Yesterday reader CHilke suggested that DOTE writes itself lately. How right he is! Signs of the Empire's Decline are everywhere you look. All I have to do is write it up.
Our accelerating downfall is truly a shame, and should be shameful to those running this country. The media will tell you how Obama's jobs proposal is faring, will report about Obama on the stump in North Carolina to promote it. Krugman likes the proposal. Republicans don't like it. On and on this nonsense goes. This new jobs bill is like putting a band-aid on a broken leg. Actually, it's worse than that, because the patient is dying. And it won't even pass!
The latest sign of our decline came from the Wall Street Journal's As Middle Class Shrinks, P&G Aims High and Low. It seems that Proctor and Gamble (P&G) has a strategy to tailor their products for the Haves and the Have Nots in so far as there doesn't seem to be any Middle anymore. This is being called an "hourglass" strategy. You can learn about it in the Daily Ticker video (below). We've got bigger fish to fry. Let start with this background text from the Journal.
In the wake of the worst recession in 50 years, there's little doubt that the American middle class—the 40% of households with annual incomes between $50,000 and $140,000 a year—is in distress.
Even before the recession, incomes of American middle-class families weren't keeping up with inflation, especially with the rising costs of what are considered the essential ingredients of middle-class life—college education, health care and housing. In 2009, the income of the median family, the one smack in the middle of the middle, was lower, adjusted for inflation, than in 1998, the Census Bureau says.
The slumping stock market and collapse in housing prices have also hit middle-class Americans. At the end of March, Americans had $6.1 trillion in equity in their houses—the value of the house minus mortgages—half the 2006 level, according to the Federal Reserve. Economist Edward Wolff of New York University estimates that the net worth—household assets minus debts—of the middle fifth of American households grew by 2.4% a year between 2001 and 2007 and plunged by 26.2% in the following two years.
I could quibble with their definition of the Middle Class—those making between $50,000 and $140,000 per year. That's a huge range, with the top being almost 3 times the bottom. Just yesterday we learned that 50% of households (the median) make $49,400 or less. (Of those, 15% make $22,314 or less.) I therefore do not see how the next 40% of households constitutes the "middle". But let's move on.
Here's where things get interesting.
To monitor the evolving American consumer market, P&G executives study the Gini index, a widely accepted measure of income inequality that ranges from zero, when everyone earns the same amount, to one, when all income goes to only one person. In 2009, the most recent calculation available, the Gini coefficient totaled 0.468, a 20% rise in income disparity over the past 40 years, according to the U.S. Census Bureau.
"We now have a Gini index similar to the Philippines and Mexico—you'd never have imagined that," says Phyllis Jackson, P&G's vice president of consumer market knowledge for North America. "I don't think we've typically thought about America as a country with big income gaps to this extent."
Over the past two years, P&G has accelerated its research, product-development and marketing approach to target the newly divided American market.
We now have a Gini index similar to the Philippines and Mexico—you'd never have imagined that. Well, go ahead and imagine it. Think really hard about it. Absorb it.
I found an interesting article called Equality and growth: a non-linear relationship which clarifies America's predicament.
The question whether equality is beneficial for economic growth and progress has occupied the minds of the greatest scientific thinkers as well as policy makers. Evidence from a broad panel of recent academic studies shows the relation between income inequality and the rate of growth and investment is indeed robust however not linear.
In his study Inequality and Growth in a Panel of Countries, Robert J. Barro (Harvard University) found that higher inequality tends to retard growth in poor countries and encourage growth in well developed regions. In their study for the World Institute for Development Economics Research, Giovanni Andrea Cornia and Julius Court (2001) reach similar conclusions. They found that both very high egalitarianism and high inequality cause slow growth, and that the relation between equality and growth follows an inverted U-shape curve. The authors therefore recommend pursuing moderation as to the distribution of wealth to avoid the extremes.
Extreme egalitarianism leads to incentive traps, free-riding, high operation costs and corruption in the redistribution system, all reducing a country's growth potential. However also extreme inequality diminishes growth potential through the erosion of social cohesion, increasing social unrest and social conflict causing uncertainty of property rights.
I've edited the graph to show where I estimate the U.S. stands in the inequality-growth space (hatched circle).
It seems that the United States has moved far beyond the "optimum" inequality point where growth is maximized. We are clearly in the space in which there are incentive traps, erosion of social cohesion, social conflicts and uncertain property rights. In my recent post America Is A Plutonomy, we learned that societies overly dependent on the rich to prop up consumption are especially unstable. In America, the top 5% of Americans by income account for 37% of all consumer outlays. The bottom 80% account for only 39.5%.
But history makes it clear that when economies mutate into plutonomies they become dangerously volatile. Just as a ship with a broad base is more stable than a top-heavy boat, so an economy in which well-paid workers create mass consumer markets for the goods and services they provide is more stable than a top-heavy plutonomy.
The United States has entered into very dangerous territory. In his opening remarks in the video below, Henry Blodget says the following—
One of the dirty little secrets in the United States of America right now is that we are seeing record inequality, the difference between what the rich people make and everybody else makes is at levels we have not seen since the late 1920s. No one likes to talk about that, but that's the fact, and now one of the nation's biggest companies, Proctor and Gamble, is straight-up acknowledging that...
We specialize in "dirty little secrets" here at DOTE, but let me add some crucial detail. Creating jobs and lowering the unemployment rate is now mostly a political issue, as I explained in A Modest Proposal For Reducing The Unemployment Rate. Since creating jobs is a worthy goal, the political debate about it has credence. But as we've seen today, the structural problems in this country go way, way beyond creating a few lousy, low-paying jobs.
This is yet another example of "fool you once, fool you twice" politics in action. Don't get distracted. Don't let our rulers pull the wool over your eyes. America is in serious trouble.
Back in May, a prominent Madison Avenue marketing firm published a paper which basically told companies they needed to direct their marketing to the über wealthy, not the "middle class" or even "upper middle class".
It was blogged about here(not sure if you caught this):
http://toomuchonline.org/madison-ave-declares-mass-affluence-over/
Here's the link to the Ad Age paper discussed above:
http://adage.com/article/adagestat/ll-rich-35-100k-household-income/227671/
Posted by: xraymike79 | 09/15/2011 at 12:21 PM