Subject: [Homestead] James is absolutely correct, personal income scene changing
Date: Sat, 09 Oct 2004 12:21:57 -0700
For the thinking man, and economic broken-field-runner chaos equals
oppurtunity. For the workforce who believe if you work hard and are
productive you will be adequately rewarded by an employer, life is going
to be hell.
THE NEW DEAL
If America Is Richer, Why Are Its Families So Much Less Secure?
*For 25 years, government and business have forced workers to take on
mounting risk. A Times analysis shows ever-larger swings in household
incomes.
"This is a crazy notion . . . that somehow . . . the government of the
United States can make it . . . unnecessary for any of its citizens to
face any difficulty, to run any risk."
*Charles A. Eaton*
/Republican congressman from New Jersey, during the 1935 debate over
Social Security/
"We've allowed bankruptcy to become commonplace in America. Last year,
more people filed for bankruptcy than filed for divorce or were
diagnosed with cancer or graduated from college."
*Elizabeth Warren*
/Harvard Law School professor and coauthor of 'The Two-Income Trap'/
"There has been a shift toward people taking more risk on themselves . .
. and the economy has gained for it."
*Gary S. Becker*
/University of Chicago economist and Nobel laureate/
HORNELL, N.Y. -- By most conventional measures, Paul Fredo is an
American success story.
The son of a coal miner, he made almost $200,000 in the last year,
enough to place him in the top 2% of wage earners. As a financial
manager for the U.S. unit of Alstom, the French bullet-train maker, he
has lived an expense-account life, spending most nights in hotels and
jetting to meetings in Washington and Paris.
But look carefully at Fredo's circumstances and a less appealing picture
begins to emerge -- one in which, over the last 25 years, economic risk
has been steadily shifted from the broad shoulders of business and
government to the backs of working families like his.
By the time Fredo joined Alstom here last year, he had become an
itinerant executive, a contract worker brought in for a particular
purpose, then sent packing. "They tell me every Friday whether to come
back," the 57-year-old explained.
Between his last regular job as the chief financial officer of another
company and his hiring at Alstom, Fredo was unemployed for nearly two
years and saw his income decline by two-thirds. He has long been without
health benefits, holidays, paid vacation or job security.
"We come from the old school that you work hard and give it your all,
and the job will be there for you," said Fredo's wife of 35 years,
Donna. "It's different today."
From his perch several rungs down the economic ladder, Ron Burtless
sees the same forces at play -- forces that have caused his family's
income to swing sharply up and down.
Unlike Fredo, Burtless never aspired to the executive suite. Instead,
almost three decades ago, he reached for a union card and went to work
as an electrician at a Bethlehem Steel Corp. plant in Indiana. Until
recently, he seemed the very embodiment of Middle American stability,
with a $60,000 annual wage, two grown daughters, a red Ford pickup and a
five-bedroom suburban home.
But in a matter of just two weeks last year, Burtless' finances were
thrown into disarray when Bethlehem collapsed and, adding injury to
insult, he was badly hurt on the job and saddled with more than $90,000
in medical bills. Having fallen through cracks in the workers'
compensation system, he now ponders a wrenching question: "Am I going to
have to go bankrupt?"
In their own ways, the problems encountered by Fredo and Burtless can be
traced to the same source -- a set of economic policies shaped by
government officials and corporate executives intent on creating a more
prosperous America.
Starting in the late 1970s, the nation's leaders sought to break a
corrosive cycle of rising inflation and stagnating output by remaking
the U.S. economy in the image of its frontier predecessor --
deregulating industries, shrinking social programs and promoting a
free-market ideal in which everyone must forge his or her own path, free
to rise or fall on merit or luck. On the whole, their effort to
transform the economy has succeeded.
But the economy's makeover has come at a large and largely unnoticed
price: a measurable increase in the risks that Americans must bear as
they provide for their families, pay for their houses, save for their
retirements and grab for the good life.
A broad array of protections that families once depended on to shield
them from economic turmoil -- stable jobs, widely available health
coverage, guaranteed pensions, short unemployment spells, long-lasting
unemployment benefits and well-funded job training programs -- have been
scaled back or have vanished altogether.
"Working Americans are on a financial tightrope," said Yale University
political scientist Jacob S. Hacker, who is writing a book called "The
Great Risk Shift." "Business and government used to see it as their duty
to provide safety nets against the worst economic threats we face. But
more and more, they're yanking them away."
The yanking may be far from finished.
On the campaign trail this year, President Bush has made the case that
people are better off relying on themselves, rather than on business or
government, in case of trouble. Under the banner of the "Ownership
Society," the president has proposed a series of new, tax-break-heavy
accounts to let families pay for their own retirements, healthcare and
job training. He also has called for partially replacing the biggest of
the government's protective programs -- Social Security -- with
privately held stock and bond accounts.
Such arrangements might help people build up their personal assets. But
the approach also would expose them to even more economic risk than
they've already taken on.
*Leaps and Plunges*
Nowhere is the risk shift of the last quarter century more apparent than
in the widening swings in working families' incomes.
Although average family income adjusted for inflation has risen in
recent decades, the path that most households have followed has hardly
been a steady line upward -- the historical norm for most of the
post-World War II era. Instead, a growing number of families have found
themselves caught on a financial roller coaster ride, with their annual
incomes taking increasingly wild leaps and plunges over time.
In the early 1970s, the inflation-adjusted incomes of most families in
the middle of the economic spectrum bobbed up and down no more than
about $6,500 a year, according to statistics generated by the Los
Angeles Times in cooperation with researchers at several major
universities. These days, those fluctuations have nearly doubled to as
much as $13,500, the newspaper's analysis shows.
This growing volatility -- and the rising risk it signals -- has cut a
wide swath. It has touched families from the working poor to those, like
the Fredos, near the top of the earnings pyramid. The shifting of risk,
in other words, is proving to be a democratic phenomenon.
The Times' analysis is based on the Panel Study of Income Dynamics,
which is underwritten by the National Science Foundation and run by the
University of Michigan. Unlike most economic measures, which involve
taking snapshots of random samples of Americans at different times and
comparing them, the panel study has followed the same 5,000 nationally
representative families and their offshoots for nearly 40 years.
As such, it is the most comprehensive publicly available record of
family earnings and income in the world -- and it goes a long way toward
explaining why, even in the midst of a recovery such as the one
underway, so many Americans feel so uncertain about their economic
circumstances.
In using income volatility to gauge risk, The Times is taking a page
from the financial markets, where the chief measure of a stock's
riskiness is how much its price bounces up and down compared with
changes in a market measure such as the Standard & Poor's 500 index.
And just as with the stock market, there can be a big payoff.
Families in the economic middle saw their incomes, adjusted for
inflation, climb by almost one-quarter to an average of nearly $50,000
between the early 1970s and the beginning of this decade, the
newspaper's analysis shows. At the same time, middle-class families saw
their average net worth grow 40% to $86,100 in the last decade alone,
according to the Federal Reserve.
The rewards near the top of the economic heap have been even greater.
The average income of families in the upper 10% of earners nearly
doubled in the last generation to $130,400. Their average net worth
nearly doubled as well, according to the Fed, to $833,000.
Free-market advocates cite these pocketbook advances as proof that the
economy has been overhauled in the right way.
"On the whole, we have moved toward a freer market, a more competitive
economy and a richer one," said University of Chicago economist and
Nobel laureate Gary S. Becker. "There has been a shift toward people
taking more risk on themselves ... and the economy has gained for it."
But there is another, less sanguine way to view what has unfolded.
The more that a family's income fluctuates, the greater the chance it
will be caught in a downdraft when a crisis -- such as a layoff, divorce
or illness -- strikes. Then, it can be extremely tough to bounce back.
Over the last three decades, working families have faced ever-changing
-- and, for the most part, increasingly more perilous -- risk-reward
bargains.
During the 1970s, families in the economic middle enjoyed a
comparatively favorable run. Although their incomes generally swung up
or down as much as 16% a year, they ended each year an average of 2%
ahead of where they began. The result by the decade's close was that the
reward of extra annual income had more than covered the potential loss
from a single year's sudden plunge.
But the story during the 1980s and early 1990s was basically the
reverse. The volatility of families' income nearly doubled to as much as
30% a year. But now, instead of growing amid all the ups and downs,
average family income dropped at an annual rate of 0.3% in the 1980s and
an even steeper 2.3% in the early '90s. The bottom line: more risk for
less reward.
Although volatility remained high in the late 1990s, with typical annual
swings of as much as 27%, incomes finally began to grow again, improving
families' odds of being able to get ahead. But the good times didn't
last. Since 2000, incomes have reversed course and fallen about 1% a
year, according to recently released census figures. In other words,
things are back to the unattractive equation of more risk for less reward.
A separate analysis by Hacker, the Yale political scientist, found even
more dramatic changes in income swings. In a study published in May,
Hacker and a colleague reported that income volatility among households
in the University of Michigan database had more than doubled between
1973 and 1998. The pair concluded that at its peak in the mid-1990s,
volatility was roughly five times greater than in the early 1970s.
"The incomes of American families have grown more unstable over the last
generation," said Johns Hopkins University economist Robert A. Moffitt,
who along with Boston College economist Peter Gottschalk pioneered
techniques for analyzing earnings volatility more than a decade ago.
"All other things equal," added Moffitt, who assisted The Times with its
analysis, "rising income instability suggests that families from the
working poor to those fairly far up the income distribution are bearing
more economic risk."
*Protector of Last Resort*
It was not always so.
With workers' compensation, welfare, unemployment benefits, Social
Security, Medicare, workplace rules, environmental regulations, product
liability laws and more, government officials spent most of the 20th
century adding to the economic protections that Americans could count on
-- and reducing the risks they had to tackle alone.
"State and federal lawmakers continually expanded the circle of public
risk-management programs ... to include workers, the elderly, consumers
and, in the end, just about everybody in some form or another," said
David A. Moss, a Harvard University economic historian whose book "When
All Else Fails" traces Washington's role as a protector of last resort.
Not everyone favored these developments. During the 1935 congressional
debate over Social Security, one House member, Republican Charles A.
Eaton of New Jersey, fumed: "This is a crazy notion ... that somehow ...
the government of the United States can make it ... unnecessary for any
of its citizens to face any difficulty, to run any risk."
But so strong was the conviction that working families needed
protection, and so firm the consensus that government must help provide
it, that leaders of virtually all political stripes sounded as if they
were reading from the same script. It would remain this way from the New
Deal programs of the 1930s through President Nixon's push for national
health insurance and expanded unemployment benefits.
However, by the late 1970s and certainly by Ronald Reagan's election in
1980, new notions began to take hold, ones that turned many an
established view about the needs of working Americans on its head.
The sense that something had to change -- and that the free market was
the answer -- was fed by a variety of factors: fear that American
business was being overtaken by Japan; concerns that the 1970s
bankruptcies of Lockheed Corp., New York City and Chrysler Corp.
betrayed some deep flaw in the U.S. economy; the influence of economist
Milton Friedman, author George Gilder and Wall Street Journal editor
Robert Bartley; and Reagan's sunny conservatism.
"Government is not the solution to our problem," the new president
famously declared. "Government is the problem." Safety nets that were
designed to help people were now said to be ensnaring them. Economic
upheaval that was long thought to hurt people was now praised for
sifting winners from losers. Ordinary Americans who were once simply
seen as workers were now regarded as entrepreneurs and investors as well.
Along the way, wittingly or not, they became something else too: huge
risk takers. Consider:
Government used to provide substantial help in coping with joblessness.
In the mid-1970s, jobless workers could collect up to 15 months of
unemployment compensation. By last December, Congress had pared the
program to just six months. Additionally, federal legislation in 1978
and 1986 effectively reduced the value of benefits by making them
taxable. And state eligibility restrictions imposed in the late 1970s
and early '80s shrank the fraction of the workforce entitled to collect
benefits from about one-half to a little more than one-third. Of the 8
million people who were unemployed last month, only 2.9 million were
collecting benefits.
The minimum wage was once the government's chief means of ensuring that
"work pays" -- that those willing to head to a job each day would make
enough to live on. For decades, Democratic and Republican
administrations alike maintained the minimum wage at about half of
average hourly earnings in the U.S. But starting in the early 1980s, the
minimum wage was allowed to slip. At $5.15, it is now only one-third of
average hourly earnings, its lowest level in 50 years.
Washington once sought to help people adjust to global competition,
industrial restructuring and technological change by offering job
training. Twenty-five years ago, the federal government spent $27.3
billion annually (in 2003 dollars) through the Comprehensive Employment
and Training Act, or CETA. Even if one doesn't count CETA's "public
service" jobs, which were widely criticized as boondoggles, it was still
spending $17.1 billion. By contrast, the government now spends about
$4.4 billion on CETA's successor, the Workforce Investment Act. "It's
largely a place holder," said Anthony P. Carnevale, an authority on
education and training who was appointed to major commissions by
presidents Reagan and Clinton. "It gives politicians something to point
to but doesn't do much good."
Welfare was created to protect poor women and children, but by the late
1970s a growing chorus of analysts complained that the system had
backfired by fostering a culture of dependency. In 1996, President
Clinton and a Republican-controlled Congress approved a "work first" law
that has cut welfare rolls by one-half and reduced inflation-adjusted
welfare spending by at least one-third, or about $10 billion a year. On
balance, the changes appear to have benefited people who can find jobs
and hold them. But those who can't work or have lost their jobs can
often find themselves in far worse shape. Twenty-five years ago in
California, a mother of two who depended on welfare collected about
$15,000 in cash assistance and food stamps. By last year, a woman in the
same circumstances brought in $3,300 less, in inflation-adjusted terms.
"Washington," said Hacker, "has been in a quarter-century-long retreat
from what was once one of its primary responsibilities: helping provide
economic security."
*Upward Striver*
Paul Fredo was born in a Pennsylvania coal town called Spangler to a
father who lost his mining job to automation; his pension, according to
Fredo, to union corruption; and, ultimately, his life to black lung
disease. The son was determined to have an easier go of it.
Fredo lifted himself up the way many poor kids do: He joined the
military. He spent four years in the Air Force, including a stint in
Vietnam, then went on to the University of Pittsburgh, studying
accounting at night.
During his early career, he worked for a dairy, a nuclear waste
processor and a company that sold tire-making equipment. His Social
Security records show that his salary moved progressively higher. He
earned $7,800 in 1970, $24,500 in 1980 and $51,300 in 1990.
By 1985, at age 37, he had snared a vice president's title. "I'm going
up the ladder," he remembers thinking. He and Donna picked out a design
from a Ryan Homes catalog and had a house built along the Ohio River
north of Pittsburgh -- a blue aluminum-and-brick colonial with four
bedrooms, two-and-a-half baths and a 15-year mortgage.
Fredo's income began to dance around during the 1990s as more and more
of it came in the form of bonuses rather than straight pay -- up $25,000
one year, down $5,000 or $10,000 the next.
Still, by 2000 Fredo was pulling in more than $160,000 annually. And he
thought he was in line for the top spot at steel-plant builder
Voest-Alpine Industries Inc., where he had been chief financial officer
for eight years, helping the company grow from 14 employees to 450.
But in October 2001, as the steel industry swung from boom to bust,
Voest-Alpine began to winnow its executive ranks. Instead of a
promotion, Fredo was handed a pink slip. The setback seemed to stun
family and friends even more than Fredo himself.
"I called my fiancee and said, 'Dad's been downsized,' " remembered
Fredo's son Stephen. "She said, 'Did the company go under?' "
Don Battaglia, a Pittsburgh computer consultant who has worked for
Fredo, was equally incredulous. "I was convinced he'd be the guy who
turned out the lights," Battaglia said.
The Fredos quickly made adjustments. They canceled plans to trade in
their 1998 Chrysler sedan. They drew up a bare-bones budget for
groceries, utilities, Christmas gifts and an occasional permanent for
Donna's hair. They started collecting buy-one-get-one-free coupon books
at the Walgreens pharmacy.
Meanwhile, Fredo pulled down his copy of the Iron and Steel Institute's
industry directory. Before, whenever he needed a job, he landed one by
writing to a few of the companies listed in the book and calling a
couple of Pittsburgh employment agencies.
He assumed this time would be no different. Little did he realize how
much the world of work had changed.
*Employers Break a Bond
*For most of the post-World War II era, Washington had a partner in
helping to shield working families from risk: corporate America.
Businesses considered themselves duty-bound to provide stable jobs and
strong ties to employees, cushioning workers against the vicissitudes of
the economy.
Employers must find ways "of protecting the individual against the more
damaging effects of inevitable change," Standard Oil of New Jersey
President Eugene Holman said in the late 1940s. "So far as the
management of my own company is concerned," he added, "we have formed
the habit of thinking in terms of ... lifetime employment. That is our
goal."
For decades, employers delivered on the promise of job security. "The
workers of our parents' generation typically had one job, one skill, one
career -- often with one company," Bush said last month at the
Republican National Convention.
Beyond that, businesses erected a bulwark against the risk of illness by
raising the number of workers with employer-provided health insurance
from 1.5 million before World War II to more than 150 million. They
helped families deal with the economic costs of death by giving life
insurance to 160 million of their employees, up from 9 million. And they
offered seemingly ironclad protection against the insecurity of old age
by boosting the number of workers with pensions from 4 million to 44
million.
But like the government's safety net, corporate America's began to fall
apart in the late 1970s -- shifting still more risk onto working families.
Twenty-five years ago, almost 40% of the nation's private full-time
workforce was covered by traditional pensions, under which the employer
bears the risks and pays the benefits. That number has fallen to 20%. In
the place of pensions have come defined-contribution plans such as
401(k)s, under which an employer may kick in some funds -- typically
about half what would have been spent previously -- but employees alone
bear the burden of ensuring that they have enough money to retire on.
A similar shift is underway in health insurance. As recently as 1987,
employers provided health coverage for 70% of the nation's working-age
population, according to the Employee Benefit Research Institute in
Washington. By last year, that had dropped to 63%. The change translates
into nearly 18 million people who would have been covered under the old
system scrambling to make their own arrangements. What's more, even when
employers continue coverage, they increasingly push more of the costs
onto employees. Since 2000 alone, employers have raised the premiums
their workers must pay by an average of 50%, or about $1,000 a family,
according to a recently released study by the Kaiser Family Foundation
and the Health Research and Educational Trust.
When it comes to job security, employers have largely broken the bond
they had with workers. A late 1980s study by the Conference Board, a
business research group, found that 56% of major corporations surveyed
agreed that "employees who are loyal to the company and further its
business goals deserve an assurance of continued employment." A decade
later, that number dropped to just 6%.
As a result, people are increasingly likely to be bounced from their
jobs, with ever more severe financial consequences. In 1978, middle-aged
men could expect to be with the same employer for 11 years, according to
Bureau of Labor Statistics data. That's now down to about 7.5 years.
Since the 1970s, the average length of an unemployment spell has risen
by 50% to almost 20 weeks. The economic damage done when someone is laid
off and his or her job is eliminated also has grown -- even for those
with college degrees. Princeton University economist Henry S. Farber
recently found that college graduates laid off in the early 1980s
suffered a 10% decline in income through a combination of forgone pay
hikes from the old job and lower wages once back to work. By last year,
laid-off college grads were taking a far bigger hit of 30%.
"For almost a century, business and government worked in tandem to
expand the economic protections afforded working Americans through
social insurance programs and career employment," said University of
Pennsylvania economist Peter Cappelli. "In the last 25 years, we've
stripped most of these away."
For a growing number of people, Cappelli said, the result is
unmistakable: "You're on your own."
*Starting Over
*Paul Fredo entered unemployment in late 2001 vastly better prepared
than most Americans.
He was granted six months of pay -- roughly twice the typical severance
package, according to WorldatWork, an association of compensation
executives. He and his wife had hundreds of thousands of dollars in
savings, most of it squirreled away for retirement but available in case
of emergencies. They had almost finished financing their sons' college
educations. And they had recently paid off their mortgage.
Within a week of the layoff, Fredo began getting in touch with his
industry contacts but came up dry. He then started sending out resumes a
handful at a time. Still nothing materialized. He eventually pitched 900
companies.
"I got two callbacks and an interview that didn't go anywhere," he said.
By the spring of 2002, Fredo changed tactics and began attending
Priority Two, a job networking group at nearby Northway Community
Church. There, the group's director, Charlie Beck, offered some advice:
"You've got to have a hook so they remember you."
Fredo hated selling himself. But he began telling potential employers to
remember him as "PAC Man," for planner, analyst and cost saver. He had
business cards printed up with an image of the little yellow video-game
figure chomping its way across the face.
The effort produced a few temporary consulting assignments. They were
better than the alternatives: a $10-an-hour customer service position at
a local Verizon Wireless call center, or a job as a checkout clerk at
the neighborhood Giant Eagle supermarket. But Fredo soon discovered that
landing a decent temp job was almost as difficult as nailing down a good
permanent one.
Fredo's job search was foundering on changes in the labor market that
had been underway for 25 years but had begun to show themselves only
during the last two recessions. Even as the economy rebounded in 2002,
many companies were wary about hiring, especially when it came to taking
on senior managers. Top executives didn't want to get stuck with fat
payrolls if the recovery fizzled. And thanks to technological
breakthroughs and new management techniques, they were squeezing more
work out of fewer people.
As Fredo's severance pay began to run out, he was forced to rely more
and more on unemployment compensation. But this turned out to be a poor
palliative -- in large part because of his previous success.
Policymakers have been quick to say that the one element of the nation's
unemployment compensation system that has remained unchanged over the
years has been the so-called replacement rate, the fraction of a
person's pre-unemployment wages covered by the benefits. That has stayed
rock-solid at about 50%.
But what they usually fail to mention is that the 50% figure applies to
the median worker -- the one in the middle of the economic spectrum. For
the half of American workers who've made above the median, and
especially for those like Fredo who've made far above it, the
replacement rate is much lower.
The maximum weekly benefit in Pennsylvania in 2002, when Fredo began
collecting, was $442 a week. That was 15% -- not 50% -- of what he had
previously earned.
As Fredo's severance pay finally ran out, so did his employer-provided
health insurance. That was a big blow to Fredo and his wife because he
has high blood pressure and she is diabetic. The Fredos retained their
policy under COBRA, the federal law that requires companies to permit
laid-off employees to continue coverage for 18 months as long as they
pick up the tab for the premium. The Fredos ultimately switched to a
less generous policy. But even for this policy, the premiums run $800 a
month.
As 2002 turned into 2003, the Fredos hunkered down further. The couple
cut their weekly offerings at church. Donna gave up one of her favorite
activities, sending packages of toys and party favors to the children in
the North Carolina special-needs class taught by her older son Joseph's
wife, Maureen.
Things also changed between Fredo and his youngest son, Stephen. As a
boy, Stephen had waited up to put his father's dinner in the microwave
and greet him when he got home late from work. Now, Fredo was getting up
at 7 a.m. to have coffee with his son before Stephen headed off to his
new job as a systems analyst at Children's Hospital in Pittsburgh.
Then the elder Fredo would trudge upstairs to spend the rest of the day
-- and often much of the night -- in a bedroom, glued to his computer
screen, searching for work.
As Stephen's July 2003 wedding approached, Fredo acknowledged that he
was getting desperate; his annual income was down to about $48,000. When
the Alstom job opened, he was told it was temporary and would require
him to be away from home all week. He jumped at it.
*The Great Moderation
*If most people don't have much occasion to dwell on economic risk, save
for when they pay their auto or homeowner's insurance, the same cannot
be said for the wizards of Wall Street and the chiefs of American business.
As part of their effort to harness the power of the market, they have
plowed tremendous energy -- and money -- into understanding risk. Their
mathematical equations have let them predict the odds of bad outcomes
with growing precision. Their financial inventions have let them shape,
share and limit their risk with ever-greater sophistication.
"All of finance -- not just insurance, but banking, venture capital,
even the stock and bond markets that are so often held out as the very
models of what a competitive economy should be -- is about managing
risk," said Yale economist and financial theorist Robert J. Shiller.
Risk management tools help health insurers tailor coverage so that they
avoid people apt to file lots of claims -- or charge them more. Credit
card issuers have figured out how to target those most likely to carry
large balances and yet still manage to pay. Consultants devise variable
pay schemes and flexible work schedules that let companies increase
output while minimizing their risk of being stuck with unneeded employees.
In these ways, the economy has been reshaped much as government and
business leaders envisioned 25 years ago, and with the very result they
sought.
After bouts of instability in the 1970s and early '80s, the economy as a
whole has begun operating in a smoother, less calamity-prone fashion.
The amount that the gross domestic product -- a measure of all the goods
and services produced in the U.S. -- jumps around from quarter to
quarter has been cut in half since 1984.
Scholars have dubbed this decline in economic volatility "The Great
Moderation." They have praised the trend for significantly reducing the
risks that businesses face in making investments and that policymakers
must juggle in guiding growth. Working families have also reaped
substantial benefits, with inflation held mostly in check for more than
20 years.
And yet -- with the new tools of high finance largely unavailable to
them -- there has been a huge downside for families as well.
Although the overall economy has become steadier -- settling into a
pattern of long swells of growth followed by relatively gentle dips --
the incomes of working people have been beset by ever-larger
fluctuations. Looked at in this way, "we haven't reduced economic risks"
at all, said Harvard economist Martin L. Weitzman. "We've simply
redistributed them from the economy as a whole to individual households."
Among those households is Ron Burtless'.
*Blue-Collar Security
*Burtless arrived at Bethlehem Steel's sprawling Burns Harbor, Ind.,
plant at the southern tip of Lake Michigan on a cold day in March 1975.
The steel industry was near its zenith, and jobs at the factory looked
as durable as the heavy metal sheets that are its specialty.
So confident were industry executives about steel's permanence on the
American scene that they had recently signed a landmark labor pact with
the United Steelworkers union. What the industry got from the
Experimental Negotiating Agreement was a no-strike pledge. What it gave
in return was perhaps the richest package of wages and benefits in the
history of the industrialized world.
The accord promised an indefinite string of 3% raises. In an era when
oil embargoes and Soviet grain deals had sent prices flying, it provided
complete protection against inflation above and beyond the 3%. It set
the stage for improvements in health, dental and eye-care coverage;
extra unemployment and workers' compensation in case of layoff or
injury; and even employer-paid "sabbaticals" for plant veterans.
In short order, the agreement helped Burtless more than double his
income from $13,500 in the mid-1970s to $32,000-plus in the early 1980s.
The money gave him the wherewithal to buy a blue three-bedroom ranch
house near the plant and an American Motors Javelin with V-8 engine and
dual exhausts.
Just as important, the labor pact inspired the young electrician to set
a long-term goal -- to hang on until March 2005, when he would hit the
30-year mark with Bethlehem and could quit with an ample pension and
health insurance for life.
At that point, Burtless would be only 50 years old, and he could pick
up, move or start a new career at almost no risk to his economic
security. "It was going to be my freedom," he said.
But in 1982, Big Steel buckled. A combination of recession, foreign
competition and a tripling of compensation costs clobbered the industry.
In short order, steel producers ditched the groundbreaking labor accord
and Bethlehem cut its workforce from nearly 80,000 to 34,000. Steel
sabbaticals were out.
To this day, Burtless is foggy about what happened. All he remembers is
that the neighbors in his suburban subdivision, all steelworkers, began
to go bankrupt and lose their homes at foreclosure. His own income
dropped in inflation-adjusted terms from $32,000 in 1982 to $28,000 five
years later. His marriage fell apart.
"I figured my income would keep on rising, but here we were doing
givebacks" at the union negotiating table, he said. "It got pretty bad."
Over time, Burtless rebounded by signing up for all the Sunday and
holiday shifts he could. He won custody of his daughters, Mary and
Patty, after a two-year court battle. And in 1992 he remarried, this
time to a fellow steel-plant employee, Toni Brown.
Brown, who'd endured her own financial setbacks during the steel bust of
the 1980s, brought an extra $50,000 a year to the Burtless household,
almost doubling the family's annual income. In 1993, the couple built a
$150,000 five-bedroom, three-bath house to shelter their new clan, which
was made up of Toni and her four children from a previous marriage as
well as Ron, Mary, Patty and eventually Patty's young son, Nicky. They
outfitted the place with cherry furniture and a 35-inch Magnavox TV.
They also took out several loans and a $30,000 second mortgage to
finance a parade of motor vehicles that at various times included a van,
a sedan, a Jeep, a truck, a motorcycle and a Dodge Caravan. In 1996,
they bought into a vacation time share in the Caribbean.
Still, at about $1,500 a month, their mortgage payments weren't
exorbitant. And as the family settled in, and as Mary and then Patty got
their own places, they were able to manage the cost of their day-to-day
lives pretty easily. They even stashed $72,000 in a 401(k) -- about
twice what Federal Reserve statistics show a typical couple their age saves.
Then, in 2000, the Burtlesses went through a bitter divorce. Among other
things, Ron had to give up half the money in the 401(k).
*Two Incomes, More Debt
*Like Ron Burtless, millions of Americans have relied on two factors to
help them handle the heightened risks of the last 25 years: the entry of
women into the paid workforce and borrowing.
Today, more than 70% of mothers work outside the home, compared with
less than 40% in the 1970s. Although women's arrival in the full-time
workforce has been driven by forces as disparate as feminism and the
triumph of brain jobs over brawn, their influx could hardly have come at
a better time for millions of working families. It has provided
households with the insurance of a second wage earner in case anything
happens to the first.
Yet women's employment also has meant new costs -- for day care, extra
cars, more meals out. And most families have treated the additional
income not as savings to be set aside in case of emergency but as a
means of raising living standards.
An analysis of two decades of the government's Consumer Expenditure
Survey, Washington's tally of what Americans buy, shows that the
fraction of spending going toward big-ticket items such as houses, cars
and schools has increased to more than 50% as the number of earners
within families has grown.
The situation "puts families in a bind," said Raj Chetty, a UC Berkeley
economist who specializes in studying risk. "It means that if they are
hit with an economic shock, they have to adjust to it by making bigger
changes in the part of their budget that is still not locked in."
In other words, people have ended up leading lives that are both more
prosperous and more precarious.
To help cope, many Americans have borrowed. Arguably, borrowing has
become for this generation what unemployment compensation, the GI Bill
and government-guaranteed mortgages were for a previous one -- a way to
tide over one's family during bad times and reach for a better life.
The traditional measure of household debt -- calculated as a percentage
of a family's after-tax income -- has climbed from 62% a quarter century
ago to almost 120%, according to Federal Reserve statistics. Much of
that increase is from the rush of mortgage lending during the last
decade. But non-mortgage debt, including credit cards and auto loans,
also has risen, from 15% to almost 24% of after-tax income.
Economists and policymakers have generally applauded the growth of
borrowing as a boon to the economy and a blessing for average Americans.
They have portrayed the extension of credit to families further and
further down the income scale as part of a sweeping democratization of
finance.
But even upbeat commentators such as Dean M. Maki, a former Fed
economist now with J.P. Morgan Chase & Co. in New York, acknowledge that
families' growing reliance on debt exposes them to new risks, especially
if interest rates rise. Maki estimates that the interest cost on about
one-quarter of household debt is now variable and prone to swell if
overall rates go up.
The borrowing boom has already produced one disturbing trend -- a
sixfold increase in personal bankruptcies since 1980. Bankruptcy filings
reached a record 1.625 million last year and were up again through March
of this year. Two decades ago, they totaled 288,000.
"We've allowed bankruptcy to become commonplace in America," said
Elizabeth Warren, a Harvard Law School professor who, with her daughter,
Los Angeles business consultant Amelia W. Tyagi, has written an
influential book on bankruptcy and people's financial strains called
"The Two-Income Trap." "Last year more people filed for bankruptcy than
filed for divorce or were diagnosed with cancer or graduated from college."
Ron Burtless may well be next.
*Misfortune Multiplied
*By the beginning of last year, partly by gobbling up as much overtime
as he could, Ron Burtless had managed to get back on his feet financially.
So, too, had Bethlehem Steel.
After a succession of losses through the 1980s, the company posted a
profit in four of five years after 1993. It spent close to $1 billion
modernizing Burns Harbor and other plants and began winning back market
share from foreign rivals.
Among the many advantages of Bethlehem's return to profitability was
that it was allowed to run its own workers' compensation program instead
of being required to buy expensive insurance against industrial
accidents, as most companies must. At Burns Harbor, the program was
backed only by a sort of standby policy from another corporate giant,
Illinois-based Kemper Insurance Cos.
It was an arrangement that Burtless had no reason to pay any attention
to -- until a year ago Easter Sunday.
From his first day at Burns Harbor, Burtless had worked at the front
end of the steel-making process, where coal is turned into coke by
heating it to 2,300 degrees. (The coke is combined with limestone and
ore to form molten cast iron. The molten iron then goes to a blast
furnace, where it is transformed into steel.)
At close to midnight on the holiday, a locomotive delivering 36 tons of
fire-red coke to be quenched with thousands of gallons of water suddenly
stalled. Burtless, the electrician on duty, was dispatched to find out
why. As he reached for the ladder to scramble up into the engine cab, he
fell into an open trench of boiling runoff.
Train operator Ron Lewis still recalls the scream: "It was like in the
movies when somebody's getting electrocuted."
By the time Lewis got to him, Burtless was talking rapidly, joking about
having been "lobstered," insisting he wasn't badly hurt. The plant
ambulance raced him to a local hospital, where the doctor took one look
and sent him on to Loyola University Medical Center's burn unit in Chicago.
Burtless remembers Patty getting on the phone and describing Nicky's day
at nursery school to distract him from the pain. The nurses came in at 3
every morning to debride the wounds, scraping away the damaged layers of
skin in search of what was still alive. Burtless suffered chills, and he
underwent a lengthy operation in which skin was stripped from his upper
thighs and grafted onto his lower legs.
He would soon discover that he had been stripped of his financial
security as well.
After its mid-1990s comeback, Bethlehem Steel had stumbled again, the
victim of intense foreign competition, industry consolidation and failed
investments.
In May 2003, with Burtless still at Loyola recovering from surgery, the
company sold all of its assets -- but almost none of its liabilities --
to International Steel Group, a two-year-old firm set up by investor and
"vulture" fund operator Wilbur L. Ross Jr. At virtually the same moment,
Kemper Insurance found itself sinking under a mountain of claims, many
of them connected with Enron Corp.'s implosion and the priest abuse
scandal in the Catholic Archdiocese of Boston.
The combination ripped right out from under Burtless the workers'
compensation safety net that was supposed to have caught him when he fell.
It remains murky who is responsible for Burtless' medical bills. Lawyers
for Bethlehem and the Indiana Workers' Compensation Board say Kemper
should be covering the costs of injured workers such as Burtless.
Lawyers for Kemper say Bethlehem stopped paying premiums on its backup
policy more than a year before Burtless was hurt, and so the insurer is
not responsible. Indiana has a law that bans health providers from
trying to collect from injured workers. But because Burtless was rushed
across state lines to Illinois for treatment, it's not clear that those
protections apply.
The upshot is that Loyola, Superior Air Ground Ambulance of Elmhurst,
Ill., and even local St. Anthony hospital are all dunning Burtless to
pay for his care. Their bills come to $92,075.10 -- an amount, Burtless
said, he can't possibly hope to meet.
*Back to the Factory
*To save money in the months after his discharge from Loyola, Burtless
decided to forgo the $200-a-day medical dressings the doctors had
ordered for his legs. Instead, he bought Pampers and boiled them to make
a sort of papier-mache that he used to swathe his burns.
After Burtless spent weeks wrangling with St. Anthony to continue
sending a home health aide, Patty and Nicky moved back in and Patty
began taking care of her father. Then Mary returned, too, after her car
loans and credit card bills got out of hand and she had to declare
bankruptcy.
The sale of Bethlehem Steel did not eliminate the $1,670-a-month pension
that Burtless expects to collect someday. That's only because the
Pension Benefit Guaranty Corp., a federal agency, picked up the obligation.
But the acquisition did erase the 30-year finish line that Burtless had
been pushing for so long to cross. Instead of starting to collect his
pension next March at age 50, Burtless was recently informed by the PBGC
that he must wait until he is 62.
The company also defaulted on its promise of retirement health coverage
for more than 90,000 former and current Bethlehem Steel employees,
including Burtless. With no federal agency to guarantee those benefits,
they are gone for good.
Without workers' compensation, and with the start of his pension delayed
by more than a decade, Burtless decided two months after his accident to
hide his wounds under heavy stockings, apply with the new owners and go
back to work at Burns Harbor.
He seems reconciled to toiling at the plant until 2016.
"I'm thankful to have the job," he said recently. "But 41 years in the
mill seems like a high price to pay for retirement, especially if I have
to go broke."
*No Guarantees
*Last spring, Paul Fredo was making so much money at Alstom that, after
paying for health insurance and replenishing the family savings, he
traded in his 1998 sedan for a royal blue 2004 Chrysler Concorde.
He and Donna also prepared to celebrate their 35th wedding anniversary
in style. Each of 100 people invited to join them at the airport
Sheraton in Pittsburgh was to be greeted with a party box containing
Teaberry gum, a tiny Etch A Sketch and a refrigerator magnet showing the
average income ($8,547), price of a loaf of bread (23 cents) and cost of
a gallon of gas (35 cents) in 1969 when the couple married.
"I wanted something retro," Donna said, "but I didn't want the whole
anniversary to be retro."
Several weeks before the July 3 soiree, just shy of a year after he'd
started at Alstom, Fredo was told by the company that his time was up.
He was replaced by a French executive, who would work on the same
week-to-week basis.
The Fredos celebrated their anniversary, and Paul spent the better part
of the next four months looking for a new job. He recently found a
full-time one near Pittsburgh as business manager for a road and bridge
builder.
He'll make roughly $120,000 a year -- an excellent salary, but only
three-quarters of what he made in his last regular job three years ago
and about half of what he pulled in at Alstom. He reports to work
tomorrow morning.
/Times researcher Janet Lundblad in Los Angeles contributed to this report./
[Homestead] James is absolutely correct, personal income scene changing,
Tvoivozhd, 10/09/2004