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U.S. Consumers: Not So Broke


As the economy sank into recession in 2001, American consumers kept spending and borrowing at a rapid pace. That led some economists to worry that debt-laden consumers would be tapped out and unable to fuel the recovery.

But according to Bruce Steinberg, chief economist at Merrill Lynch & Co., U.S. consumers were in good financial shape going into the recession, especially compared with other large industrialized countries. Based on 2000 data--the latest available across countries--the financial net worth of all U.S. households was 365% of total disposable personal income. That was the highest ratio in the Group of Seven major economies.

This high level of financial net worth--which includes stocks, bonds, and bank accounts, but excludes real estate--means that "there is little evidence Americans were particularly stretched" during the recession, observes Steinberg. And while new data from the Federal Reserve show that financial net worth dropped about 8% in 2001, that's not enough to change his conclusions. "The balance sheet is frankly, even after the bear market, in excellent shape," says Steinberg.

Despite the attention given to the borrowing of U.S. consumers, they are not terribly debt-laden when compared to other countries, he notes. Among the G-7 countries, Americans had the third-lowest ratio of liabilities to disposable income. The liability ratio, Steinberg points out, was "highest for the famously thrifty Japanese and Germans." On the asset side, Americans benefited from the long bull market, even taking into account the downturn of the last two years. In contrast, Japan's bear market wiped out about half of Japanese households' net worth.

To be sure, Steinberg believes U.S. households will have to save more to make up for more modest gains in the stock market. He forecasts a 2% increase in the official savings rate during the next couple of years. Nevertheless, he thinks spending will remain healthy because job growth will raise incomes. Report cards for hospitals are intensely controversial. Advocates say that they help patients find the best doctors and hospitals and push health-care providers to improve quality. Critics respond that report cards encourage hospitals to reject sick patients, who are harder to treat and drag down performance scores.

A new study sides with the critics. It's based on the experience of elderly heart attack victims in New York and Pennsylvania, states which began to publish mortality rates for coronary bypass surgery for particular hospitals and surgeons in the early 1990s. The authors are David Dranove and Mark A. Satterthwaite of Northwestern University's Kellogg School of Management, Daniel P. Kessler of Stanford University's Graduate School of Business, and Mark McClellan, a member of the President's Council of Economic Advisers.

The researchers found that after report card programs began, hospitals in New York and Pennsylvania were more likely to do bypass surgeries on relatively healthy patients. That improved their marks, just as critics predicted. There is also some evidence that they were less likely to accept sick patients for bypass surgery.

The report cards led to a rise in Medicare costs, the study suggests. One reason is that hospitals did bypasses on patients who otherwise would have gotten cheaper angioplasty surgery--a switch that didn't improve outcomes. Another is that sick patients who went untreated wound up back at the hospitals with more heart attacks.

The authors caution that "our results do not imply that report cards are harmful in general." They investigated only the short-term effects of report cards and say that the long-term effects could be better. They also point out that the report cards can be changed to reduce hospitals' incentives to alter patient care in counterproductive ways. It's conventional wisdom among economists that Europe isn't as good at generating jobs as the U.S. is. Some evidence: Only 64% of the adult population under the age of 65 is employed in Europe, compared with 74% in the U.S.

But according to a study by Richard B. Freeman, a Harvard University economist, and Ronald Schettkat, an economist at the Netherlands' Utrecht University, the lower employment-to- population ratio in Europe partially reflects that Europeans perform work at home for themselves, such as food preparation, that Americans pay others to do. In the early 1990s, Americans spent 59% of their work time in paying jobs outside the home, while Germans spent 52% of their work time on work at home for themselves.

That difference is even greater for women. American women spent 44% more time in market activities than German women in the early 1990s, while German women spent a third more time in unpaid home production than American women. Data not in their study show that in 2000, just 54% of women in the European Union worked outside the home, vs. 68% in the U.S. (chart).

Wages and taxes also come into play. In Europe, even many low-skilled workers have good educations and demand high pay. If a woman can earn only a bit more by working outside the home than she would have to pay a cleaning lady, "it doesn't make sense to hire the cleaning lady," points out Freeman. Also, taxes on a second earner's wages are so high in Europe that it often doesn't pay for both members of a couple to work.

By Margaret Popper


Steve Ballmer, Power Forward
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