The most incisive guide to issues facing the American family today . . . An invaluable resource for anyone wishing to stay on the cutting edge of research on family trends.
-W. Bradford Wilcox
Associate Professor of Sociology, University of Virginia
Way back in 1995, more than a dozen years before the traumatic financial upheavals of 2008, The Atlantic had the audacity to puncture the perception of good times during the Clinton presidency, a perception fueled by endless news reports of a bullish stock market, rising industrial output, and low unemployment. Despite the optimism among experts that interpreted economic indicators as proof that America was at the top of her game, the magazine editors sounded a sobering note with their October cover story, “If the GDP Is Up, Why Is America Down?” Many Americans, according to the respected magazine, were not flourishing during the so-called boom years of the 1990s. The Baby Boomers, in particular, were more discontent than ever. They were working longer hours; their families were falling apart. Like many Americans today, the public was not optimistic about the future.
The article offered the counter-unintuitive warning that existing economic measuring sticks represented a mixed bag and should not be taken at face value. The essay did not claim that signs of economic distress should be ignored. (Many families that have suffered job losses or home foreclosures, for example, do reflect what the depressed numbers of today indicate). But the essay did suggest that rising economic indicators, which have been idolized as the gods of political success for decades, often misrepresent reality. Even in 2011, the rebounding stock market and improving GDP numbers surely mask the sober reality of a 9 percent unemployment rate and continued trouble on the housing front. The essay was particularly critical of the nation’s obsession with the GDP, warning that a quantitative measure of the total dollar value of goods and services produced within the nation’s borders within a given year says very little—and should not be equated with national well-being.
It doesn’t appear that many policymakers or politicians bothered to read the 1996 piece, as they continued to slavishly chase after “economic growth” as the be-all and end-all of American life. From President George W. Bush’s 2001 and 2003 tax cuts to the “easy money” policies of the Federal Reserve, not to mention the unprecedented market interventions and stimulus packages of Presidents Bush and Obama in 2008 and 2009, policymakers of both parties have been rolling out measure after measure in hopes of recapturing the economic dynamics of the 1980s and 1990s. Given that another presidential election season is around the corner, the voting public can expect to be inundated with another round of ideas and proposals, especially from candidates for the Republican nomination, candidates who typically frame economic expansion as the panacea for all that ails America.
What Does It Mean to Grow the Economy?
Yet what does it mean to “grow” the economy? The growth that the typical American family wants to see is the kind that gives the economy a human or family purpose. It is the kind of growth that allows a breadwinner to earn a “family wage” sufficiently high enough to support and provide benefits for a spouse and children. But as currently constituted, measurements of GDP tell us nothing about the presence or absence of such an economy. As currently constituted, the GDP captures a rather limited range of activities, counting only financial transactions in the “public” and “private” sectors of society, regardless of their impact on the family. Moreover, the GDP only adds things up—it never subtracts—meaning that all monetary exchanges in these two sectors of society are treated the same whether or not they actually build a healthy economy or serve the family. What’s considered important or valuable is the fact that money changes hands, not what the exchange represents. Activities in the public sector stemming from responding to natural disasters, terrorism, and crime, for example, are all looked upon as signs of growth or pluses for GDP purposes. So are all the transactions involved in the failed War on Poverty that has left the underclass far less capable of self-reliance than when LBJ’s central domestic initiative began.
Moreover, parasitic undertakings of the private sector—such as gambling and pornography interests—which corrode the social fabric, are considered “pluses” for the GDP. Likewise included as pluses are transactions that look like they add to national wealth but mean nothing today, like the building of the estimated 2.4 million homes in 2008 but which now sit vacant because of the real estate slowdown. Think of the multiple ways these houses, which demographers had for years warned represent an over-investment in real estate, boosted the GDP when under construction: the building materials, construction-trade workers, municipal-zoning officers, architects, real-estate agents, and bankers. Yet all this mostly private-sector economic activity meant little more than bankruptcy to the builders and owners of these empty properties.
As these examples illustrate, the GDP is strictly a quantitative metric; as economist E. F. Schumacher noted a generation ago, the GDP does not distinguish between costs and benefits, between productive and destructive activities, between sustainable and unsustainable ones, or between pathological and healthy growth. Yet the fatal flaw is that the GDP leaves out the most important sector of society that makes the private and public sectors able to function: the social sector. The social sector comprises the realm of society, as John D. Mueller explains in Redeeming Economics, where people relate to each other without contracts or commercial transactions and where they satisfy their profound need for emotional connections and personal relationships. Here, people give gifts and transfer resources with little or no expectation of reciprocity.
The social sector includes, for example, all kinds of voluntary activities that charitable and service organizations perform. For certain, the most important work of the social sector takes place within the enduring bonds of marriage and the family. The GDP thus tells us nothing about an enormous and important sector of economy. While most economists treat the family as an adjunct to the market, there would be no social capital, no private sector, and no public sector without the family. There would be no economy without the social sector. In reality, the private and public sectors are adjuncts to the social sector. Yet the activities of marrying as well as bearing children, which Adam Smith considered among factors of lasting economic growth and true wealth in capitalist societies like the United States, are not counted in the GDP. In fact, many economists look at children, although surely not their own children, as a special kind of consumer good. Likewise, all the vital production of a full-time, at-home mother—caring for and rearing children, food preparation, household management, volunteering, and even homeschooling—does not count in the GDP because it does not involve a financial transaction.
Further skewing the books, every time an intact family breaks up—which represents a huge loss to parents and especially to children—the GDP calculators, deeming that significant, suddenly turn on and count all the derivative activities of divorce as positive indicators of economic growth. Believe it or not, every divorce, because it generates activity in the private and public sectors, boosts the GDP. That activity includes greater workloads for divorce lawyers as well as the divorce-court and child-support systems, heightened demand for second households, therapy for the children, as well as new or increased employment commitments for the mother outside the home. In fact, as a divorcing mother is often forced into the full-time labor force, she may spend relatively more money on clothes, commuting, daycare, and dining out. Even when eating at home, she may opt more for costlier prepared foods than cooking at home. At the same time, the divorced father will increase both energy and water consumption in setting up a second household. He may eat even less at home and frequent bars more often. The GDP rises in response to all these inputs, but the net effect is reduced happiness, the handicapping of the next generation, and a less promising economy down the road. So in the GDP universe, the destruction of a little civilization through divorce—which splits a strong joint home economy into two weaker ones—is considered good for the larger economy. But in this same distorted GDP universe, the success of married couples in maintaining a lasting union harms the economy at large.
Lessons from the Housing Bust
All this raises doubts about “growing the economy” in ways measured by the GDP, a metric that fools Americans into believing that the nation is moving forward when in fact the country may be moving backwards. If all the country is doing economically is the equivalent of digging holes in the ground and refilling them with dirt, the last thing America needs is a preoccupation with economic indicators that fail to capture what really matters. This was precisely the problem that led to the housing bust. For years, the nation’s policymakers—Democrat and Republican alike—had been fixated on “growing the economy” by promoting homeownership through every antic imaginable, including reckless lending, but had ignored the imperative of “growing the family” when indicators of marriage and family formation were heading south. They thought that a bipartisan commitment to increasing homeownership, rather than bipartisan commitment to the family, would keep the American Dream alive.
Even though both parties have been chastened by the realities of the housing bust that has shaved, depending upon the estimate, between $10 and $15 trillion from the household wealth of Americans, neither party understands how their joint abandonment of socially conservative housing policies in the 1970s ultimately inflated the real estate bubble. As social historian Allan Carlson has extensively documented, the early federal housing and mortgage policies put together in the New Deal era—including the National Housing Act of 1934, the Federal National Mortgage Association (Fannie Mae) in 1938, the Serviceman’s Readjustment Act of 1944, and the Federal Housing Act of 1949—were animated not by a desire to create macro-economic benefits by fostering home ownership but rather by the recognition that the nation needed to help young married couples with children to buy their first home.
Those early policies infused the housing and mortgage industries with a human purpose: providing homes for American families and children, not treating real estate as a commodity to be traded like common stock. This family-centric vision not only transcended profits but also, by preventing the housing industry from expanding for its own sake, limited systemic risk. For an entire generation, this devotion to building not just houses, but homes, worked wonders. Default rates were extremely low. Moreover, the number of owner-occupied homes more than doubled between the years 1940 and 1960, and increased again by almost as many between 1960 and 1975, raising the percentage of Americans living in owner-occupied homes from 44 percent in 1940 to 65 percent in 1975.
Underwriting these remarkable achievements was federal oversight of the old “savings and loan” associations through the Federal Home Loan Bank Act of 1932, which also introduced the thirty-year, amortized mortgage. That legislation not only gave mutual savings banks, which were local institutions, a market niche—allowing them to pay higher interest rates than commercial banks on savings deposits—but also helped to keep home prices within the reach of most American families by encouraging thrift and standardizing mortgage-eligibility procedures that limited loans to responsible and credit-worthy borrowers. Among underwriting procedures that kept housing prices relatively modest for the average middle-class family was the practice of counting only one salary per married couple to determine home affordability.
This human, “pro-family” orientation of federal mortgage assistance came under attack in the 1970s. Both policymakers and homebuilders lost sight of the needs of young married couples with children. Part of the problem was demographic. By this time, most of the nation’s intact families were already living in their own homes, a credit to the New Deal-era policies. In addition, as economist David P. Goldman has noted, the dramatic growth in the number of married-couple families with dependent children since the Second World War had leveled off (at around 25 million). Given that the nation’s stock of housing units with three bedrooms or more (about 36 million units in 1973) was roughly in line with the number of families, there was no need for continued suburban expansion. Indeed, as the Baby Boomers pulled back from the marriage and fertility patterns of their parents, the natural demand for family housing that characterized the 1950s and 1960s was drying up.
Contrived Demand, Artificial Growth
This fall in housing demand, of course, didn’t sit well with housing and mortgage interests. Looking for ways to prop up demand that wasn’t really there, the legislators, regulators, developers, homebuilders, Realtors, and lenders started to spin real estate as an investment vehicle—not for its human purpose. Consequently, housing policy shifted away from the goal of providing homes for young married couples with children to promoting real estate as a hedge against inflation. The industry claimed, in collusion with both political parties, that expanding homeownership would raise the GDP and “grow the economy.” American investment in housing continued. Between 1973 and 2005, the number of U.S. housing units with three bedrooms or more doubled, to 72 million.
To find buyers for all this housing surplus, financial institutions offering mortgage subsidies would no longer favor a relatively dormant market—young married parents—but instead would favor the growing population of households without marriage or children that would triple by 2005: single persons, cohabiting couples, the divorced, and unwed mothers. As these applicants for home mortgages, on average, are not as credit-worthy as married parents, loan underwriters had to weaken mortgage eligibility standards, in part in response to the Home Mortgage Disclosure Act of 1975 and the Community Reinvestment Act of 1977, which forced banks and savings-and-loan associations to direct their lending to include the so-called “underserved” or “low-income” population. On the theory that U.S. housing prices would never go down, financial entrepreneurs introduced subprime loans in the 1980s while hiding the risks of the new lending schemes through the practice of selling investors bundled packages of loans guaranteed by the government and quasi-government agencies, such as Fannie Mae and Freddie Mac.
The dramatic increase in financial support for nonfamily households seeking new housing since the 1970s represented significant economic and environmental inefficiencies, as the average size of U.S. households declined even as the square footage of newer homes significantly increased. While the environmental movement has yet to notice the connection, these inefficiencies are the root causes of “suburban sprawl.” Yet the expanded supply of housing and relaxed mortgage-eligibility standards were not simply driving demand; they appeared to be fostering family breakup, separation, divorce, and cohabitation outside of wedlock. In essence, American housing policy was no longer reinforcing the married-parent family as the social ideal or upholding the needs of children; it had lost what Carlson calls its “normative content.” So at the very time the housing industry was booming, the “home economy” was struggling. Moreover, the single-salary rule that was used to qualify mortgage applications was eliminated under legal pressures from activists who claimed to be representing women, not the family. This had the effect of making housing relatively more expensive and introducing disincentives for married parents who would prefer the ideal division of labor that would allow mothers to devote their full-time attention to children rearing. All these policy reversals coincided with the sharp decline in the proportion of new mortgages granted to married couples with children, which in the mid-1960s time represented 99 percent of all FHA mortgages.
Conservatives tend to blame the Democrats as well as Fannie Mae and Freddie Mac for the boom-and-bust of real estate during the Aughts (the 00s) that brought about the liquidity crisis, panic, and global depression in 2008. While it is true that U.S. Representative Barney Frank, the Democratic from Massachusetts, strenuously resisted efforts to tighten the reigns on Fannie Mae and Freddie Mac when he chaired the House Financial Services Committee, the Republican party has been equally complicit in the fixation on homeownership, not family formation, as a means of growing the economy. Both sides of the aisle have supported policies that disproportionately encourage and reward homeownership over other forms of capital investment. Those policies include government-guaranteed mortgages, the mortgage-interest deduction in the tax code, and the Taxpayer Relief Act of 1997, which exempts most sellers from paying taxes on capital gains arising from home sales. They also include a host of relatively recent “innovations” in housing finance that put the country in a deeper hole—including adjustable-rate, interest-only, and no-money down mortgages.
Making matters worse, both parties have more or less supported the Federal Reserve’s effort, since the mild 2001 recession, to keep interest rates at historically low levels, an effort that re-inflated the dollar, pushing it down against the Euro and gold and driving demand for hard assets that presumably would be paid back with cheaper future dollars. While it may not have been apparent at the time, every one of these developments put upward and artificial pressure on housing prices. As Carlson draws the analogy, policymakers in Washington supported the digression of U.S. housing policy from a world where men like George Bailey of It’s a Wonderful Life and family-owned institutions like the Bailey Brothers’ Building & Loan were the dominant players to the nightmare where financial giants like Mr. Potter, who lack a sense of civic mindedness, and big Wall Street firms, not only took over the industry but also benefited as their friends in Washington quickly came to their rescue when their house of cards came tumbling down.
Another Broken Promise
It may not have been clear three years ago, but no one would doubt today that Uncle Sam’s intervention in the housing and mortgage markets under the rubric of “growing the economy” utterly failed to deliver on what the political class had promised. At the very time when the policy experts were repeating their promises that they were keeping the housing market viable, making housing affordable and accessible for “the underserved,” and extending the American Dream as widely as possible, the housing market entirely unraveled. The efforts to “grow the economy” by artificially enlarging the real-estate market backfired.
This unraveling didn’t happen right away. But the structure gave way at the very moment when economists thought recessions were a thing of the past and homeowners thought rising housing values would continue to deliver unprecedented levels of discretionary income. Indeed, the first decade of the twenty-first century was the worst decade of economic performance since the 1930s. As the Washington Post reported in early 2010, the Aughts were “a lost decade for American workers” as measured by a wide range of data: Job growth was essentially zero, as the modest gains in employment in the middle years of the decade did not compensate for the job losses due to the recessions that framed the beginning and the end of the ten-year period. Even a metric as flawed as the GDP indicated weak economic growth. Household net worth, adjusted for inflation, plunged while stock prices stagnated.
Housing metrics reflect this dismal record. The home-ownership rate increased only marginally, from 65 to 69 percent between 1975 and 2005, nothing like the 20-point jump in the thirty years after World War Two. Moreover, median housing prices today, adjusting for the drop in values since 2005, remain higher in inflation-adjusted dollars than they were in the mid-1990s, leading some analysts to predict that values will decline further as historical trend lines re-establish themselves.
Driving the distortion of housing prices, in part, is a new demographic phenomenon of the past thirty years: the multiplication of upper-middle-class couples in which both husband and wife are highly educated and command high salaries. These dual high-income couples represent a social arrangement very different from that found in marriages in which the wives’ earnings from outside employment are supplementary. The new arrangement allows a relatively small number of privileged “power” couples to pool their resources and social networks, doubling their advantages relative to their less-privileged peers, especially those living on one paycheck but rearing more children. By eliminating the “one-salary” rule for weighing mortgage eligibility, policymakers drove up home values and so helped create a new dynamic in which the old “family-wage” economy gave way to a new “dual-income” economy.
The net effect has been the development of an entirely new living standard, one that further disorders the economy: a standard set by the high-earner two-income family that leaves all others behind, especially the one-earner family that not long ago epitomized the vast American middle class. The multiplication of couples in which both husband and wife hold advanced degrees and earn high salaries has created a new social segregation as divisive as racial segregation. Unlike the old social world where highly educated Americans were more or less evenly distributed in U.S. cities and where very few marriages had more than one advanced degree (because women tended to marry up the educational ladder), the new social world is one where couples, if both spouses pursue high-powered careers, enjoy the status of a new aristocracy. The emergence of this new aristocracy helps explain the gap that separates Red States from Blue States as well as the “clustering” of like-minded elites that journalist Bill Bishop laments in The Big Sort. As indicated by studies showing that inequality has grown steadily since 1980, the multiplication of dual-professional couples marks the end of a golden era (from World War Two to about 1980) when Americans were more alike and when social and economic inequality was actually declining.
These demographic shifts were at work well before the dislocations caused by the mortgage and financial crises, making the costs of family formation—from buying a house to bearing, rearing, and educating children—exceedingly high in major metropolitan areas. The fact that middle-class couples—especially young married parents who seek a conventional division of labor so that Mom is not forced to work outside the home and can have three or more children—find their backs against the wall underscores how the American economy of the twenty-first century has lost any sense of human purpose. Instead of resembling the “humane economy” that French writer R. L. Bruckberger claimed made America at mid-twentieth century the envy of the West, the U.S. economy has been looking more like the “creative destruction” that Joseph Schumpeter wrote about when he taught at Harvard in the 1930s and 1940s.
Spurring Investment in Human Capital
Had policymakers not lost sight of the family in the 1970s—had they focused on ensuring that the growth in the numbers of married-parent families that graced the immediate postwar era had continued as the then-rising Baby Boomers reproduced the same healthy family patterns—the economic narrative of the past ten years would have been very different. Unfortunately, policymakers focused instead on the mere production and consumption of goods and services as ends in and of themselves. Indeed, as long as policymakers continue to overlook the fundamental importance of the family, the country can kiss any kind of sustained or meaningful recovery good-bye. Meanwhile, American families will continue to suffer from the acute consequences of a disordered economy in which the balance sheet of multinational corporations counts for more than the health of the American family.
The lesson for 2011 should be clear: Now, more than ever, the country needs economic policies that foster family growth, initiatives that favor, not undermine, the social realm in which Americans find their true identity, by making marriage, family formation, and the Declaration’s “pursuit of happiness”—understood by Thomas Jefferson’s fellow Virginians to mean family life and children—dramatically more affordable, more desirable, and more achievable in the twenty-first century. As Goldman observes, “Unless we restore the traditional family to a central position in American life, we cannot expect to return to the kind of wealth accumulation that characterized the 1980s and 1990s.”
A renewed policy focus on the development of human capital is imperative because people are what matter most in any economy. As Patrick F. Fagan explained in a previous issue of this journal, every marriage is a fundamental building block of the economy:
Every marriage creates a new household, an independent economic unit that generates income, spends, saves, and invests. The vast majority of these new households produce children and transforms what are largely self-centered babies into responsible adults, contributing the indispensable next generation of human capital to the economy. But that new household does more than simply increase the labor supply or consumer spending. . . . Marrying and staying married for life, as well as bearing and rearing children, . . . transforms the behavior and attitudes of men and women—and their children—in profound ways that not only strengthens the economy but also serves as its very lifeblood.
Likewise, John Mueller has warned, “neither growth of the labor force nor rising labor productivity owing to technical progress can be assumed, because there can be no growth in the labor force without a prior investment in child-rearing.” Investments in human capital in one generation, he writes, determine the return of labor compensation of the next, a return which has historically accounted for two-thirds of economic growth in the United States. Moreover, stimulating greater investments in human capital by encouraging the children of Boomers, who seem even slower to wed than their parents, to settle down and form families would generate near-term economic consequences as well. Relative to any other segment of the population, young married parents are most likely to purchase new homes, new appliances, new cars, new consumer items, and new clothes—and all for a human purpose. When this type of investment in human capital happened in the mid-1950s, it accounted for nearly the entire increase in the GDP.
Given the deterioration of the social sector since the 1970s, policymakers should recognize that corrective action to rebuild the American family is every bit as urgent as were measures to stabilize the credit markets in 2008. To understand this urgency, we need only to paraphrase Abraham Lincoln’s observation that labor predates capital: the family is prior to, and independent of the economy. The economy is only the fruit of the family, and could have never existed if the family had not first existed. The family transcends the economy, and deserves much higher consideration. Whatever specific proposals policymakers adopt to spur greater investment in human capital, whether the reforms set forth by John D. Mueller and James C. Capretta in their accompanying essays or the tax proposals set forth by Allan Carlson, David Goldman, or former George W. Bush administration Treasury official Robert Stein, they need to act quickly. Until they do so, the country will remain stuck with a surplus of broken families and empty McMansions—not to mention high unemployment—rather than a full stock of solid homes with children to fuel genuine and lasting economic growth.
Mr. Patterson is editor of The Family in America.