Just When You Thought It Couldn’t Get Worse

Any journalist who has covered the U.S. economy during the past two decades has met the type: the ex-steel worker in scrub whites retraining as a nurse’s aide; the laid-off marketing manager who walks around with a briefcase that turns out to be empty: people who thought they had an unshakable grip on the good life only to be tossed over by economic forces beyond their control or even understanding.

By now, much of the middle class--everyone earning from, say, $53,000 (the median family income in 2000) to $165,000 (the threshold for the top 5% of wage earners)--is scrambling to avoid a similar fate. As plunging stocks punch holes in their retirement savings and debt-ridden employers chisel away at their health benefits, more and more Americans are realizing they will have to work longer, save more and scale back on a standard of living that once seemed assured. Republicans fear that the resulting outrage could cost them control of the House in the fall elections and might even jeopardize their hold on the White House.

But how likely is it that the setbacks of average Americans will result in political change? What are the chances of a middle-class populism? On the evidence of these books, at least, the answer is slim. William Wolman, a former editor and chief economist of Business Week magazine, his wife, Anne Colamosca, and New York University economist Edward N. Wolff are superbly qualified to make the case for fundamental change. They have delved deeply into the numbers that measure the economic prospects of working Americans. They have proven immune to the cant that passed for economic insight over the last decade. They had the courage to attack Corporate America well in advance of the recent accounting scandals, gross displays of executive greed and gigantic bankruptcies that have made it an easy mark. (Both books were finished before the full dimensions of business’ current troubles became apparent.)

Wolman and Colamosca’s book, “The Great 401(k) Hoax,” in particular, aspires to go beyond the pension and retirement issues of its title and delivers a grand critique of American culture at the turn of the millennium. It includes, among other things, an extended discussion of the literature of the Gatsby ‘20s and the Bobo ‘90s. The problem is that the U.S. economy is too big, and the nation’s economic actors too varied, to offer easy targets.

That is most vividly demonstrated by Wolff’s “Retirement Insecurity,” on which Wolman and Colamosca rely. Wolff set out to prove that--contrary to conventional wisdom--the economic booms of the 1980s and 1990s and the great bull market of the last decade failed the very people who came to depend on them the most--middle-aged workers saving for retirement. If his key findings held up under scrutiny, they might have provided the smoking gun needed to convince Americans it is time to drop their infatuation with unfettered markets and begin demanding the kind of government protections that have been eroding since the Reagan era. But they don’t. (More on this later.)

Even with these deficiencies, however, the two books perform an important service. They remind us of how much we had riding on the boom times of the 1990s. And they show how unlikely it is that our great gamble for security and wealth will pay off in anything like the fashion we had hoped.

“The occasions are rare. But there are times when an ugly combination of letters and numbers penetrates deeply into the American consciousness,” write Wolman and Colamosca. “There was a time when ‘4F’ was one of the best-known expressions in the American language, connoting a young man who became exempt from the military draft because he had flunked the physical. ‘Catch-22,’ the title of a book by Joseph Heller about a military snafu in the war against Japan, became famous as a description of a problem with no solution.

“A similar fate awaits the combination that defined the hopes and dreams of American families as they celebrated the booming 1990s and looked forward to a new, exciting postmillennial decade: 401(k).” The 401(k)is a retirement account in which employees are responsible for managing their own money, and employers can contribute matching funds or stock. The accounts were originally intended as supplements to Social Security and traditional pensions, in which employers manage the money and guarantee a monthly income to retirees. But as stocks lifted off in the last years of the 1990s, they provided the principal means by which the great mass of Americans entered the market, and they largely replaced pensions.

They became, in the words of Wolman and Colamosca, “a cultural icon.” They seemed to embody “the promise that the average American family, neither rich nor poor, but middle class, could stake a claim for its share in the prosperity created by the technological wonders that energized the American economy in the 1990s.”

Two problems didn’t surface until the market began cracking in early 2000. The first was that the risks of coping with tumbling stock prices, which were borne by employers under the old scheme, had been shifted to the employees. The second was that the great bull market of the ‘90s turned out to be largely a bubble, in which share prices were driven up by the anticipation of further increases, rather than by fundamentals, such as a company’s ability to make money.

It is on the subject of stock bubbles that Wolman and Colamosca are at their depressing best.

The authors compare the ‘90s with the three previous bubbles of the 20th century--those ending in 1901, 1929 and 1966--and find that it was by far the most spectacular, with the wildest disparity between stock prices and corporate earnings. They look at how the stock market performed in the aftermath of the previous bubbles and discover that, in each instance, it took share prices more than two decades to recover their previous highs.

They show that in the interim, the total, after-inflation return to stocks was not the 15% to 20% a year investors came to expect in the ‘90s nor the 7% a year Wall Street often portrays as the irreducible minimum equities can deliver, but somewhere between 1.9% and --0.2% a year.

For the retirement investor, the authors write, the difference between Wall Street’s promise and what history suggests will happen in the wake of the most recent bubble “is the difference between comfort and virtual penury.”

Where Wolman and Colamosca are at their weakest is in explaining what caused the ‘90s bubble and what Americans should do now that it has popped.

They engage in some overheated rhetoric about the “Wall Street claque” and bought-and-paid-for politicians. They hint of conspiracy in arguing that the Lewinsky scandal left Bill Clinton helpless to resist the entreaties of the financial industry to keep the party going. They boldly declare that “protests are fated to become an important part of the post-millennium era.” As for what individuals should do, their answer, in a nutshell, is: Buy bonds. It’s hard to think of a more apt image of the difficulties facing a middle-class populism than that of bond-buying protesters.

For his part, Wolff reaches the startling conclusion that despite the longest period of economic prosperity in American history, most older workers ended the 1990s financially less prepared to retire than when the growth began. But his explanation of what caused the decline does not square with his own statistics. Wolff charges that the advent of personal retirement accounts “has produced greater inequality between rich and median households and declining retirement wealth for the typical household.” But two dozen pages later, he concedes that the spread of 401(k)s and their growth in value has more than compensated for a steep decline in the other major sources of private retirement savings, pensions and Social Security. In the end, both books must be treated as way stations on an uncertain route to a new political era, tracts that knock the struts out from under the free-market catechism without saying what should replace it.

To tackle this grander project will require convincing arguments on at least two counts. The first is that even the “haves” of middle-class America have a legitimate grievance against an economy that cannot deliver stable employment, secure retirement and the opportunity for their children to do better than they. The second is that Washington has managed to get a few big things right in the past--take Social Security (which is in better financial shape than critics claim), civil rights and World War II--and is likely to be able to do so in the future.

The middle class, placards in hand, awaits its call to arms as the market falls further.