. Costa of Massachusetts Institute of Technology and Matthew E. Kahn of Tufts University focuses on such trends as the huge rise in working women and the growing racial, ethnic, and income diversity in communities.
They report that rising income inequality has played a big part in eroding America's social capital outside the home, whereas the advent of the working woman has eroded social capital in the home. And despite the vaunted benefits of rising immigration and ethnic diversity, such changes (rather than racial diversity) also appear to weaken the ties that bind communities together.
Analyzing copious survey data, the two economists first focus on a five- percentage-point drop since the early 1970s in the share of prime-age adults doing volunteer work. The main culprit, they find, is growing income inequality in communities--suggesting, says Kahn, that "people are more likely to volunteer if they can identify with the economic status of those they're helping."
Income inequality was also the largest contributor to an 11-percentage-point decline in organizational membership from the early 1970s to the early 1990s, with the impact especially apparent in youth, sports, church, literary, and hobby clubs. Increased ethnic diversity and the rising number of women in the workforce played smaller roles, the authors report.
Finally, the study looked at a drop in home-based social capital as reflected in declines in the frequency with which people entertain at home or visit friends and neighbors--behaviors that enhance the socialization of children. Of the possible explanations here, the rising labor-force participation of women turns out to be by far the most compelling.
How worrisome is the decline in social capital? Its purported effects on economic performance were hardly noticeable during the booming 1990s. But in the slow-growth era that may lie ahead, note Kahn and Costa, they could become painfully apparent.
Consumers Tap Home Wealth
If the economy avoids a recession this year, it will be largely because of the resilient U.S. consumer. One reason consumption has held up, says economic consultant L. Douglas Lee of Economics from Washington Inc., is that households have been able to tap the wealth engendered by the continuing rise in home prices, which have been running more than 8% above last year's levels.
Lee notes that an estimated 10% of outstanding mortgages have been refinanced since late last year. More important, much of that has involved so-called cash-out refinancing, in which owners increase their mortgage loans.
He is especially intrigued by a recent study by MGIC Capital Markets Group that indicates that homeowners who refinanced during last year's fourth quarter added an average $41,000 to their first mortgage balances. Although the average interest rate on the new mortgages was more than half a percentage point higher than the rate on the old ones, borrowers used most of the proceeds to pay off even higher interest debt on credit cards, auto loans, and second mortgages--and often reaped a tax deduction at the same time.
In other words, homeowners have gotten a lot more sophisticated. They're willing to refinance their mortgages even when interest rates are slightly higher because they realize they can still save money and boost cash flow by consolidating other debts. "If even small declines in interest rates can now trigger refinancing decisions," says Lee, "the latest refinancing boom is likely to last a lot longer than usual."
Nothing Fishy in the Euro's Slide
Earlier this year, many economists expected the euro to rise against the dollar. Since then, its value has dropped as low as 84.5 cents, and one popular theory is that its decline has been fueled by a rush by black marketeers to exchange marks and other euro-zone national currencies for dollars before those currencies are replaced by euro coins and notes early next year.
Currency experts at HSBC Holdings are dubious, however. If such a scramble out of black-market money into dollars were happening, they argue, euro-zone coins and notes in circulation would be shrinking significantly. Instead, they estimate that such currencies in circulation have fallen by a mere 5 billion euros or so from last year's average level--more than half of which is easily explained by the cessation of national currency production by banks, the recent slowdown in European economic growth, and the actions of people with legitimate currency holdings.
The rest--a drop of at most 2 billion euros--is "utterly insignificant as far as the euro's external value is concerned," say HSBC's experts. What has really mattered for the euro, they note, is this year's 142 billion-euro outflow in the form of foreign direct and portfolio investment.
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Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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