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Spending Binge? Not Really

And they're off! From the farm bill to increases in defense spending, Democrats and Republicans seem to be vying to see who can spend the most.

Nevertheless, federal outlays as a share of gross domestic product are still relatively modest in historic terms. Even including the farm bill and the Mar. 9 stimulus package, federal spending will likely total just 19.2% of GDP in the current fiscal year, according to estimates from Lehman Brothers Inc. (chart). That's still well below the 20.2% of GDP the federal government averaged from 1950 to 2000. And Lehman's chief economist, Ethan Harris, projects the federal share of GDP could stay at 19.2% in fiscal year 2003 as well.

Moreover, political resistance to higher spending may increase if the federal government's share climbs much above 20%. Historically, that has been the level that triggers a public reaction. For example, when the federal share of GDP rose above 20% in the second half of the 1970s, that helped build popular opposition to government taxes and spending. Indeed, the federal share of GDP peaked at 23.5% in 1983, right when the Reagan tax cuts started going into effect. "One reason why total government spending hasn't fluctuated that much over the years is that eventually political pressure forces it back down," says Srinivas Thiruvadanthai, director of research at the Jerome Levy Forecasting Center in Mount Kisco, N.Y. As a result, federal expenditures have tended not to move much above or below 20% of GDP in the long run.

That doesn't make the current spending trends harmless. What's worrying economists is that both defense and homeland security have been added to Social Security and Medicare as nonnegotiable spending categories. That means that the public outcry against big federal spending may be more muted than in the past. Add this to your midlife crisis: Workers who lost jobs this recession are staying unemployed longer than those in the last economic downturn--an average of 16.6 weeks in April, 2002, vs. 13.5 weeks in April, 1991, right after the last recession ended.

The burden of extended unemployment is falling hardest on older workers, notes David A. Wyss, chief economist at Standard & Poor's. Over the past year, the length of unemployment for workers 45 and over has risen much more than for younger workers. For example, the duration of unemployment for workers age 55 to 64 averaged 20.6 weeks in the three months ending April. That's up nearly five weeks from the same period a year earlier. The unemployment duration for workers age 45 to 54 showed a similar but slightly smaller rise. By comparison, the duration of unemployment rose only by about three weeks for workers age 25 to 44.

Of course, it could be that some older unemployed workers, flush with money from the boom, are pickier when they look for a new job. But a more worrisome possibility is that many older workers aren't as comfortable with new technology as their younger counterparts, making it harder to find jobs.

In addition, Wyss suggests that in this downturn companies have been axing entire business units when they cut jobs, rather than cutting less-senior workers. This lops off more older workers with one swing.

The increase in duration of unemployment could help dampen the recovery, Wyss predicts. (It could also be adding to the spike in age-discrimination complaints, which have surged 23% in the past two years, according to the Equal Employment Opportunity Commission.) Older workers already have had to wrestle with declines in their retirement portfolios. Now it is likely that a growing proportion will have to accept lower-paying jobs once they find them. "Forget about early retirement," Wyss says. Over the past year, the headline number for inflation was 1.6%. But that doesn't represent everyone's experience. In fact, big-city dwellers have been hit by bigger price increases recently than their small-city or town counterparts.

In the year ended April, 2002, inflation in the largest metropolitan areas--ones with a population of more than 1.5 million--was 2.1%. By comparison, the inflation rate in medium and small metropolitan areas was 1.1%, and it was only 0.7% in nonmetropolitan urban areas, defined as areas with a population under 50,000 (chart).

The difference was due primarily to housing. Take that out, and the gap between big cities and small towns narrows significantly. "Housing prices have increased in cities faster than inflation," says Susan M. Wachter, professor of real estate and finance at the University of Pennsylvania's Wharton School.

Wachter argues that the higher prices reflect a sort of urban renaissance. The largest American cities are losing population at a much slower rate these days. Less than a third of the largest 100 cities lost population during the 1990s, compared with half of the top 100 from 1970 to 1990, says Wachter. Meanwhile, many rural towns have been shrinking.

It has also become harder to build housing near many big cities as local governments try to limit urban sprawl. These policies make cities more livable, but they also limit the local housing supply. Such antisprawl zoning started in the late 1980s, "but now it is pervasive enough to affect metropolitan areas nationwide," says Wachter.

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