Many political commentators have been complaining recently about the financial difficulties of the American middle class. For example, a recent report from Bill Moyers and Company, “By the Numbers: The Incredibly Shrinking American Middle Class”, has a chart showing that the median middle class salary, adjusted for inflation, is now no better than it was in 1989 and not much higher than in 1979: But there is another point of view, very well described by the two economists, Donald Boudreaux and Mark Perry, in the Wall Street Journal just about a year ago, “The Myth of a Stagnant Middle Class”. They make several pertinent points:
The Consumer Price Index overestimates inflation by underestimating the value of improvements in product quality and variety.
Wage figures ignore the rise over the past few decades in the portion of worker pay taken as (nontaxable) fringe benefits. Health benefits, pensions, paid leave, etc. now amount to almost 31% of total compensation according to the Bureau of Labor Statistics.
The average hourly wage has been held down by the great increase of women and immigrants into the workforce over the past three decades. Because the economy was (before the Great Recession) so strong, it created millions of jobs for the influx of often lesser skilled workers into the workforce.
Messrs. Boudreaux and Perry point out several other improvements in the quality of life which Americans enjoy:
Life expectancy has increased to 79 years for an American born today, five years longer than in 1980. And the gap in life expectancy between whites and blacks has narrowed.
Spending by households on the basics of food, housing, utilities, etc. has shrunk from 53% of income in 1950, to 44% in 1970 to 32% today.
Although income inequality is rising when measured in dollars, it is falling when measured in terms of our ability to consume. For another example, air travel is now as common as was bus travel in an earlier era. And another: the latest electronic products are available to even middle class teenagers.
Conclusion: We should stop complaining about inequality and thank our lucky stars for the free enterprise system which has been so successful in improving our quality of life.
In yesterday’s Wall Street Journal, the economist Robert Grady addresses “Obama’s Misguided Obsession With Inequality”. The basic problem is that an important Congressional Budget Office report in 2011, “ Trends in the Distribution of Household Income Between 1979 and 2007”, is easy to misrepresent and misinterpret. Here are three basic pieces of data from the CBO report: The first chart shows that yes, between 1979 and 2007 the rich did indeed get richer relative to the rest of the population. The second chart shows, however, that median household income increased by 62% during this same time period. And the third chart shows that all five income groups made substantial gains at the same time.
As Mr. Grady says, “Here is the bottom line. In periods of high economic growth, such as the 1980s and 1990s, the vast majority of Americans gain and have the opportunity to gain. In periods of slow growth, such as the past four and a half years since the recession officially ended, poor people and the middle class are hurt the most, and opportunity is curbed. … The point is this: If the goal is to deliver higher incomes and a better standard of living for the majority of Americans, then generating economic growth – not income inequality or the redistribution of wealth – is the defining challenge of our time.”
So then, what is the best way to address income inequality? Should we concentrate on raising taxes on the rich and increasing spending on social programs like we have done in the last five years? Or should we rather concentrate on speeding up economic growth, as Mr. Grady says, in order to create more jobs and more opportunities for advancement?
Compare the enormous growth in the period from 1979 to 2007 with the stagnation of the past five years. Isn’t it obvious which is the better way to proceed?
The economist Joseph Stiglitz has an Op Ed column in today’s New York Times, “In No One We Trust”, blaming the financial crisis on the banking industry. “In the years leading up to the crisis our traditional bankers changed drastically, aggressively branching out into other activities, including those historically associated with investment banking. Trust went out the window. … When 1 percent of the population takes home more than 22 percent of the country’s income – and 95 percent of the increase in income in the post-crisis recovery – some pretty basic things are at stake. … Reasonable people can look at this absurd distribution and be pretty certain that the game is rigged. … I suspect that there is only one way to really get trust back. We need to pass strong regulations, embodying norms of good behavior, and appoint bold regulators to enforce them.” Mr. Stiglitz is partially correct. Although the housing bubble, caused by poor government policy – loose money, subprime mortgages, and lax regulation – was the primary cause of the financial crisis, nevertheless, poorly regulated banking practices made the crisis much worse. But this is all being fixed with Dodd-Frank, a just recently implemented Volker Rule, and a soon coming wind-down of Fannie Mae and Freddie Mac. Mr. Stiglitz concludes, “Without trust, there can be no harmony, nor can there be a strong economy. Inequality is degrading our trust. For our own sake, and for the sake of future generations, it is time to start rebuilding it. But how do we reduce the inequality in order to restore the trust which is necessary for a strong economy? Mr. Stiglitz doesn’t say! What we need is faster economic growth in order to create more new jobs. The last four years have demonstrated that the Federal Reserve can’t accomplish this with quantitative easing. It needs to be done by private business and entrepreneurship. Tax reform and the easing of regulations on new businesses is what we need. It’s too bad that ideological blinders prevent so many people from understanding this basic truth!
A recent article in Bloomberg View by Cass Sunstein, “How Did the 1 Percent Get Ahead So Fast?“, discusses the significance of new research by the economist Emmanuel Saez, ”Striking it Richer: The Evolution of Top Incomes in the United States”. Referring to Saez’s table and chart below, the conclusion is that income inequality has been getting steadily worse since the early 1980s and has been especially pronounced since June 2009 when the Great Recession ended. In particular, 95% of all income gain in the last four years has gone to the top 1%. This is a much greater disparity than during the so-called Clinton Expansion, from 1993 – 2000 (45% to the top 1%) or during the Bush Expansion, from 2002 – 2007 (65% to the top 1%). According to Mr. Sunstein, “one point is clear: through 2012 the gains from the current recovery were concentrated among the top 1 percent, and that pattern, extreme though it is, fits with a general surge in economic inequality over the last 40 years.” But there is more to the story! Looking at the final chart, just above, it is clear that the economy grew much faster during the Clinton Expansion than during the Bush Expansion, and, in turn, much more slowly during the Obama Recovery. In other words, the way to reduce inequality is to speed up economic growth. There are tried and true ways to speed up growth (e.g. tax reform with lower rates, emphasis on deregulation, boosting entrepreneurship, etc.). It is unfortunate that too many in Congress, as well as the President have ideological blinders which prevent them from moving in this direction!
The liberal economist Paul Krugman returns to one of his favorite topics in yesterday’s New York Times, “Why Inequality Matters”. “On average, Americans remain a lot poorer today than they were before the economic crisis. For the bottom 90 percent of families, this impoverishment reflects both a shrinking economic pie and a declining share of that pie.” The problem with Mr. Krugman’s analysis is that he offers no solution beyond more fiscal stimulus: “the premature return to fiscal austerity has done more than anything to hobble the recovery.” But there is another route to recovery and it is propounded in today’s Wall Street Journal by George Osborne, the United Kingdom’s Chancellor of the Exchequer, “How Britain Returned to Growth”. “We cut spending and top tax rates, and now deficits are down and jobs are being created at a healthy clip … at the rate of 60,000 per month, roughly equivalent to 300,000 in the U.S. … The corporate tax rate is being cut to 20% from 28%. … As a result, more international firms are moving their headquarters to Britain and investment is flowing into our country.”
Yes, as Mr. Krugman says, economic inequality in the U.S. is bad and getting worse. The question is what to do about it. Shall we try to improve the situation with artificial stimulation, increasing government debt, already very high, for future generations? Or shall we address this inequality by encouraging businesses to grow and expand and thereby raise wages and hire more people.
The good news is that America is the success story of the 20th century. The bad news is that everyone else in the world has figured this out and is now copying our own best methods. Either we can compete, innovate, stay on top and thrive, or else we can get lazy, stagnate and sink down in the pack.
Will it be more inequality or more growth? The choice is up to us!
In today’s New York Times, the economist Arindrajit Dube has an Op Ed column in the Great Divide series, “The Minimum We Can Do”, pointing out that today’s minimum wage of $7.25 per hour is only 37% of today’s median hourly wage of about $20 per hour. This compares with the 1968 minimum wage of $10.60 per hour (in today’s dollars, adjusted for inflation) which was 55% of the median wage at that time. This is in line with the current Democratic proposal to raise the minimum wage to $10.10 per hour.
The standard argument against raising the minimum wage is that it will reduce employment because “when labor is made more costly, employers will hire less of it.” However Mr. Dube offers empirical data which “suggest that a hypothetical 10% increase in the minimum wage affects employment in the restaurant or retail industries by much less than 1 percent” and therefore very little.
Basically Mr. Dube is arguing that raising the minimum wage won’t hurt the economy and it will help many low-paid workers. The problem with this point of view is that it distracts attention from what we really should be doing: namely, everything we possibly can to speed up economic growth. By far the best way to raise wages is to increase the value of labor by creating more jobs!
I may sound like a broken record, repeating the same thing over and over again, but we badly need to concentrate on the fundamentals of growing the economy: lowering tax rates, individual and corporate, to stimulate business investment and risk taking by entrepreneurs; removing onerous regulatory burdens, especially on new businesses and existing small businesses; and emphasizing career education and job training to fill the millions of high skill job openings which exist.
There are strong headwinds facing our economy: bad demographics (rapidly retiring baby boomers), pressure from technological progress and globalization which put a high premium on education and advanced skills, and massive national debt which will become a huge burden as interest rates inevitably increase.
These strong headwinds aren’t going away. To overcome them we need national leaders who are able to rise above ideology and focus on the fundamentals.
Conclusion: we should raise the minimum wage when unemployment drops to 6% or, perhaps, tie a raise in the minimum wage to a tax reform measure which significantly lowers tax rates.
In a recent Washington Post column, “Government is Not Beholden to the Rich”, the economics writer Robert Samuelson shows that the federal government is actually “beholden to the poor and middle class. It redistributes from the young, well-off and wealthy to the old, needy and unlucky.”
For example, in 2006 “53% of non-interest federal spending represented individual benefits and healthcare. Of these transfers (nearly $1.3 trillion), almost 60% went to the elderly. Of the non-elderly’s $550 billion of benefits and healthcare, the poorest fifth of households received half. The non-elderly paid about 85% of the taxes, with the richest fifth covering two-thirds of that. If government taxes and transfers – what people pay and get – are lumped together, the average elderly household received a net payment of $13,900 in 2006; the poorest fifth of non-elderly households received $12,600. By contrast, the net tax payment for the richest fifth of non-elderly households averaged $66,000.”
A couple of months ago a Wall Street Journal Op Ed “Obama’s Economy Hits His Voters Hardest” by the economist Stephen Moore, points out that during the time period 1981 – 2008, the Great Moderation, income for black women was up by 81%, followed by white women up 67%, black men up 31% and, finally, white men up only 8%. Of course, all of these groups have lost income in the last four years, during the very weak recovery from the Great Recession.
The answer is clear. The best way to help low income people lift themselves up is not to redistribute even more government resources to them but rather to boost the economy to create more and better jobs. There are tried and true methods to get this done: tax reform (to encourage more risk taking and entrepreneurship), immigration reform (to provide more willing workers) and true healthcare reform (to get healthcare spending under control).
We need national leaders who understand how to make the economy grow faster and are able to stay focused on this urgent task.
Today’s Wall Street Journal has a story “Job Gap Widens in Uneven Recovery”, which shows how unbalanced the economic recovery is. For workers aged 25 and older, unemployment is only 6%, compared to the overall unemployment rate of 7.3%. But for the young, ages 16 – 24, unemployment is 15%. Since the end of the recession in June 2009, wages have risen by 12% for the highest paid 25% of all workers. For the lowest paid 25%, wages have only risen by 6% over this time period.
“Households earning $50,000 or more have become steadily more confident over the past year and a half. Among lower income households, confidence has stagnated. The gap in confidence between the two groups is near its widest ever. That isn’t only bad for those being left behind. It’s also hurting the broader recovery, because it means families are able to spend only on essential items. Consumer spending rose just .1% in September 2013, after adjusting for inflation.”
Unfortunately, this data is entirely consistent with other gloomy economic trends which I have been reporting on recently such as the threat of technology to the middle class, the increased competition from globalization, and the shrinking size of the labor pool because of baby boomer retirements.
The New York Times has a running series of articles on “The Great Divide” and how to address it. Here is a clear cut example of this divide: how older, better trained and more affluent Americans are recovering from the recent recession more quickly than the less well off. This evident unfairness is damaging to the health of our society. The question is how do we address it in an effective manner?
The basic problem is the overall slow growth of the economy, about 2% of GDP per year, since the recession ended in June 2009. There are many things that policy makers can do to speed up this growth if they were only able to set aside ideological differences. The best single action by far is tax reform, for both individuals and corporations, lowering overall rates in exchange for reducing deductions and loopholes which primarily benefit the wealthy.
Here is yet another reason why it is so important to speed up the growth of our economy. How exasperating that our national leaders cannot figure out a way to come to together and get this done!
In yesterday’s New York Times Timothy Noah has a column in The Great Divide series “The 1 Percent Are Only Half the Problem” in which he makes the case that there are two different types of inequality which society needs to address. First, the income gap between the top 1% and the bottom 99% is getting wider and wider. But there is also a skills gap between the (college) educated class and those whose education ended in high school.
What can and should be done about these two different aspects of inequality in America? Controlling the excesses on Wall Street in order to avoid future bailouts will help control the wages of the top 1%. This is already being done with the Dodd-Frank financial reforms and current efforts to require the biggest banks to hold more capital reserves.
But much more could be done. Unfortunately, the main effect of the Federal Reserve’s low interest rate policy is to drive up the stock market which favors the more affluent. Broad based tax reform which would lower tax rates by eliminating unjustified tax breaks for the rich would do much more to stimulate faster economic growth and give a big boost to middle class incomes.
The huge and rapidly growing cost of employer provided health care (now averaging about $5000 annually for individual coverage and about $14,000 for family coverage) is having a huge negative impact on middle class wage growth. The U.S. spends twice as much of GDP, about 18%, on healthcare as any other developed nation. Reforming employer provided health insurance by removing the tax exemption (and replacing it with lower tax rates) would get each of us personally involved with controlling healthcare costs.
The skills gap is driven by globalization and the advance of technology and is not going to disappear. The only way to address it is by improving educational outcomes. Putting more emphasis on early childhood education (ages 0-5) will help as well as making college more accessible and affordable. Online education and especially Massive, Open, Online Courses (MOOCs) will help in both respects. Hopefully more and more students and families will come to realize that there are many attractive alternatives to very expensive and elite residential colleges and universities. It is not necessary to be wealthy or to borrow lots of money to attend college!
Conclusion: inequality in American society is a large and growing problem. But there are effective ways for both policy makers and individuals to respond.