Comfort for the Jobless

The poor are generally getting richer

Do we as a society want to lean more towards a European-style model -- large, interventionist government with a well-developed social safety net -- or to the US model of more reliance on markets and individual responsibility?

The economic nationalists argue for moving more in a European direction.  The economic rationalists, the market reformers, look more to the US model.

One of the strongest arguments against the US model -- used again by Wayne Swan in these pages ("All talk, but no trousers" July 5) -- has been US levels of poverty and inequality.

The US labour market is held to produce large numbers of working poor -- 13 per cent of live in poverty.  American income distribution is very unequal -- the top fifth of households receive about 49 per cent of the national income, the bottom fifth less than four per cent.  Since 1970, the income of the top fifth of US households has gone up 50 per cent, whereas that of the bottom two-fifths has been stagnant.

But the American ideal is about people doing better during the course of their lives.  It is not a static, pattern-oriented ideal such as material equality, but a dynamic ideal about opportunity.

The power of the US model becomes evident from what happens to households over time.  The increased income inequality is largely a result of much greater changes in income in different life-stages because of the shift to an information economy.

In 1950, people in the peak income years of 35-44 typically earned about 50 per cent more than 20-24 year olds.  Now the peak income years are 45-54;  and their average earnings are three times as much as 20-24 year olds.  The US is a highly mobile society.  Of households in the bottom fifth in 1975, fewer than five per cent were still there in 1991, a mere 16 years later.  Far more, 29 per cent, had made it to the top fifth of US incomes and a whopping 80 per cent were in the top three-fifths.  Poverty in the US is generally a temporary state of affairs.  Half of the poverty spells people experience are of four months or less.  The long-term poverty rate is only four per cent.

As for working poor, the highly regulated Australian labour market produces a similar proportion of working poor as that in the US.  The Australian system has also, since 1974, provided jobs to a lower proportion of the population and, since 1983, a higher rate of unemployment.  The average duration of unemployment in Australia is more than four times that of the US.

As a would-be measure of absolute poverty, the official US poverty line suffers from problems in measuring income and inflation -- particularly improvement in product quality -- and the largely temporary nature of US poverty.  In 1994, poor US households had an equivalent level of possession of washing machines, clothes dryers, dishwashers, freezers and cars as was the US average in 1971.  They had a higher rate of possession of refrigerators, stoves, microwaves, colour TVs, VCRs, personal computers and air-conditioners.

Poverty does not mean the same in the US as it used to -- the poor are getting richer.

By adapting the official poverty benchmark of income -- three times the income required to provide a nutritionally adequate diet for all household members -- economist Daniel Slesnick has tracked consumption levels.  He found that the proportion of Americans in poverty on the basis of consumption patterns fell from 31 per cent in 1949 to 13 per cent in 1965 to two per cent at the end of the 1980s.

The American dream is far from an empty one.  Germany's Social Democrat Chancellor Schroder noted earlier this year that the US economy can produce employment growth when GDP growth is as low as 0.7 per cent;  the German economy requires at least 2.5 per cent growth to do the same.  Between the early 70s and mid-90s, both Europe and US increased public sector employment by over 6 million.  Yet private sector employment grew by 3 million in Europe -- and by over 40 million in the US.

Europe, focusing on the static ideal of preserving particular patterns of social outcomes, has sacrificed the dynamism which is central to both American success and ideals.  In seeking what to adapt for our own purposes, there is a clear contrast between the dynamic model of the US and the more stagnant model of Europe.  The IT revolution which is transforming our lives came out of the US:  Europe is struggling to catch up.

The US is already embracing the biotech revolution:  Europe is turning its back on it.  The US is model is about having confidence in yourself and the future.  According to international opinion polling, Americans are far more optimistic than Europeans.

So, do we opt for dynamism and optimism or pessimism and stagnation?  The choice -- about choice itself -- is ours.

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