Category Archives: Broken in the USA

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Income Inequality and how the middle class has been screwed (con’t)

Income Inequality and how the middle class has been screwed

Cash money isn’t the only way workers are compensated, of course – health insurance, retirement-account contributions, tuition reimbursement, transit subsidies and other benefits all can be part of the package. But wages and salaries are the biggest (about 70%, according to the Bureau of Labor Statistics) and most visible component of employee compensation.

                                                                                                        

Wage stagnation has been a subject of much economic analysis and commentary, though perhaps predictably there’s little agreement about what’s causing it (or, indeed, whether the BLS data adequately capture what’s going on). One theory is that rising benefit costs – particularly employer-provided health insurance – may be constraining employers’ ability or willingness to raise cash wages. According to BLS-generated compensation cost indices, total benefit costs for all civilian workers have risen an inflation-adjusted 22.5% since 2001 (when the data series began), versus 5.3% for wage and salary costs.

Other factors that have been suggested include the continuing decline of labor unions; lagging educational attainment relative to other countries; noncompete clauses and other restrictions on job-switching; a large pool of potential workers who are outside the formally defined labor force, neither employed nor seeking work; and broad employment declines in manufacturing and production sectors and a consequent shift toward job growth in low-wage industries.

Sluggish and uneven wage growth has been cited as a key factor behind widening income inequality in the United States. A recent Pew Research Center report, based on an analysis of household income data from the Census Bureau, found that in 2016 Americans in the top tenth of the income distribution earned 8.7 times as much as Americans in the bottom tenth ($109,578 versus $12,523). In 1970, when the analysis period began, the top tenth earned 6.9 times as much as the bottom tenth ($63,512 versus $9,212).

Income includes the revenue streams from wages, salaries, interest on a savings account, dividends from shares of stock, rent, and profits from selling something for more than you paid for it. Income inequality refers to the extent to which income is distributed in an uneven manner among a population. In the United States, income inequality, or the gap between the rich and everyone else, has been growing markedly, by every major statistical measure, for some 30 years.

The chart below is for 2015 and the income gap has increased since then in large part to the recent income tax adjustment.

Final posting on this topic next week

Income Inequality and how the middle class has been screwed

Income Inequality and how the middle class has been screwed

Most of us believe that our citizens are entitled to a living wage. In my mind that should include adequate nutrition, acceptable housing and affordable healthcare at a bear minimum. Overall the US is the wealthiest country in the world, by far, and yet fully 1/3 of our families could not afford the average cost of healthcare if they had to pay for it. The average cost per person (regardless of age) is approaching $11,000 per year. A young family, with both husband and wife working at minimum wage would not only not have enough to pay for healthcare, but they would have nothing for food, housing, utilities, etc.

It was recently reported the top 400 wealthiest persons have a worth in excess of fully ½ of the population at the bottom end. There are top executives in companies that are earning 500 times the average wage of rest of their workers below the executive level.

The United States has the 4th worst income inequality among all the industrialized nations. The only countries that are worse are Turkey, Mexico & Chile.

It’s hard to imagine the United States being so high on this list, but truthfully, the US hasn’t seen such large income disparity since 1928. And if you thought some of the other countries had it bad in regards to numbers, these numbers will no doubt serve to shock: From 2009 to 2012, the top 1% in the U.S. claimed 95% of gains from the economic recovery. And the rest of country, the other 99%? They only saw income growth of 0.4% while their richer counterparts saw their incomes rise by over 30%. While the economy is superficially showing recovery from the Global Financial Crisis, the reality is that the lower classes are not recovering nearly as fast as that top 1%.

The following chart is another view of the inequality. It is from 2003 and the current numbers are much worse. The adjusted average adjusted gross income for ½ of the tax payers is less than 14%. Obviously, the recent tax cut will only serve to increase the disparity as almost 2/3rd of the proceeds went to high income folks.. How can anyone think this is fair?

More on this topic in next week’s post

Income Group Number of Returns AGI ($ millions) Income taxes paid ($ millions) Group’s share of total AGI (%) Group’s share of income taxes (%) Average tax rate (%) avg income
All taxpayers 128,609,786 6,287,586 747,939 100% 100% 11.90%  $        48,889
Top 1% 1,286,098 1,054,567 256,340 16.70% 34.27% 24.31%   819,974
Top 5% 6,430,489 1,960,676 406,597 31.18% 54.36% 20.74%  $     304,903
Top 10% 12,860,979 2,663,470 492,452 42.36% 65.84% 18.49%  $     207,097
Top 25% 32,152,447 4,078,277 627,380 64.86% 83.88% 15.38%  $     126,842
Top 50% 64,304,893 5,407,851 722,027 86.01% 96.54% 13.35%  $        84,097
Bottom 50% 64,304,893 879,735 25,912 13.99% 3.46% 2.95%  $        13,681

More on this topic next week

The Economy

The Economy

The U.S. economic outlook is healthy according to the key economic indicators. The most critical indicator is the gross domestic product, which measures the nation’s production output. The GDP growth rate is expected to remain between the 2 percent to 3 percent ideal range. Unemployment is forecast to continue at the natural rate. There isn’t too much inflation or deflation. That’s a Goldilocks economy. The average growth rate for the past 60 years has fluctuated quite a bit but the overall average has been in this range.

President Trump promised to increase economic growth to 4 percent. That’s faster than is healthy. Growth at that pace leads to an overconfident irrational exuberance. That creates a boom that leads to a damaging bust. The factors that cause these changes in the business cycle are supply, demand, capital availability, and the market’s perception of the economic future.

U.S. GDP growth averaged 2.4% in 2017, will average 3.1 percent in 2018, 2.5 percent in 2019, and 2.0 percent in 2020. That’s according to the most recent forecast released at the Federal Open Market Committee meeting on September 26, 2018. This estimate takes into account Trump’s economic policies.

The unemployment rate dropped to 3.7 percent in 2018, and will drop to 3.5 percent in 2019 and 2020. That’s lower than the Fed’s 6.7 percent target. But former Federal Reserve Chair Janet Yellen admitted a lot of workers are part-time and would prefer full-time work. Also, most job growth is in low-paying retail and food service industries. Some people have been out of work for so long that they’ll never be able to return to the high-paying jobs they used to have. Structural unemployment has increased. These traits are unique to this recovery.

Yellen admitted that the real unemployment rate is more accurate. It is double the widely-reported rate.

Inflation was 2.1 percent in 2018 and should be 2.0 percent in 2019, and 2.1 percent in 2020. The core inflation rate strips out those volatile gas and food prices. The Fed prefers to use that rate when setting monetary policy. The core inflation rate was 2.0 percent in 2018, and will be 2.1 percent in 2019 and 2020. It’s unusual that the core rate is that similar to the regular inflation rate. Fortunately, the core rate is close to the Fed’s 2 percent target inflation rate. That gives the Fed room to raise rates to a more

What is particularly interesting to me is economic performance over time and its relation to previous administrations. One might assume that it is always relative to the “party” that is in control of the government, but:

U.S. GDP by Year Since 1929 Compared to Major Events

Year  Nominal GDP (trillions) Real GDP (trillions) GDP Growth Rate Events Affecting GDP
1929   $0.105   $1.109     NA Depression began.
1930   $0.092   $1.015   -8.5% Smoot-Hawley.
1931   $0.077   $0.950   -6.4% Dust Bowl.
1932   $0.060   $0.828 -12.9% Hoover tax hikes.
1933   $0.057   $0.817   -1.2% New Deal.
1934   $0.067   $0.906  10.8% U.S. debt rose.
1935   $0.074   $0.986    8.9% Social Security.
1936   $0.085   $1.113  12.9% FDR tax hikes.
1937   $0.093   $1.170    5.1% Depression returned.
1938   $0.087   $1.132   -3.3% Depression ended.
1939   $0.093   $1.222    8.0% WWII. Dust Bowl ended.
1940   $0.103   $1.330    8.8% Defense increased.
1941   $0.129   $1.566  17.7% Pearl Harbor.
1942   $0.166   $1.862  18.9%  
1943   $0.203   $2.178  17.0% Defense spending tripled.
1944   $0.224   $2.352    8.0% Bretton Woods.
1945   $0.228   $2.329   -1.0% WWII ended. Recession.
1946   $0.228   $2.058 -11.6% Budget cuts.
1947   $0.250   $2.035   -1.1% Cold War began.
1948   $0.275   $2.119    4.1% Recession.
1949   $0.273   $2.107   -0.6% NATO. Fair Deal.
1950   $0.300   $2.290    8.7% Korean War.
1951   $0.347   $2.474    8.0%  
1952   $0.367   $2.575    4.1%  
1953   $0.389   $2.696    4.7% War ended. Recession.
1954   $0.391   $2.680   -0.6% Dow returned to 1929 high.
1955   $0.426   $2.871    7.1%  
1956   $0.449   $2.932    2.1%  
1957   $0.474   $2.994    2.1% Recession.
1958   $0.481   $2.972   -0.7% Recession ended.
1959   $0.522   $3.178    6.9% Fed raised rates.
1960   $0.542   $3.260    2.6% Recession.
1961   $0.562   $3.344    2.6% JFK’s deficit spending ended recession.
1962   $0.604   $3.548    6.1%
1963   $0.638   $3.703    4.4%
1964   $0.685   $3.916    5.8% LBJ’s Medicare, Medicaid.
1965   $0.742   $4.171    6.5%
1966   $0.813   $4.446    6.6% Vietnam War.
1967   $0.860   $4.568    2.7%  
1968   $0.941   $4.792    4.9% Moon landing.
1969   $1.018   $4.942    3.1% Nixon took office.
1970   $1.073   $4.951    0.2% Recession.
1971   $1.165   $5.114    3.3% Wage-price controls.
1972   $1.279   $5.383    5.3% Stagflation.
1973   $1.425   $5.687    5.6% End of gold standard.
1974   $1.545   $5.657   -0.5% Watergate.
1975   $1.685   $5.645   -0.2% Recession ended.
1976   $1.873   $5.949    5.4% Fed lowered rate.
1977   $2.082   $6.224    4.6%  
1978   $2.352   $6.569    5.5% Fed raised rate to 20% to stop inflation.
1979   $2.627   $6.777    3.2%
1980   $2.857   $6.759   -0.3% Recession.
1981   $3.207   $6.931    2.5% Reagan tax cut.
1982   $3.344   $6.806   -1.8% Recession ended.
1983   $3.634   $7.118    4.6% Tax hike and defense spending.
1984   $4.038   $7.633    7.2%
1985   $4.339   $7.951    4.2%  
1986   $4.580   $8.226    3.5% Tax cut.
1987   $4.855   $8.511    3.5% Black Monday.
1988   $5.236   $8.867    4.2% Fed raised rates.
1989   $5.642   $9.192    3.7% S&L Crisis.
1990   $5.963   $9.366    1.9% Recession.
1991   $6.158   $9.355   -0.1% Recession.
1992   $6.520   $9.685    3.5% NAFTA drafted
1993   $6.859   $9.952    2.8% Balanced Budget Act.
1994   $7.287 $10.352    4.0%  
1995   $7.640 $10.630    2.7% Fed raised rate.
1996   $8.073 $11.031    3.8% Welfare reform.
1997   $8.578 $11.522    4.4%  
1998   $9.063 $12.038    4.5% LTCM crisis.
1999   $9.631 $12.611    4.8% Repeal of Glass-Steagall.
2000 $10.252 $13.131    4.1% Tech bubble burst.
2001 $10.582 $13.262    1.0% 9/11 attacks.
2002 $10.936 $13.493    1.7% War on Terror.
2003 $11.458 $13.879    2.9% Iraq WarJGTRRA.
2004 $12.214 $14.406    3.8%  
2005 $13.037 $14.913    3.5% Katrina. Bankruptcy Act.
2006 $13.815 $15.338    2.9% Fed raised rates.
2007 $14.452 $15.626    1.9% Bank crisis.
2008 $14.713 $15.605   -0.1% Financial crisis.
2009 $14.449 $15.209   -2.5% Stimulus Act.
2010 $14.992 $15.599    2.6% ACADodd-Frank.
2011 $15.543 $15.841    1.6% Japan earthquake.
2012 $16.197 $16.197    2.2% Fiscal cliff.
2013 $16.785 $16.495    1.8% Sequestration.
2014 $17.522 $16.900    2.5% QE ends.
2015 $18.219 $17.387    2.9% TPP. Iran deal.
2016 $18.707 $17.659    1.6% Presidential race.
2017 $19.485 $18.051    2.2% Trump Tax Act

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