Stephen J. Rose's Rebound foresees America Unbound

Stephen J. Rose, a think-tank economist who worked in the Clinton administration, has drawn ire on the left because he challenges key articles of economic faith: that the American middle class has remained static for three decades; that Americans are "drowning in debt"; that they shoulder far more risk than they did a generation ago.  His new book, Rebound: Why America Will Emerge Stronger from the Financial Crisis, consolidates and develops these theses, which boil down to John McCain's  ill-timed campaign mantra: the fundamentals of our economy our strong.

In Rose's view, financial industry recklessness threw sand in the gears (his cliche) of a rip-roaring economic machine. His prognosis for the U.S. economy in the wake of the financial crisis was well summed-up by a David Brooks column largely based on his findings (with which I picked a rather notorious bone): Relax, We'll be Fine. (That is, if we enact effective financial reform, as Rose simply assumes we will.)

Rose is in his element in the book's middle chapters, in which he parses Census, Current Population Survey and other data on Americans' incomes and wealth to debunk what he defines as five myths: that all income gains in the last thirty years have gone to the rich; that the middle class is declining; that good jobs have been disappearing; that international trade is to blame; and that employee benefits are disappearing.

Some of these myths he dispatches more thoroughly than others; his argument with liberal economists such as Jacob Hacker and Elizabeth Warren is often aptly characterized as a glass half empty/half full dispute because at times he emphasizes different aspects of a data set that is not in dispute.  This is almost literally true when Rose points out that "54 percent of households had no credit card debt after paying their monthly bill; this means that the median credit card debt of Americans is zero" (212). Okay -- it also means that almost half of Americans are paying double-digit interest rates on a credit card balance every month. More on this later.

To get a purchase on Rose's attack on the notion that the American middle class is shrinking, it's useful to work one's way backwards through his central claims. The vast majority of American retirees are satisfied with their retirement.  There is every reason to believe that Americans approaching retirement age are equally well positioned -- though Rose does acknowledge that the major decline in wealth caused by the financial crisis seriously dents this relative prosperity, knocking asset levels back to about 2004.  Those subject to the most income volatility -- prime age adults -- also have much higher incomes than oft-cited median income figures for all Americans would indicate.  While growing income inequality is a real problem (indeed, Rose takes credit for bringing it to national attention in 1983), its worst effects are concentrated among the least well educated; the majority of Americans who have at least "some college" have benefited substantially from the strong growth in GDP over the past four decades.

Among the facts Rose cites that run counter to the 'disappearing middle class' thesis:

• From 1979 to 2007, real GDP per person rose by 66%.  While households in upper income percentiles captured a disproportionate share of these gains -- income inequality did rise -- households at all income levels shared in them (p. 92).
• Since 1994, in a survey conducted every two years with little variation in results, between 62 and 68 percent of Americans said that they live better than their parents; only 10-15% said they live worse (p. 100).
• Adjusting census data on median household income for age (because adults under 26 and over 60 need less) and household size (since poor households tend to have fewer people, and more than half of Americans live in households in the two upper income quintiles) yields a more revealing and more prosperous portrait of typical household income. "Median income rises to $66,000 when combining the effects of person-weighting rather than household-weighting, focusing on prime-age years, and adjusting for family size" (p. 111).
  
• According to data from the Panel Study on Income Dynamics (PSID), which has tracked Americans' household incomes over four ten-year periods beginning in 1967, 60%  of prime age adults (those who were never younger than 26 or older than 59 in the 10 years) had household incomes over $100,000 in at least one of the ten years from 1995-2004; 40% had incomes over $100k in at least three of those years; and the median size-adjusted household income for that period was $83,413 (p. 120).
  
• While the percentage of Americans in manufacturing jobs has shrunk dramatically, these jobs have been replaced mainly not by low-level service jobs but by managerial and skilled  professional jobs. While the percentage of workers in manufacturing/construction shrunk from 30.5% in 1960 to 18.4% in 2007, and in mining/agriculture from 6.3% to 1.6% in the same period, the share in the office sector rose from 34% to 43%, and of those in high-skilled services (health, education, communication) from 9.7% to 18.4% (pp. 140-143).
  
• The rise in the proportion of high-wage high-skilled job corresponds to improvement in average education levels. In 1960, only half of workers had a high school diploma, almost 30% had some college, and 10% had a college degree. "Today, these numbers are completely reversed": only 10% lack a high school diploma, 60%  have some postsecondary education, and 30% have at least a 4-year college degree.
• There was no golden age of defined-benefit pensions. Generally, the benefits of such a plan only surpass those of a defined-contribution plan for workers who stay 20 years or more with one company. Rose cites a study finding that 80% of workers would have higher benefits at retirement under a DC plan than under a traditional DB plan (p. 206).
  

Among the facts that Rose acknowledges, often just in passing, but never considers as a body to balance his portrait of a country in essentially robust economic health:

• The gains in education that drive the income gains he cites largely ended in about 1970; the college graduation rate for each cohort since that date has remained static at about 30%  (p. 232).
• Educational achievement the U.S. is determined to a shocking degree by family income. About three quarters of students in the lower three income quartiles either never take a college entrance exam or have combined SAT scores under 1000 (p. 233).
• Median male income has dropped since 1979 (while median female income has risen 54%) (p. 176).
  
• Income inequality has increased dramatically. The percentage gains in ten-year median income from the 1967-1976 period to the 1995-2004 period for households in the 90th income percentile were nearly triple those of households in the 10th percentile and double those of the 50th percentile (p. 120).
  
• Income volatility increased markedly about thirty years ago and stayed high.  In the PSID survey of income paths over ten years, the percentage of losers spiked upward while that of gainers dropped in the 1975-84 period; since then, the percentages have remained more or less stable (p. 118).
  
• Compared to the citizens of every other wealthy country in the world, astounding percentages of Americans go through periods in which they lack health insurance. Over a four-year period, only 71 percent of prime-age citizens (18-60 at the outset) had stable coverage; 19% of 18-64-year-olds are without coverage in a typical month.  Lack of insurance correlates closely with educational level (189-192).
• The average debt to disposable income ratio has risen from 74% in 1979 to 132% in 2005 and is presumably much worse now (though Rose does defuse the 'drowning in debt' meme with some pretty powerful counter-arguments: median household debt is under $28k; the spike in debt is an anomaly caused by the recent housing bubble; median credit card debt is under $3k; generally, the difference between medians and averages is very large in this area).
• Incomes and wealth have stagnated in the last decade, thanks to a) two market bubbles, b) soaring health care costs, and c) the bloated financial sector.
  

It's to Rose's credit that he dispassionately cites and parses data that bear both good news and bad news. What's missing, somehow, is an integrated theory that balances Rose's compelling portrait of the U.S.'s still-robust engines of economic growth with an equally full account of the main threats to future prosperity, e.g., the fact that the educational gains that have largely powered economic growth have slowed almost to a halt; that perhaps largely as a consequence, income inequality continues to grow; that effective financial reform is a highly fraught, international struggle in uncharted territory with powerful interests arrayed against it; and that indebtedness has indeed soared, even if the distress it generates is not as widely spread throughout the population as others claim.

Rose does offer a set of policy prescriptions, but they are perfunctory: improve education, pass effective financial reform, attain energy efficiency by "the judicial [sic] use of a cap and trade system that encourage the most cost-efficient systems to be adopted first."   His first two chapters, focused on the financial crisis and its aftermath, and his final chapter, offering policy prescriptions, are poorly written -- rushed surveys that read like undergraduate essays. We are treated to nostrums like this: "...we are not the Japanese, with their ten-year stagnation (the 'lost decade'), following their simultaneous crash of stock and housing prices. Americans are a much more 'can-do' optimistic bunch." And this: "Unfortunately, the financial industry acted as many adolescents do--they kept testing the limits until they found danger. In the end, this learning process is beneficial for adolescents" (pp. 222-23).  Sloppy sentence structure creeps in: "Our views toward assisting young adults [as opposed to the elderly] are more ambivalent and President Clinton ended 'welfare as we know it'" (p. 238).  These chapters abound in dangling modifiers: "By making these programs open to men as well, families are better able to balance work and child and elder care" (p. 237). There are strange grammatical constructs: "By contrasts [sic], the 'optimists' base their views on the belief in Americans to bounce back from adversity" (240).  The book, published by St. Martin's Press, is terribly edited, and my copy came with large ink blots obscuring text in the index pages.


Fortunately, Rose is a different writer when he's doing what he does best -- parsing data about Americans' income, wealth, education levels, occupations, debt levels, and access to health insurance.  He x-rays for us at least the skeleton of an enduringly healthy national  economy, and he has much to teach his fellow Democrats in particular about what's not the matter with Kansas. Democrats like to moan that they lack the message discipline and unity of action that come naturally to Republicans.  If they can engage with Rose without drumming him out of the party, as Republicans tend to do to those in their ranks who question core tenets, they will reap some benefit from their relative open-mindedness.