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Economic "Reform" in the United States

by TGeraghty Mon Oct 17th, 2005 at 01:01:09 PM EST

Topic du jour: "Reform" - back from the frontpage ~ whataboutbob

With a little update at the bottom - TG

There is a very important diary on the recommended list over at Daily Kos that will be of interest to many people over here:

The goal IS to reduce the standard of living by Pellice.

The Washington Post ran a very revealing online chat yesterday with one of their business columnists, Steven Pearlstein. He was quite open that what the "economy" [business leaders, I guess] needed now is a working class with a reduced standard of living that will compete with third world labor.

He was using the Delphi, and the automotive industries' debacles, as his example.  The answer to all the problems is to knock back the workers' wages below "middle class" standards, and reduce their benefits, particularly health care.

To all comers who brought up the facts that Delphi managers had deliberately underfunded pensions, had stolen funds from the company, had managed it poorly, and, finally, had awarded themselves bonuses even as they demanded that workers take wage cuts, Pearlstein responded:  But that doesn't matter.  The basic truth is that the workers, all workers, must work for less pay so that their companies will still be competitive with overseas labor.

Sound familiar?


The column that goes with the chat is here:

Listening to the Oracle of Delphi

What is Pearlstein's prescription for the U.S. auto industry?

Average pay and benefits of $65 an hour would need to be reduced and made less egalitarian -- $40 for skilled technicians, but maybe only $25 for forklift operators or low-skilled parts assemblers. (Today, the difference between the two is small.) Autoworkers who now get the company to pay for nearly all their health coverage will have to pay 30 percent, like the rest of us. And current workers need to forget about those traditional, defined-benefit pensions -- most other U.S. workers settle for a generous contribution to a bankruptcy-safe 401(k) account.

Retiree benefits will be trickier. Although most retirees have Medicare, which now includes drug coverage, supplemental health benefits will have to be scaled back and capped. And while the funded portion of pension plans is protected, unions will need to exchange the unfunded portion for a first-call on the company's profits -- in effect, swapping pension IOUs of questionable value for preferred stock in a more viable company.

Of course, what Pearlstein doesn't tell you is that of the supposedly exorbitant $65 per hour, $39 of that is nonwage benefits, driven by truly exorbitant increases in US health care costs which are fundamentally a function of an inefficient health care and insurance system.

But according to Pellice, Pearlstein says the US is "not ready" for national health insurance yet.

What the Pearlstein scenario means is that forklift operators and other workers who are treated like them will move from having a middle class wage of around $50,000 per year to a barely-scraping-by wage of about $20,000 per year ($10 an hour).

Compare that wage to the federal poverty standard for a family of four: $18,850. Now figure in the fact that by some estimates, a real "living wage" is 30% above the poverty standard and we are getting pretty close to placing the lowest-paid ranks of autoworkers in the class of the working poor. Some American dream that is.

Pearlstein is also pretty ignorant of basic economic history, for example:

[L]et's start by dispelling two popular myths. . . .

The second myth, this one favored by the left, is that generous wages and benefits negotiated by the unions created the great middle class and lifted the standard of living for all Americans.

The real story is that those pay packages were negotiated in industries that were either government-regulated and could automatically pass on labor-cost increases to consumers, or were dominated by a handful of large companies that tacitly agreed not to compete on the basis of price. These companies earned excess profits and passed on most of them to employees in the form of generous wages and benefits. It took deregulation and foreign competition to reveal how much airlines, phone companies, automakers and steel manufacturers -- and their employees -- were overcharging the rest of us for their goods and services. Now competition is forcing those pay scales back into line with market realities.

Oooohhh, "deregulation," "competition," "market realities." He almost had me convinced.

The real reason that American autoworkers have historically been paid such high wages is that, when the labor standards for the industry were established in the immediate post-WWII period, American automobile manufacturers and autoworkers, with their mastery of mass production technology, were the most productive in the world (as they still largely are). Union power was important to making sure that these productivity benefits were shared equitably between labor and management.

The reason that American automakers are in trouble today long predates low-wage competition from developing countries. The problems go back to the 1970s, and some of it does have to do with the temporarily cozy postwar environment of muted competition that the Big 3 automakers found themselves in. But where did the firms come from that broke the domination of the Big 3? Japanese firms (apparently undaunted by lifetime employment and extensive worker-management cooperation systems) had developed a more flexible technology for producing a wider range of fuel-efficient, smaller cars with less waste in the production process. And Germany (similarly unhindered by its codetermination and generous welfare state policies) leveraged its engineering know-how into making high-quality cars for the upper end of the market.

The U.S. automobile industry was never government-regulated. And it is also not true that wage gains in the American economy during the postwar period were limited to a few favored industries. They were broadly distributed throughout the economy until the 1970s.

Pearlstein is (mostly) full of it. The problem in the American auto industry is primarily one of management failure to innovate - failure to design high-quality cars that people want to buy, and to develop the efficient production technologies to make them. Economy-wide, the problem is that the policies and institutions that allowed workers to carve out a high and rising standard of living - strong unions, labor-management cooperation, government-established minimum labor standards, and a generous welfare state - have all been eviscerated in the US. Low wages and falling living standards are not simply "market realities." They are also the outcomes of political processes that are heavily biased against ordinary people.

The truly new phenomenon here - competition from low-wage developing countries - can also be dealt with without demolishing rich-world living standards. The key, as contributors to this site have established in previous stories, is to innovate, to move into the high-skill, more technologically sophisticated product lines that (hopefully) will not immediately be subject to low-wage foreign competition. The other thing is to establish global counterparts to domestic regulation of labor and financial markets - for example, a global right to organize unions; and alternative to "Washington Consensus" type development policies - to ensure that all workers get to share in the productivity gains that they help generate.

UPDATE (October 17):

Delphi Officials, Responding to Criticism, to Take Pay Cuts

The top executives at Delphi Corporation, the nation's largest automobile supplier, will take voluntary pay cuts until the firm emerges from bankruptcy, the company announced today.

The move comes in response to fierce criticism of Delphi's executive pay plan, which would have provided generous compensation to the company's officers as it headed into bankruptcy. Union officials had complained about the plan at a time when they were being asked to accept cutbacks in pay and benefits. . . .

Delphi's union workers were particularly embittered when Delphi made an 11th-hour move, a day ahead of its bankruptcy filing, to sweeten substantially the severance packages available to 21 top managers. The executives were to get cash and up to a 10 percent stake in the reorganized company, whose restructuring is to be completed by mid-2007. Delphi said the offer was a necessary step to retain its executives.

It's amazing that they thought they could get away with it in the first place. Or maybe not.

Display:
I think it makes sense to post here the extract from the article by Gordon Brown in the Ft this morning which i posted in the European Breakfast thread:


Why it is make or break for European social reform By Gordon Brown

For 10 years Europe has grown at not only one-quarter of the rate of China and India but at half the rate of the US. (...) This year's 1.2 per cent European growth is a wake-up call we cannot ignore.

With European unemployment approaching 10 per cent, the time for debating European economic reform is over. Now is the time for action: a new German government is coming to power; a make-or-break summit chaired by Britain will be held this month on European social and economic reform; (...)

That is why I am publishing detailed proposals ahead of the summit, calling for reforms in labour and capital markets, in trade and in macro-policy to achieve faster European growth.

The change we need is quite fundamental. For decades the assumption has been that Europe's nations would prosper as economic integration at a national level was superseded by economic integration at a European level: (...) But globalisation has brought challenges none of Europe's founders could foresee. (...) For it is not European, but global sourcing of goods and services and global flows of capital that drive change. (...) Global Europe must be outward not inward looking, focused on external competition, and adjust its social model to combine flexibility with fairness. And we should recognise that with China and India not only leading in low-cost goods and services but producing 4m graduates a year, the new race is not to the bottom but to the top.

Wholesale economic reform must help Europe raise its game where it matters - in high technology, high skill, high value-added goods and services. (...) The old state aids should make way for modern research and development incentives. A risk-based approach to regulation must replace the old model that assumed everything must be inspected and everyone must fill in forms. (...)

To call for a new social model is not to abandon fairness, but to say that in the new world fairness and flexibility depend upon each other. An old model that leaves 20m unemployed, 10m of them for more than a year, is not working.

So the whole emphasis must shift to equipping people for jobs and helping people into work, removing labour market rigidities and combining new incentives with new obligations to take up jobs.

Matching a new supply side dynamism must be modern macroeconomic and trade policies, including removing the non-tariff barriers that impede transatlantic commerce. Effective monetary and fiscal policy requires not the old annual rigid rules but monetary and fiscal policy working together for the whole economic cycle. And we must consider anew the case for a euro-area symmetrical inflation target.

So the West needs PhDs with Chinese salaries, if I understand him correctly. But where will demand come from then? From Bubbles Greenspan fuelled runaway debt? What a silly world.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Oct 13th, 2005 at 07:04:32 PM EST
There is one grain of truth in Gordon Brown's load of drivel, and it is this:
An old model that leaves 20m unemployed, 10m of them for more than a year, is not working.

By the way, Jerome, can you comment on the relationship between capital flows and comparative advantage?

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Thu Oct 13th, 2005 at 08:17:10 PM EST
[ Parent ]
This is a very interesting development in the history of Capitalist economics: we have come full circle. Let me explain...

At the beginning of the industrial revolution, Adam Smith set about to try and understand what made some countries (in particular, England) more prosperous than others. One of his most interesting analysis is when he points out that it is not ewalth but economic growth that determines the standard of living. On the one hand he considered China, a wealthy country, but which had been "stationary" for a long time, and in which the standard of living had deteriorated to the point when large numbers of people are known to live in abject poverty. On the other hand, he considered England's American colonies (The Wealth of Nations was written just before the American revolution), which were a young, rough country in need of much "improvement" (i.e., investment in infrastructure) but where economic expansion was fast and so there is good profits for capital and good wages for labour. In the middle he considered England, where there was a constant struggle between wages and profit, but where economic growth was just enough to maintain a steady improvement in the standard of living.

The next generation of political economists, including Robert Malthus and David Ricardo, concerned themselves with the "steady state" of capitalism. Malthus is arch-famous for his theory that exponentially increasing population in a finite world would inevitably lead to a deterioration of the standard of living. Ricardo wrote a famous paper called "the iron law of wages" much in the spirit of Malthusian theory.

Malthus and Ricardo were friends with the Utilitarian philosopers Jeremy Bentham, and with James Mill, father of John Stuart Mill. The latter was also very concerned with the bleak "steady state of capitalism". He considered as an established fact that the steady state is a situation where the profits of capital are as low as they can be and the standard of living of the general popuilation steadily deteriorates. His only solution, much in Malthus' spirit, was population control. However, JS Mill was primarily concerned with Ethics where Malthus and especially Ricardo were concerned with what we would call today Macroeconomics.  Mill sought the general welfare where Ricardo was more sympathetic to the capitalists. Mill considered that population control must be voluntary, and that such a state of affairs could only come about through a more educated populace. He also weighed heavily the pros and cons of Socialist theories coming from Continental Europe, and concluded that the question of Socialism must be settled in the future, on the basis of which system allowed a more prosperous steady state and more individual freedom. His analysis of Socialism was pre-scient, but that is a topic for another diary.

Steady state economics has been anathema to both capitalists and Western bourgeois democracies, because only the promise of a continued improvement in the standard of living could prevent a socialist revolution among the working masses. I believe this explains in part the Cornucopian emphasis on maintaining a constant rate of economic growth (as is well known, empirically this sustainable rate seems to have been about 3% of GDP per annum). As soon as the rate of growth drops below 3%, the people start feeling a crunch in thein standard of living, and that is not good for the moneyed elite, or for the stability of government. Religious morals, with their strong condemnation of family planning and the "Divine Providence" ethos, definitely contribute to Cornucopianism.

For the last 200 years, capitalism has indeed grown constantly, but only by constantly expanding its markets and its resource base. First it was through colonialism, where the role of the colonies was to provide cheap raw materials and a captive market to the metropolis. Already John Stuart Mill strongly criticized colonialism not only on liberal ethical principles, but also on the failure to produce the intended positive economic effects on the Metropolis (let alone on the colony). The period between WWI and WWII was a colossal collapse both of colonialism and of the international financial system. Trying to fix the latter was the motivation for the Bretton Woods agreement, and we might be living in a very different world had the ideas of John Maynard Keynes been adopted then. After WWII, capitalism has continued to increase its resource base and its markets exponentially, but in the 1970's that came to an end as the fraction of the planet's resources under use became substantial.

The logistic curve qualitatively describes growth in a finite container. You will notice that growth appears exponential until maybe 80-90% of the space has been used, and then the crunch is quite rapid.

Anyway, what I want to get at is that in the space of a couple of years, the ortodox message we get fed by the business elite and the government has shifted from "the economy will expand and market forces will find a way to solve any scarcity problems through innovation" to "you'd better get ready to accept a reduction in your standard of living". It is also interesting how quickly they switch from "we" (will be all right) to "you" (had better brace for rough times).

The problem I have with this is not the realization that continued economic growth is no longer possible (it's about time politicians starting telling people to expect hard times ahead). My problem with a position like Gordon Brown's, or with the "official" reaction to Delphi's bankruptcy in the US, is that they do not question the need for the profits of capital to continue growing as before, at the expense of larger cuts in the general standard of living. Gordon Brown also famously blamed OPEC for the current spike in energy prices, instead of coming clean about the need for conservation. So, the government still believes in prosperity measured as GDP growth, and in plentiful energy to drive the process.

By the way, I find it deeply ironic that the list of impressive English intellects I mention in this post is crowned by the mediocre Gordon Brown, not to speak of the lying authoritarian wanker Tony Blair.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Thu Oct 13th, 2005 at 08:12:07 PM EST
I can see it's time for me to get cracking on my review of Keen, Schell, and Alperovitz.  thanks Migeru for that pithy summary.  pity ol' Smith wasn't as frank as Kennan about the true sources of "the wealth of nations."

the US story is well told in the ratio between average employee salaries and benefits, and CEO/upper management salaries, benefits, stock options and severance packages.  the grotesquely Gatsbyish income and wealth accruals at elite levels can only be maintained (a) by skimming the cream off a very rapidly expanding cake, or (b) by squeezing the peasants mercilessly, Pharaoh-style.  when there are "infinite" resources to liquidate and "infinite" markets to control and hold captive (er, "open to free trade") then the squeezing happens there, at the colonial level.  but when the colonised fight back, or the resources dry up, or the markets contract or determined competitors enter them -- then the squeezing starts back home, on the domestic population.

what's bitterly amusing is that anyone in public US discourse who suggests reducing elite compensation to, say, mid 1960's levels, or increasing elite taxation to similar levels, is immediately accused of "class warfare".  as if class warfare were only waged in one direction :-)  and as if the US in the 40's through 60's was some kind of dismal Stalinist work camp to which no sane person would ever wish to return.  (OK, parts of it were, but mostly if you were Black or female -- ordinary white guys had it pretty good for a while there.)

The difference between theory and practise in practise ...

by DeAnander (de_at_daclarke_dot_org) on Thu Oct 13th, 2005 at 08:52:58 PM EST
[ Parent ]
You ought to post this as a diary (or series of diaries) in its own right. Very interesting . . .
by TGeraghty on Thu Oct 13th, 2005 at 09:58:50 PM EST
[ Parent ]
I am very self-conscious about my opinions on economics... I prefer to hide them in comments to other people's diaries.

Now seriously, when I saw how long this was I thought about making it a diary, but I just didn't have the energy to provide the context and motivation, which this diary and Jerome's post give me for free.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Fri Oct 14th, 2005 at 05:10:13 AM EST
[ Parent ]
"For the last 200 years, capitalism has indeed grown constantly, but only by constantly expanding its markets and its resource base".

(my thanks to whataboutbob and izzy for pointing out I was yelling and giving me a method not to yell)

Just to put a little more concreteness on your point: let's take two relatively new industries, computers and endovascular medicine, and I would ask you if they fit in your model.  The whole computer/internet industry has exploded in the last 50 years.  The treatment of many diseases, which were either not treatable, or treated only with very invasive surgery, are now treated with tiny catheters that thread there way through our vessels and treat diseases such as blocked vessels in the heart (treatment called angioplasty), cerebral anneurisms, lower leg thrombosis, etc. has also exploded over the last 30 years.  Our efficiency has been greatly increased by computers/internet, our pleasure and learning greatly expanded--ex. this very blog.  Lives have been saved with less invasive products, quality of life has been greatly expanded, people that would have died are walking around leading very productive lives.

I guess i'm just not sure how these industries fit in that statement.

The problem I have with this is not the realization that continued economic growth is no longer possible (it's about time politicians starting telling people to expect hard times ahead). My problem with a position like Gordon Brown's, or with the "official" reaction to Delphi's bankruptcy in the US, is that they do not question the need for the profits of capital to continue growing as before, at the expense of larger cuts in the general standard of living.

I just don't share your pessimism about economic growth and our future.  Once again sticking with these two industries, I think computerization is going to continue to give us wonderful tools for work and play.  And expand the ability for people in LCD's to learn and become very productive and happy in a more connected world economy.  In healthcare, there are some many new products and developments coming out of the base of these endovascular technologies, and i think they're going to have even more dramatic effect on length of life and quality of life.  And as countries become wealthier, they will have more money and can, if they choose, devote more of their wealth to higher tech medical devices.

I'm not so naive as to realize that there aren't world issues to overcome. But how would you see these two industries fitting into your above view of the future.

by wchurchill on Thu Oct 13th, 2005 at 09:59:17 PM EST
[ Parent ]
It was "general" standard of living. Migeru's arguments point to a future where your technical advances will benefit the few, the increasingly few (especially your medical advances). (And think of the whole world here, in which you and me are part of the "few".) And they won't save the general economy from resource shortages (in fact, might induce rare material shortages themselves).

Regarding computers, that 'explosion' is a bit overblown. But good you mentioned it, for this is used to overstate the US economic growth: instead of calculating with the real sum, for example the PC industry's income is added after multiplying with a so-called hedonic price index (HPI), which is supposed to express improvement in quality. If a computer with the same speed now costs the half, or if the average speed of PC processors increased by two, this is "corrected" in GDP calculation by multiplying the real sum with two. (Other countries have since adopted some HPI, but with less brutal ratios, and the USA remains the most 'consequent'.)

From 1995 to 2000, computer investitions rose from $20 to $87 billion. But with HPI, the sum added to the 2000 GDP was $240 billion. In the last figure I have a source for, Q4/2001, an increase of $1.9 billion was blown up to $23.5 billion.

This is troubling both because the majority of even 'analysts' (at least those writing or talking to the media) doesn't seem to have heard of HPI yet compare US GDP figures with other countries' as if the measure were the same, and because the chosen measure of quality increase is hogwash. If you use your computer most of the time as text editor or a terminal to some database, being twice as fast means not much, surely not "twice as good".

There is a lot of other such statistical wizardly behind every economic success claim, including those on productivity and 'efficiency'.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Fri Oct 14th, 2005 at 08:19:17 AM EST
[ Parent ]
You WHAT?????? Time to run off to Google ...
by Colman (colman at eurotrib.com) on Fri Oct 14th, 2005 at 08:32:11 AM EST
[ Parent ]
A chief critic (but not the only I read) of the US use of HPI is Swiss economist Fredmund Malik, I took the figures from him (in German articles). I don't know where to look for raw data.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Fri Oct 14th, 2005 at 08:38:37 AM EST
[ Parent ]
DoDo, this sounds like economic data reports are published by MiniPlenty and vetted by MiniTruth. Well worth a diary, if you ask me.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Oct 14th, 2005 at 08:57:29 AM EST
[ Parent ]
My very first diary at ET touched on this (and this comment told the same story), but I might do a more focused diary once I do some research for more recent data. But not this weekend - I'll be at a family reunion in Slovakia. However, Colman sez he is off Googling - maybe he'll have better data and do it in my stead.  

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Fri Oct 14th, 2005 at 09:09:05 AM EST
[ Parent ]
I knew I'd seen it somewhere but couldn't remember where. I'll try and get a chance to dig through the OECD and so on at the weekend and see what the story is. If there aren't comparable figures published in the way that the SURs are then we're just being lied to again.
by Colman (colman at eurotrib.com) on Fri Oct 14th, 2005 at 10:38:30 AM EST
[ Parent ]
You need to google "hedonist" prices or GDP, i.e. taking into account the supposedly higher service provided by the same goods. I remember a pretty detailed article in the WSJ, not sure it will be available online.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Oct 14th, 2005 at 11:55:00 AM EST
[ Parent ]
I see it has already been covered downthread. Sorry.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Oct 14th, 2005 at 12:00:28 PM EST
[ Parent ]
"Hedonic".
by Colman (colman at eurotrib.com) on Fri Oct 14th, 2005 at 12:36:57 PM EST
[ Parent ]
Well, Googling turns up this article, which sounds familiar.
by Colman (colman at eurotrib.com) on Fri Oct 14th, 2005 at 10:45:15 AM EST
[ Parent ]
And eventually some definitions.
by Colman (colman at eurotrib.com) on Fri Oct 14th, 2005 at 10:55:46 AM EST
[ Parent ]
Also, when you trash a perfectly good computer full of high pollutants in order to buy a new computer which will mostly sit idle, you increase the GDP. The cost of properly disposing of the old hardware is also added to the GDP, while the environmental damage from improper disposal would not be subtracted from the GDP. And on, and on, and on...

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Oct 14th, 2005 at 09:03:28 AM EST
[ Parent ]
An Atlantic article from a while back (DeAnander posted the link here) has a swipe at the golden calf of GDP. It can be read here.

Quick quote:

By itself the GDP tells very little. Simply a measure of total output (the dollar value of finished goods and services), it assumes that everything produced is by definition "goods." It does not distinguish between costs and benefits, between productive and destructive activities, or between sustainable and unsustainable ones. The nation's central measure of well being works like a calculating machine that adds but cannot subtract. It treats everything that happens in the market as a gain for humanity, while ignoring everything that happens outside the realm of monetized exchange, regardless of the importance to well-being.
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Oct 14th, 2005 at 10:59:19 AM EST
[ Parent ]
Here's a good explanation of hedonic pricing.

They really do assume that computing power is something you can value like apples and oranges.

by Colman (colman at eurotrib.com) on Fri Oct 14th, 2005 at 11:11:45 AM EST
[ Parent ]
I think it is appropriate to paraphrase the Internationale here considering the naked display of a class 'an sich' and 'fur sich' that we see in this interview. It obviously has nothing to do with economic rationality as displayed by the lack of interest in reforming the world's most dysfunctional health care system. Nor is it about necessary sacrifices for employees in troubled industries since only the workers are expected to sacrifice. And the generally oh so 'moral hazard' obsessed business pundits seem suddenly unworried when it applies to execs with their guaranteed benefits or shareholder 'activists' pressing for companies to pay out their reserves to them through dividends and buybacks, who cares if it drives them into bankruptcy soon thereafter.  Lowering the income of the wealthy through taxes - can't do that, it'll hurt people's incentive to work hard (I guess they'll just decide to find some shorter hours and much lower salary job instead). Lowering wages for the working class - suddenly that argument disappears.

Migeru's post was quite interesting but I disagree that we've seen any sort of steady state economics. The economy has grown, worldwide and in the US. In the US specifically GDP has almost tripled over the past thirty years while GDP per capita has almost doubled. Not a bad performance you'd think - but it depends on who you are. Look at these household income stats, constant dollars, mean household income per group.

Bottom fifth: $9,350 (1973)to $10,264 (2004)
Second fifth $23,511 (1973)to $26,241 (2004)
Middle fifth $38,562 (1973)to $44,455 (2004)
Fourth fifth $55,477 (1973)to $70,085 (2004)
Top    fifth $99,261 (1973)to $151,593 (2004
Top five percent: $152,892 (1973) $264,387 (2004)

http://www.census.gov/hhes/www/income/histinc/histinctb.html

Anybody see a pattern here?

And that doesn't take into account America's increasingly regresive tax system. I'm not talking just about income tax but rather the tendency to sharply reduce or eliminate taxation on non wage income - capital gains, dividends, and inheritance - taxes which basically only apply to the top fifth of the population.  

Now will anybody kindly explain to me why the bottom sixty percent of America should be so happy about the US economy growing faster than that of Europe? Reagan promised a trickle down effect, unfortunately, like trickles generally do, it dries up long before reaching the bottom.

by MarekNYC on Fri Oct 14th, 2005 at 02:50:15 AM EST
I did not say that we have seen steady state economics, but that in the 1970s, with the first oil shocks and the shift from the gold standard to fiat currencies, we abandoned exponential growth. The elite is now preparing the masses psychologically for the crunch.

This is not to say that there is no growth, but I have heard stories of US software engineers moving to Thailand to work for $800 a month, and of western animation artists being sent to work to North Korea (of all places). When the jobs are outsourced, some people start having to outsource themselves.

As for trends... (I added the bold bits)

Bottom fifth: $9,350 (1973)to $10,264 (2004) 0.30% per annum
Second fifth $23,511 (1973)to $26,241 (2004) 0.35% per annum
Middle fifth $38,562 (1973)to $44,455 (2004) 0.46% per annum
Fourth fifth $55,477 (1973)to $70,085 (2004) 0.76% per annum
Top    fifth $99,261 (1973)to $151,593 (2004 1.38% per annum
Top five percent: $152,892 (1973) $264,387 (2004) 1.78% per annum

Do you see a trend?

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Oct 14th, 2005 at 05:23:40 AM EST
[ Parent ]
Looks like "steady state" . . . for the bottom 60%.
by TGeraghty on Fri Oct 14th, 2005 at 05:30:25 AM EST
[ Parent ]
You know what's even funnier?

Before the 1970's most middle-class households had a single adult income. Nowadays, just about every family has two adult incomes, and many, many people work two jobs, or work longet hours than they used to.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Fri Oct 14th, 2005 at 05:57:25 AM EST
[ Parent ]
Marek, first of all thanks for this data.  this is exactly the kind of data I've been hoping we could find.  

But let's take our time and analyze it, before jumping to conclusions--we need to understand what's behind the data.  Honestly I'm with you on geting the facts and drawing conclusions.

But just as an example, you say "In the US specifically GDP has almost tripled over the past thirty years while GDP per capita has almost doubled."  but, (and i've not dug into the data yet), none of the 20% groups (vingttiles?--only joking), show a doubling of real income over this period, according to your table in your post.  the top 5th show a 50% increase and all the other groups show less--that doesn't average a doubling of GDP per capita.  It would appear to show a pattern that benefits the higher income group, but unless I'm misinterpreting what you are saying, you just have not got the analysis together right--and we'll be ridiculed be the far right on these statements.

Please correct me if I've missed something.  Great start, but let's figure it out before we blast people.

by wchurchill on Fri Oct 14th, 2005 at 05:45:27 AM EST
[ Parent ]
Marek's GDP growth figures may not be corrected by inflation, while his household income figures are constant dollars (1973, or 2004 dollars? if I may ask). Marek, can you clarify?

For comparison with my previous per-annum conversion: +100% (doubling) is +2.26% per annum; +200% (tripling) is 3.61% per annum.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Fri Oct 14th, 2005 at 06:01:42 AM EST
[ Parent ]
That, and capital movements, and investments (another US-EU difference: some company expenses are added to the GDP as investment); and HPI (see my other reply to wchurchill).

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Fri Oct 14th, 2005 at 08:33:33 AM EST
[ Parent ]
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Oct 14th, 2005 at 10:40:41 AM EST
[ Parent ]
25% is a quartile, 10% is a decile and 1% is a percentile, but Marek is not talking about Quintiles, but about "fifths".

The technical definition is this: the first quintile of the household income distribution is the single household income that is higher than the bottom 20% and lower than the top 80%. Marek's figure is the "average over the bottom 20%".

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Fri Oct 14th, 2005 at 06:06:30 AM EST
[ Parent ]
Good question. Not sure about the answer. First a question - does total household income equal GDP? (any of you economists out there have an answer?) Now two factors that might help explain the disparity - household size has declined - less kids, people staying single for longer, meaning that even if total household income and GDP correlate perfectly household income growth would have lagged per capita growth. Also worth remembering that mean income is well above the median income with very high earners dragging up the average. Can't seem to find national stats on mean income but judging from a couple state ones I saw it seems to be in the $75K range.  
by MarekNYC on Fri Oct 14th, 2005 at 07:31:25 AM EST
[ Parent ]
From your own census data, mean household income would be

$45.232 (1973) to $60528 (2004) +0.94% per annum

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Fri Oct 14th, 2005 at 07:48:41 AM EST
[ Parent ]
From your own census data, mean household income would be

$45.232 (1973) to $60528 (2004) +0.94% per annum

No, remember that these are mean figures within quintiles thus averaging them out would give you something in between median and mean.

by MarekNYC on Fri Oct 14th, 2005 at 07:59:51 AM EST
[ Parent ]
"Mean household income per group" means that each group should be weighed by group size when taking the average. Now, the size of each group is the same number of households so to get the mean household income you just average the group averages.

They are all homogeneous quantities in this case. It's not like I am taking a mean of quantiles or a median of means.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Fri Oct 14th, 2005 at 08:44:02 AM EST
[ Parent ]
Yup, you're right. I wasn't thinking straight.
by MarekNYC on Fri Oct 14th, 2005 at 08:45:56 AM EST
[ Parent ]
Minor note: a fact about "constant dollars" is that it is calculated with a single purchasing power correction (i.e. the price index that weights various products a given way), while lower-income people usually have a higher proportion of their spendings for stuff that inflates stronger than average.

Hence, I suspect a more thorough analysis of income developments would actually show a decrease in the lower deciles.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Fri Oct 14th, 2005 at 08:28:56 AM EST
[ Parent ]
I know very little about economy, next to nothing really, so I'll gladly defer to the experts here.

I do know about history though.

What is really bad is the combination of shitty times and profligate consumption at the top.  

The true tyrants (Mao, Brezhnev) understood you have to keep your private Versailles hidden from the hoi polloi or face retribution.

Our mndern-day Marie Antoinettes don't get that.

In the US, the quirk in the zeitgeist seems to be that a poor man watching Donald Trump doesn't dream of becoming Jesse James but of joining Trump, even though he's got 0.00% chance of ever achieving that.

But then, as I said, the US used to be the country of Jesse James, Billy the Kid and Frank Niti and there may be a comeback -- REVENGE OF THE POOR Part 2.

In Europe, at least in France, from what I can tell, reform won't fly unless the rich, especially the nepotistically useless rich (like stock analysts or to quote Douglas Adams telephone sanitizers), are first skinned alive, boiled and hung on lampposts.

The aristocracy's stubborn refusal to relinquish and/or share some of its wealth has always been the seed of bloody revolutions, especially when times are tough.

Madame Defarge may still stage a comeback.

by Lupin on Fri Oct 14th, 2005 at 04:16:58 AM EST
a poor man watching Donald Trump doesn't dream of becoming Jesse James but of joining Trump, even though he's got 0.00% chance of ever achieving that.

the class war has been won by the wealthy by conditioning everyone to think of themselves not as they are or have been but as they might be in the future if they are hard-working, lucky and successful.

(Migeru in a comment here.)

As I've read several times but don't have a source for, around 40% of young Americans in an opinion poll said they believed they would get rich during their lifetimes.

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Oct 14th, 2005 at 11:22:17 AM EST
[ Parent ]
You might want to link to the comment as well as the diary.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Oct 14th, 2005 at 11:26:59 AM EST
[ Parent ]
I did :-)

Though the diary takes time to load before going to the comment.

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Oct 14th, 2005 at 11:46:05 AM EST
[ Parent ]
Not with my link it doesn't.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Oct 14th, 2005 at 11:48:32 AM EST
[ Parent ]
man, y'all sure left me in the dust...but it doesn't sound good....

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Fri Oct 14th, 2005 at 11:35:38 AM EST
Exactly.  I'm quaking in my boots, but not quite sure why.

Maybe we can eventually make language a complete impediment to understanding. -Hobbes
by Izzy (izzy at eurotrib dot com) on Fri Oct 14th, 2005 at 01:46:43 PM EST
[ Parent ]
Pearlstein's command of economics is limited to the one-sector, short-term equilibrium, or the supply/demand curves. He is just not qualified to discuss international economics, comparative advantage, Heckscher-Ohlin, etc. It's that simple.

The reason is his age. When I took economics classes in the States in the 70s, professors barely touched upon international issues, because the American economy was large enough, compared to the rest of the world which could be ignored. I believe Pearlstein belongs to that generation.

Things changed greatly since then. It doesn't take Paul Krugman to realize that. But Pearlstein just didn't bother to catch up.

I will become a patissier, God willing.

by tuasfait on Fri Oct 14th, 2005 at 12:58:35 PM EST
The German car maker Porsche is paying a (success) bonus of Euro 3200 per employee this year.
(Up from Euro 3000 in 2004 and 2003.)

http://www.manager-magazin.de/unternehmen/artikel/0,2828,378192,00.html

http://www.autoblog.com/entry/1234000220062361/#comments

Giving roughly Euro 45 million of the profits back to its employees (mostly in Germany).
[Something Wall Street probably wouldn´t like. :) Taking money away from the shareholders and giving it -gasp! - to the employees.]

Manager for personal Harro Harmel said that the raise in sellings, turnover and profit in the last year was in the main a result of the efforts of the employees. Worker union council chief Uwe Hueck added that the special bonus was part of the company culture.

Now I do know that Porsche is a luxury car manufacturer. Still...

Still, producing in stagnant, decadent, union regulated  :) Germany with all the taxes, social benefits, Porsche is giving its employees an extra bonus of roughly $ 3800 this year.

I wonder what Steven Pearlstein thinks about that?

by Detlef (Detlef1961_at_yahoo_dot_de) on Fri Oct 14th, 2005 at 02:32:22 PM EST
Good one!

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Fri Oct 14th, 2005 at 02:43:53 PM EST
[ Parent ]
actually there are companies that have done very well in the stock market and given stock options to all employees, so they share in the growth of the company.  admittedly a minority, because many people think only the people who influence total company results should get options.
by wchurchill on Sat Oct 15th, 2005 at 06:37:34 PM EST
[ Parent ]
And i worked for companies in Germany that gave stock options to employees too.

Additionally I admit that Porsche might be a special case. A lot of the shares are owned by only two families IIRC. Giving the management more "freedom".
The CEO of Porsche even removed Porsche from some stock markets because he doesn´t like quarterly reports. Saying that such reports aren´t good for long-term planning.

I just wanted to point out that

  • high wages
  • health care costs
  • unemployment benefit costs
  • taxes
  • regulations
  • unions
don´t necessarily mean that a car company can´t be profitable.
by Detlef (Detlef1961_at_yahoo_dot_de) on Sat Oct 15th, 2005 at 07:12:26 PM EST
[ Parent ]
How did I forget this?  Predatory lending.  Not just for gangsters anymore.  There's all kinds of links to studies, statistics, and resources here:

http://www.responsiblelending.org/

A few choice quotes:

Predatory lending strips billions in wealth from low-income consumers and communities in the U.S. each year. Borrowers lose more than $25 billion annually due to predatory mortgages, payday loans, and other lending abuses like overdraft loans, excessive credit card debt, and tax refund loans

And about those mortgages (designed to force foreclosure some of them):

Most abusive lending takes place in the subprime market, targeting people with weak or blemished credit records. A typical predatory mortgage is a refinance of an existing loan that is packed with excessive or unnecessary fees and provides no tangible benefit to the borrower. Unfortunately, many of these loans are perfectly legal, and too often they are targeted at some of our most vulnerable citizens. CRL is working with policy makers, civil rights leaders, and consumer advocates to support public policies that will provide meaningful protection against predatory mortgage lending practices.

Guess where it's most common:

A growing body of research confirms that predatory mortgage lending has a disproportionate impact on Americans in communities of color, and may help perpetuate a shameful disparity in wealth between white households and minority households. Elderly citizens, women and residents in rural communities also face a greater risk of receiving mortgages with abusive features. The research highlighted here illustrates why combating predatory mortgage lending is an integral part of achieving greater economic and social justice in the United States.


Maybe we can eventually make language a complete impediment to understanding. -Hobbes
by Izzy (izzy at eurotrib dot com) on Fri Oct 14th, 2005 at 07:29:44 PM EST
Izzy many commenters might say, "Well this population is a natural target for predators being less literate, less numerate, having less family training in money management etc."  But I think the real kicker is that this population does not have the cash to waste on financial consulting services.  I know many people of my own modest middle class status who pay a CPA to do their taxes each year and consult with a CPA or planner before every major decision.  Few working or poverty class people would do this, I believe -- expert advice is expensive.

It's not so much that the middles and uppers are financially smarter -- they wouldn't be maxing out their credit cards on consumer binges if they were so smart.  I think it's more that they can afford the advice of professionals, just like they hire mechanics and plumbers instead of DIY...  just another illustration of how having money helps one to keep money and earn money, even without any special personal abilities or knowledge.

The difference between theory and practise in practise ...

by DeAnander (de_at_daclarke_dot_org) on Fri Oct 14th, 2005 at 07:49:02 PM EST
[ Parent ]
Exactly.  And they're targeting people who are struggling and have equity in their homes with offers of a "low-cost" mortgage to pay off medical bills or avoid bankruptcy.  Then the loans are designed to balloon and somewhere in the fine print you've signed away all your rights and agreed to despicable conditions.  

The whole thing is deliberately designed to take these people's houses away from them.  They do mailings to people who've first filed for bankruptcy who have home equity, because they know these people are proud and will jump at a way to pay their debts.  It's flat-out evil if you ask me.

Maybe we can eventually make language a complete impediment to understanding. -Hobbes

by Izzy (izzy at eurotrib dot com) on Fri Oct 14th, 2005 at 09:13:07 PM EST
[ Parent ]
Good point, Izzy. I was thinking of this on the American Poverty thread, but there are so many things in there already! Precisely, I was thinking about Rent-a-Centers, where the urban poor can get the goods they need or desire (stove, washing machine, bed, couch, TV, etc) on ruinous terms no one with just a little more money would accept. (But no questions asked about tricky stuff like your credit rating...)
by afew (afew(a in a circle)eurotrib_dot_com) on Sat Oct 15th, 2005 at 01:38:33 AM EST
[ Parent ]


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