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Wednesday, March 19, 2014

Wage Stagnation



                Wage Stagnation 
         The Fact that Unlocks the Mystery of a Bad Economy

                Compare 2 periods 
        1st period -- 1947 to 1979  -- 32 years
        2nd period -- 1979 to 2011  -- 32 years
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                 GDP/capita growth           Weekly wage growth              Average Family Income
                  (productivity)                                                                 Growth, Middle  
                                                                                                                  Quintile                                                                                                                                                          
1st period --       113%                                54.0%                              113.0%    
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2nd period           68%                                  0.5%                                10.3%
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As you can see, wage income growth in the second period failed to match growth in GDP, disposable income per capita, or productivity. That’s the major event of the last 30 years.  This is common knowledge. See "Source of Info" below.
A professor at Princeton and another at University of Chicago agree with my analysis and post this paper "The Most Important Chart", see here.

We could easily improve life for all of us, and especially for those who have little income or savings.
Maybe you have no feelings for poor people, well?, you should. It may be you or some member of your close family soon enough. Your grandchild faces a future of very limited opportunity and precarious economic security. Read the section below on income and wealth. Almost 4 in 5 Americans go through periods of poverty in their adult lives, some never escape. Read below about Chasing the American Dream. I don't know how to get through the thick skulls of the people I normally interact with and care about. It's not a difficult task, it is just a matter of simple understanding and determined application.

Cumulative change in total economy productivity and real hourly compensation of production/nonsupervisory workers, 1948–2012

Note: Data are for compensation of production/nonsupervisory workers in the private sector and productivity of the total economy. "Net productivity" is the growth of output of goods and services less depreciation per hour worked.
- See more at: http://stateofworkingamerica.org/chart/swa-wages-figure-4u-change-total-economy/#sthash.S69FscQL.dpuf   -- Link to graph here.

Or this graph from the Economic Report to the President cited in this article:
Sources: Economic Report of the President to Congress (G.D.P.); Census Bureau (income)

The after-tax disposable per capita income grew by 79% between 1979 and 2011, see the line graph below. I just looked it up at BEA.gov (see  Table 2.1, convert it to a graph if you can.) In 32 years it went from $20,248 to $36,293. Every household of four therefore, on average, has in 2014 after taxes $155,950 to spend! Every household regardless of its size has $690,000 in savings -- that's "on average" and certainly less than 10% are "average"-- (see my section on wealth, below). That's how affluent our nation is -- but who would believe it? In contrast, wages went up by 4% to 6% depending on the table between 1979 and 2011, a 32 year period. Despite the fact that in 30 years annual hours worked increased by 10.7% and "every worker working [was working] an additional 4.5 weeks per year" (see L. Mishel's article here), the median household income increased by only 5%, increasing from $47,527 to $50,054 (See this graph at State of Working America/Income. I reproduce it below, the last one. And at State of Working America/Income check these other related income graphs, Figure 2A, 2B, 2C, and Figures 2E, K, N, T, Z).

Labor's share has dropped 13% of total income since 2000. That's about $1.7 trillion, or $13,629 for every household in the country, $17,000 per year for every full-time worker. That would be a 42% annual income raise for the median full-time worker, see the bls numbers here. That median level full-time worker would increase his income from $40,320 per year to over $57,000. The median wage income for all full and part-time workers was $27,519 in 2012, and the average wage income for half of workers was below $10,000 a year.
Here's a graph of "labor's share of national income" from the Bureau of Labor Statistics or go to the St. Louis Federal Reserve for the graph: 









This is the BIG STINK. Or to be precise, it is the key structural deformity of the economy, the source of malfunction that has led to an economy over-reliant on debt creation. If the minimum wage since 1968 had been closely tracking inflation and productivity growth, it would be $22.81 not $7.25 per hour (see previous essay). Aggregate household debt remains high at 103.8% of aggregate income (see Christian Weller's snapshot for March 2014, point 12.) Consumers lack the income in an economy 70% driven by personal consumption. This is the major missing rung in the ladder of opportunity. What is wrong with our politics and media that they don't pick up on this more? Recently I read Meyerson's article on wage growth strategies at the American Prospect along with this article by Robert Kuttner who says that the median household income should be $80,000 not $50,000. Meyerson said research shows that the top-earning 10% had received ALL the economic growth over the past three decades. Lawrence Mishel at EPI shows that the top-earning 1% received 59.9% of economic gains. This Mishel article is the serious student's article on productivity and wage growth. Lending, borrowing and debt, the financial services, has exploded during these decades (see the colorful wikipedia graph below and note the growth in financial debt). We should seek to reverse that trend. Similarly, the Secular Stagnation concept that Krugman and L. Summers talk about is all about wage stagnation. I suggest a financial transaction tax on a large scale to be applied to fund a direct jobs program. I think it's politically palatable. (See this CPEG paper for a full description.)

Average Household Income -- $71,274 or $78,900? 
               -- Median
                                $51,017
Here is the BLS report on Consumer Expenditures, March 2014, page 2, showing the average household income of $65,596 for 2012. And similar data here from the Citizens for Tax Justice report, reporting average income for the lower 99% at $64,200 for 2014. When CTJ includes the top 1% the average "cash income" increases to $78,900 per household. The BLS does not track the top 1% accurately. And from EPI's State of Working America, average total income of $104,163 -- this is not "cash income" but total income which includes pension, social security and the value of health insurance compensation (about $30,000 non-cash income). This SWA average would yield $12.9 trillion total personal income for 2007 in 2011 dollars. The BEA.gov shows total income for 2011 was $13.0 trillion. So the SWA figure is close enough. I find the calculation for average household income very complex, you might agree. The Joint Committee on Taxation reported total income of $11.468 trillion for tax year 2012, page 28 of this report. Divide 120 million households into that last figure, equals almost $96,000 for all 120 million households in 2012. The median household income is around $51,000. Page 31 of this 2013 U.S. Census report shows household average income of $71,274 and median of $51,017 for 2012. The average is 40% higher than the median. Why don't the average and the median cluster together?  They should be about the same. On page 31, look at the 1979 average and median incomes, the average was 15% higher, not 40% higher.


A Solution, one part of the fix
I would like to remember the National Jobs for All Coalition right now. They have led the fight for creating "jobs for all" for years, and their monthly labor report is important. Nancy Rose has an article there, "We Need a WPA for Our Time."
"The private sector won't create enough decent-paying JOBS FOR ALL. Nor will it meet the nation’s human and infrastructure needs. It’s up to us to pressure the government to do what the private sector can’t or won’t do."

And just as the median household income should cluster around the average of $75,100 (see here), so should the median household wealth or net worth cluster around the average of $690,000 per household.

The Unemployed, and the Poorly Paid -- 16.8% plus 4.8% = 21.6%
                    or 36 million Adult American Workers  --- One in Five, almost One in Four 
We have over 20 million adults out-of-work, out of 160 million, one in eight, 12.5% -- roughly. As of April 7, 2014, I calculated that 12.4% would be the unemployment rate  if we substitute the Labor Force Participation Rate (LF/P) of January 2000 and keep today's number of employed. To this 12.4% add 4.4% who are involuntarily employed in part-time work (see here). That's a total rate of 16.8%. To that add those who work full-time and year-round for less than the poverty level, the "working poor", and it reaches 21.6% of all U.S. workers.
Millions of would-be workers have dropped out of the LF and are not counted as unemployed, perhaps most of them would be working if the pull or demand for labor was greater. Today's LF/P is lower than anytime since 1978, and that of course includes the recessions of the 1980s. The Unemployment rate (U3) would be 11.2% if we substituted the January 2007 LF/P. (See LF/P ratio at the St. Louis Fed graph, and calculate using data from these two BLS sources, one and two.)
 Anther 50 million are very poorly paid. As my recent essays show, only 6% of national income goes to half of the U.S. workers (77 million workers) in wage income. Or see the Social Security report on wage income, and do the calculation yourself, comparing it with total personal income at the BEA.gov site of $14 trillion, or post-taxes $39,000 of income per human. Half of U.S. workers earn on average less than $10,000 a year, only 12% of workers are voluntarily part-time workers. Yet the average income, after paying federal taxes, is over $39,000 per human being. Maybe this is a problem?

Half of all Income to 10% of Earners -- a New High


This article from the NYTimes, September 2013, shows the continuing trend of income. Note the period between 1945 and 1980. Also check Saez' article Striking It Richer which updates maybe yearly. Its graphs are more extensive, but mostly the same story. A colleague of Saez, Thomas Piketty, has written Capital in the 21st Century and it is receiving much press coverage, see here and here.

Wealth and Liquid Asset Poverty -- no Cash Reserves
Over 140 million citizens, 44% of the population, live in families that have liquid asset poverty (less than $6,000 in cash savings for a family of four) while the nation's official household net worth is about $690,000 per household as our total private savings exceeds $80 trillion(see Fed. Reserve's Flow of Funds report, page 2). See this Huffington Post article relating data from a soon-to-be-published book, Chasing the American Dream. Some 79% of the US population experience "significant economic insecurity at some point between the ages of 25 and 60."
Wealth Report for 2013
Or look at the Credit Suisse World Wealth Report for 2013, Databook, page 149, that shows the wealth Gini Coefficient (level of wealth inequality) for the U.S. is the highest except for one among 27 other nations. We have a level of 85.1, while that of France is 69.0, UK is 67.7, Italy 65.0, Australia 63.6, and the lowest being Japan's at 63.5. Even though the average wealth in Japan is 28% lower than the U.S. average, in Japan 9.1% of the adults have less than $10,000 in savings, in the U.S. 30.7%. The average savings in the U.S. per adult is $357,951, or about $700,000 per household, which corresponds to the Fed. Reserve figure of $690,000 quoted above. Yet 44% cannot pay an emergency $2,000 expense in 30 days -- see this NBER report -- of the 44%, 25% definitely couldn't pay it, and 19% would "do so by relying at least in part on pawning or selling possessions or taking payday loans". 
People are hurting and it is taking a toll. 

What is an economy for? Is it to impoverish the poor and enrich the already rich? Apparently that is the outcome of our present arrangement. And who cares enough to study it, to care about changing it? To help the majority bring some security into their lives? There are obvious solutions. This comparison above is a good place to start to understand where our problem lies.

Sources of Info
At the top of this article I compared two 32 year periods.
This is where I got my GDP/capita growth: measuringworth.com
For my Weekly Wage Growth: State of Working America, Table 4.3,
For Average Family Income: Table 2.1,
Figure 2A and 2C, shown below, also graphically show this disparity.
You can Google those sites to confirm. Bring your calculator. But this is pretty standard, well- known material.
Let me plug Too Much, a weekly newsletter, and a constant flow of ideas about inequality and solving the problem.

Real median family income, 1947–2010

Note: Data are for money income. Shaded areas denote recessions.
- See more at: http://stateofworkingamerica.org/chart/swa-income-figure-2a-real-median-family/#sthash.q1dfbA0Z.dpuf


Average family income growth, by income group, 1947–2007

- See more at: http://stateofworkingamerica.org/chart/swa-income-figure-2c-average-family-income/#sthash.HLUj4MLt.dpuf

The war of ideas -- Who is right, the Tea Party that cuts taxes to the wealthiest and cuts government programs that support the poorest? Or the Obama plan that would restore finance driven capitalism? Or the progressive left with its new Better Off Budget? that would create public jobs which would lead to a tighter labor market which would lead to higher wage income for all workers? What caused the Great Recession? What to do? I am reading slowly Restoring Shared Prosperity, edited by Thomas Palley, and I find that it agrees with my analysis.

I find that comparing the recent 32 year period of wage stagnation with the previous 32 year period is a fountainhead explaining our miserable economy: the Great Recession, inequality, unemployment, an economy dominated by finance, excessive wealth in the hands of a few and a financial system that gains most of its profits from speculation, the culture of greed where bad ethics crowds out good ethics, and many poorly performing social statistics such as education and declining marriage rates. IT EXPLAINS PLENTY.

I need to make a Table of Contents for this blog, many important facts are hidden and a contents page would help. The Blog Contents at the right shows the most recent articles which explain a good deal.
Search the "Contents" drop-down file on the right.
The Wage Stagnation story can be found at the EPI.org site, the report by Lawrence Mishel describes much of this trend. A last graph:

Growth of hourly productivity, real average hourly compensation, and real median hourly compensation (overall and by gender), 1973–2011

Growth of  hourly productivity, real average hourly compensation, and real median hourly compensation (overall and by gender), 1973–2011
Note: Compensation is for production/nonsupervisory workers in the private sector, and productivity is for the total economy.
Source: Author's analysis of unpublished total economy data from the Bureau of Labor Statistics, Labor Productivity and Costs program and Bureau of Economic Analysis, National Income and Product Accounts
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Chart: Real median household income, 1979 – 2011

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The link above to the article by Lawrence Mishel has the fullest reasoning.
This last graph, check the link at the BEA.gov is the per capita after-tax disposable income from 1947 to 2011 from the BEA.gov site. --- This graph has disappeared --- It was Neat. Today per capita post-tax income is almost $39,000, or $155,950 after-tax income for every four-person family -- in our nation with massive poverty, food stamp usage, and hardship. Why did wage income for middle-earning workers stop to grow?


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I would like to remember the National Jobs for All Coalition right now. They have led the fight for creating "jobs for all" for years, and their monthly labor report is important. Nancy Rose has an article there, "We Need a WPA for Our Time".  
The Congressional Progressive Caucus over the past two years proposed a $700 billion direct jobs program for 3 years running, and this year they propose a $450 billion jobs program for the next three years. There's a link here, EPI has the best synopsis of it, here
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Debt to GDP
File:Components-of-total-US-debt.jpg
Credit Market Self-Destructs
Viewing the Federal Reserve's Flow of Funds report, Z.1, Table D.3, page 5, "Credit Market Debt Outstanding by Sector", I calculated that the "Domestic Financial Sector" debt between 1996 and 2008 increased by 162% while the GDP/capita increased by 25% (using this source for the GDP/cap rate). Financial debt over ten years increased 6 times faster than economic growth. Other sectors had lessor rates of growth, notably the federal government debt grew by 26% in the same period. 
Such an enormous run-up of debt spelled disaster. 
Was it obvious?  Why not?  Magdoff and Foster in their book, The Great Financial Crisis, also report the same.  Is the economy still vulnerable to collapse due to excessive debt?  See the graphs at this article at the Business Insider. These graphs show steep increases especially 1996 to 2008. Here's the one for financial sector debt, 
image


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LETTER TO MY LOCAL ASSEMBLYMAN       Below is a letter to my state assemblyman. It is a short history of the causes of the great recession and an explanation why the unemployment problem is not a result of excess regulation, the normal Republican mantra. It may be redundant for some readers. It provided the motivation for the above portion of this entry. 


Dear Assemblyman Frank Bigelow, March 20, 2014

Why I Am Writing
I received a mailer from you in the past week and I'd like to comment. You stated that your highest priority was to improve employment opportunities in California, that 9.1% unemployment was unacceptable, and that regulations were preventing small businesses from originating and surviving. I could quote, but you are familiar with your own flyer. 

I am a retired public school teacher. I taught in Oakland, teaching fourth grade bilingual Spanish children in east Oakland. I became interested in economics in 2006 and began reading. I have written a blog about economics for about 6 years now, Economics Without Greed. I favor the Congressional Progressive Caucus's  approach to healing the economy, and I thought you would appreciate another perspective, just as a learning opportunity. I think your very brief suggestions for improving the economy were totally off the mark and inadequate. Here is my reasoned explanation. 

Unemployment 
It's true that the unemployment rate is high. As you say, it’s 9.1% in California while the nation officially marks 6.6%. That would be 2.5% above the national. Most leftish economists place the unemployment level at 10.1% nationally. You can look at the Economic Policy Institute web page, Heidi Shierholz' articles on employment and you'll find that the decline in the labor force participation rate is the main reason the U3 unemployment measure is not accurate. I place true U3 at 12.4%, and I have a few articles on my web page. Since this is a long essay in a sense I'm not going to explain everything, and leave it to you if you wish to explore some of my reasoning. It's on the blog I write, pretty easy to find. 

Perhaps California is 2.5% above the 12.4%, that would be 14.9%, I don't know. That would be one in seven workers not working, idle, useless. One in eleven is a little better. But the fact is millions of real people, our neighbors and friends, hearty and honest workers, are side-lined and there is no hope for improvement on the horizon. The Employment to population ratio dropped off a cliff in January of 2007, hit bottom in December of 2009, after 3 years of straight fall, and it has stayed near 58.8% now for 4 years -- no improvement since January 2010. 
If we had the same ratios of unemployment (U3) and of employment to population (E/P) as in 2007, then today's U3 would be 11.5% because workers who no longer participate would be counted as unemployed. And if again we had the numbers of January 2000, Clinton's last year, then unemployment would be 12.4%. I believe 12.4% is most accurate. But the cause is not over-regulation! 

Financial Regulation Is Upper Most
The financial system crashed in 2007 and 2008, and it was not because there were too many rules!
There were not enough enforced rules; the financial system self-destructed all on its own, it went crazy, it over-extended its loan portfolio and reality caught up with risk, and the entire thing would have disintegrated save for the taxpayer bailout. Worldwide depression was avoided. Sorry, but that is the real story. Regulation? Yes, we need it in the financial sphere, Dodd-Frank for a beginning. All the Republicans in the U.S. Congress voted against Dodd-Frank They oppose regulation. Perhaps their amnesia is due to the financial system contributions to their election campaigns. 

Financial Debt Accumulation in Ten Years
I just looked up the facts from the Federal Reserve Bank, Flow of Funds report, Z1, page 5, D3. “Credit Market Debt Outstanding”. Total financial corporation debt was $6.3 trillion in 1998, and in 2008 $17.1 trillion. In ten years, adjusted for inflation, fincancial corporate debt doubled, increased by 105%, while the total economy (GDP per capita) grew by 14%. How is debt growth sustainable at a rate 7 times greater than income growth? It is an obvious case of self-destruction by the profession that is supposed to be expert at managing risk. It was expert on maximizing its own personal income while the rest of the economy could go to hell, and did. And then Bush’s Secretary of Treasury stepped in to save the banks!    

Who Lost Most, Real Estate or Finance?
Did the tail wag the dog? 
The main problem was not collapsing subprime home loans. A quick look at the Statistical Abstract of the U.S., Income/wealth, Table 722, shows that in 2007 a full 20% of all private property in the U.S. disappeared, went up in smoke; about $13 trillion in U.S. private assets were lost. Of the $13 trillion, $9 trillion were financial assets, $4 trillion were residential assets. Where was the bubble? What caused the economic collapse? It was in finance! Read After the Music Stopped by Alan Blinder. Read more than the Heritage Foundation for accurate information. Anyone who knows the history knows that blaming the crisis on subprime defaults is like blaming a cat crossing a highway for causing a 50 car pile-up of tail-gating speeders. 

In reality the cause was a chain of very bad elements created by the financial system: bad liar’s loans that lenders very knowingly dispersed, very bad and manipulated home appraiser fraud to boost mortgage amounts, bought-for inflated security’s rating agencies’ ratings on CDOs or bundled mortgage securities, and the selling-off of CDOs avoiding the consequences of bad loan policy, and a systemic culture of greed where bad ethics crowded out good ethics  -- that caused the crisis. Instigating the crisis was not just bad subprime loans and not just Fannie Mae purchasing subprimes which happened late in the game of the rising bubble, nor was FM mandated by government regulations to buy subprimes; it was a privately owned for-profit corporation selling its own stock on the NYSE. Perhaps the poster-child of for bad regulation was AIG, the unregulated -- a case of no regulation -- insurance group that sold an insurance called credit default swaps, but there were no reserve requirements and the company went bankrupt when the pyramid collapsed costing taxpayers $160 billion to make up for this lapse of regulation. Eventually the Fed executed $29 trillion (with a T) in bank loans to save the financial system at a time when all private wealth was about $60 trillion. Blinder estimates total cost of the crisis at $18 trillion. Others have stated $40 trillion worldwide.  

Regulation Reform Is Minor
That is not to say that your point about bad and excessive regulations is not important, but it is a minor, very minor issue. Regulation, like most areas of discussion, is not a simple black or white, good or bad isssue as your mailer suggests. Yet most Republicans condemn them all with a very broad brush and never delineate the specific regulatory reforms they propose. I suspect you are just parroting a line, a piece of propaganda that some political expert told you to parrot. 

The Real Problem is Inequality --- 
Unemployment is second only to inequality as the nation’s most important challenge. Inequality has created unemployment, not regulation. 
     Purchasing Demand Is Paramount
Perhaps the most important economic truth for our times is that wages have not kept up with economic growth, and that has caused a very poor economy. Purchasing demand must match output for economic growth to be sustainable. Purchasing demand is also called consumer demand or aggregate demand, and this depends on wage income adequately distributed. J.M. Keynes introduced the  concept in the 1930s. The Chairman of the Federal Reserve between 1934 and 1946, Marriner Eccles, put this principal in clear terms, stating, 
“As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth ... to provide men with buying power. ... Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth [income]. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.  --- and 
“It is for the interests of the well to do – to protect them from the results of their own folly – that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit. This is not “soaking the rich”; it is saving the rich. Incidentally, it is the only way to assure them the serenity and security which they do not have at the present moment.

Sustained economic growth is impossible if incomes do not rise in tandem with increased output. Potential purchasers will be unable to buy what workers produce. When no one buys the output, then production must be cut back, and unemployment must increase. It’s not a complicated explanation. Growth that is sustainable requires a fairly even matching up of worker/consumer income with producer output growth. Like any theory, it has limits. But the basic concept of equality is pretty clear. 

I’m going to compare 2 periods. 
1st period -- 1947 to 1979  -- 32 years
2nd period -- 1979 to 2011  -- 32 years
  GDP/capita growth Weekly wage growth   Av. Family Income
(productivity) Growth, Middle Quintile
1st period --       113%            54.0% 113.0%    

2nd period         68%   0.5%     9.7%

As you can see, the income growth in the second period failed to approximate the growth of the productivity. That’s the major event of the last 30 years. Regulation is not the major event. This is common knowledge. 

This is where I got my GDP/capita growth: measuringworth.com
For my Weekly Wage Growth: State of Working America, Table 4.3, 
For Average Family Income: Table 2.1, 
Figure 2A and 2C also graphically show this disparity.
You can Google those two sites to confirm. But this is pretty standard, well- known material. 

During the post-war period, 1947 to 1979, all incomes increased in every income category, lowest to highest, as the GDP/capita increased. Sometimes they refer to GDP/capita as productivity. There are repeated demonstrations showing how income has dropped off since the 1980s. In the earlier period it was not uncommon for a single income earner per family to buy a home as well as provide for all necessary expenses. That’s no longer the case. 

I know I’m running on, and I want to run on myself. 
Let me at last refer you to the Congressional Progressive Caucus budget; this year it’s called The Better Off Budget; in the recent years it has been called The Back to Work Budget. EPI.org has articles about it. I find the 2013 budget analysis Andrew Fieldhouse and Rebecca Thiess the easiest to understand. 

Here’s a taste of their proposals:
Financing job creation and public investments. The budget finances roughly $700 billion in job creation and public investment measures in 2013 alone and $2.1 trillion over 2013–2015.3 This fiscal expansion is consistent with Economic Policy Institute estimates of the fiscal support needed to rapidly restore the economy to full health (Bivens, Fieldhouse, and Shierholz 2013).” 

They propose to create public jobs to eliminate unemployment and in doing so to run up the federal budget deficit and debt. They do not propose to lower the income tax rate on the wealthiest 1% of households from 43% to 25% as the Ryan and Republican Budget proposes, nor to 5% as Senator Rand Paul proposes. The 1% have a collective yearly income (21.9% of all income) greater than the collective income of 60% of U.S. households (21.4%), and their collective total wealth is greater than all the wealth of 94% of all households; their incomes have increased at a greater rate than any other income group, they received 60% of all income gains between 1979 and 2007, and they’ve just seen their financial assests increase by a stupendous $23 trillion in the past five years as the stock market shot-up. Their income tax rates (on only income above $400,000) should be closer to the 91% rate that held during all of the years of Eisenhower’s presidency. 

I’d like to continue this letter in future editions.
I would try to explain why the Dodd-Frank bill was necessary, how the financial system collapsed (but you could just read former Fed governer Alan Blinder’s book, as mentioned). Perhaps I would correct some of McClintock’s errors. 
It’s a vast array.  My blog is a good source for info, as is EPI.org, State of Working America, CPBB.org, Demos.org, Inequality.org, and so on. 

Thank you, sincerely, and I hope it was worth the little effort. I praise your spirit of service to the community. We can disagree with respect and amity. 
Yours, Ben Leet 


Friday, March 7, 2014

A $22.81 per hour Minimum Wage


 


(Century Foundation graph here) In 1968 a 40 hour week's pay at minimum wage income would buy an month's apartment rent in 36 of 50 states; today no state.

     A $22.81 per hour Minimum Wage?
That would be a $41,000 per year for full-time year-round workers.

(This 2012 professional report says it should be $21.74 an hour.)

At $22.81 this would triple the existing minimum wage which now is $7.25 an hour. So, $22.81 is unrealistic. It would be an utter disaster for many firms who couldn’t make payroll, and it would cause massive unemployment. But there is another way to do it. First raise the wage to between $10 to $12.50 an hour, and then increase the Earned Income Tax Credit (EITC) to effectively lift the minimum to $22.81.
Three years ago I wrote about a report from scholars at UMass/Amherst who propose an increase to $12.30 an hour while doubling the benefit of the EITC. Read my essay here

Why so high?  This is what the minimum wage would be if it had kept pace since 1968 with both inflation and economic growth. It would be triple today’s rate. And why is that important? It would reduce much of the suffering in our nation. We have very high, unnecessary and growing poverty. Half of U.S. workers receive in wage income less than 6% of personal income, and a full 46% of all workers receive less than $25,000 a year, and this lower-earning half has an average worker income of $10,000 per year. Nano assets characterizes nearly half of the U.S. population; 44% of households and U.S. citizens are liquid asset poor, equivalent to less than $6,000 for a family of four. The average per worker income is $90,000 -- simply divide total personal income by total workers ($14 trillion divided by 155  million workers equals $90,322 per worker. Admittedly its much more complicated than that, but $90,000 is still the mathematical per worker income.). The bare majority of Americans have a bare minimum of solid economic security.  (See here for GDP per capita increase of 116% since 1968 and here for inflation calculator)

$690,000 is average household savings --- 
We could eliminate poverty on the other hand. Security matters. Wealth for instance is a nice security blanket. On average most Americans don’t have it, but the average savings is almost $690,000 per household. (See here page 17 and here page 2,  updated to 2013 Q4) Less than ten percent of households have that amount. Imagine your life with $690,000, the average savings, in your bank account and the same for most of your neighbors -- some higher and some lower, but most around “average”. 

$200,000 of new savings per household in last five years!
Since 2008 the nation's households have increased their savings by $23.5 Trillion, about $200,000 per household!  ( See here again, page 2.)
We can create this widespread affluence because we already have affluence, $80 trillion in private savings, it’s just sequestered at the top. To make it broadbased is doable, affordable, and practical. It only lacks popular will and political power. Big money owns our  news media and politics. When, for instance, have you read about possibly raising the minimum wage to above $20 an hour? Or of redistributing the nation’s wealth or income? Or eliminating poverty in a nation where the average household savings is over $690,000? Who controls the press and the politics? We are very  wealthy, we are a democracy, why doesn’t it come to the minds of every citizen that we can and should eliminate all poverty? On average every citizen has over $250,000 in savings.

Good article on Min. Wage Basics here
Minimum Wage, Maximum Stupidity  


In 1968 the minimum wage adjusted for inflation was $10.56 per hour. Adjusted for economic growth it would be $22.81. Productivity has increased; workers create more each hour and their products last longer and travel faster. Think of cars, airplanes, light bulbs, fiber optics, pharmaceuticals, by-pass surgery, plastics, cable TV, lap tops, the Internet or pretty much everything. Total output grew by 116% per citizen between 1968 and 2012; this is another measure for worker productivity. A full-time and year-round minimum wage worker would be earning $41,058 today, a higher income than 65% of workers today. A boost to $22.81 would  lift the incomes of over 65% of  all workers, not just the small portion who earn minimum wage. 

Today’s full-time and year-round (FTYR) minimum wage worker earns about $13,000 today, not $41,000. And 84% of workers earning minimum wage are older than 20, see here

Since 1968 wages have increased by only 4% and the economy per human has expanded by 116% -- that's the long and the short of it. 

Who suffered? Who benefitted? 

A think tank that produces reams of statistics on wages and income, the Economic Policy Institute and its subsidiary State of Working America, reports that between 1973 and 2011 weekly earnings for non-supervisory employees increased by less than 3% -- while, of course,  the productivity of workers increased by about 116% (see Table 4.3). From 1973 to 2011 wages for the 50th percentile worker increased by 4% (Table 4.4). The graph of Table 4.B shows no movement between 1970 and 2010, 40 years of stagnant wages, while the economy's productivity per worker more than doubled. 

Real hourly earnings and compensation of private production and nonsupervisory workers, 1947–2011

Growth of real hourly compensation for production/nonsupervisory workers and productivity, 1948–2011From Laurence Mishel's report here, The wedges between productivity and median compensation growth. If any article describes the dynamics, it is this one. 
Note: Hourly compensation is of production/nonsupervisory workers in the private sector and productivity is for the total economy. 
Note: Private production and nonsupervisory workers account for more than 80 percent of wage and salary employment.
Source: Authors' analysis of Bureau of Economic Analysis National Income and Product Accounts data and Bureau of Labor Statistics Current
- See more at: http://stateofworkingamerica.org/chart/swa-wages-figure-4b-real-hourly-earnings/#sthash.9qhPx8Sx.dpuf

A numerical fusilage
The following is a numerical barrage that may disinterest some readers. 
In 2012 (the most recent Social Security Administration report on wage income) the mean average annual wage income for all workers, 153 million, was $44,226. And the median annual wage income (or middle worker, half of workers earned more, half earned less) was $27,519 per year. The total combined income in wages for half of U.S. workers was less than 6% if all personal income, and half of all households earned only 17.6% of all personal income (see here page 33). Median household income since 1968 is up by 14% (or $6,000) and the mean average is up by 41% (or $20,600), meaning the majority of gains has gone to the top. And the collective total income of 1% of households exceeded  that of 60% of households. If wages had grown at the same rate as the GDP per capita rate since 1968, by 116%, the mean average yearly wage income would be $74,468, not $44,226, and the median yearly wage income (at 65% of average) would be $48,404 instead of $27,519. Half of U.S workers would be earning over $48,000 per year. 

The lowest FTYR income could be $41,000 per year, and a $22.81 per hour minimum wage could be the reality. Presently 18 million workers, about 12% of workers, work FTYR at wages below the poverty line for a four person family, see here. They are working poor in a very wealthy nation. This essay is an exercise in counterfactual conjecture -- what if -- and the “what if” deserves consideration. If the progress in poverty reduction that began in the 1960s had continued throughout the 1980s and beyond, poverty would be extremely low today. 

The EPI states, 
" Before the mid-1970s, economic growth in the United States was associated with falling poverty rates. If that relationship had held, poverty would have been eradicated in the 1980s. The decoupling of rising growth and falling poverty, however, means that Americans are working longer and harder but becoming poorer and less economically secure.” - See more here

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This graph was created by the CEPR.org in 2013. Their conclusion is less than mine. And this graph from the 2012 report linked to at the top of this essay.
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Average Worker Income -- $90,000, or $56,464 cash income.
Why should half earn on average $10,000 per year? 
Today 47% of U.S. workers earn yearly less than $25,000 in wages. That's about 72 million workers out of a total of 153 million who are either in poverty or on its verge. Each worker contributes $90,000 to the personal income total above $14 trillion, and about $116,000 to the total GDP which about $16 trillion. After taxes each citizen could receive $39,000 in income in 2013 Q4 according to the BEA.gov stats on Personal Income.  That’s roughly about $160,000 income for a family of four. Personal income is complicated, another measure, cash or money income, places per worker income at $56,464, not $90,000. The Citizens for Tax Justice places per household "cash income" at $75,100 for 2012. All workers --- the 10 million unemployed,  the  29 million part-time workers, and several million partial year workers --- contribute $90,000 per year to total personal income. Or $56,464 in cash income, if you prefer. The EPI states that average household income in 2007 was $104,163 (see the table), considerably higher than the "cash income" of $75,100. The lower-earning 47% or workers, 72 million, whose mean average income is less than $10,000 also contribute $90,000 each. This does not seem fair or reasonable. Nor does it produce a society working at its full potential.  

Is $22.81 an hour Ridiculous?
Raising the minimum wage to $22.81 on first blush seems overly generous, and outlandish. But in the light that each worker -- including all unemployed and part-timers and temp workers --  contributes $90,000 per year, then $41,000 for the lowest paid seems about right. Workers in a very wealthy society should not be living in poverty -- poverty is personally demeaning and has serious consequences to society at large. Our problem is political and managerial, not economic.  

Unemployment Today
The unemployment rate today would be 11.4% (not today’s 6.6%) if the January 2007 employment to population ratio and unemployment rate were substituted for today’s lower ratio. And it  would be 12.6% if the January 2000 ratios replaced today’s ratio. And 12.6% is a minor depression. Participation in the labor force has declined. The recession has driven workers out of the labor force. Those workers are not counted as unemployed. Employers have less demand for workers and pay raises are smaller. If we had the same ratios as January 2000, then an additional 14.3 million workers would be employed today, that is nearly an additional 10% to the number currently employed, 145 million. Instead we would have over 159.5 million employed. The present labor force is smaller than that, 155 million. 

Income Share 
In 1967 the lower-earning 90% of U.S. households received 66% of the nation’s income share, and in 2012 they received 50% while the top-earning 10% received 50%. A drop of 16% spread evenly over the 80% of the work force who are nonsupervisory workers means a loss of income in the range of  $18,000 per worker. Labor’s share of income is at a historical low. (NYT Economix

Graph of Nonfarm Business Sector: Labor Share


(StL Fed graph) A policy is needed to restore labor’s share; this will mitigate income inequality which is robbing the society and its economy of purchasing demand and vitality. 

chart minimum wage be43a51 Most minimum wage workers are adults who work for large corporations

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The Earned Income Tax Credit 
President Obama has proposed to lift the minimum wage to $10.10 an hour. But to reach the equivalent of $22.81 an hour, the higher minimum wage should be matched with an increase in the Earned Income Tax Credit (EITC). The EITC is an annual wage bonus for low earning workers. A full-time year-round (FTYR) minimum wage worker at $10.10 an hour earns about $18,180. An additional  $23,000 in annual income, using the EITC, would bring the FTYR worker's income to $41,000.  In 2012 the EITC cost tax payers $60 billion dollars, it was distributed to 26 million workers, mostly to low-earning couples and single parents with children, at an average bonus of $2,300 per recipient. Increasing the EITC bonus by a factor of ten would increase the FTYR worker’s income by $23,000. Increasing the EITC tenfold would exact a cost of $600 billion per year. Presently the EITC increases the hourly income by $1.30 per hour. This proposal would increase it by almost $13 an hour. Mathematically, a $22.81 per hour minimum wage is also equal to a minimum wage of $10.10 for a full-time worker (annual income of $18,180) plus an EITC benefit that has increased by ten times from $2,300 per year to about $23,000. Total income $41,000. Here's an article that shows how the EITC works. 

It could be done, but it would be a extremely messy, a political battle royal full sound and fury. It would throw society into unending turmoil. Perhaps perpetual growing poverty would be better? Why a tax on that recent wealth gain of $23 trillion? Didn't the collapse of the financial industry cause this mess, in part? Why not combine the EITC increase with Philip Harvey's plan for direct job creation, Back to Work? That would increase employment in itself, and the EITC would increase the wages paid across the spectrum.   
















Progressive Change 
Nonetheless, as U.C. professor Emmanuel Saez has stated, it's time to seriously propose a maximum income tax level of 80% on the highest earners. The Guardian article states, "For example, 

doubling the average US individual income tax rate on the top 

1% income earners from the current 22.5% level to 45% 

would increase tax revenue by 2.7% of GDP per year – as 

much as letting all of the Bush tax cuts expire (only a small 

fraction of them lapsed in January 2013)."
And others have voiced appeals to  create a financial transaction tax that would raise up to an additiional $700 billion, and the Congressional Progressive Caucus has proposed a direct public jobs program of $700 billion a year for three years to re-employ those who have been forced out of the labor market (see the Congressional Progressive Caucus).  "The budget finances roughly $700 billion in job creation and public investment measures in 2013 alone and $2.1 trillion over 2013–2015.3 This fiscal expansion is consistent with Economic Policy Institute estimates of the fiscal support needed to rapidly restore the economy to full health (Bivens, Fieldhouse, and Shierholz 2013)." 
Now that the President has gotten on board with a minimum wage increase, things are rolling; but a return to 1968 and an economy that grows wages in tandem with productivity is still very far away. 

The Many Benefits 
Such a change would increase the entire nation's economic output, and increase the number of working individuals at higher wages, and lead in time to a permanent reduction of dependency on government charity programs. Here is a report from the Institute of Policy Studies that concludes, "The annual economic benefits of returning income inequality to 1968 levels would be equivalent to adding a whopping 22 percent to Maryland's annual current Gross State Product." If the entire nation had this advance, the economy and all citizens would benefit. A 22% addition to economic output --- most of it would benefit lower-earning workers who earn less than the 6% of all personal income. 

It would also improve family stability, the marriage rate, educational achievement, national security, and add a measure of security to the many, perhaps 3 out of 8 Americans, who live in families with less than $25,000 in savings. Presently our nation can boast of having an average household savings of $690,000 per household (according to the Federal Reserve Bank report). But the lower-saving households own only about 1.1% of all savings, about $11,000 per household. A survey from the FDIC, Department of Treasury, states that 44% of U.S. adults report they would be unable to pay an emergency $2,000 expense within a 30 day period, such is our liquid asset poverty rate. See article on liquid asset poverty here. "A family of four with less than $5,763 is liquid assets poor." "Nearly half (43.9%) of households do not have a basic personal safety net."

What is the Purpose of an Economy?
Such a wide discrepancy in household savings is a consequence of extremely low wages. It’s time to change that. Or is it better to have increasing poverty, instability, homelessness and dependency on a hand-out? We can create an economy that shares its growth and its rewards. The main question is: what is the goal and purpose of an economy? Is the purpose and over-riding goal of economic activity to provide the liberty for a small minority to have the freedom to accumulate and hoard an unlimited amount of capital for the pleasure of hoarding in their private accounts? Or is it to provide a method for all humans to exericise their talents and provide for themselves according to their innate skills and talents? It becomes a serious question of how damaging is the freedom for a few to accumulate unending stacks of bills that strain one’s mathematical imagination to the detriment of the vast majority who are either jobless or cannot  find employment at a living wage. Like it or not, we have to care for every sentient being on the planet, especially those with human attributes. The minimum wage is a metric of civility and humanity.  

New Civil Rights 
In 1944 Franklin Roosevelt expressed the foundation of a civil society when in his proposal for a second bill of rights he stated as a right, “The right to a useful and remunerative job in the industries or shops or farms or mines of the nation; The right to earn enough to provide adequate food and clothing and recreation”. We are missing this right. About 10% of the nation’s workers cannot find any work, and another 40% cannot find sufficient work with adequate income. The solution is not just economic, it is moral, it is a historical promise and a destiny waiting to be fulfilled. 










  







Here is a graph about wealth I used in my March 3, 2013 report.
Wealth distributional changes
Since 2008 the nation's private wealth has jumped up by $23 trillion, from $57 trillion to $80 trillion. Most of the gains went to owners of financial assets -- to the richest Americans. This graph does not capture the entire recent history up to today. But it shows the historical trend has not stopped. 



Min. Wage Historical --- http://www.infoplease.com/ipa/A0774473.html



Inflation Calculator, bls --  http://data.bls.gov/cgi-bin/cpicalc.pl?cost1=1.60&year1=1968&year2=2012

GDP per person -- http://www.measuringworth.com/datasets/usgdp/result.php

http://www.stateofworkingamerica.org/fact-sheets/poverty/