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America May Never Be the Same

The just-released report from the Pew Research Center, “How the Great Recession Has Changed Life in America,” is probably the most searching investigation of this question produced so far. Although some of the top-line findings have circulated widely, some of the less-noticed details are just as significant. Taken as a whole, the report suggests that the Great Recession will have a more-than-transitory effect on the outlook and psychology of most Americans, with significant consequences for our economy and society. Some key items:

  • Not surprisingly, nearly half of all homeowners report a decline in the value of their homes during the recession. What is surprising is how long they think it will take for prices to recover: about half estimate three to five years; about 40 percent expect it will take six years or longer. And because homes constitute the dominant part of middle class households’ net worth, this helps explain why these families think it will be quite some time before their overall financial condition returns to its pre-recession peak. Forty percent estimate three to five years, 13 percent six to ten years, and 10 percent longer than ten years (or never).

  • While it is true, as Stephen Rose has recently argued, that the net worth of U.S. households increased during recent decades despite record levels of debt accumulation, it is also true that upper-income households captured most of the gains. The Federal Reserve conducts a triennial survey of family finances, of which the most recent was completed at the end of 2007. From 1998 to 2007, the median net worth of all families increased by a modest $29 thousand, from $91 to $120 thousand. But mean net worth increased by almost $197 thousand, demonstrating the concentration of gains at the top. From other sources we know that overall household net worth declined by nearly 20 percent during the current recession, erasing the decade of modest gains for households at the median. And the Pew report provides evidence that middle-class families were hit harder than those in the upper tier. Among the top 20 percent, almost as many households report being better off as worse off since the onset of the recession. Among middle-class households, 45 percent report being worse off, versus only 21 percent who say they are better off.

  • We already knew that long-term unemployment is the worst it has been since the end of the Great Depression. But the Pew report dramatizes just how bad it is. During what was previously the worst recession since the 1930s (1981-82), the median duration of unemployment peaked at 12.3 weeks. In May of this year, the median duration was almost twice as high: 23.2 weeks. Today, 46 percent of all unemployed workers have been out of work for more than six months, versus 26 percent at the height of the Reagan recession.

  • The effects of the Great Recession on the labor market extend beyond unemployment. In 1999, the share of the working-age population that is working (the “employment rate”) peaked above 64 percent. In 2007, just before the current downturn, it stood at 63.3 percent. By this May, it had declined by a stunning 4.8 percent points, to 58.5 percent. (By contrast, the Reagan-era recession produced a decline of 2.9 percent points.) Today’s employment rate stands where it was in 1985, erasing a quarter-century of gains.

  • While this recession has been bad for everyone, it has been a catastrophe for men. In the fourth quarter of 2007, male and female unemployment rates were almost identical, at a bit under 5 percent. By the end of 2009, the rate for women was 8.7 percent–but for men it was 11.2 percent. (In the male-dominated construction sector, the unemployment rate surged from 7 percent to 20 percent.)

  • Most of the jobs lost during the current recession aren’t coming back. Fifty-two percent of currently unemployed workers lost their jobs for reasons other than temporary layoffs—a far higher share than in any other postwar downturn. This is not a cyclical downturn in the labor market. Returning to full unemployment will require many millions of new jobs in companies and even sectors that do not yet exist.

  • More than six in ten Americans report having cut back on spending since the recession began, and many expect this to continue after it ends. Pew finds similar patterns of behavior and expectation in the areas of borrowing and saving as well. It’s easy to forget that as recently as 1970 through 1985, household savings averaged 10 percent of disposable income. In the next two decades, the savings rate decline to almost zero before increasing modestly to about 4 percent by 2009. There’s a good reason to believe that this number will continue to increase: only 23 percent of workers say that they are very confident that they’ll have enough income and assets for retirement, versus 32 percent who report little or no confidence.

  • Among workers ages 50 to 61 who are currently employed, 60 percent say that they may have to delay retirement, as do even more--69 percent--of workers in this age group with incomes between $30 and $75 thousand. Young adults are already experiencing great difficulty finding jobs and starting careers; in a sluggish labor market, later retirements could make a tough situation even worse.

Despite all this, Americans remain congenitally optimistic: 62 percent expect their financial situation to improve over the next year; 61 percent believe that the damage the recession has inflicted on the economy will turn out to be temporary rather than permanent; 63 percent endorse the proposition that, “America will always continue to be prosperous and make economic progress.”

But there are signs of doubt as well. As recently as 2002, 61 percent thought their children’s standard of living would be better than their own; only 10 percent thought it would be worse. Today, the optimists’ share has declined to 45 percent, while pessimists now constitute fully 26 percent of the population. And doubt tends to reinforce caution. We don’t have enough evidence to conclude that the Great Recession will generate the kind of long-lasting risk aversion that characterized the Depression-era generation throughout their lives. But we do have reason to believe that for some time to come, what Keynes famously called “animal spirits” will remain subdued, which suggests that we’re in for a slow recovery and historically high levels of unemployment for much of this decade. If the Pew report is on target, the “new normal” will be more than a slogan.