Thursday, August 03, 2006
Aug. 3 (Bloomberg) -- Evelyn Dawson and Kevin Manning spent most of their working lives in the same town, living on their paychecks. They now find themselves on opposite sides of a widening wealth gap that increasingly defines American politics and the economy.
Dawson, 58, a former government worker, owns an expanding business in Roanoke Rapids, North Carolina. Manning, 36, supports a wife and three kids on a truck driver's wage, with nothing left for savings or to buy a house. ``I have pretty much always had to live paycheck to paycheck,'' he says.
Dawson was able to kick-start a second career because she had assets and specialized knowledge, two attributes driving a wedge between an upwardly mobile middle class and others trying to manage on meager income growth in less-skilled jobs. Household wealth grew six times faster than wages from 2001 to 2005, the biggest gap of any five-year period in half a century.
``It bothers me,'' former Federal Reserve Chairman Paul Volcker said in an interview. ``I tell you, I don't know why there hasn't been more discussion and more unhappiness about this because it's become quite distinct. For a long time now, if we believe the statistics, the average working guy does not have an increase in income.''
The divide is reviving protectionism in Congress, awakening a debate on the minimum wage, and making the Federal Reserve more sensitive to the risks of causing a collapse in financial and housing markets.
``Asset prices have never had such a powerful impact on the economy,'' Joseph Lavorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, said in an interview. ``Changes in wealth rather than income growth are a main reason why consumer spending and gross domestic product have both been so strong.''
Previously, income grew more or less in step with household wealth. From 1962 to 1966, a period of low inflation and robust economic growth, real private sector wages rose 27.5 percent while real net worth increased 23.6 percent, according to Bloomberg News calculations based on government data. In the five-year period ending in 1996, real net worth gained 15.6 percent while private wages grew 11.3 percent.
More recently, the gap between household net worth and wage growth has widened. From 2001 to 2005, the value of household assets minus liabilities rose 16.6 percent after inflation. Private sector wages rose just 2.7 percent.
Fruits of Success
In some sense, U.S. policy makers are confronted with the results of their own success at reducing trade barriers and keeping inflation low. As prices and economies stabilized, interest rates fell and house prices and stocks rose. Meanwhile, the spread of technology and better access to foreign labor suppressed wages for some Americans.
``Asset ownership is now the driving force behind income inequality,'' says Robert Reich, former U.S. secretary of labor and now a professor at the University of California in Berkeley. ``People with education and connections are doing better and better and accumulating extraordinary assets.''
In Roanoke Rapids, Dawson says she and her husband, who worked at a local paper mill, saved their entire working lives, acquiring a house, mutual funds and money in the bank. She started in her 20s with a life insurance policy, and later began putting away $50 a month. ``That was a lot then,'' she says. ``I just grew up and knew you were supposed to save.''
As a storied textile mill was shutting down in her home town in 2003, Dawson was starting a health care consulting business.
While wages are stagnant in the area and unemployment is 6.7 percent, her firm recently moved into new headquarters she built.
Link to GDP
Dawson's experience illustrates how growth in individual wealth has increasingly become linked to economic expansion. Lavorgna's research finds that, since 1997, increases in household wealth have moved in lock-step with growth in the U.S. gross domestic product 90 percent of the time. Americans have become more inclined to spend as their homes and stock portfolios rise in value.
It hasn't always worked that way. The correlation between household net worth and GDP was only about 20 percent in the decade prior to 1995, according to Lavorgna.
The wealth gap presents Fed officials with new risks. If housing values fall sharply after 17 consecutive interest rate increases, wealth-powered spending may fall off at a time when disposable incomes have grown only about 1.7 percent after inflation over the last year.
Less Dependence on Assets
``It is going to be a problem,'' says Lavorgna, who expects economic growth to slow to an annual rate of 1.9 percent in the fourth quarter. ``Now you are going to depend less on assets and good old traditional wage growth'' at a time when pay is ``moderating.''
The wealth gap helps explain why, after 19 consecutive quarters of economic growth and unemployment at a five-year low, a sizeable minority of Americans don't feel that well off. About half of Americans polled say the economy is doing poorly, according to a Los Angeles Times/Bloomberg News national poll of 1,478 adults conducted between July 28 and Aug. 1.
Labor economists call it the ``hourglass economy,'' with an educated, asset-owning middle class moving up and families with manual skills and fewer assets being shoved lower.
``Globalization is not win-win. In the last four to five years, countries have had jobless or wage-less recoveries or both,'' Stephen Roach, chief global economist for Morgan Stanley in New York, said in an interview. ``The pressure on the worker in an era of globalization is going to be increasingly an issue for the body politic.''
Manning sees his dream of starting his own truck service business slipping away because his paychecks barely keep up with inflation.
``People are willing to work for less,'' Manning says. ``It is really cutthroat.''
Manning's parents worked at the WestPoint Stevens Inc. textile mill, the site of a unionization movement featured in the 1979 film ``Norma Rae.'' The mill was shuttered in 2003 and his mother lost her job.
After working as a mechanic, Manning became a long-haul truck driver, earning about 28 cents a mile and missing his family after days on the road. Rumbling along U.S. interstates, he did his own market research on citizens band radio, chatting with other truckers under his handle, ``Hubcap.'' He discovered drivers needed a service stop somewhere between New York and Savannah, Georgia. Roanoke Rapids, located right off Highway 95, was an ideal location.
`Saw a Need'
``I always saw a need to work for myself,'' he says during an interview at Ralph's Barbecue in Roanoke Rapids. ``I saw the need for this business.''
The ``biggest obstacle'' he says, is that he doesn't own his home or have savings that he can put up against a bank loan. ``It takes every bit that you make to make ends meet.''
Owning a business, he says, is the way to get beyond that.
``Right now it is just a dream of mine,'' Manning says. ``But I am not going to give up on it.''
Dawson started her business after a 33-year career with the State of North Carolina, during which she rose to director of the Halifax County Department of Social Services, with a budget of $110 million and a staff of nearly 200.
When the state decided to privatize mental health care, she saw an opportunity.
``It just hit me: They have a lot of clients and not many providers,'' she said. ``I said, `I am going to find out more about this.'''
She and a friend started BriteSmilz Family and Community Connections in her remodeled garage in 2003. Her staff of 12 coordinates the work of about 100 consultants who manage about 500 cases, such as helping single mothers get their lives back on track. Her new 6,500-square-foot headquarters opened in July.
Economists say the wealth gap is already influencing policies. Republicans have made a clampdown on illegal immigration a top issue. Democrats want to raise the minimum wage. Five-year-old talks on tariff cuts at the World Trade Organization collapsed last month.
``In terms of trade protectionism, and immigration law, there is a lot of debate in Washington about the right answer,'' says Andrew Tilton, a former Treasury official who is now an economist at Goldman, Sachs & Co. in New York. ``The answer that is best for the U.S. economy may not be the best for the hardest hit parts of the country that are seeing declining wages.''