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Economic inequality has been on the rise in the United States for 30-odd years. Not since the Gilded Age of the late 19th century -- during what Mark Twain referred to as "the Great Barbeque" -- has the country witnessed such a rapid shift in the distribution of economic resources.
Still, most mainstream economists do not pay too much attention to the distribution of income and wealth -- that is, how the value of current production (income) and past accumulated assets (wealth) is divided up among U.S. households. Some economists focus their attention on theory for theory's sake and do not work much with empirical data of any kind. Others who are interested in these on-the-ground data simply assume that each individual or group gets what it deserves from a capitalist economy. In their view, if the share of income going to wage earners goes up, that must mean that wage earners are more productive and thus deserve a larger slice of the nation's total income -- and vice versa if that share goes down.
Heterodox economists, however, frequently look upon the distribution of income and wealth as among the most important shorthand guides to the overall state of a society and its economy. Some are interested in economic justice; others may or may not be, but nonetheless are convinced that changes in income distribution signal underlying societal trends and perhaps important points of political tension. And the general public appears to be paying increasing attention to income and wealth inequality. Consider the strong support voters have given to recent ballot questions raising state minimum wages and the extensive coverage of economic inequality that has suddenly begun to appear in mainstream news outlets like the New York Times, the Los Angeles Times, and the Wall Street Journal, all of which published lengthy article series on the topic in the past few years. Just last month, news outlets around the country spotlighted the extravagant bonuses paid out by investment firm Goldman Sachs, including a $53.4 million bonus to the firm's CEO.
By now, economists and others who do pay attention to the issue are aware that income and wealth inequality in the United States rose steadily during the last three decades of the 20th century. But now that we are several years into the 21st, what do we know about income and wealth distribution today? Has the trend toward inequality continued, or are there signs of a reversal? And what can an understanding of the entire post-World War II era tell us about how to move again toward greater economic equality?
The short answers are: (1) Income distribution is even more unequal that we thought; (2) The newest data suggest the trend toward greater inequality continues, with no signs of a reversal; (3) We all do better when we all do better. During the 30 or so years after World War II the economy boomed and every stratum of society did better -- pretty much at the same rate. When the era of shared growth ended, so too did much of the growth: the U.S. economy slowed down and recessions were deeper, more frequent, and harder to overcome. Growth spurts that did occur left most people out: the bottom 60% of U.S. households earned only 95 cents in 2004 for every dollar they made in 1979. A quarter century of falling incomes for the vast majority, even though average household income rose by 27% in real terms. Whew!
The classless society
Throughout the 1950s, 1960s, and 1970s, sociologists preached that the United States was an essentially "classless" society in which everyone belonged to the middle class. A new "mass market" society with an essentially affluent, economically homogeneous population, they claimed, had emerged. Exaggerated as these claims were in the 1950s, there was some reason for their popular acceptance. Union membership reached its peak share of the privatesector labor force in the early 1950s; unions were able to force corporations of the day to share the benefits of strong economic growth. The union wage created a target for nonunion workers as well, pulling up all but the lowest of wages as workers sought to match the union wage and employers often granted it as a tactic for keeping unions out. Under these circumstances, millions of families entered the lower middle class and saw their standard of living rise markedly. All of this made the distribution of income more equal for decades until the late 1970s. Of course there were outliers -- some millions of poor, disproportionately blacks, and the rich family here and there.
Something serious must have happened in the 1970s as the trend toward greater economic equality rapidly reversed. Here are the numbers. The share of income received by the bottom 90% of the population was a modest 67% in 1970, but by 2000 this had shrunk to a mere 52%, according to a detailed study of U.S. income distribution conducted by Thomas Piketty and Emmanuel Saez, published by the prestigious National Bureau of Economic Research in 2002. Put another way, the top 10% increased their overall share of the nation's total income by 15 percentage points from 1970 to 2000. This is a rather astonishing jump -- the gain of the top 10% in these years was equivalent to more than the total income received annually by the bottom 40% of households. To get on the bottom rung of the top 10% of households in 2000, it would have been necessary to have an adjusted gross income of $104,000 a year. The real money, though, starts on the 99th rung of the income ladder -- the top 1% received an unbelievable 21.7% of all income in 2000. To get a handhold on the very bottom of this top rung took more than $384,000.
The Piketty-Saez study (and subsequent updates), which included in its measure of annual household income some data, such as income from capital gains, that generally are not factored in, verified a rising trend in income inequality which had been widely noted by others, and a degree of inequality which was far beyond most current estimates. The Internal Revenue Service has essentially duplicated the Piketty-Saez study. They find that in 2003, the share of total income going to the "bottom" four-fifths of households (that's 80% of the population!) was only slightly above 40%. Both of these studies show much higher levels of inequality than were previously thought to exist based on widely referenced Census Bureau studies. The Census studies still attribute 50% of total income to the top fifth for 2003, but this number appears to understate what the top fifth now receives -- nearly 60%, according to the IRS.
A brave new globalized world for workers
Why the big change from 1970 to 2000? That is too long a story to tell here in full. But briefly, we can say that beginning in the early 1970s, U.S. corporations and the wealthy individuals who largely own them had the means, the motive, and the opportunity to garner a larger share of the nation's income -- and they did so.
Let's start with the motive. The 1970s saw a significant slowdown in U.S. economic growth, which made corporations and stockholders anxious to stop sharing the benefits of growth to the degree they had in the immediate postwar era.
Opportunity appeared in the form of an accelerating globalization of economic activity. Beginning in the 1970s, more and more U.S.-based corporations began to set up production operations overseas. The trend has only accelerated since, in part because international communication and transportation costs have fallen dramatically. Until the 1970s, it was very difficult -- essentially unprofitable -- for giants like General Electric or General Motors to operate plants offshore and then import their foreign-made products into the United States. So from the 1940s to the 1970s, U.S. workers had a geographic lever, one they have now almost entirely lost. This erosion in workers' bargaining power has undermined the middle class and decimated the unions that once managed to assure the working class a generally comfortable economic existence. And today, of course, the tendency to send jobs offshore is affecting many highly trained professionals such as engineers. So this process of gutting the middle class has not run its course.
Given the opportunity presented by globalization, companies took a two-pronged approach to strengthening their hand vis-à-vis workers: (1) a frontal assault on unions, with decertification elections and get-tough tactics during unionization attempts, and (2) a debilitating war of nerves whereby corporations threatened to move offshore unless workers scaled back their demands or agreed to givebacks of prior gains in wage and benefit levels or working conditions.
A succession of U.S. governments that pursued conservative -- or pro-corporate -- economic policies provided the means. Since the 1970s, both Republican and Democratic administrations have tailored their economic policies to benefit corporations and shareholders over workers. The laundry list of such policies includes:
- new trade agreements, such as NAFTA, that allow companies to cement favorable deals to move offshore to host nations such as Mexico;
- tax cuts for corporations and for the wealthiest households, along with hikes in the payroll taxes that represent the largest share of the tax burden on the working and middle classes;
- lax enforcement of labor laws that are supposed to protect the right to organize unions and bargain collectively.
Exploding millionairism
Given these shifts in the political economy of the United States, it is not surprising that economic inequality in 2000 was higher than in 1970. But at this point, careful readers may well ask whether it is misleading to use data for the year 2000, as the studies reported above do, to demonstrate rising inequality. After all, wasn't 2000 the year the NASDAQ peaked, the year the dot-com bubble reached its maximum volume? So if the wealthiest households received an especially large slice of the nation's total income that year, doesn't that just reflect a bubble about to burst rather than an underlying trend?
To begin to answer this question, we need to look at the trends in income and wealth distribution since 2000. And it turns out that after a slight pause in 2000-2001, inequality has continued to rise. Look at household income, for example. According to the standard indicators, the U.S. economy saw a brief recession in 2000-2001 and has been in a recovery ever since. But the median household income has failed to recover.* In 2000 the median household had an annual income of $49,133; by 2005, after adjusting for inflation, the figure stood at $46,242. This 6% drop in median household income occurred while the inflation-adjusted Gross Domestic Product expanded by 14.4%. When the Census Bureau released these data, it noted that median household income had gone up slightly between 2004 and 2005. This point was seized upon by Bush administration officials to bolster their claim that times are good for American workers. A closer look at the data, however, revealed a rather astounding fact: Only 23 million households moved ahead in 2005, most headed by someone aged 65 or above. In other words, subtracting out the cost-of-living increase in Social Security benefits and increases in investment income (such as profits, dividends, interest, capital gains, and rents) to the over-65 group, workers again suffered a decline in income in 2005.
Another bit of evidence is the number of millionaire households -- those with net worth of $1 million or more excluding the value of a primary residence and any IRAs. In 1999, just before the bubbles burst, there were 7.1 million millionaire households in the United States. In 2005, there were 8.9 million, a record number. Ordinary workers may not have recovered from the 2000-2001 rough patch yet, but evidently the wealthiest households have!
Many economists pay scant attention to income distribution patterns on the assumption that those shifts merely reflect trends in the productivity of labor or the return to risk-taking. But worker productivity rose in the 2000-2005 period, by 27.1%. At the same time, from 2003 to 2005 average hourly pay fell by 1.2%. (Total compensation, including all forms of benefits, rose by 7.2% between 2000 and 2005. Most of the higher compensation spending merely reflects rapid increases in the health insurance premiums that employers have to pay just to maintain the same levels of coverage. But even if benefits are counted as part of workers' pay -- a common and questionable practice -- productivity growth outpaced this elastic definition of "pay" by 50% between 1972 and 2005.)
And at the macro level, recent data released by the Commerce Department demonstrate that the share of the country's GDP going to wages and salaries sank to its lowest postwar level, 45.4%, in the third quarter of 2006. And this figure actually overstates how well ordinary workers are doing. The "Wage & Salary" share includes all income of this type, not just production workers' pay. Corporate executives' increasingly munificent salaries are included as well. Workers got roughly 65% of total wage and salary income in 2005, according to survey data from the U.S. Department of Labor; the other 35% went to salaried professionals -- medical doctors and technicians, managers, and lawyers -- who comprised only 15.6% of the sample.
Moreover, the "Wage & Salary" share shown in the National Income and Product Accounts includes bonuses, overtime, and other forms of payment not included in the Labor Department survey. If this income were factored in, the share going to nonprofessional, nonmanagerial workers would be even smaller. Bonuses and other forms of income to top employees can be many times base pay in important areas such as law and banking. Goldman Sachs's notorious 2006 bonuses are a case in point; the typical managing director on Wall Street garnered a bonus ranging between $1 and $3 million.
So, labor's share of the nation's income is falling, as Figure 3 shows, but it is actually falling much faster than these data suggest. Profits, meanwhile, are at their highest level as a share of GDP since the booming 1960s.
These numbers should come as no surprise to anyone who reads the paper: story after story illustrates how corporations are continuing to squeeze workers. For instance, workers at the giant auto parts manufacturer Delphi have been told to prepare for a drop in wages from $27.50 an hour in 2006 to $16.50 an hour in 2007. In order to keep some of Caterpillar's manufacturing work in the United States, the union was cornered into accepting a contract in 2006 that limits new workers to a maximum salary of $27,000 a year -- no matter how long they work there -- compared to the $38,000 or more that long-time Caterpillar workers make today. More generally, for young women with a high school diploma, average entry-level pay fell to only $9.08 an hour in 2005, down by 4.9% just since 2001. For male college graduates, starter-job pay fell by 7.3% over the same period.
Aiding and abetting
And the federal government is continuing to play its part, facilitating the transfer of an ever-larger share of the nation's income to its wealthiest households. George W. Bush once joked that his constituency was "the haves and the have-mores" -- this may have been one of the few instances in which he was actually leveling with his audience. Consider aspects of the four tax cuts for individuals that Bush has implemented since taking office. The first two cut the top nominal tax rate from 39.6% to 35%. Then, in 2003, the third cut benefited solely those who hold wealth, reducing taxes on dividends from 39.6% to 15% and on capital gains from 20% to 15%. ( Bush's fourth tax cut -- in 2006 -- is expected to drop taxes by 4.8% percent for the top one tenth of one percent of all households, while the median household will luxuriate with an extra nickel per day.)
So, if you make your money by the sweat of your brow and you earned $200,000 in 2003, you paid an effective tax rate of 21%. If you earned a bit more, say another $60,500, you paid an effective tax rate of 35% on the additional income. But if, with a flick of the wrist on your laptop, you flipped some stock you had held for six months and cleared $60,500 on the transaction, you paid the IRS an effective tax rate of only 15%. What difference does it make? Well, in 2003 the 6,126 households with incomes over $10 million saw their taxes go down by an average of $521,905 from this one tax cut alone.
These tax cuts represent only one of the many Bush administration policies that have abetted the ongoing shift of income away from most households and toward the wealthiest ones. And what do these top-tier households do with all this newfound money? For one thing, they save. This is in sharp contrast to most households. While the top fifth of households by income has a savings rate of 23%, the bottom 80% as a group dissave -- in other words, they go into debt, spending more than they earn. Households headed by a person under 35 currently show a negative savings rate of 16% of income. Today overall savings -- the savings of the top fifth minus the dis-savings of the bottom four-fifths -- are slightly negative, for the first time since the Great Depression.
Here we find the crucial link between income and wealth accumulation. Able to save nearly a quarter of their income, the rich search out financial assets (and sometimes real assets such as houses and businesses) to pour their vast funds into. In many instances, sometimes with inside information, they are able to generate considerable future income from their invested savings. Like a snowball rolling downhill, savings for the rich can have a turbo effect -- more savings generates more income, which then accumulates as wealth.
Lifestyles of the rich
Make the rich even richer and the creative forces of market capitalism will be unleashed, resulting in more savings and consequently more capital investment, raising productivity and creating abundance for all. At any rate, that's the supply-side/neoliberal theory. However -- and reminiscent of the false boom that defined the Japanese economy in the late 1980s -- the big money has not gone into productive investments in the United States. Stripping out the money pumped into the residential real estate bubble, inflation-adjusted investment in machinery, equipment, technology, and structures increased only 1.4% from 1999 through 2005 -- an average of 0.23% per year. Essentially, productive investment has stagnated since the close of the dot-com boom.
Instead, the money has poured into high-risk hedge funds. These are vast pools of unregulated funds that are now generating 40% to 50% of the trades in the New York Stock Exchange and account for very large portions of trading in many U.S. and foreign credit and debt markets.
And where is the income from these investments going? Last fall media mogul David Geffen sold two paintings at record prices, a Jasper Johns ($80 million) and a Willem de Kooning ($63.5 million), to two of "today's crop of hedge-fund billionaires" whose cash is making the art market "red-hot," according to the New York Times.
Other forms of conspicuous consumption have their allure as well. Boeing and Lufthansa are expecting brisk business for the newly introduced 787 airplane. The commercial version of the new Boeing jet will seat 330, but the VIP version offered by Lufthansa Technik (for a mere $240 million) will have seating for 35 or fewer, leaving room for master bedrooms, a bar, and the transport of racehorses or Rolls Royces. And if you lose your auto assembly job? It should be easy to find work as a dog walker: High-end pet care services are booming, with sales more than doubling between 2000 and 2004. Opened in 2001, Just Dogs Gourmet expects to have 45 franchises in place by the end of 2006 selling hand-decorated doggie treats. And then there is Camp Bow Wow, which offers piped-in classical music for the dogs (oops, "guests") and a live Camper Cam for their owners. Started only three years ago, the company already has 140 franchises up and running.
According to David Butler, the manager of a premiere auto dealership outside of Detroit, sales of Bentleys, at $180,000 a pop, are brisk. But not many $300,000 Rolls Royces are selling. "It's not that they can't afford it," Butler told the New York Times, "it's because of the image it would give." Just what is the image problem in Detroit? Well, maybe it has something to do with those Delphi workers facing a 40% pay cut. Michigan's economy is one of the hardest-hit in the nation. GM, long a symbol of U.S. manufacturing prowess, is staggering, with rumors of possible bankruptcy rife. The best union in terms of delivering the goods for the U.S. working class, the United Auto Workers, is facing an implosion. Thousands of Michigan workers at Delphi, GM, and Ford will be out on the streets very soon. (The top three domestic car makers are determined to permanently lay off three-quarters of their U.S. assembly-line workers -- nearly 200,000 hourly employees. If they do, then the number of autoworkers employed by the Big Three -- Ford, Chrysler, and GM -- will have shrunk by a staggering 900,000 since 1978.) So, this might not be the time to buy a Rolls. But a mere $180,000 Bentley -- why not?
Had enough of the “haves”?
In the era Twain decried as the "great barbeque," the outrageous concentration of income and wealth eventually sparked a reaction and a vast reform movement. But it was not until the onset of the Great Depression, decades later, that massive labor/social unrest and economic collapse forced the country's political elite to check the growing concentration of income and wealth.
Today, it does not appear that there are, as yet, any viable forces at work to put the brakes on the current runaway process of rising inequality. Nor does it appear that this era's power elite is ready to accept any new social compact. In a recent report on the "new king of Wall Street" (a co-founder of the hedge fund/private-equity buyout corporation Blackstone Group) that seemed to typify elite perspectives on today's inequality, the New York Times gushed that "a crashing wave of capital is minting new billionaires each year." Naturally, the Times was too discreet to mention is that those same "crashing waves" have flattened the middle class. And their backwash has turned the working class every-which-way while pulling it down, down, down.
But perhaps those who decry the trend can find at least symbolic hope in the new boom in yet another luxury good. Private mausoleums, in vogue during that earlier Gilded Age, are back. For $650,000, one was recently constructed at Daytona Memorial Park in Florida -- with matching $4,000 Medjool date palms for shade. Another, complete with granite patio, meditation room, and doors of hand cast bronze, went up in the same cemetery. Business is booming, apparently, with 2,000 private mausoleums sold in 2005, up from a single-year peak of 65 in the 1980s. Some cost "well into the millions," according to one the nation's largest makers of cemetery monuments. Who knows: maybe the mausoleum boom portends the ultimate (dead) end for the neo-Gilded Age.
Tagged as: inequality, wealth
James M. Cypher is profesor-investigador, Programa de Doctorado en Estudios del Desarrollo, Universidad Autónoma de Zacatecas, Mexico, and a Dollars & Sense associate.
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