Posts Tagged ‘inflation’

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Those aren’t my words. The quotation that forms the title of this post is from a recent Federal Reserve Bank of St. Louis blog post.

And they’re important to keep in mind in light of the news coverage (e.g., by the New York Times) of last week’s Labor Department report on hiring and unemployment. Yes, 250 thousand jobs were added in the U.S. economy last month and average earnings did rise by 0.2 percent and are up 3.1 percent over the past year.

But. . .

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The rate of growth of American workers’ wages (the blue line in the chart above) is only a hair above the increase in consumer prices (the red line). So, for all intents and purposes, real wages remain stagnant.

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Meanwhile, the profits captured by American corporations continue to grow, reaching new record highs.

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It should come as no surprise, then, that the labor share of national income (the light blue line in the chart above) remains below its pre-crash level (and much lower than any earlier year in postwar history), while the share of national income that is distributed to wealthy households in the form of dividends (the light green line) is still much higher than it’s been throughout the postwar period.

Never have corporate profits and dividends outgrown workers’ wages so clearly and for so long. And the political party dominating all three branches of the U.S. government is doing everything in its power to make sure that trend continues.

That’s the proper context for the latest jobs report—and for tomorrow’s elections across America.

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Marketplace’s Kai Ryssdal is no class warrior. Far from it. But after Donald Trump’s chief economic adviser Larry Kudlow spent considerable time during a recent interview celebrating the latest statistics about economic growth, jobs, and wages and minimizing the effects of the trade tariffs, Ryssdal was encouraged to challenge him:

Ryssdal: Look, sir, really with all respect that’s easy for you to say sitting here on the second floor of the West Wing of the White House.

Kudlow: Now, don’t class warfare me or anything like that.

OK, let’s not class warfare him. Let’s just do some simple calculations. In June, hourly wages (for production and nonsupervisory workers in the private sector) rose at an annual rate of 2.7 percent. Prices (as measured by the Consumer Price Index) rose at an annual rate of 2.8 percent. That means real wages—workers’ purchasing power—actually declined, by 0.1 percent.

As is clear from the chart above, even as hourly wages (the grey line) have been growing by 2.2 to 2.7 percent since Trump was inaugurated, inflation (the red line) has also been rising, by 2.5 to 2.8 percent. The result is that the rate of growth of real wages (the blue line), which started in negative territory, is still in negative.

So, a year and a half after Trump took office, lots of conventional economic numbers look good: GDP growth, corporate profits, the stock market, the unemployment rate, and so on all point in a positive direction. Now, it’s a stretch to call it the Trump Bump, since it’s basically a continuation of the recovery that preceded his election. But we can let Trump and Kudlow revel in those numbers, which improve the fortunes of a small group of large corporations and wealthy individuals at the top.

However, it’s the rate of growth of real wages that affects the majority of Americans—and it indicates what can only be called a Trump Slump.

Put the two together and it sounds like class warfare to me. And it’s being directed not at but from the West Wing of the West House.

 

 

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John Hatgioannides, Marika Karanassou, and Hector Sala are absolutely right: mainstream macroeconomists and policymakers never venture beyond the “holy trinity” of economic growth, inflation, and unemployment.* Everything else, including the distribution of income and wealth, is relegated to the fringes.

This problem, while always serious, has been magnified in recent decades as inequality has grown to obscene levels, particularly in the United States. The labor share (the blue line in the chart above) has been falling since 1960 and, in the past decade and a half, it dropped an astounding 10.2 percent. Meanwhile, the share of income captured by the top 1 percent (the red line in the chart) has soared, rising from 10.5 percent in 1976 to 19.6 percent in 2014.

In order to rectify the problem, Hatgioannides, Karanassou, and Sala propose to bring inequality in from the margins as the “missing fourth statistic.”

They focus particular attention on inequality in relation to tax contributions. But they do so in the manner that departs from the usual discussion, which leaves the discussion at absolute income tax contributions (such as the share of income taxes paid by each economic group). Those are the numbers we often hear or read, which seek to show how progressive the U.S. tax system is. For example, according to the Tax Foundation, the top 1 percent paid a greater share of individual income taxes (39.5 percent) than the bottom 90 percent combined (29.1 percent).

Instead, Hatgioannides, Karanassou, and Sala concentrate on the ratio of the average income tax per given income group divided by the percentage of national income captured by the same income group (what they call the Effective Income Tax contribution), whence they calculate an inequality index (the Fiscal Inequality Coefficient).

What the Fiscal Inequality Coefficient shows is the relative contribution of filling the fiscal coffers for different pairs of income groups.

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In the figure above, they plot the Fiscal Inequality Coefficient based on income shares (they also report a related index based on wealth), of the bottom 90 percent versus the top 10 percent, the bottom 99 percent versus the top 1 percent, and the bottom 99.9 percent versus the top 0.1 percent for 1962, 1980, 1995, 2010, and 2014.

Thus, for example, the Fiscal Inequality Coefficient based on income shares remains relatively constant for all pairs for years 1962 and 1980 but increases significantly by 2010—with the bottom 90 percent effectively contributing 6.5 times more than the top 10 percent, the bottom 99 percent 21.4 times more than the top 1 percent, and the bottom 99.9 percent effectively contributing 89.7 times more than the top 0.1 percent.**

Clearly, the relative income tax burden for those at the top has fallen over time, demonstrating that the U.S. tax system has become less, not more, progressive.

And the authors’ conclusion?

In the current era of fiscal consolidation should the rich be taxed more? Our evidence suggests unequivocally yes.

 

*Their paper is discussed in the Guardian by Larry Elliott. The submitted version of their article is available here.

**The results are even more dramatic if one calculates the Fiscal Inequality Coefficient based on household wealth shares: in 2010, the Bottom 99.9 percent contributed 208.9 times more than the Top 0.1 percent, nearly four times more than what it was in 1980!

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Neil Irwin would like us to believe there’s a mystery surrounding the U.S. economy. But it’s not what one might expect:

The real mystery. . .isn’t why wages are rising so slowly, but why they’re rising so fast.

Really?!

In Irwin’s model, workers’ wages should rise at the same rate as productivity combined with inflation. And he’s worried that wages are rising faster than that right now.

Except they’re not. And they haven’t been for decades.

As is clear from the chart at the top of the post, the change in workers’ wages (hourly wages for production and nonsupervisory workers) has often surpased the rate of growth of per capita output (GDP per capita) for long periods of time. But when we add in inflation (according to the Consumer Price Index), only rarely in recent decades have wages surpassed the sum of output and price changes (during some months of some recessions). In general, workers’ wages have fallen short—in many cases, by 4 and 5 percentage points.

And that’s been going on for decades, which is why the labor share of national income has been falling. Workers produce more, prices go up, and wages rise by much less.

Even recently, after a short period when wages were rising faster than productivity plus inflation (from the second quarter of 2015 to the third quarter of 2016), that trend has continued. In the first quarter of 2017, when wages rose at an annual rate of 2.4 percent, the rate of growth of output per capita and inflation was higher, at 3.9 percent.

For Irwin, as for most mainstream economists, the real mystery is why productivity has been growing so slowly—because they cling to the idea that everyone, including workers, will benefit if only they could find some way to boost productivity.

But that ship sailed long ago. Workers’ wages haven’t matched the growth of the value workers produce for decades. And there’s no reason to expect that trend to change in the foreseeable future—not when employers can get away with paying workers as little as possible.

As I see it, the real mystery is why Irwin and mainstream economists continue to hold to the myth that workers will benefit from rising productivity.

It doesn’t take a Sherlock Holmes (or, if you prefer, Kurt Wallander) to figure out that, if they continue to focus on productivity and its supposed benefits, they can try to keep things just as they are right now.

But the rest of us know the existing economic institutions have failed—and failed miserably for decades now—and that radically new ways of organizing the economy have to be imagined and enacted.