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Wednesday, September 28, 2011

A Very Short Course in the U.S. Economy 

Often while talking on the phone to a friend I realize that he or she has a very sketchy concept of the economy and how to solve its problems. So I have put together some quick graphics, about 7 of them from web pages, with a short narrative connecting the story, plus some solutions. The reader can flip through the pages and graphs, and come out with an improved vista._________________________________
Photo originates here: New Deal 2.0, a good source. 
(Note: On October 15, 2011 my friend sent me a link to an article that is better than my summary here. 
The title is "Here's What the Wall Street Protesters Are So Angry About . . ." Be sure to also read that article.) 
The general picture is that we've gone through several decades of growing income and wealth disparity while at the same time degrading the structure of the economy. We may never recover --- I would not joke about it --- and if we do we'll have to make some big changes. It's all here in a flash. 

1.) Income disparity
What has been the economy's problem? A look at three graphs explains the inequality problem. The first and second show changes in income distribution 1979 to 2007; the third shows changes in wealth distribution, 1983 to 2009. 

Figure A

This comes from the Economic Policy Institute, a report by Lawrence Mishel and Josh Bivens, Oct 26, 2011. See the entire article here

The next graph on income gains comes from Jared Bernstein's blog, titled ""The Policy Backdrop of Inequality and It Implications for 'Class Warfare'". His source is the Congressional Budget Office.

Imagine a pie cut into five pieces each representing the amount of income distributed to the five groups of 20% households. Over time the pieces get bigger and/or smaller.  The top 20% piece is sub-divided. The top-earning 1% fared well over the past decades, their piece of pie grew from 7.5% to 17.1% (post-tax). The sizes of all four lower-earning 20% groups, representing 80% of the population, shrunk. That is the gist of this graph. It fails to show the relative sizes before or after the comparison, showing only the changes. According to the Tax Policy Center, the sizes (of the "income pie") per each 20 percentile household group in 2006 was 2.5%, 6.4%, 11.4%, 19.8% and 60.3% for the incomes of the five quintiles of households. This is pre-tax income. The top 20% received 60.3%. See my other essay previous to this one for similar comparisons. The income to the top 1% was approximately equal to the combined incomes of the lower-earning 60% of households.
See the Tax Policy Center for actual figures.

2. Wealth Disparity
Top 20% = yellow
Bottom 20% = not visible or 0.1%
20% to 40% = not visible or 0.2%
40% to 60% = 4%
60% to 80% = 11%                               (Source PBS News Hour)

For a full report on wealth see State of Working America's Wealth. 
The graph on household wealth gains, 1983 to 2007, shows the same picture. It derives from Lawrence Mishel at the Economic Policy Intitute, September 15, 2011. The bottom 60% of households have lost savings since 1983. This is consistent with U.C. Berkeley professor Sylvia Allegretto's study that showed the bottom 80% of households on average lost 40% of their savings between 2007-2009. 

Once again, the pie chart showing wealth distribution is missing. But here are some aids. State of Working America's Wealth, a 2011 report by U.C. Berkeley professor Sylvia Allegretto, pages 4 and 5, shows the relative sizes. The lower-wealth-holding 60% own a mere 2.2% of the total wealth. 
Mother Jones magazine ran an article, "It's the Inequality, Stupid" in March/April 2011. Check out the graphs. 

Combine this with the knowledge that the GDP/capita (the economic output per citizen) in the nation has more than doubled (an increase of 100%) since 1963, while the typical family or household's income has increased by 22% from 1967 to 2003. The economy more than doubled, the typical household saw income rising by a quarter. The St. Louis Federal Reserve Bank provides the first graph showing an amazing increase in output per human being. The next graph, from the U.S. Census, shows a less amazing  distribution of output where the median household barely grows its income. 

Real GDP per Capita in the United States (USARGDPC)

Graph of Real GDP per Capita in the United States
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File:United States Income Distribution 1967-2003.svg

 The majority of Americans did not experience the full benefits of a growing economy, in fact in our present decline, a majority are seeing declines in wealth back to levels of 1983, while income has not budged for individuals since the mid 1970s.

Now, if you are interested in learning about the recent recession, you can catch many graphs at this site, "The Legacy of the Great Recession" at Center for Budget and Policy Priorities. But you might skip that to avoid overload. But if you crave overload, look at, part of 

What is the solution:

Public Employment
Public employment worked in the 1930s and '40s, it may be our last hope to end the epidemic of unemployment and underemployment. About 30% of workers, or 45 million, are either out of work (9.2%), under-employed (5.8%), discouraged and dropped out (4.2%), or working full-time year-round for below poverty level wages (10.9%). It is a sick economy. 

There are plans to create public jobs, professor Philip Harvey, Rutgers University, published on at in January 2011, "Back to Work"
On page 11, Table 3, you'll see Harvey's plan would create 1,000,000 jobs plus 414,000 additional private sector jobs for a net cost of $28.6 billion. Harvey states, page 12, "We currently need about 8.2 million more jobs to reduce the nation's unemployment rate to 4.5%. Creating that many jobs in a program like the one described in Table 3 would require a net increase in federal spending of about $235 billion during the first year of the JLRS initiative. If the Bush-era tax cuts had been allowed to expire at the end of 2010, the federal government would have collected about $295 billion in additional revenue during 2011." I recommend readers look at the graph on page 2 and the table on page 11. 

Marshall Auerback at New Deal 2.0 writes (in The Real Lesson from the Great Depression) that the "Roosevelt administration reduced unemployment from 25 per cent in 1933 to 9.6% per cent in 1936, up to 13 per cent in 1938 (due largely to a reversal of the fiscal activism which had characterized FDR’s first term in office), back to less than 1 per cent by the time the U.S. was plunged into the Second World War at the end of 1941."

There is no reason to review Auerback's essay in a very "short course", but you will be interested to know that the public jobs program built real structures, "It also built or renovated 2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds, 7,800 bridges, 700,000 miles of roads, and a thousand airfields. And it employed 50,000 teachers, rebuilt the country’s entire rural school system, and hired 3,000 writers, musicians, sculptors and painters, including Willem de Kooning and Jackson Pollock. So much for the notion that government jobs are not “real jobs”, as we hear persistently from critics of the New Deal!"

Restore Manufacturing
And finally look at Ron Baiman's essay of September 7, 2011, "What We Need to Do to Revive the Economy". He states that government spending is not enough to revive the economy, it needs restructuring. "In the absence of restructuring there is no magic date in the future after which point the economy will be able to grow without public or private deficits.5
The need for fundamental restructuring to revive our economy makes our current downturn more like a "Depression" than a "Recession".  . . . The U.S. economy suffers from major macroeconomic imbalances and a three decade loss of productive capacity that cannot be corrected by a decade long spree of public infrastructure spending (though this would certainly help in the short-term and the long- term)."  
He further states, 
"We don't need to "shrink the size of the public sector" ([which is] what the real underlying "deficit" debate is all about about). Rather, we need to dramatically increase it. We need to vastly expand our taxing and spending in order to reorient our economy away from a rentier [finance dominated] and back to a productive [manufacturing] and balanced advanced economy configuration by enacting a massive federal jobs program that will expand public and private sector employment in: a) social services, b) infrastructure, c) new green technologies (CPEG 2009, 2011). We desperately need a new New Deal."

The graphs on unemployment, page 3, and the conclusion beginning on page 5 are very instructive. 
Also look at the articles at New Deal 2.0 by William Lazonick and John Rynn dealing with restoring manufacturing industry to the U.S. 

At this point you might try my essay, February 2011, in which I try to offer 6 or 7 indispensable changes needed. It's a "basic solutions" essay. 

In Short
There is no happy ending. It is a royal mess. 

The economy should not serve only those who seek fabulous fortune. Greed has perverted the society. What if the GDP/capita graph (from the St. Louis FRB) that showed 100% growth between 1963 and 2007 had matched the median household income graph? And what if the other wealth and income graphs had even growth for all income sectors? And why shouldn't they? Between 1947 and 1979 those graphs did match; there was even growth for all income sectors. 

Change in Real Family Income by Quintile and Top 5% 1947-1979

In Contrast, the years since 1979 are starkly different:
Change in Real Family Income by Quintile and Top 5% 1979-2009
Source: U.S. Census Bureau, Historical Income Tables: Families, Table F-3 (for income changes) and Table F-1 (for income ranges in 2009 dollars).

These two graphs come from, and originate at the  Economic Policy Institute. The EPI created a web page called State of Working America.

See this interactive graph at State of Working America, and compare the share for the bottom 90% before and after 1969. You will notice as you swing the pointer pre-1969 that the blue sector is visible, indicating the 90% of households made income gains. What do you see when you swing the pointer post-1969?  We had growth for all sectors 1947 - 1979, but the top earners still captured half or more the growth. The income tax bracket was over 90% on income above $200,000 from 1951 to 1964. (See this table.) Or we could just establish a maximum wage set at 20 times the median household income. There are plenty of solutions for curbing inequality. 

Ben Leet  
You finished this session. Now go to the next:
THIS BLOG: My February 2011 essay, the Six Point Program, is a comprehensive proposal to restore prosperity. I recommend it. Go the the column at the right, click-on February, 2011. Look for the Contents page also, December of 2010. We can do two major things in this nation: we can make sure all jobs pay a decent wage -- they don't, believe me --- and democratically we can create jobs for everyone.
I left this comment to the article I cited above, "Here's What the Wall Street Protesters Are So Angry About . . ." Here it is:

Excellent. Add this: 40% of the savings of the typical family (the median household) were lost between 2007-2009, their savings dropped from $105,000 to $65,000, down to savings level below 1983 levels. This is according to Sylvia Allegretto, U.C. Berkeley professor, writing in State of Working America's Wealth. The wealthiest 1% own 225 times more than the "typical" or median family. 1 in 4 households have "zero or negative" net worth (savings) and another 1/8 have less than $12,500. Our economy generates over $47,000 per year yet 15% of the population lives in poverty. The St. Louis Fed also has a chart showing that the average worker contributes over $100,000 yearly in output to the economy, but the median income is around $30,000.  And the National Bureau of Economic Research conducted a survey and half the adults said they would not be able to handle a $2,000 emergency within 30 days without borrowing or selling something. And add that about 30% of the young people below 18 years old get their food from the Food Stamp program. The economy is a mess. The Labor Department reports that manufacturing workers in China earn $1.36 an hour, and in the U.S. $34 an hour or about $70,000 a year. This is why 1/3rd of U.S. manufacturing jobs were lost in the past ten years. In fact, in the year 2000 the economy had more private sector employment, 110 million workers, than today in 2011, 109 million workers. Protest or lose what little you have. Excellent report. See my blog, for more. Excellent report here. 

This photo credits: -- a good source of socialist thought.


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