The Economic Crisis in the United States

Everyone knows that there is something wrong with the U.S. economy. The rich are getting obscenely rich, and doing so faster than ever before. The poor are still with us in large numbers. The middle class feels threatened economically. Here are three recent sources of information with more details on the problem.

Bill Moyers Journal interview with Barbara Ehrenreich (August 3, 2007)

Dr. Ehrenreich, a biologist, author and social activist, discussed the problems of the poor and working class in the United States as the distribution of income more and more favors the wealthy. This was not the only topic of conversation, but is the underlying issue behind her important and influential books: NICKEL AND DIMED: ON (NOT) GETTING BY IN AMERICA and Bait and Switch: The (Futile) Pursuit of the American Dream

"Thy Neighbor’s Stash" by DANIEL GROSS, The New York Times Sunday Book Review, August 5, 2007. (A review of The Winner-Take-All Society
by Robert H. Frank).

In his new book “Falling Behind: How Rising Inequality Harms the Middle Class,” Professor Frank deftly updates the argument for our current gilded age. The rise of an overclass, he convincingly argues, is indirectly affecting the quality of life of the rest of the population — and not in a good way.....

What does this societywide arms race for goods have to do with income inequality? Frank trots out sobering data. Between 1949 and 1979, the rising tide of the American economy lifted all boats more or less equally. In fact, the incomes of the bottom 80 percent grew more rapidly than the incomes of the top 1 percent, and those of the bottom 20 percent grew most rapidly of all. But since 1979, gains have flowed disproportionately to top earners. In an economy where the wealthy set the norms for consumption and people at every rung strain to maintain the consumption of those just above them, that spells trouble. In today’s arms race, the top 1 percent are armed to the teeth and everybody else is scavenging for ammunition. Between 1980 and 2001, Frank notes, the median size of new homes in the United States rose from 1,600 to 2,100 square feet, “despite the fact that the median family’s real income had changed little in the intervening years.” The end result? Frank methodically presents data showing that the typical American now works more, saves less, commutes longer and borrows more to maintain what he or she views as an appropriate standard of living.

Ehrenreich mentioned Lawrence Summers, who is also concerned about this issue. Read his piece, "Harness market forces to share prosperity" in the Financial Times, June 24, 2007.

It can no longer plausibly be asserted that the income distribution is relatively static or that average wage growth tracks productivity growth. Indeed, in a recent paper on tax policy prepared for the Hamilton project, my collaborators and I concluded from Congressional Budget Office data that, since 1979, changes in income distribution had raised the pre-tax incomes of the top 1 per cent of the population by $664bn or $600,000 per family – an increase of 43 per cent.

By definition what one group gains from changes in the distribution of income another group must lose. The lower 80 per cent of families are $664bn poorer than they would be with a static income distribution, which works out to $7,000 less in income per family or a 14 per cent loss. To put this in some perspective, the total gain in median family incomes adjusted for inflation between 1979 and 2004 was only 14 per cent. If middle income families had shared fully in the economy’s income growth over the past generation their incomes would have risen twice as rapidly!

While the most recent data available for performing these calculations come from 2004, it appears that the trend towards increased inequality is continuing and may even be accelerating, and will continue even in years when the price of stocks and other assets does not rise abnormally. It also appears that these trends reflect far more than increases in the financial return from education, as the top 1 per cent of the population has pulled away from the rest of the top 10 per cent and the top 0.1 per cent has pulled away from the rest of the top 1 per cent.....

it is no longer credible, if it ever was, to argue that the goal of economic policy should be only to increase the size of the economy and that addressing questions of its distribution is populist or divisive. Given what has not happened to the pay cheques of average workers over the period of the information technology-induced acceleration in productivity and cyclical expansion, it is not plausible to suppose that policies that focus only on aggregate economic growth are sufficient to meet current challenges.

Equally, arguments that suggest the only way to raise the incomes of middle-class families is through measures to regulate business practices more heavily or to restrict increases in international trade are very dangerous. As much justified concern as we have about increased inequality, we need to recognise that it could be much worse if the economy had not been able to achieve the combination of under 5 per cent unemployment and sub-3 per cent inflation that we have enjoyed for much of the past decade. This surely would not have happened without the US economy benefiting from greater global integration. As western Europe’s long experience with unemployment rates that in some cases are more than double American rates illustrates, we would be taking great risks if, in the name of benefiting workers, we took steps that made production in the US less competitive in the global marketplace.

The right approach is activist but it embraces activism that goes with – rather than against – the grain of the market system. This is not a new idea. The enduring legacy of the New Deal is not the many measures taken to regulate prices or increase public employment. It is the measures such as securities regulation and Social Security that do not seek to oppose but channel market forces and mitigate their consequences.

The challenge for those running for president of the US in 2008 – a challenge very different from that faced by presidential candidates until very recently – will be to develop a mandate for policy approaches that can ensure prosperity is more fully shared without threatening its fundamental basis.

Comment: There are a lot of processes involved. The Information Revolution is increasing the value of knowledge workers and deskilling manual work. 12 million illegal immigrants are predominantly in the lowest paying jobs, increasing the supply of workers for those jobs (and consequently the market decreases their remuneration). Offshoring via the Internet allows a wage equalization for many jobs across nations (and oceans), much to the loss of American workers whose pay is affected. Globalization (made possible by improved transportation and communications technologies and infrastructures) means that there is more competition for the U.S. market from foreign producers who compete based on low cost labor and other inputs. I think it is not coincidental that the worsening of income distribution has also occurred during the period since 1979- which saw Republican administrations (Reagan, Bush I and Bush II) and a fiscally conservative Democrat (Clinton I) facing a Republican House of Representatives. The Republicans are after all the party most representing the wealthy classes in the United States.

However, public policy can help to reverse or at least ameliorate this trend towards the concentration of wealth in the hands of the rich. Lets vote to make that happen! JAD