Martin Hart-Landsberg: Yes, Virginia, there is a 1%

For more on the Occupy movement, click HERE.

By Martin Hart-Landsberg

October 24-November 7, 2011 – Reports from the Economic Front, posted at Links International Journal of Socialist Renewal with permission – The Occupy Wall Street movement has succeed in forcing the media to acknowledge the extent and seriousness of income inequality. In many ways wealth inequality is a bigger problem, since it is wealth that largely underpins income and power differences.

According to an Economic Policy Institute posting,

the richest 5 percent of households obtained roughly 82 percent of all the nation’s gains in wealth between 1983 and 2009. The bottom 60 per cent of households actually had less wealth in 2009 than in 1983, meaning they did not participate at all in the growth of wealth over this period.

It is worth dividing the top 5% into what has now become two familiar groups, the top 1% and the next 4%.

As the chart below shows, the top 1% of households captured 40% of all the growth in wealth over the period 1983 to 2009.

The next 4% gained 41.5%.

Putting these trends into dollars, households in the top 1% gained an average of $4.5 million in wealth and households in the next 4% gained an average of $1.2 million over the period. It is worth restating that those are just their gains. How does your existing wealth stack up against their gains?

Too big to fail

Our financial system is dominated by banks considered too big to fail. And that is a problem for the rest of us. As Time Magazine explains:

“Too big to fail is opposed by the right and the left, though not apparently by the people drafting legislation,” says Simon Johnson, an MIT professor and the author of a recently published book on the subject, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. “The current financial-reform bills are effectively a wash on the issue.”

The question is how large banks ought to be allowed to become. When large banks run into trouble, regulators are often unwilling to let them fail, as bank failures can wipe out individual depositors. What’s more, banks often fund their operations by borrowing from other banks. The bigger the bank, the more likely it is to put other banks at risk if it fails. Mass bank failures, especially of big banks, means people can’t get loans. And no loans, no economy.

That’s why the government decided to bail out most of the nation’s largest banks at the height of the financial crisis. And here’s where the problem potentially gets worse. Once bankers understand that the government will bail out their firms when their loans or other financial bets go bad, they are likely to take riskier and riskier bets. That, of course, leads to more potential bank failures — and more taxpayer-funded bailouts.

Not only have attempts at reform largely failed, government regulators have often tried to paper over financial problems by encouraging our dominant banks to swallow smaller, less stable ones, thereby worsening the problem.

So, who are our ”too big to fail” banks and how did they get so big? Here is a time line that charts the process and highlights the winners.

Inequality: class and race

The Occupy movement has clearly transformed conversations about the economy.

It is now inequality–in particular, the gap between the top 1% and everyone else–rather than the national debt that dominates the news.

This gap is real, as the following charts from the Economic Policy Institute make clear.

This first one shows the percentage increase in household income over the period 1979 to 2007 by income group.

While the top 1% enjoyed income gains of 224% over the period, the gains enjoyed by the bottom 90% were far more modest–5%.

Equally striking is the fact that the household income of top 0.01% shot up an astounding 390%.

The second illustrates the fact that the top 1% of households captured approximately 60% of the total income growth over the years 1979 to 2007.

The third illustrates the fact that the top 1% of households also captured 86.5% of the total growth in capital income (defined as dividends; interest payments; realised capital gains; and other business income, which includes partnership income, income from S corporations, and rental income).

Strikingly as the Economic Policy Institute explains, “This figure departs from the convention of the other charts in not isolating the bottom 90% because their average capital income fell between 1979 and 2007, registering as negative capital income growth, which is hard to depict in a pie chart.”

Unfortunately, there is another income gap that has not received nearly as much attention. It is the white--non-white gap. The Oregon-based Coalition of Communities of Color recently published a report on the socioeconomic situation of people of colour in Multnomah Country (which includes Portland) and Oregon.

As the chart below reveals, the mean income of families of colour in the top decile actually declined by $6002 over the years 1979 to 2007.

By contrast, the mean income of white families in the top decile rose by $122,591.

White families and families of colour in the bottom half of the distribution all suffered losses.

The following two charts show the mean earnings of each group by decile and their change between 1979 and 2007.

This last chart shows poverty rates by colour. Clearly, as we work to create a more equitable society, our efforts must also be guided by awareness of the existence of serious racial and ethnic inequities.

Troubling trends

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.

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.

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.

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.

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%.

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.