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Martin Hart-Landsberg: Troubling economic trends for US workers

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By Martin Hart-Landsberg

September 15, 2011 -- Reports from the Economic Front, posted at Links International Journal of Socialist Renewal with permission -- The US Census Bureau just published new data revealing trends in living standards as of 2010. The trends are troubling to say the least.

Median household income (adjusted for inflation) fell to US$49,445 (see below). That means that the median household in the United States now earns less than it did a decade ago.This marks the first decade since the Great Depression without an increase in real median income. According to Lawrence Katz, a labour expert and Harvard economist,

This is truly a lost decade.We think of America as a place where every generation is dong better, but we’re looking at a period when the median family is in worse shape than it was in the late 1990s.

The percentage of Americans living in poverty hit 15.1 per cent, the highest percentage since 1993 (see below). There are now 46.2 million people living below the poverty line, the greatest number ever recorded by the Census Bureau. Child poverty stood at 22 per cent.

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Things are unlikely to get better this year. State and local governments are slashing employment and programs and the federal government is now moving into cutting mode itself.

This depressing situation is not simply a recession phenomenon.As the New York Times reports, the expansion period of 2001 to 2007 “was the first ... on record where the level of poverty was deeper, and median income of working-age people was lower, at the end than at the beginning”.

Of course, while the great majority of people are struggling, a small minority have been doing very well. One consequence, as the chart below highlights, is a strong growth in inequality (as measured by the Gini coefficient with higher numbers reflecting greater inequality).As I noted in a previous post, over the years 2002 to 2007, the top 1 per cent of households captured 58 per cent of all the income generated.

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So, in brief, there is a small minority that is doing very well and a great majority that is struggling, with a significant number in free fall. Corporations understand what is happening and they are responding. In brief, they are letting go of the middle class as a market and restructuring their offerings to appeal to the top and bottom of the income distribution.

Here is an enlightening five-minute discussion of this new business strategy on Daily Ticker video.

The Wall Street Journal, highlighting Procter & Gamble, also reports on this development:

For the first time in 38 years ... the company launched a new dish soap in the U.S. at a bargain price. P&G’s roll out of Gain dish soap says a lot about the health of the American middle class: The world’s largest maker of consumer products is now betting that the squeeze on middle America will be long lasting...

P&G isn’t the only company adjusting its business. A wide swath of American companies is convinced that the consumer market is bifurcating into high and low ends and eroding in the middle. They have begun to alter the way they research, develop and market their products...

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.”

Such a response may well strengthen corporate bottom lines, at least for a while. Unfortunately for the great majority of us, it may also reinforce existing downward trends in income.

One nation divisable

By Martin Hart-Landsberg

September 5, 2011 --  Reports from the Economic Front, posted at Links International Journal of Socialist Renewal with permission -- The media generally talk about the economy in national terms—as if economic trends affect us all equally and we all share a common interest in supporting or opposing the same economic policies.  This comforting view tends to promote political passivity – since we are all in the same “boat”, it makes sense to leave policy making to the experts.

A recently published study on income distribution by economists Anthony Atkinson, Thomas Piketty and Emmanuel Saez stands as a welcome corrective. Uwe E. Reinhardt discusses some of the main implications of their work in his New York Times blog.

Reinhardt’s Figure 1 shows average annual income growth for households in the United States and the different experiences of the top 1% and the bottom 99%.  From 1976 to 2007, average household income grew at an average annual rate of 1.2%. Over the same period, the top 1% of households experienced an average annual income gain of 4.4% while the bottom 99% of households gained only 0.6% a year. Household income gains were higher in both sub-periods (1993-2000 and 2002-2007), in large part because these sub-periods were recession free.   

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Figure 2 shows the share of total income growth in each time period that was captured by the top 1% of households. Over the years 1976 to 2007, these households captured 58% of all income generated. Their share was an astounding 65% in the period 2002 to 2007. 

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This skewed income distribution means that average income figures present a highly misleading picture of the US experience. As Reinhardt explains:

So if an American macroeconomist — a specialist who tends to think of nations as people — or high-level government officials or politicians mimicking a macroeconomist boasted on a television talk show that “average family income grew by 3 percent during 2002-7, more than in most European economies,” about 99 percent of American viewers, reflecting on their own experience, would probably scratch their heads and wonder, “What is this guy talking about?”

Figure 3 highlights the growth in real GDP per capita and median household income from 1975 to 2007. The data show a growing divergence between what working people produced and what the average household received from that production.  Real GDP per capita rose by an annual compound rate of 1.9% while real median household income increased by less than 0.5%.

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As Reinhardt points out: “Other than national pride in league tables, that 1.9 percent average economic growth does not mean much for the experience of the median household in the United States.”

This brings us back to the issue of whether it makes sense to talk in “national” terms, especially given the dominance of the top 1% of households. According to Anthony Atkinson, Thomas Piketty and Emmanuel Saez:

Average real income per family in the United States grew by 32.2 percent from 1975 to 2006, while they grew only by 27.1 percent in France during the same period, showing that the macroeconomic performance in the United States was better than the French one during this period. Excluding the top percentile, average United States real incomes grew by only 17.9 percent during the period while average French real incomes — excluding the top percentile — still grew at much the same rate (26.4 percent) as for the whole French population. Therefore, the better macroeconomic performance of the United States and France is reversed when excluding the top 1 percent.

None of this is to suggest that US society is best understood in terms of a simple division between the top 1% and the bottom 99%; the latter group is far from homogeneous. Still, this division alone is big enough to establish that talking in simple national terms hides more than it illuminates about the US experience. Said differently, just because the top 1% of US households have reason to celebrate the US economic model doesn’t mean that the rest of us should join in the celebration.

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