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Wednesday, March 2, 2011

Could We Double the Median Income?

Could We Double the Typical Income?

The answer is “Yes”, and it’s not magic. We could simply increase the income tax on extremely high incomes and then redistribute it to lower incomes. Let’s suppose one group is earning 28.2% of all the nation’s income, and systematically we transfer to them another 14%, increasing to 42.8% their total income portion. That would increase by 50% their yearly earnings. That is not doubling, but it’s a good start. The lower 80% of families in 2006 received through salaries and wages 28.2% of the nation’s income (according to the Tax Policy Center of the Brookings/Urban Institute, quoted page 79 in State of Working America, 2006/2007). If the one percent of households who received 23.5% of the nation's pre-tax income in 2007 were to receive 9%, a drop of 14%, then they would be back to their 1976 level. Returning back to 1976 does not seem too radical an idea. So realizing this ‘transfer’ is one method of substantially raising non-supervisory workers’ incomes. Though it does not double their incomes.

If the determined reader wants to read a real scholarly report superior to this report I suggest the Chicago Political Economy Group’s paper “Toward a New Political Economy” January 2010. But to continue . . .

The rich will detest the idea, of course, but they are a minority in a democracy. Research shows that the top one percent has captured 56 percent of the economy’s growth in the 20 years leading to the Great Recession. (See "Striking It Richer") It is time they give some of it back. Our U.S. economy generates about $46,000 per person per year, yet strangely many, many families are very insecure. One in seven eat food purchased with food stamps, over 44 million citizens, and one in four children get their food from food stamps. To qualify for stamps one must have less than $2,000 in savings. Obviously there is something awry with the entire economy.

For 13 years during the 1950s and a little beyond, the top tax rate was 91% on incomes over $3 million (in 2009 dollars); for 45 years, 1936 to 1981, the top rate averaged 78% on incomes ranging between over $750,000 to over $3,500,000 depending on the year. To double the typical worker’s income today, which is $26,261, would require increasing the top marginal income tax rate to 78% on incomes over $450,000.

The typical U.S. worker, including (32%) part-time and (68%) full-time workers, receives $26,261 per year income; typical full-time workers receive $40,000, and households typically receive around $50,000. These typical or median incomes could be 50% higher simply by restoring the income distribution of 1976.

Between 1940 and 1980 the incomes of top ten percent of households never exceeded 35% of the total national income. In 2007 they received 49.7%, according to U.C. Berkeley Professor Emmanuel Saez' report "Striking It Richer". Very likely it is very damaging to the society and the economy to have such one-sided distribution, at least Marriner Eccles, the Chairman of the Federal Reserve from 1934 to 1948, the period of the Great Depression, argued as much in his auto-biography of 1951, Beckoning Horizons.

Productivity vs. Wages
Or, a second way to approach this problem is to conjecture that if workers’ wages had equaled rising productivity rates since 1973 then typical incomes would be double their present day amounts cited above. Our U.S. society would be another world. Could we double the typical income? Maybe, but we could easily restore the previous decades’ distribution ratio, and increase incomes by 50%: to $39,391, $60,000 and $75,000 respectively. Let’s look at doubling it. That would move the “typical” to $52,000 for individuals, $80,000 for full-time workers, and $100,000 for families:
Professor Robert Pollin, writing in the Boston Review, states that
The drop in average wages since 1973 suggests the seriousness of this problem. In 2009 the average non-supervisory worker in the United States earned $18.62 an hour (in 2009 dollars)—7 percent below the 1972 peak of $20.20 per hour (also in 2009 dollars). But this is only half the story. While wages fell, average labor productivity in the United States rose by 105 percent. In exchange for being twice as productive as they were in 1972, American workers took a 7 percent pay cut.”

In fairness, Lawrence Mishel recently writing somewhere states that the productivity rate increased by 80% not 105%. Do we really care? It all went to a few select people.

Squeezed family incomes
Much of our nation’s social problems derive from squeezed family budgets, some being extremely squeezed. It’s little known that the bottom 40% of households have on average less than $2,200 in savings (see page 33). Their budgets are squeezed. It does not have to be that way. Another, statistic shows that between 1950 and 1984 the personal savings rate averaged around 9%. It sank to below zero in 2007, and has been well below 4% since 1998. (This is a marvelous link to see all the inequality numbers.) After the Great Recession, 2007 - 2009, the median household wealth amount dropped to 1983 levels, to $65,400 from $102,000. (Much of these data come from Edward Wolff’s report of March 2010 writing for the Levy Economics Institute, available on the Internet.)

Less than $3 out of every $10 dollars (28.2%) that we generate, the economy generates, goes into the wages and salaries of the lower earning 80% of households deriving from their work. We could raise wages politically, it does not take the “free market” to do it, and see my previous essay to see “how”. Or see the report by the Chicago Political Economy Group.

I am going to repeat the first paragraph again: In 1976 the top one percent received less than 9% of the nation’s income, in 2007 it received over 23%. This almost 15% shift, if added to the 28.2%, would bring to about 43% the amount going to the bottom 80% due to labor, and to 65% in total national income. The top 20% would receive not 60% but 35% of all income. This shift would jump the typical income from $26,261 to $39,391, and full-time workers would earn $60,000 typically, and households would receive $75,000, not $50,000.

But to double incomes, we have to re-configure economic history, and match productivity gains with wages. It is sort of a fantasy, but a productive fantasy, I hope. I don’t think it’s that far-fetched; the average worker generates over $100,000 of value, and that includes the 32% of all workers who are part-time workers. Our GDP is over $14 trillion, and when divided by the labor force’s 140 million active workers, they on average generate $100,000 per worker. Doubling the median worker’s income raises it to $52,500, well under $100,000 and still leaving plenty for owners’ income, capital gains income and “other” which are mostly pension incomes.

This quote comes from Economics for the Rest of Us page 113 by Moshe Adler (2010,
“In 2007, U.S. workers produced $95,000 worth of goods and services per worker. [he cites a BEA web page] If each of them, whether CEO or worker on the shop floor, whether in the financial industry or in agriculture, earned this wage, all families could live not only well but also in affluence. But this is, of course, not the case. Nationwide, 25 percent of workers earn wages that with full-time work put them below the poverty line. [He cites State of Working America, 2006/2007] In New York City, 24 percent of retail workers must rely on some form of welfare payments while they are working full-time. What workers do not get, executives do. In 2007, average CEO compensation for S&P 500 CEOs was $10.5 million, 344 times the pay of the average worker.

We have to discover ways to balance our dysfunctional income distribution ratio. I say “dysfunctional” because 9% unemployment is dysfunctional; having over 30% of the workforce either “out of work” or with “not enough work” or “working full-time full-year for below poverty wages” is dysfunctional and wasteful; one in four children eating food bought with charity coupons is dysfunctional; the lower 40% of households owning 0.3% of the nation’s wealth is dysfunctional. This may sound like rhetoric, but I mean it objectively and clinically. It does not work, it’s dysfunctional.

Recently I came across some disturbing reports, and I wrote a comment to someone about it:

I read a report on corporate governance at PERI, — “On Uneven Ground, How Corporate Governance Prioritizes Short-Term Speculative Investment, Impedes Productive Investments, and Jeopardizes Productive Growth”. It shows that corporate net investment since 2008 is at 1% of GDP, much below its normal rate 1950 to 2000 of 3% and above. The report also presents a graph showing corporate reinvestment in stock buybacks and dividends exceeding 100% of after-tax profits since 1980. Before that time the average was around 35%. And to round out this comment, I also read a report from Rutgers University on unemployment (by Hughes and Seneca, their most recent report, Post-Recession America, a New Economic Geography?). They show that since December 2000 the number of private sector jobs has declined by 4.7%, about 5 to 6 million, so that a little more than 10 years after January 2001 the nation has fewer private sector jobs. Between 1990 and 2000 the nation created 20 million jobs in the private sector, and between 1980 and 2000 38 million were created. If the private sector is not creating jobs, who is?

Robert Brenner, in Economics in the Age of Global Turbulence, also studies these economic phenomenon. Are we eating our “seed corn”? Is this a clear indication that our ‘captains of industry’ are selling our ship down river? I’m afraid so.

Warren Brussee (Feb. 1, 2011, states that the manufacturers of a new battery for electric cars, previously U.S. owned, was just sold to a Chinese company for untold millions.
The exact quote follows:
"The Economic Policy Institute’s report on U.S. jobs lost due to the trade deficit with China shows 2.4 million jobs lost since 2001. That means that an increase of the trade balance with China of $195 billion cost the U.S. 2.4 million jobs. Since the table above shows that by 2016 our balance of trade with China will go up another $222 billion, we can expect to lose another 2.6 million jobs by 2016. It is always risky to extrapolate a trend, but will someone please tell me what we are doing to reverse this?

I had mentioned before a company that makes batteries that completely recharge in less than 10 minutes, work in extreme temperatures, are safe, and last for 25,000 cycles. Well, just last week the U.S. approved the sale of 51% of this company to a Chinese firm. This is despite the fact that this company has worked on many military contracts testing the use of this battery in several military applications, and despite the fact that this battery is used in the stimulus-supported Proterra bus that just last week got all kinds of accolades from the Obama administration for being the type of energy savings project America can be proud of."


This array of 19 facts came to me in my high school reunion newsletter, and I cannot verify the sources or the facts, but they sound about correct.

Here are 19 stunning facts about the deindustrialization of America:

#1 The United States has lost approximately 42,400 factories since 2001. About 75 percent of those factories employed over 500 people when they were still in operation.

#2 Dell Inc., one of America's largest manufacturers of computers, has announced plans to dramatically expand its operations in China with an investment of over $100 billion over the next decade.

#3 Dell has announced that it will be closing its last large U.S. manufacturing facility in Winston-Salem, North Carolina in November. Approximately 900 jobs will be lost.

#4 In 2008, 1.2 billion cell phones were sold worldwide. So how many of them were manufactured inside the United States? Zero.

#5 According to a new study conducted by the Economic Policy Institute, if the U.S. trade deficit with China continues to increase at its current rate, the U.S. economy will lose over half a million jobs this year alone.

#6 As of the end of July, the U.S. trade deficit with China had risen 18 percent compared to the same time period a year ago.

#7 The United States has lost a total of about 5.5 million manufacturing jobs since October 2000.

#8 According to Tax Notes, between 1999 and 2008 employment at the foreign affiliates of U.S. parent companies increased an astounding 30 percent to 10.1 million. During that exact same time period, U.S. employment at American multinational corporations declined 8 percent to 21.1 million.

#9 In 1959, manufacturing represented 28 percent of U.S. economic output. In 2008, it represented 11.5 percent.

#10 Ford Motor Company recently announced the closure of a factory that produces the Ford Ranger in St. Paul, Minnesota. Approximately 750 good paying middle class jobs are going to be lost because making Ford Rangers in Minnesota does not fit in with Ford's new "global" manufacturing strategy.

#11 As of the end of 2009, less than 12 million Americans worked in manufacturing. The last time less than 12 million Americans were employed in manufacturing was in 1941.

#12 In the United States today, consumption accounts for 70 percent of GDP. Of this 70 percent, over half is spent on services.

#13 The United States has lost a whopping 32 percent of its manufacturing jobs since the year 2000.

#14 In 2001, the United States ranked fourth in the world in per capita broadband Internet use. Today it ranks 15th.

#15 Manufacturing employment in the U.S. computer industry is actually lower in 2010 than it was in 1975.

#16 Printed circuit boards are used in tens of thousands of different products. Asia now produces 84 percent of them worldwide

#17 The United States spends approximately $3.90 on Chinese goods for every $1 that the Chinese spend on goods from the United States.

#18 One prominent economist is projecting that the Chinese economy will be three times larger than the U.S. economy by the year 2040.

#19 The U.S. Census Bureau says that 43.6 million Americans are now living in poverty and according to them that is the highest number of poor Americans in the 51 years that records have been kept.

So, how many tens of thousands more factories do we need to lose before we do something about it? How many millions more Americans are going to become unemployed before we all admit that we have a very, very serious problem on our hands? How many more trillions of dollars are going to leave the country before we realize that we are losing wealth at a pace that is killing our economy? How many once great manufacturing cities are going to become rotting war zones like Detroit before we understand that we are committing national economic suicide? The deindustrialization of America is a national crisis. It needs to be treated like one.

And to underscore the above: 11/9/10: The largest private employer in Saginaw, Michigan will soon be the city government of Beijing, as a 104-year-old unit of General Motors will be sold to new owners from China. The $450M purchase received little attention this summer, but it is a landmark deal - the first time Chinese investors have bought a U.S. industrial operation of such scale and history.

To quote Moshe Adler again, his last sentences: “The economy is us, and we are not doing well. We need to turn economics from a weapon that is being used against us into a science that will show us how we can do better.”

There are some solutions, read the following essay. Read the Chicago Political Economy Group’s essay. Read Josh Holland’s book The 15 Biggest Lies about the Economy. We have our homework to do.

March 2, 2011