Economics and Poverty

My aunt and I got into a discussion about economics and poverty. I was essentially coming from the right and she was essentially coming from the left. I just sent her an email on the topic and took the relevant excerpts for this page. Maybe this will be some debate fodder for us on this page.

Email snippet:

...Also, I was thinking about our discussion of poverty
so I thought I'd do a little looking around.

I came across two facts that when taken together argue
against your structural model and for my behavioral
model (I gave the URL and snippets below). The first
snippet states that poverty rates for single mother
families have stayed above 35% since 1959. The second
snippet states that overall poverty moved from 22% in
the late '50's to 12% in 1969 where it has hovered
around since then. If our current poverty is fully a
structural issue, then why has there been a general
poverty reduction but not a corresponding reduction of
single mother poverty? It would seem that the 10%
drop in overall poverty was structural (probably women
taking jobs, birth control advances and acceptance and
families going to dual income), that I would grant
you, but we were talking about today's poverty not the
poverty of the 1950's.

Secondly, I was thinking about your statement that,
paraphrasing, "Are we saying that our parents could
live on one income but we can't?" That stuck with me
and I couldn't figure out why it bothered me until I
remembered a discussion I had with a feminist econ
student at the U of C a few years back. She had
reminded me that the stay at home mom worked at many
functions that raised the family's quality of life,
extended resources, helped in child rearing, etc, etc,
and that these are functions that modern 1 parent
families do without (lower quality of living) or have
to pay for (higher bills). She gave me a academic
journal article, sorry I can't remember a citation,
that placed a stay at home mom's economic contribution
at something like 60% of an average yearly wage if the
family had two kids. She also pointed out that this
contribution went up with each additional child that
the family had. So, given this point, I feel that a
generation or two ago, they didn't live on one income,
they lived on aprox. 1.6 incomes. That is why there
is a significant drop in income and quality of living
when you go from two parents to one parent regardless
of whether they both worked outside of the home or
not.

In a general sense, I feel obliged to try to help the
poor both for moral but also practical reasons.
However, let us search out the true causes of poverty
and not lay the blame on "trickle down economics" or
some other bogeyman when the answer may be as
simple as the number of productive adults per family
unit or the number of new poor immigrants who take
some time to make it to the middle class (this is not
to say I'm anti immigration, I think this influx
serves an extremely useful function for both parties,
the same as it always has in our history).

While there isn't anything intrinsically wrong with
children out of marriage and single parent families
(to my mind anyway) there is something instrinsically
wrong with making choices that negatively affect the
children you decide to have.

To go back to an old battle in the culture war, that
is why Murphy Brown was a stupid target for
conservatives when Quayle was trying to make points.
Murphy Brown could afford a full time caregiver, could
afford anything the kid needed, there was nothing
wrong with her (fictional) choice. While it would
seem mean, cruel, and generally conservative to point
this out, a seventeen year old high school student
with a kid doesn't realistically have the same options
as an older and richer woman. She should make her
choices accordingly or she (and her kids) shall
suffer. No matter how many self help books they read
or how large their support group is, the only
meaningful empowerment is financial in this context.

Reference citation and snippet:

From http://www.ssc.wisc.edu/irp/faqs/faq3.htm:

Snippet 1: Of all family groups, poverty is highest
among those headed by single women with children under
18 years (Table 2), especially if they are African
American or Hispanic. Such families are much more
likely to be poor than other families with children or
families with aged members. The poverty rate for
female-headed families has remained above 35 percent
since 1959. In 1998, 38.7 percent of such families
with children were poor, compared with 8.5 percent of
families in which males were present.


Snippet 2: In the late 1950s, the overall poverty rate
for individuals in the United States was 22 percent,
representing 39.5 million poor persons. Between 1959
and 1969, the poverty rate declined dramatically and
steadily to 12.1 percent. As a result of a sluggish
economy, the rate increased slightly to 12.5 percent
by 1971. In 1972 and 1973, however, it began to
decrease again. The lowest rate over the entire
24-year period occurred in 1973, when the poverty rate
was 11.1 percent. At that time roughly 23 million
people were poor, 42 percent less than were poor in
1959.

In 1975 the poverty rate increased to 12.3 percent.
It then oscillated around 11.5 percent for the next
few years. After 1978, however, the rate rose
steadily, reaching 15.2 percent in 1983. In 1998, the
last year for which data are available, 12.7 percent
(34.5 million people) were poor.

Teenagers consuming one-fourth of the nation's alcohol

According to an old New York Times article, a Columbia University study that produced an often repeated sound bite about teenagers consuming one-fourth of the nation's alcohol used faulty statistical methods to arrive at that particular statistic. This is an excellent case of "figures don't lie, but liars do figure"--the researchers oversampled young people in their poll by a factor of two (out of just over 25,000 recipients, they included 10,000 people between the ages of 12 and 20) and then failed to adjust the data to reflect the skewed sample. The real figure is about 11 percent. My knowledge of statistics is pretty shaky, but even I know the basic rules of sampling; this kind of sloppy math is absolutely inexcusable.

Of course, no one's going to be ashamed of having made such a mistake, because it succeeded in bringing public attention to the "social problem" of teenage drinking. Welcome to the "it's-the-thought-that-counts" school of leftist social science. The article cites several other statistics, including percentages of teenagers that reported drinking any alcohol in the past month (about 40 percent) and that engaged in binge drinking (about 7 percent). I'd like to know what percentage of those occasional drinkers and binge drinkers actually proceed to full-fledged alcoholism later in life, but I guess that's too much to ask.

The Poor Standard of Standard & Poor's

How the S&P 500's bad bubble-stock picks have cost investors billions.
By Daniel Gross Posted Thursday, Aug. 1, 2002, at 9:55 AM PT

For decades, investors have regarded the highly diversified Standard & Poor's 500 as a safe place in which to plow long-term investments. For most of the '90s, Americans were hectored to invest their money in S&P 500 index funds. Champions of the S&P 500 boasted incessantly about how S&P index funds crushed most mutual funds and stock pickers, all while charging lower management fees. But in the past two years, the safe S&P 500 has proved to be even more dangerous than the rest of the market. While the Dow is off 26.6 percent from its 2000 peak, the S&P 500 is off a whopping 40.6 percent.

The index is one of the more unlikely villains of the bubble. Despite perceptions, the index is not a passive investment vehicle. Instead, S&P is constantly choosing new stocks and booting old ones. And in the past few years, S&P's modus operandi—which receives surprisingly little scrutiny—led it, essentially, to recommend that investors buy highly speculative companies at or near their tops.

Standard & Poor's traces its roots to 1860, when Henry Varnum Poor, author of the definitive History of Railroads and Canals in the United States, started supplying financial data to investors. His company began to rate bonds in 1916 and merged with Standard Statistics in 1941 to form S&P. Since 1966, it has been part of the McGraw Hill empire, which also includes Business Week.

S&P has compiled an index of 500 leading companies in critical industries around the world since 1957. (Today, it includes only U.S. companies.) And while it typically doesn't get as much press as the Nasdaq or the Dow, the S&P 500 is far more important than either. Because of its breadth and diversification, the S&P 500 is the crucial benchmark for professional investors. Investments by insurance companies, pension funds, college savings funds run by states, and public employee pension funds are either invested in the S&P 500 companies or mimic its makeup closely. "The S&P 500 is used by 97 percent of U.S. money managers and pension plan sponsors," S&P's Web site proudly notes. "More than $1 trillion is indexed to the S&P 500." (That sum is almost certainly lower now.) About 8 percent of the shares of every S&P 500 stock are held by index funds. As a result, S&P's eight-person Index Committee, which selects the companies that enter and leave the S&P 500, is a far more influential stock picker than Warren Buffett or Fidelity manager Peter Lynch.

When a company merges with another index company, or is acquired by a foreign concern, or files for Chapter 11, the S&P committee automatically deletes it. And some companies simply wither away to the point where the committee—which remains anonymous to forestall lobbying—determines them to be too insignificant to merit inclusion.

Between 1990 and 1994, the committee made an average of about 13 changes each year. But with the surge of merger and acquisition activity in the late 1990s, the need for deletions rose. Between 1996 and 2000, the committee changed an average of 40 companies each year. In 2000, a record 58 changes occurred.

The Index Committee, which meets regularly to evaluate potential targets for inclusion, is guided by several long-standing criteria. Companies added are supposed to be representative of the American economy. They should have market capitalizations of about $4 billion or more and should have the largest market values in their sectors. They must also show four consecutive quarters of profits. The committee also uses new additions to ensure that the index remains representative of a highly dynamic economy. If a health-care company leaves, it is generally replaced by a health-care company. But if a company in a declining industry leaves—say a steel manufacturer—the committee might choose to replace it with a company in a rapidly growing industry, like software or telecommunications.

It's easy to see how the standards, which had generally served the index well, were affected by the bubble. Historically, company and industry market capitalizations have been highly correlated with their commensurate roles in the American economy. But that relationship went wildly out of whack in the late 1990s, as companies with relatively small revenues—Yahoo!, Amazon.com, Qualcomm, etc.—became worth far more than giant companies like General Motors and Sears. Suddenly needing to fill a large number of openings, the committee turned to these initiates.

By and large, dot-coms didn't make the S&P 500, largely because they couldn't report profits. But in 1998 and 1999, telecommunications, software, and fiber-optic companies started to trickle in; in 2000, that trickle became a flood.

AOL was arguably the first New Economy stock granted entree into the S&P 500. It entered at the close of 1998, replacing Venator, the parent company of Foot Locker. Network Appliances entered on June 24, 1999, followed soon after by Qualcomm on July 21, Global Crossing on Sept. 28, and Yahoo! on Dec. 7. The tech-tilted makeover accelerated throughout 2000.

The problem was not that these companies were added—it was clear that they represented an important part of the economy—but when they were added. S&P essentially took many of these speculative companies at or near their tops. When Yahoo! came in, it traded at an astronomical 228 (it's now at 13); Qualcomm traded at 159.75 when it was initiated into the club, and now it trades at 27.

S&P also contributed to the frothiness surrounding these stocks. When S&P announced an addition, it became clear that every public fund that uses the S&P 500 benchmark would have to buy that stock on the date of its inclusion. Guess what that did to the fortunate stocks?

On the day Yahoo! joined the S&P 500, it rose 67 points. And in the week between the announcement and the actual inclusion, Yahoo! rose 136 points, or 64 percent. According to a 2000 study by Salomon Smith Barney, stocks selected for inclusion outperformed the S&P 500 by 7.7 percent in the period between the announcement and the inclusion. The net effect: S&P 500 mutual funds—that is, you—effectively bought these new stocks at artificially inflated prices.

Some of the moves the committee made in 2000 turned out to be enormously bad for S&P investors, adding volatile, incredibly overpriced stocks to the index. On Jan. 28, 2000, Consolidated Natural Gas was replaced by Conexant—then an $88 stock, now a $2 stock. On March 31, auto-parts company Pep Boys was replaced by Veritas Software. On May 4, out went Reynolds Metals and CBS, in came Sapient (a $102 stock) and Siebel Systems. On July 26, JDS Uniphase subbed in for Rite Aid. And on Nov. 3, PaineWebber was swapped for Broadvision. Of the 58 stocks entering the index in 2000, 24 were Nasdaq stocks.

Joining the S&P 500 conferred a greater legitimacy on the companies and brought in a whole new class of institutional buyers who, by virtue of their mandate to follow the S&P 500, had to own the newly selected stocks. By virtue of their mandate to follow the S&P 500, they also had to hold them all the way down.

Throughout 2000 and 2001 many of the multibillion-dollar new initiates plummeted and were unceremoniously ejected from the index. Sapient, for example, was booted out after less than two years, having lost 98.4 percent of its value. Broadvision, worth $23 billion at its peak (it's now worth just $98 million), got axed after just 10 months. Conexant got disconnected last June, 30 months after its inclusion.

Investors who plowed funds into the S&P 500 thinking they were getting a conservative barometer have been sorely disappointed. Sure, the S&P 500's performance hasn't been as abysmal as the Nasdaq's—off 74 percent from its 2000 peak. But because the S&P 500 dictates the investments of millions of investors, its decline has been far more destructive.

Big Boom, Weak Profits

Revised figures show Corporate America's earnings were a lot skimpier in the last expansion and were already well into their slide by 2000

Trustworthy numbers are hard to come by these days. Corporations such as AOL Time Warner (AOL ), Qwest Communications (Q ), and WorldCom are under investigation for accounting problems. The reputation of the accounting profession is in shambles. And investigators in Congress and the New York State Attorney General's office have turned up e-mails confirming the long-held suspicion that analysts are pressured to write favorable reports about the companies they follow.

The one beacon of honesty left seems to be the government statistical agencies -- and that's what makes the latest report from the Bureau of Economic Analysis so important. The gross domestic product report, released on July 31, showed that last year's downturn was deeper and longer than first believed. The economy shrank for the first three quarters of the year, rather than the single quarter that the numbers originally showed.

That removes any doubt that the U.S. experienced a true recession in 2001. Moreover, the recovery so far in 2002 has been weaker than expected. First-quarter GDP growth, first thought to be 6.1%, has been revised down to 5.0%, while the second quarter clocked in at only 1.1%, less than half the 2.3% economists had expected.

REAL PRODUCTIVITY GAINS. But more important, the report revises the economic data for 1999, 2000, and 2001, giving a far clearer sense of what really happened during the New Economy boom and bust. The good news is that despite the downward revisions, the productivity gains of the New Economy were real. Since 1995, productivity rose at a 2.5% annual pace, according to BusinessWeek's analysis of the BEA revisions. These numbers might change a bit when the Bureau of Labor Statistics releases its official productivity stats on Aug. 9. While slightly lower than the previous 2.6% rate, that's still a big jump over the 1.5% rate that prevailed from 1980 to 1995.

The bad news: Corporate profits were much weaker than first believed. They've been revised down a total of $143 billion, or 6%, for the three years from 1999 to 2001. While the revisions were concentrated in telecom, utilities, and business services, the problem went well beyond a few bad apples such as Enron Corp. and WorldCom Inc.

Profits, rather than peaking in 2000 as everyone thought, actually hit their high point in the third quarter of 1997, and have been bumping lower since, especially outside the financial sector. Instead of going towards profits, the benefits of faster productivity growth flowed out the door to workers and managers as higher wages and lucrative stock options.

PRESSURE TO CUT. That means the stock market was even more irrationally exuberant in 1999 and 2000 than anyone realized, skyrocketing in value even as profits tailed off. This has big implications for the future. The new data from the BEA suggests companies are going to have to go through a prolonged period of rebuilding earnings to make up for the deep profit decline.

In a world where demand is weak and it's tough to raise prices, that can only mean one thing: continued intense pressure on companies to hold down labor costs by laying off workers, reducing wage increases, and restricting the use of stock options. Indeed, companies such as Avaya, Providian Financial, and Alcoa have announced job cuts in recent weeks.

In 2000, the notion that Corporate America was in the midst of a profits recession would have seemed like heresy. Companies were reporting respectable increases in earnings per share, with the BusinessWeek profits scoreboard showing a 17% gain in the second quarter of 2000 over a year earlier. Federal Reserve Chairman Alan Greenspan lauded the profit performance of U.S. corporations. Even the government's initial estimate pegged corporate profits at a record $964 billion in the second quarter of 2000, a rise of 15% over a year earlier. That made the sharp rise in stocks at the time seem at least plausible, if not fully rational.

TAX DATA KNOWS ALL. But over time, the government statisticians refined their profit estimates, mainly using information from tax returns submitted to the Internal Revenue Service. The IRS data has several advantages.

First, manipulating tax return data is harder than distorting earnings statements, since there is no such thing as a pro forma tax return. Second, the tax data for profits, unlike the financial reports for investors, treat the cost of exercised stock options as an expense. Finally, tax return data includes all companies, from money-losing startups to the biggest multinationals.

With each successive revision, corporate profits have dropped. The declines for nonfinancial corporations were especially dramatic. In March, 2001, the BEA originally reported profits for 2000 of $631 billion. Then in June, it revised the number down to $550 billion. The latest release shows only $462 billion, a number well below the overall profits figure for the preceding several years. Profits for 2000 now appear to have fallen 11% below the revised 1999 total of $518 billion, and 17% below overall 1997 profits of $556 billion--the year they peaked.

WEAKNESS REVEALED. It may well be that the bad news is not over, either for 2000 or 2001. As companies such as WorldCom officially restate their profits, they will refile back tax returns, which will eventually show up in the government figures. And the BEA's profit numbers for 2001 are vulnerable to further revisions as more complete tax data become available.

The profits revisions show just how weak many companies became in recent years. But how did so many fall into such bad shape? A lot of startups ran up big losses during the tech frenzy of 1999 and 2000. Not surprisingly, the industries with the biggest downward revisions in profits were business services -- most of the dot-com startups -- and new telecoms. Webvan had $438 million in operating losses in 2000, PSINet lost $735 million, and Global Crossing lost a whopping $1.4 billion. Remember Pets.com? It lost nearly $100 million in 2000 before closing down.

Moreover, the BEA also subtracts the value of exercised stock options, which can be enormous. For example, Kenneth Lay and Jeffrey Skilling of Enron exercised stock options worth $185 million in 2000 -- an expense that shows up as part of the government's overall profit data but not in reported earnings. In telecom, top executives took home at least $500 million from exercised stock options and other long-term compensation in 2000 alone, and perhaps much more.

RISING WAGES. Finally, companies were simply paying a lot of money to managers and workers. Of course, part of this was the outsize compensation packages executives got. But the biggest cost was the rising outlay for ordinary workers. During the boom years, companies were hiring people at a frantic pace and paying them more and more.

Surprisingly, the wage increases continued even into the recession. From 1997-2000, real wages rose by 5%. And since the end of 2000, real wages have risen by another 3%. All told, from the first quarter of 1997 to the first quarter of 2002, compensation to workers and executives, including exercised stock options, rose by $1.4 trillion. By comparison, corporate profits were flat.

The recession in New Economy profits helps explain why there was so much accounting chicanery during the boom years. Companies were under pressure to show earnings growth, even while their real profits were declining. The hidden weakness also explains the devastation in the stock market over the last couple of years. In effect, stock prices had been soaring for three years, from 1997-2000, while earnings had actually been falling. As a result, it took a wrenching bear market to get stock values back into line with profits again.

NO MAGIC ELIXIR. But the readjustment won't likely stop there. Profits at nonfinancial corporations are still only 8% of corporate output, way below the 11% in 1998. To get profit margins back up to a normal level, companies will have to hold labor compensation flat for at least another year. That likely means cutbacks in health benefits, smaller wage increases, and fewer jobs.

Still, there is no sign in the revision that the central achievement of the New Economy -- faster productivity growth -- is disappearing. Indeed, the latest numbers strengthen the case that output per worker is still rising at a full percentage point faster than it did in the previous 15 years.

But the new numbers also show that productivity growth is not a magic elixir. Just as the U.S. economy experienced high productivity growth with flat or falling profits, the pendulum may swing back the other way, and we may be entering a period of high productivity growth combined with a weak labor market.

One Nation, Under Conservative Judges

Thanks to the Pledge flap, Bush may now be able to push through the Senate all the right-leaning jurists he wants

What in the name of Zeus was that California appeals court thinking when it struck down the Pledge of Allegiance for allegedly violating the separation of church and state? The ruling has since been suspended pending further judicial review, but the repercussions could be far more dramatic than the appellate justices ever imagined.

The original 2-1 decision by a three-judge panel on June 26 wasn't just politically tone-deaf. In trying to strike a blow for civil liberties, the circuit court widely viewed as the most liberal in the U.S. (and one of the two justices striking down the Pledge was a Nixon appointee!) may have just handed the right wing its biggest public-relations victory since the flag-burning decision more than a decade ago. And it will likely give President Bush carte blanche to stack the federal bench with all the conservative judges he wants.

Bush was ready as soon as the decision was announced: This is why the federal courts need common-sense conservatives, the President declared in speaking out against the ruling. You could almost hear the theme that Republicans will now use from now until Liberal Doomsday: America needs reasoned jurists, not judges like those San Francisco radicals who would ban the Pledge of Allegiance and allow Rastafarians to smoke marijuana on federal property (another recent ruling from this crew).

SCURRYING FOR COVER. This is a no-brainer politically. Bush and his conservative allies have public opinion strongly behind them. According to a June 26-27 Fox News/Opinion Dynamics Poll, 83% of Americans disagree with the decision, while only 12% approve. And it's not just Republican conservatives who decry this latest round of judicial activism. Democrats give the ruling a big thumbs down, 77% to 16%, as do liberals, 72% to 20%.

No wonder Democratic leaders were scurrying for cover as House Republicans launched into impromptu renditions of God Bless America on the Capitol steps. Democratic National Committee Chairman Terry McAuliffe quickly labeled the ruling "unfortunate" and called on the court system to "overturn this wrong-headed decision." Senate Majority Leader Tom Daschle (D-S.D.) teamed up with Republican Leader Trent Lott of Mississippi to co-author a bipartisan resolution to defend the Pledge of Allegiance on appeal.

An interesting historical question here is whether Congress was responding to the Red-baiting hysteria of the McCarthy period when it added the words "under God" to the Pledge of Allegiance in 1954. Indeed, the record of the floor debate at the time shows that the chief sponsors wanted to highlight the differences between "Godless Communists" and "God-fearing Americans." It clearly was political posturing, rooted in the era. But all that is history now.

AN HISPANIC THOMAS? Today's debate is post-September 11, when the nation feels threatened and with the federal bench facing an unprecedented vacancy rate that Supreme Court Chief Justice William Rehnquist calls a national "emergency." The Democratic-controlled Senate is holding up Bush nominees for close review, and Republicans have decried Daschle & Co. as obstructionists bent on slowing down the confirmation process -- or even trying to derail it completely. Now they can turn up the heat.

The big fight will be over the next vacancy on the Supreme Court, which could happen in a year or two. Liberals fear that Bush's strategy is to nominate a conservative Hispanic lawyer, similar in philosophy to Justice Clarence Thomas.

After the Pledge of Allegiance episode, imagine liberal Democratis in the Senate trying to block a conservative nominee from California or Texas. You can almost hear the retort already: Does America want a common-sense conservative or a Left Coast radical? Liberals have good reason to worry that the definition of "mainstream" may now become someone who loudly and publicly supports the Pledge of Allegiance, not someone who struggles with the legal nuances of abortion or civil rights, or privacy protections.

As they say in law school, bad facts make bad law. Now there's a corollary: Bad decisions make bad politics. That's just fine with Bush, however. He and fellow Republicans may have just gotten one issue, indivisible, that they never could have dreamed of.

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