Posts Tagged ‘1 percent’

Year 3 of the Trump presidency was absolutely terrific—indeed, record-breaking—for Americans.

At least that’s how things look in terms of the headline numbers from the Census Bureau: median household income was up (by 6.8 percent, a record) over 2018 and the official poverty rate decreased (by 1.3 percentage points, to 10.5 percent, the lowest rate observed since estimates were initially published for 1959).*

And then there’s Kevin Hassett, former chair of Trump’s White House Council of Economic Advisers (who returned to the White House to lead its pandemic-response team, downplaying the danger of coronavirus and pushing the administration to re-open the economy amid lockdowns and social distancing) who seized on the report to make another of his wild claims:

If you’re a social justice warrior and you’re looking at the data, you would have to say that the Trump years, through the beginning of the pandemic, were the sort-of best years for advances in social justice since World War II.

The problem is that other data in the same report show nothing of the sort.

The distribution of income in the United States was just as grotesquely unequal in 2019 as it was in 2018 (and in every year both before and now during the Trump presidency). The highest quintile of American households captured 51.9 percent of income in the United States (it was 52 percent in 2018), the fourth quintile 22.7 percent (compared to 22.6 percent the previous year), and so on down the line. The lowest quintile got 3.1 percent, exactly the same as in 2018.

So no, no “social justice warrior” would be able to say the Trump years were the “best years for advances in social justice since World War II.”

In fact, quite the opposite. The economic policies of the Trump administration are both the product of and serving to reinforce the fundamental inequalities that have characterized the United States for decades now.

They’re also the reason why the novel coronavirus pandemic has hit the United States so savagely and unevenly. As I argued back in May, and Nick Hanauer and David M. Rolf recently concurred in Time,

Like many of the virus’s hardest hit victims, the United States went into the COVID-19 pandemic wracked by preexisting conditions. A fraying public health infrastructure, inadequate medical supplies, an employer-based health insurance system perversely unsuited to the moment—these and other afflictions are surely contributing to the death toll. But in addressing the causes and consequences of this pandemic—and its cruelly uneven impact—the elephant in the room is extreme income inequality.

The basis of their claim about inequality in the United States is a new working paper by Carter C. Price and Kathryn Edwards [ht: mfa] of the RAND Corporation, “Trends in Income From 1975 to 2018.”

While their general claim is pretty familiar (the pattern of capitalist growth in the United States during the two or three decades after World War II lowered the degree of inequality but, beginning in the mid-1970s, the trend was reversed and inequality rose during every decade), their analysis of the new pattern of capitalist growth reveals just how obscene it has been.

Consider the following conclusions from their study:

  • On average, extreme inequality is costing the median income full-time worker about $42,000 a year. Half of all full-time workers now earn less than half what they would have had incomes across the distribution continued to keep pace with economic growth.
  • The median male worker needed 30 weeks of income in 1985 to pay for housing, healthcare, transportation, and education for his family. By 2018, that “Cost of Thriving Index” had increased to 53 weeks (more weeks than in an actual year).
  • Two-income families are now working twice the hours to maintain a shrinking share of the pie, while struggling to pay housing, healthcare, education, childcare, and transportation costs that have grown at two to three times the rate of inflation.

Basically, according to Price and Edwards’s calculations, the income growth for most groups of Americans—thus, the bottom 25 percent, the median, the bottom 90 percent, and so on—was less than the rate of growth of real per capita Gross Domestic Product. Only the incomes of those in the top 5 percent grew at a faster rate. Thus, for example, the aggregate income for the population below the 90th percentile after 1975 would have been 67 percent higher in 2018 had income growth followed the pattern of the first two post-War decades.

The cumulative result over the past 45 years is that the members of the bottom 90 percent lost almost $50 trillion ($47 trillion or $48.6, depending on the price deflator used), which was seized by those at the top, especially the richest 1 percent of Americans.**

That pattern of unequal growth, which was inherited by the Trump administration, has simply not changed in the last three and a half years, no matter what Trump, Haslett, or the other “hacks and grifters” in the White House say.

Moreover, the monstrous inequalities that existed at the end of 2019 have shaped in profound ways both the effects of the spread of the coronavirus across the country and the early stages of the recovery from the Pandemic Depression. American economic economic and political elites have demanded and been able to implement policies that have only served to reinforce the unequalizing pattern of economic growth, which left most Americans vulnerable to the pandemic and to the resulting economic downturn.

The unequal pattern of capitalist growth in the United States documented in the new RAND report is exactly the opposite of what social justice warriors have been fighting for. Everyone, except the tiny group at the top, have been the ultimate losers.

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*But there is a caveat on the median household income figures: the bureau’s main household survey for the report on Income and Poverty in the United States: 2019 was conducted in March and April of this year, as the pandemic was surging. That lowered the response rate, especially among low-income Americans. Still, the bureau estimates that median income in 2019 was about 4.1 percent higher than in 2018.

**The missing piece in the story told by Price and Edwards has to do with the mechanism of the massive transfer from the bottom 90 percent to those at the top. I have tried to fill in that missing piece, most recently in 2019 (e.g., here and here).

The phrase, which was used in the early nineteenth century to describe the the spoils system of appointing government workers, accurately describes the American economy today.* And it’s pretty clear who the victor is, and it’s not the working-class.

Instead, a small group at the top have come out as the victor—and that’s been true for decades now.

How do we know?

Well, all we have to do is look at the growing gap between the amount produced by American workers and what they received in their wages. Gross Domestic Product (the green line in the chart above) grew by a factor of almost 16 from 1973 onward while workers’ wages increased by a bit more than 5 before the COVID Depression.

So, American workers only received back in the form of wages a small percentage of the increased amount they produced. The rest went to their employers.

The result has been an enormous rise in U.S. corporate profits (before tax, without inventory valuation and capital consumption adjustments)—particularly evident in the trendline fitted to the data in the chart above.

The employers, in turn, transferred a portion of those profits to the Chief Executive Officers of their corporations.

According to the latest report from the Economic Policy Institute, in 2019, a CEO at one of the top 350 firms in the United States was paid $21.3 million on average (using a “realized” measure of CEO pay that counts stock awards when vested and stock options when cashed in rather than when granted). The ratio of CEO-to-typical-worker compensation was therefore 320-to-1 (222.8-to-1 using a different, “granted” measure of CEO pay). That is up from 293-to-1 in 2018 and a gigantic increase from 61.4-to-1 in 1989 and, even more, 21.1-to-1 in 1965.

Exorbitant CEO pay is a major contributor to rising inequality that we could safely do away with. CEOs are getting more because of their power to set pay—and because so much of their pay (about three-fourths) is stock-related, not because they are increasing productivity or possess specific, high-demand skills. This escalation of CEO compensation, and of executive compensation more generally, has fueled the growth of top 1.0% and top 0.1% incomes, leaving less of the fruits of economic growth for ordinary workers and widening the gap between very high earners and the bottom 90%. The economy would suffer no harm if CEOs were paid less (or were taxed more).

An even large—and growing—distribution of the surplus that is the basis of corporate profits has taken the form of dividends, paid to owners of corporate equities. In 1965, dividends were about 26 (25.8) percent of corporate profits; by the beginning of this year they were almost 70 (69.2) percent.

And according to my calculations, the top 1 percent in the United States owns (as of 2014, the last year for which data are available) 62 percent of corporate equities, which has been climbing since the late 1970s. Meanwhile, the share of the entire bottom 90 percent has been falling, and is now only 11 percent.

So, it’s really only the small group at the top that is in a position to “share in the booty” by receiving a cut of corporate profits in the form of CEO pay and stock dividends. They’ve occupied the position of victor for decades now, and to them belong the economic spoils.**

Everyone else is forced to have the freedom to try to get by on their slowly rising wages—and to watch with both fascination and horror the ongoing spectacles in corporate boardrooms and the stock market.

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*”To the victor belong the spoils” is attributed to Senator William Learned Marcy of New York who, in 1832, defended Andrew Jackson, whose campaign against President John Quincy Adams was seen partly as a vendetta against Adams, and whose conduct and remarks when taking office seemed to justify the association of Jackson with the spoils system.

**Just yesterday, in the midst of the pandemic and the worst economic downturn since the Great Depression of the 1930s, the U.S. stock market reached a new high (according to the Standard & Poor’s 500 index).

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unions

It’s clear, at least to many of us, that if the United States had a larger, stronger union movement things would be much better right now. There would be fewer cases and deaths from the novel coronavirus pandemic, since workers would be better paid and have more workplace protections. There would be fewer layoffs, since workers would have been able to bargain for a different way of handling the commercial shutdown. And there would be more equality between black and white workers, especially at the lower end of the wage scale.

But, in fact, the American union movement has been declining for decades now, especially in the private sector. Just since 1983, the overall unionization rate has fallen by almost half, from 20.1 percent to 10.3 percent. That’s mostly because the percentage of private-sector workers in unions has decreased dramatically, from 16.8 percent to 6.2 percent. And even public-sector unions have been weakened, declining from a high of 38.7 percent in 1994 to 33.6 percent last year.

The situation is so dire that even Harvard economist Larry Summers (along with his coauthor Anna Stansbury) has had to recognize that the “broad-based decline in worker power” is primarily responsible for “inequality, low pay and poor work conditions” in the United States.*

Summers is, of course, the extreme mainstream economist who has ignited controversy on many occasions over the years. The latest is when he was identified as one as one of Joe Biden’s economic advisers back in April. Is this an example, then, of a shift in the economic common sense I suggested might be occurring in the midst of the pandemic? Or is it just a case of belatedly identifying the positive role played by labor unions now that they’re weak and ineffective and it’s safe for to do so?

I’m not in a position to answer those questions. What I do know is that the theoretical framework that informs Summers’s work has mostly prevented him and the vast majority of other mainstream economists from seeing and analyzing issues of power, struggle, and class exploitation that haunt like dangerous specters this particular piece of research.

Let’s start with the story told by Summers and Stansbury. Their basic argument is that a “broad-based decline in worker power”—and not globalization, technological change, or rising monopoly power—is the best explanation for the increase in corporate profitability and the decline in the labor share of national income over the past forty years.

Worker power—arising from unionization or the threat of union organizing, firms being run partly in the interests of workers as stakeholders, and/or from efficiency wage effects—enables workers to increase their pay above the level that would prevail in the absence of such bargaining power.

So far, so good. American workers and labor unions have been under assault for decades now, and their ability to bargain over wages and working conditions has in fact been eroded. The result has been a dramatic redistribution of income from labor to capital.

labor share

Clearly, as readers can see in the chart above, using official statistics, the labor share of national income fell precipitously, by almost 10 percent, from 1983 to 2020.**

profit rate

Not surprisingly, again using official statistics, the profit rate has risen over time. The trendline (the black line in the chart above), across the ups and downs of business cycles, has a clear upward trajectory.***

Over the course of the last four decades is that, as workers and labor unions have been decimated, corporations have been able to pump out more surplus from their workers, thereby lowering the wage share and increasing the profit rate.

But that’s not how things look in the Summers-Stansbury world. In their view, worker power only gives workers an ability to receive a share of the rents generated by companies operating in imperfectly competitive product markets. So, theirs is still a story that relies on exceptions to perfect competition, the baseline model in the world of mainstream economic theory.

And that’s why, while their analysis seems at first glance to be pro-worker and pro-union, and therefore amenable to the concerns of dogmatic centrists, Summers and Stansbury hedge their bets by references to “countervailing power,” the risk of increasing unemployment, and “interferences with pure markets” that “may not enhance efficiency” if measures are taken to enhance worker power.

Still, within the severe constraints imposed by mainstream economic theory, moments of insight do in fact emerge. Summers and Stansbury do admit that the wage-profit conflict that is at the center of their story does explain the grotesque levels of inequality that have come to characterize U.S. capitalism in recent decades—since “some of the lost labor rents for the majority of workers may have been redistributed to high-earning executives (as well as capital owners).” Therefore, in their view, “the decline in labor rents could account for a large fraction of the increase in the income share of the top 1% over recent decades.”

The real test of their approach would be what happens to workers’ wages and capitalists’ profits in the absence of imperfect competition. According to Summers and Stansbury, workers would receive the full value of their marginal productivity, and there would be no need for labor unions. In other words, no power, no struggle, and no class exploitation.

That’s certainly not what the world of capitalism looks like outside the confines of mainstream economic extremism. It’s always been an economic and social landscape of unequal power, intense struggle, and ongoing class exploitation.

The only difference in recent decades is that capital has become much stronger and labor weaker, at least in part because of the theories and policies produced and disseminated by mainstream economists like Summers and Stansbury. Now, as they stand at the gates of hell, it may just be too late for their extreme views and the economic and social system they have so long celebrated.

*The link in the text is to the column by Summers and Stansbury published in the Washington Post. That essay is based on their research paper, published in May by the National Bureau of Economic Research.

**We need to remember that the labor share as calculated by the Bureau of Labor Statistics includes incomes (such as the salaries of corporate executives) that should be excluded, since they represent distributions of corporate profits.

***I’ve calculated the profit as the sum of the net operating surpluses of the nonfinancial and domestic financial sectors divided by the net value added of the nonfinancial sector. The idea is that the profits of both sectors originate in the nonfinancial sector, a portion of which is distributed to and realized by financial enterprises. The trendline is a second-degree polynomial.

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Economic inequality in the United States and around the world is now so obscene, and has convinced more and more people to do something about it, that the business press has initiated a campaign to deny its very existence.

They and the folks they represent are losing the battle of public opinion. And they’ve decided to do whatever they can to turn things around.

First up was the Economist, the “newspaper” of record for liberal capitalism [ht: sk], claiming that new research undermines the pillars of the seemingly universal belief that “inequality has risen in the rich world.” Yes, as I have documented from the very beginning on this blog (e.g., here, here, and here), there are plenty of mainstream economists who have attempted to prove that inequality isn’t really a problem—either because it doesn’t really exist or, if it does, it’s not something we can or should do much about. And so the Economist managed to find pieces of research that call into question some of the key pillars of the inequality argument—that the gap between the top 1 percent and everyone else is growing, the middle-class is shrinking, capital is gaining at the expense of labor, and wealth inequality is soaring.

I won’t waste readers’ time repeating the arguments I’ve made on all four of those points over the past decade. You can use the search function at the top of the page to see what I and others have written on these issues—or look at the latest report from the Congressional Budget Office, which I discuss below.

What’s more interesting is where the Economist wants to take the discussion—away from wealth taxes (of the sort being proposed by Bernie Sanders and Elizabeth Warren) and toward the sorts of policies that, while they won’t lessen the degree of inequality, conform to the Economist‘s fantasy of liberal capitalism. Thus, they propose more building (so that young workers can afford housing), antitrust regulation (as if capitalism didn’t have an inherent tendency toward monopoly), less regulation of high-income professions (to create more competition for those high-paying jobs), and fewer restrictions on immigration (but only for “high-skilled” workers).

That’s the Economist’s derisory attempt to minimize the existence of inequality (against most of the available evidence and widespread belief) and to devise some tiny tweaks in existing economic arrangements (and avoid more serious efforts to lessen the degree of inequality).

The Wall Street Journal has also decided to confront the growing campaign against economic inequality—by attempting to show that Donald Trump’s administration has done more to decrease inequality than Barack Obama’s, by promoting economic growth through deregulation and increased business investment. Now, it’s true, Obama oversaw a bailout of Wall Street and a return (after a brief hiatus in 2009) to the same unequalizing trends that predated the Second Great Depression. So, that’s a very low bar to surpass.

fredgraph

And even though the wages of low-income workers have been rising at a faster rate in recent quarters (the supposedly “happy wages of a growing economy”), it is still the case that the wage share of national income (as seen in the chart above) is still less than what it was in 2008 (when it was 44.9, compared to 43.2 in 2018) and far below its postwar peak in 1970 (at 51.6).

To rely on continued growth to solve the problem of inequality is simply a pipe dream, which is even less convincing than the castle in the air invented by the business press on the other side of the pond.

CBO

The fact is, the Congressional Budget Office [pdf] projects that income in the United States—both before and after transfers and taxes—will be more unevenly distributed in 2021 than it was in 2016. That’s because, even though average incomes for the bottom four quintiles are expected to grow, incomes for the top quintile (and especially for the top 1 percent) are expected to grow even faster.

Thus, for example, since 1979, while the average incomes of the middle three quintiles are expected to grow (after transfers and taxes) by a total of 57 percent, the incomes of those in the top 1 percent are projected to increase by a whopping 281 percent by 2021.

There’s no other way around it: inequality in the United States is obscene, and something—much more than minor regulations and continued growth—needs to be done to overcome it.

As it turns out, Americans are fully aware of the problem. For example, according to Gallup, the overall opinion of capitalism held by young adults (both Millennials and Gen Zers) has deteriorated to the point that capitalism and socialism are tied in popularity.

And a new Reuters/Ipsos poll finds that nearly two-thirds of respondents agree that the very rich should pay more.*

Among the 4,441 respondents to the poll, 64% strongly or somewhat agreed that “the very rich should contribute an extra share of their total wealth each year to support public programs” – the essence of a wealth tax. Results were similar across gender, race and household income. While support among Democrats was stronger, at 77%, a majority of Republicans, 53%, also agreed with the idea.

Moreover, when asked in the poll if “the very rich should be allowed to keep the money they have, even if that means increasing inequality,” 54 percent of respondents disagreed.

That’s the reason the Economist and the Wall Street Journal have decided to launch their campaign about inequality—to attempt to undermine the widespread belief that inequality is growing and, even more, to challenge any and all efforts to actually do something to create a more equal economy and society.

Such a campaign may satisfy their readers, at least in the short run, but the problem itself will remain. This election year, I expect the growing gap between the tiny group at the top and everyone else to overshadow their shabby efforts and culminate in a movement they simply won’t be able to contain.

 

*Ironically, another recent attempt to undermine the Sanders-Warren proposals of new, higher wealth taxes actually serves to reinforce how extreme wealth inequality is in the United States. While admitting that “only a small segment of the population would be subject to the top rate,” the American Action Forum’s Douglas Holtz-Eakin and Gordon Gray [pdf] can only conclude that the taxes would have “broad impacts” only because the wealth holdings of that group “constitute a significant share of the investable wealth in the economy.”