Economic Trends
Edited by Michael J. Mandel
A Gossamer-Thin Safety Net
Among the signal benefits of the long economic expansion of the 1990s was a surprisingly large plunge in the nation's poverty rate. The percentage of poor families fell from 11.9% in 1992 to 8.6% in 2000. That's a far bigger drop in poverty than seen in the previous several expansions. For example, the sharp drop in unemployment in the 1980s only nudged the poverty rate down to 10.3% in 1989.
What was different about the 1990s was that the tight labor markets helped drive up real wages for unskilled jobs. Moreover, the extended period of below-6% unemployment encouraged businesses to hire and train poor workers they would otherwise have passed over. And the welfare reforms of the 1990s forced former recipients to get jobs just when there were plenty to fill.
But as quickly as poverty dropped in the 1990s, it could rise just as dramatically in the next few years, argues Richard Freeman, a leading labor economist at Harvard University. Many Wall Street economists are predicting that the jobless rate could top 6.5% in coming months. Freeman estimates that because the U.S. has scaled back its safety net, unemployment of 6% or more will quickly send the family poverty rate back into double-digit territory. "I think we will see a rise in the poverty rate," says Freeman. "And I think it will be bigger than an historically expected increase, because we have undone a lot of the welfare underpinnings."
The family poverty rate could even rise above the 12% level of the previous two recessions. The vicious squeeze on state budgets after September 11 is limiting the ability of policymakers to respond to the growing needs of their poorest constituents. The crunch will come when welfare mothers who have proven their willingness to work lose their jobs. One sign that things are getting tougher: The jobless rate for black women jumped from 6.9% in August to 8.9% in October, the highest level since June, 1997. "The extent to which poverty will increase depends on how fast we change policies," says Freeman. "When we see women and children about to go on the streets, policymakers will have to do something." John F. Kennedy remarked that a rising tide lifts all boats. But without countervailing efforts by policymakers, the ebb of recession can sink many boats as well.
The Bad Rap on IPOs
Personal finance magazines regularly warn against buying shares in companies that have just gone public. Critics of initial public offerings say their prices run up too high in the first day or so of trading, so anyone who buys in after that will be stuck with an underperforming investment. But how true is that?
A new study by two Harvard Business School professors offers some encouraging words for potential investors in IPOs. In a National Bureau of Economic Research working paper, Paul A. Gompers and Josh Lerner take a long view of IPOs by studying the performance of more than 3,600 companies that went public from 1935 to 1972--an era that has been largely ignored because it precedes the advent of the Nasdaq Stock Market, and information about the period is harder to obtain. They then compared the companies' stock market performance both with the overall market and with the performance of longer-established companies that were otherwise similar.
Their conclusion: IPO companies performed no better and no worse than the others. Gompers and Lerner don't comment on the debate over whether IPOs have underperformed during the Nasdaq era. But they say that if indeed they have, it might be more of a "historical accident" than evidence of some enduring investing anomaly.
Europe's Scant Info-Tech Payoff
In the second half of the 1990s, U.S. productivity growth accelerated to 2.4% annually, while European productivity growth dropped to 1.2%--half its former growth rate. In part, this difference came from the explosive U.S. investment in information technology. But a study from the Conference Board, which carefully reconciled the productivity and investment measures of different countries to ensure comparability, confirms what many economists had suspected: That much of the U.S. productivity advantage came from a more competitive regulatory and market environment, rather than simply a higher level of investment in IT.
The study examined European industries that were heavy users of IT, such as finance and wholesale trade. Based on new data gathered by the University of Groningen in the Netherlands, it found that the European industries contributed less than half of the productivity gains of their American counterparts between 1995 and 1999.
It's not that Europeans can't get the technology. "IT products are available in international markets, and the prices look similar," says Robert H. McGuckin, director of economic research at the Conference Board and co-author of the report with Bart van Ark of the University of Groningen. The real issue for Europe, McGuckin says, is the need to deregulate industries from banking to telecommunications to transportation, all of which are big users of IT.
All told, industries that were heavy users of IT contributed 1.4 percentage points to U.S. productivity growth in this period. The comparable industries contributed only 0.5 point to productivity growth in Britain and Germany, and Italy and France showed even smaller gains.
But McGuckin is optimistic: Now that Europe has a single currency, it should be able to deregulate over the next few years and catch up to U.S. productivity growth.
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Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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