...And the Home of the Poor

America's dynamic economy may be wheezing a bit, but it is still the star performer that even the most advanced countries seek to emulate. In at least one key respect, however, America's performance stirs no envy among its rivals. As a recent study by economists Timothy M. Smeeding, Lee Rainwater, and Gary Burtless makes clear, U.S. poverty is far higher than the average in other industrial nations.

Because poverty can be measured in many ways, the study used two different methods. The first is an "absolute" measure based on the purchasing power of those considered poor in the U.S. This involves converting the official poverty rate, which focuses on pretax income, to one based on aftertax income (including cash and near-cash aid).

Using this measure of U.S. poverty, the authors calculated comparable poverty rates for 10 other advanced nations in the mid-1990s. That is, they estimated the shares of those countries' populations whose incomes would have provided the same limited purchasing power as those counted as poor in the U.S. As it turns out, only two nations--Britain and Australia--have higher absolute poverty levels than the U.S., and nations such as Canada, Sweden, and Germany enjoy much lower rates (chart).

The picture is even bleaker when the poor are defined as those whose incomes fall far below the median income in their own countries. Using 40% of each nation's median disposable income as its poverty line, the analysis found that the U.S. was the only one among 19 wealthy nations with a double-digit poverty rate. Moreover, its rate (10.7% in 1997) was more than twice the average for the group.

Why do low-income Americans fare so badly? One reason is that the U.S. exhibits far greater wage inequality than other nations. Another is its much lower level of social spending. The authors note that other countries typically spend at least 7% to 10% of gross domestic product on social transfers to nonaged people. In contrast, U.S. outlays come to only 4% or so.

Defenders of U.S.-style pay inequality and lower transfers argue that they enhance the dynamism of the U.S. economy and ultimately the welfare of the poor by promoting greater growth and providing work incentives. But the authors note that the working poor have lost ground in recent decades. Any benefits of wage and income inequality "have been captured by Americans much further up the income scale."

The good news is that poverty has started receding in recent years, and the budget surplus makes it possible to consider raising social spending. Expanding such programs as earnings supplements, child- and day-care credits, and skill training, the authors contend, might lower U.S. poverty closer to the levels in other advanced nations without blunting America's economic edge. Despite growing fears of recession, most forecasting models still point to a slowdown rather than a contraction. A prime example is a model recently created by Goldman, Sachs & Co. based on the performance of seven key economic variables since 1967.

Using the model, Goldman found that it could have predicted every recession since the late 1960s a full year in advance--with few false signals. Economist William C. Dudley says it currently suggests there is a 40% chance of recession between now and February, 2002 (chart). That's down from a 59% risk reading a few months ago--a decline resulting primarily from the Federal Reserve's easing of monetary policy, he says.

In fact, the risk of recession is probably even lower--closer to 33%, argues Dudley. That's because such changes as computerized inventory management have reduced cyclical volatility, while lower inflation has enhanced the Fed's ability to respond rapidly and forcefully to any developing slowdown. There's little doubt that the Internet has fostered trade among nations, judging by the growing number of global e-business Web sites and myriad anecdotal reports about how small suppliers and customers in both the U.S. and developing countries have found each other online. The big question, which Caroline Freund of the Federal Reserve Board and Diana Weinhold of the London School of Economics try to answer in a new study, is just how big a difference the Web has made.

Using a so-called gravity model, which relates bilateral merchandise trade between nations to the size of their economies and the distance between them, the two economists looked at trade flows among 56 countries from 1995 to 1999. For the first two years, they found no impact from the Net. But starting in 1997, as Web usage accelerated, they discovered a growing and marked effect.

Specifically, the results imply that a 10% increase in the number of a nation's Web sites would have led to a 1% rise in its trade flows in 1998 and 1999. The impact was strongest for poorer countries, suggesting that nations with fewer initial trade links can reap larger relative gains from the Web--assuming they have made basic infrastructure and technology investment.

Freund and Weinhold looked only at the Net's effect on trade in goods. But they speculate that its effect on trade in services should be even greater. That's because the Net not only makes it possible for potential suppliers and customers in different countries to contact each other at little cost but also is the medium through which many services can actually be traded.

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