To turn $100 into $110 is work. To turn $100 million into $110 million is inevitable
—Edward Bronfman, Sr. (as quoted in Forbes Magazine, 2001)
Writing in the Financial Times, Edward Luce explores the crisis of middle-class America. This is a familiar theme here at DOTE, which I last touched on in Wiping Out The Middle Class. Today I want to talk about median household income, which demonstrates the destruction of the Middle Class all too well. First, from Luce—
The slow economic strangulation of the [one family] and millions of other middle-class Americans started long before the Great Recession, which merely exacerbated the “personal recession” that ordinary Americans had been suffering for years. Dubbed “median wage stagnation” by economists, the annual incomes of the bottom 90 per cent of US families have been essentially flat since 1973 – having risen by only 10 per cent in real terms over the past 37 years. That means most Americans have been treading water for more than a generation. Over the same period the incomes of the top 1 per cent have tripled. In 1973, chief executives were on average paid 26 times the median income. Now the multiple is above 300.
The trend has only been getting stronger. Most economists see the Great Stagnation as a structural problem – meaning it is immune to the business cycle. In the last expansion, which started in January 2002 and ended in December 2007, the median US household income dropped by $2,000 – the first ever instance where most Americans were worse off at the end of a cycle than at the start. Worse is that the long era of stagnating incomes has been accompanied by something profoundly un-American: declining income mobility.
Source, taken from U.S. Census data. Median household income for all Americans has been falling since 1997 except for a slight Housing Bubble bump. We've now returned to trend.
In the last so-called business cycle expansion from 2002-2007, the median U.S. household income actually dropped! That certainly puts the lie to word "expansion," doesn't it? And the trend is indeed growing stronger. University of Chicago economist Richard Posner explains the deal in American Wage Stagnation—
Between 1997 and 2008, median U.S.household income fell by 4 percent after adjustment for inflation. It presumably did not rise in 2009, and may not in 2010 either. A median is not an average; average income rose because the incomes of high earners rose, and so the effect was to increase the inequality of the income distribution.
Three factors appear to have contributed significantly to this trend. One is the continuing increase in the returns to IQ and education as the United States shifts to a highly automated economy; another was and is the historically unprecedented revenue of the finance industry during this period, much of it received by financial executives in the form of very high incomes; and third is the steep increase in premiums for employer-provided health insurance: the increase was almost 80 percent between 2000 and 2009. Much of this is nominally paid by the employer, but because it is a cost of labor it substitutes for wage increases and so holds wages down.
There is no reason to think these trends will not continue; and until unemployment falls to a normal level, it is hard to see what might work to overcome the trends if they do continue.
[My note: You can tell it's the University of Chicago, which is my alma mater, because Posner could not explain declining median incomes without a reference to IQ (Intelligence Quotient). Sigh. Take that with a grain of salt.]
There is no reason to think this trend (since 1997) will not continue, and as Posner said, there is good reason to believe that the median income level is shrinking as we speak. It's not called the Dismal Science for nothing, but historical economic indicators do tell us important things sometimes.
President Obama wants to keep the Bush windfall for the wealthy (the 2001 tax cuts) for everybody but those making at least $250,000 per year (the top 2% of wage earners). Ironically, the main argument being used by apologists for the status quo is that taxing the rich will worsen the recession! As I said in Trickle Down Economics, we now have an economy which is dependent on the rich spending money because nobody else has any to spare. Clinton's Secretary of Labor Robert Reich argues—
From a strictly economic standpoint – as if economics had anything to do with this – it makes sense to preserve the Bush tax cuts at least through 2011 for the middle class. There’s no way consumers – who comprise 70 percent of the economy – will start buying again if their federal income taxes rise while they’re still struggling to repay their debts, they can’t borrow more, can no longer use their homes as ATMs, and they’re worried about keeping their jobs.
But the same logic doesn’t apply to people at the top, earning over $250K, who represent roughly 2 percent of tax filers. Restoring their marginal tax rates to what they were during the Clinton administration (36 and 39 percent) won’t inhibit their spending. That’s because they already save a large portion of what they earn, and already spend what they want to spend. (During the Clinton years the economy created 22 million net new jobs and unemployment dropped to 4 percent.)
But restoring those top marginal tax rates will help bring down the long-term debt, pulling in almost a trillion dollars of revenues over next ten years...
Yes, yes, yes, this all makes sense—up to a point. Reich's argument is disingenuous. What about income growth? Our "prosperity" during the Clinton years was based on Bubble #1 (the Tech/Internet/Stocks balloon) whereas we are now living in the aftermath of Bubble #2 (in Housing). Median household income in the United States has fallen 4% since 1997. All informed observers believe this situation will continue. Pay no attention to the politician behind the curtain.
The continuing assault on the Middle Class puts me in a Biblical frame of mind.
Romans 6:23 (King James Version):
For the wages of sin is death; but the gift of God is eternal life through Jesus Christ our Lord.
[i.e. meaning that sinners will be cast into everlasting torment]
In 21st century America, for the rich, the wages of sin are more wages! And for the rest of us? In the Sermon On The Mount (aka. the Beatitudes) Jesus told us—
Blessed are the poor in spirit,
For theirs is the kingdom of heaven.
Blessed are those who mourn,
For they shall be comforted.
Blessed are the meek,
For they shall inherit the earth...
A nice thought, but I've got to respectfully disagree. All the data says—
Artwork by Anthony Freda