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Saturday, July 2, 2016

Is Capitalism Broken?

              Is Capitalism Broken? ---  Some Evidence

               1% Earns 18.7% of annual income, and 55% Earns 16.2%  
                        2% Owns 50% of private wealth and 98% Owns 50%      

The U.S. economy does not pay workers adequately; we could raise wages and improve life for most Americans --- the conclusion.

The picture that emerges in the course of this essay is that not only is the system broken, more importantly it's unjust. See if you do not agree. 

A look at the income distribution, pre-tax and pre-transfer, shows a highly unequal distribution. The Congressional Joint Committee on Taxation (page 28) in the table below shows the top-earning 0.9% earning 18.7% of all income while the lower-earning 55% take in 16.2%. A very recent report  from the Washington Center for Equitable Growth, July 3, 2016, shows the top 10% earning 50.5% and 

the top 1% earning 22.0% in 2015. 
I will assume this 22.0% figure is accurate, and also assume the other details of the chart below are accurate. This means that the average income for the lower-earning 55% is $23,016 and the average income for those 1 percenters is $1,719,412, 67 times greater than the lower income. And there are at least 1.7 million 1 percenters, and nearly 94 million with income below $50,000. The combined income of 2 million is greater than that of 94 million. Along with the second-to-the-last paragraph of this essay about the Supplemental Poverty Measure, I find this most disturbing. 

          Taxpayers with income below $50,000 earn 16.2% of all income, and taxpayers reporting income over $500,000 earn 18.7%. 
If you break that down, the income of a single taxpayer at the top is greater by 63 times than the income of one in the lower group. Presumably income is derived from work. The contribution and value of one great worker is 63 times the value of each worker in the lower half? That's hard to believe. The labor market does not reward adequately the labor of lower-earning workers, and it's so out of balance that it is BROKEN?  The Social Security Administration shows that 45% of workers -- 71 million in all -- earn less than $25,000 a year (their average income is about $11,130) -- collectively they earn less than 6% of total income

(If the blog does not reproduce pdf file "copies", graphs can be found in the original documents.)

Distribution has not always been so one-sided. A report about "labor share and profit share" from the University of Texas "Inequality Project" (Paper #66, page 34) shows the decline in labor share of the lower-earning 90%. The dark blue represents the lower-earning 90% labor share dropping from 55% to 37%. For 36  years, 1945 to 1981, it averaged around 55% only to drop to 37% in  2009.

The author, Olivier Giovannoni, states in the conclusion, " Within the aggregate, financial and top incomes grew tremendously at the expense of labor compensation, at the pace of 15 points of net national income or $1.8 trillion in 2012 alone. It is not that labor compensation has fallen in relative terms; all evidence points to most gains going to the top incomes and a muddling through middle-class. As a result, the average American worker has experienced a triple squeeze: (1) overall, there is relatively less money going to labor; (2) among the “labor money”, less is going to the bottom 99% as wages; and finally (3) the purchasing power of the bottom 99% wages has gone down due to higher-than-assumed inflation."
Today, 2016, the total is $2.0 trillion that has shifted from the lower-earning 90%. The total labor share of 80% has stayed constant, but the distribution within labor share has shifted greatly. 

Giovannoni also provides an inverse mirror of the drop in a graph showing the increase of "profit share". From 27% post-war to 1980, to today's 44% which approximates 17% of national income that went to the lower 90%. (page 33): 

This finding is also reported in the report "Destabilizing an Unstable Economy", page 5, from the Levy Economic Institute, 2016: 


This is almost identical to the separation of wages from productivity, an graph, see here

Here we see the flat-line after 1985 of "Bottom 90%" income. Is this a sign that capitalism is broken? Since 1989, when the 90% and the 10% had clearly parted company, the "real disposable per capita income" has grown by 54% (see, Table 2.1 or this graph from the Fed) while the median household income has grown by 0.006%. Since 1999, 17 years ago, "real disposable per capita income" has grown by 29% and median household income has declined by 7%.  Is capitalism broken? 

The most comprehensive explanation to be found is in this Economic Policy Institute report, here, a set of 9 graphs from which this graph comes showing that the income of the middle 60% of households would be greater by nearly $18,000 if the wages had matched productivity since 1979. 
The U.S. middle class had $17,867 less income in 2007 because of the growth of inequality since 1979: Household income of the broad middle class, actual and projected assuming no growth in inequality, 1979–2011

U.C. Berkeley professor Emmanuel Saez again provides a new finding that underscores the not-even-glacial movement of income for 90% of U.S. families over 35 years. During these years "disposable personal income" per capita increased by 88%, but none of it reached 90% of the per capitas. From Saez's own web page,  the latest on "U.S. Income Inequality" updated to 2015, Table A3 shows income share for the top-earning 10% was below 34% from 1943 to 1978, and today it stands at 50.47%, a shift of 16.5%, similar to Giovannoni's finding shown above, a shift of $2.2 trillion, which averages to $19,700 per household for all 112 million households in the lower 90%.

two hedge fund kings

A recent issue of  Pathways  magazine from Stanford University's Center of Poverty and Inequality, presents an article by Gabriel Zucman. He shows that 1% own 42% of all private savings. In most European countries the 1% own between 12% and 25%. 
Another source is derived from the Congressional Research Service quoted in a blog posting at, it states that 50% of the U.S. own just 1.1% of all wealth. And Edward Wolff is the third source, his report can be easily digested by looking at Table 1 which shows that 30.9% of Americans have "zero" "non-home wealth"-- nothing in the bank savings account. And 50% have less than $10,000. The Federal Reserve's Flow of Funds report, page 2, shows the "Household Net Worth" stands today at $88.1 trillion, which is also 
$710,000 private net savings for every U.S. household -- almost a laughable statement in light of the fact that half have less than $10,000 outside their home equity.  The FRB report Survey of Consumer Finances, 2013, is the last report, showing a decline of 40% for the middle household net worth between 2007 and 2013, a loss of $54,200, from $135,400 to $81,200 (page 37).

         The Economy's Strength            To look optimistically at our economy we can see (BLS site here) a healthy strength that bodes well -- about 55% of the workforce are nonsupervisory employees working full-time whose average income is $37,544 a year ($722 a week and $21.49 an hour). These 87 million private sector workers, excluding low-paid retail and leisure/hospitality workers, hold the economy together with their purchasing power. To them we can add 22 million government workers, and they total 69% of the workforce. Combined their collective wage income amounts to 35% of all income. The top graph in blue shows that labor share for 90% is about 38% of all income. So my calculation does not match Giovannoni's. We can look to a table at the EPI's State of Working America web page, Table 2.4, which shows 
           Sources of Income          

Sources of pretax comprehensive income, by income group, 2007 (2011 dollars)

Income fifthBreakdown of top 10%
BottomSecondMiddleFourthTop90th–<95th percentile="" th="">95th–<99th percentile="" th="">Top 1 percentAverage all households
Households (millions)24.622.222.923. (Total)
Share of total pretax income
Proprietors’ income6.
Other business income0.
Interest and dividends1.
Capital gains0.
Cash transfers20.312.
In-kind income15.413.
Imputed taxes4.
Other income0.
Proprietors’ income1,1981,1991,3301,6347,4675,51115,00832,5162,500
Other business income202776301,12323,5516,58022,803315,0014,792
Interest and dividends2005531,3302,65521,8289,89022,130245,9045,416
Capital gains601844201,12339,6357,45119,908636,0998,437
Cash transfers4,0535,6266,7196,7396,6066,4107,0828,1295,937
In-kind income$3,075$6,041$7,768$8,883$10,339$10,138$11,039$12,194$7,187
Imputed taxes8782,3523,7095,82020,96612,74518,971193,0656,771
Other income406468401,2253,4462,3623,24526,419625
Shares of total income categories claimed by each group
Proprietors’ income9.88.810.112.558.811.023.413.0100.0
Other business income0.
Interest and dividends0.
Capital gains0.
Cash transfers14.418.122.322.522.
In-kind income9.016.021.324.429.
Imputed taxes2.76.610.817.062.99.711.329.3100.0
Other income0.79.913.319.556.69.810.622.0100.0
Source: Authors' analysis of Congressional Budget Office (2010)

This states that "average" income for all households was $104,163 in 2007, updated to 2011 dollars (see the middle rows, Average, lower right side, total income). Looking at the top line, at the left, total wage income amounted to 54.3% of all income (which also means that 45% of all income is not wage income but mostly ownership income), and looking in the lower section, the wage share for the first four quintiles was 3.8 plus 9.2 plus 14.7 plus 22.5 -- 50.2% of all wage income. Therefore, the
total wage share for the lower 80% was 27% of all income (50 times 54 = 27). This is $3.6 trillion adjusted to 2015's national income of $13.287 trillion (taken from the table above from the CJCT). This results in an average income of $36,363 for all households in the lower 80%. Remember also the average household income for all in this table is $104,163. The CBO reports (page 2) that the average household income in 2011 was $93,900, and that adjusts to just under $100,000 in 2016. 

This table of real weekly wage income of nonsupervisory workers from the BLS shows a drop of 8% in 44 years. The second graph in this series showing "real mean household income by quintile" from 1965 to 2015 shows perhaps 8% growth for the middle quintile. 
Between 1970 and 2014 "per capita disposable income" (the average per citizen growth of the economy) grew by 
123%. See here.  To repeat, 80% of workers see 8% decline in weekly buying power while economy more than doubles on a per capita basis. 

There is an immense disparity in income, and labor has not been receiving it's fair share. The Social Security report on wage income shows that the lower-earning 45% of all workers, 71 million, earn below $25,000 a year, and their average income is about $11,130 a year -- while the total national income divided by all in the workforce is $86,600 a year. The lower 45% also have a combined income of under 6% of the national income. Is capitalism broken? 

Full Employment ?  

The National Jobs for All Coalition shows that 19.7 million workers -- about 1 in every 8 -- are unemployed (7.4 million) or working part-time involuntarily (6.4 million) or not counted (5.9 million). To that group add the other 19 million who are working full-time but for less than poverty level wages -- total 38 million or 24% of all workers or would-be workers. I did the math recently, and arguably the nation needs about 18 million full-time year-round jobs, with 4% unemployment, to achieve "full employment". The expert prognosis from the Economic Policy Institute (EPI) recently stated we need 3 million. So there is room for discussion on this topic. 

In 2000 the Employment to Population ratio for age 25 to 54 workers was 89.4%, it dropped to 80.6% in 2007, and today is 85.1% --- we have half-way recovered -- still 4.4% lower than year 2000. That's about 5 million prime-age workers not working.  

President Obama likes to remind us that 13 million jobs have been created in 6 years since 2010, up 10% (2.17 million a year). But he does not state that a total of only 14 million have been added since year 2000, over 16 years (875,000 jobs a year, 73,000 a month). Over 16 years we have had a 10% increase in jobs, 13.7 million. Since 2000 over 64 million Americans joined the noninstitutional civilian population, they crossed from 15 years old to 16. While 64 million aged in, 41 million aged out, turned 65 -- a net increase of 23 million.  We need about 4 million more full-time jobs to return to 2000 levels. We also need a pay raise across the board of about $10 an hour for all "employees", from an average of $21 an hour to $31 an hour. 

What Should Your Pay Be?     
                         What Should You Be Making? 

Let's look at the Economic Policy Institute's web page. The median employee pay in 2014 was $28,815 -- what should it be if wage growth had matched productivity as it did for about 40 years: 
                             up by $17,000
                   $45,941  -- that's an increase of 59%

What if you earned the median household income of $53,600?
                             up by $25,000
                   $78,300  -- that's an increase of 44%

Remember that I stated above that since 1989 the "real disposable per capita income"  had grown by 54% 

Is Capitalism Broken? Did it perform better and more fairly? 


       The People's Budget       

The Progressive Caucus, of which Bernie Sanders is the only, the one and only, Senator to be a member, presented a budget. Here is the key recommendation, in my opinion: 
"Make necessary public investments. The budget finances roughly $295 billion in job-creation and public- investment measures in calendar year 2016 alone and roughly $565 billion over calendar years 2016–2017.3 This fiscal expansion is consistent with the amount of fiscal support needed to rapidly reduce labor market slack and restore the economy to full health." 

This morning while drinking coffee I read this report from the Levy Economics Institute: Investing in Social Care Delivery. Apparently one job in social care -- health care for the elderly and chronically ill, and "early childhood development services" -- costs about $41,600 per year. While a job in infrastructure costs about $100,000 a year. One mainly employs women, the other mainly men. A 50 - 50 split of the two types leads to a $70,000 per year cost per job, and to save the reader the math, a $300 billion investment would create 4.3 million jobs, half for men, half for women. 
More workers = more taxes. More workers = less excess labor supply and higher wages for 109 million full-time workers.  
A financial transaction tax could finance such a program according to this report from the Chicago Political Economy Group. 
The year before the Progressive Caucus budget planned to created 9.1 million jobs over a three year period, but they have trimmed down their proposal in this latest edition. We could use 9.1 million new jobs. That would raise wages for all 109 million full-time workers are jobs would be "tight" and wages would grow, and we are far away from inflation. 

             Is Capitalism Broken?            
                 A Look at the Supplemental Poverty Measure
Let's look at the U.S. Census Supplemental Poverty Measure to see how they rate income distribution. But first, on page 9 they show that poverty has been lowered by government transfer programs, principally Social Security, from around 30% to 15.3% -- cut in half by my calculation. A June, 2016, report from Robert Greenstein at Center for Budget and Policy Priorities says that government programs reduce poverty from 25.5% to 15.3%, a reduction of 10.2%. He states: ". . . the safety-net programs . . . lifts more than 40 percent of such (poor) people above he poverty line." He also says of the Republican (Ryan) plan for poverty "42 percent of all federal resources for low-income programs would disappear by 2026."   Just great, cut about half of all funding for poverty! 

But page 8, Figure 2, gets at total distribution, the graph shows 

Look at the right pillar, the SPM measure. 15.3% of Americans after all government transfers live in poverty -- 48 million -- 1 in 7.  
5.1% of Americans live with half the poverty amount, deep poverty. The poverty income for a family of 4 is less than  $25,460 if they rent an apartment, or $6,365 per year per person -- or $17 a day per person --- and this value includes all government benefits such as food stamps, EITC, Medicaid, Social Security-- called government transfers.  
But let's look at the sector that earns (or receives benefits)  twice the poverty level -- about 47.1% of all Americans fall in this category-- over 152 million Americans. As $17 a day is poverty, then $34 a day is 2 times poverty, it comes to $12,410 per person per year. A family of four will have less than $49,640 yearly income. This is low-income. The median for all families $63,810, see here.  And the median for a four person family is $84,000 (see this report, page 9).    

Now look at the average expenses for a family in the U.S., see this EPI site, Family Budget Calculator --- $63,741 is needed for a frugal but adequate life style in the median expense city of Des Moines, Iowa. So half of U.S. families have incomes below half what is needed for a frugal but decent life style. 

What is the average household income? Over $100,000. 
Is capitalism broken? But 47% live with less than 2 times poverty level, which is $49,640 for a four person family. And this is not the full story.

The BEA reports (Table 2.1) that the "disposable personal income per capita" is how much? --- $42,543. The poverty per capita amount, $6,365, is almost 1/7th this $42,543 average. That $42,543 figure may sound too high, but multiply it by 320 million citizens and it's close to the CJCT (first paragraph of this essay) reported national income of $13.287 trillion. 

The per capita amount, $42,543, leads to an income of $170,000 for a four person family. And $25,460 is about 1/7th the average of $170,000. This is not a democratically owned economy, quite obviously. 

Yet 80% live below 4 times poverty. And 4 times poverty is  $25,300, and that is about ½ (59%) the average "per capita disposable income" of $42543.  So poverty is a per capita income of about 1/6th or 1/7th the average income per capita ($6,365 divided by $42,543). And 80% of Americans  live below 59% of  the average per capita income. 
The 75th percentile of household income is $100,000 ( see here, very end of this Wikipedia article) and $100,000 is the average household income, so 75% live below average by this measure. 
The SPM does not agree with the U.S. Census figure. The SPM is a U.S. Census report. Go figure! 
If a family of four is in poverty at $25,460, as reported, then 4 times that is $101,840. But 4 times the per capita income is -- 42543 times 4 --- $170,172, and 60% is the ratio between 101,840 over 170,172!  Go figure! 

A Radical Solution?  - - Worker Management  
I've just finished reading the American Prospect article by Nick Hanauer, "Confronting the Parasite Economy", and it's excellent. But the only solution he mentions is to increase the minimum wage, which will not solve the problem. I think corporate governance must change, that all firms of a certain size must receive a national corporate charter, and this charter  would require worker representation on the board of directors to a  certain percentage. A re-writing of the National Labor Relations Act (NLRA) would mandate that every worker with one year of seniority would have a vote to select a percentage of corporate board members. Greater labor union organizing rights for workers also would help, which means re-writing the NLRA. And -- most importantly -- abolition of corporate tax for all corporations that are managed, if not owned, by workers with no management input from owners. This would advantage worker ownership firms over those owned by "absentee" owners, and transform wages for the entire economy. 

This U.S. Census report shows that 51.6% of all workers (just under 60 million workers) are employed in corporations with more than 500 workers, and 65.4% work in firms with more than 100 employees. (This U.S. Census report  (Establishment Size) shows somewhat different data.) A firm that pays high wages should receive a market advantage, and over time these firms would all drive out of existence the current ownership system of corporations. That would be radical. 

If we could convert these firms into worker managed firms, if not worker owned, then profits would be dispersed to workers. William Lazonick, at this Harvard Business Review article, has shown that at the 449 largest U.S. corporations, between 2002 to 2012 inclusive, 91% of profits went to either stock buybacks or corporate dividends. "That left very little for investments in productive capabilities or higher incomes for employees," Lazonick states. 
Very little for higher incomes for employees -- he hit the nail squarely on its head. As Hanauer has shown, employers cannot raise wages in this system without being driven out of business by competitors. "Good" employers subsidize bad employers with taxes that support the low-paying companies through government benefits to low-income workers.  "In effect, many real-economy companies end up subsidizing their parsite-economy competitors," states Hanauer. This is a broken system. Remember 91% of profits go to owners while average weekly earnings of workers since 1964 are lower by 8%.  
We need worker ownership or management as a national policy. And still that might not be sufficient. 

S&P 500 out grows all others
Since 1974 the S&P 500 has grown by 591%.
The BEA (Table 2.1) "disposable personal income per capita" adjusted to "chained 2009 dollars" has grown by 108%
The U.S. median household income, according to the U.S. Census has grown by 10.1%
The Federal Reserve shows the "Average Weekly Earnings of Production and Nonsupervisory Employees: Total Private"        
has fallen by -4.9% since January 1974. 

How did Warren Buffet become the wealthiest man? He put his money in ownership shares and those grew by about 60 times faster than the median household's income, or any other measure. The economic surplus for decades was channeled into the minority wealthy who had no constructive use for this surplus. The surplus has been wasted on the wealthy. They systematically bid up the value of stock prices creating a bonanza for stock values. Since 2008 the nominal wealth of the nation has grown by 57%, see the Federal Reserve report Flow of Funds, page 2. Since 2008 "household net worth" has increased by $31.9 trillion, $257,000 per household, a nominal increase of 57%. Since 2007 the median household income has dropped by -6.5%.

The surplus is going to waste. Or you might have some other explanation? 

Capitalism is Broken -- but it has not collapsed.
Material standards are only a part of well being. Cultural values, human relations, family, friends, social attitudes play a much greater role. Happiness, security, and life at its best are tied into material well being. Material security plays an important part, often determining life's opportunities and fulfillment of human potentials, for the individual and the society. I worked as a substitute teacher at Frick Junior High School in Oakland. I asked a boy if there were gangs in the neighborhood. He said, "Are you kidding! There are gangs on every street. This is the killing field." 
Capitalism was and is broken for his neighborhood, his friends, family relations, even his generation. A large portion of our population are struggling unnecessarily. 
It is breaking apart. It could be fixed with some attention.