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Thursday, February 2, 2012

This month: Income Inequality 1976 - 2007, a chart 
   The 30 Year Trend, According to the CBO
    Finding the Average Worker Income
             -- Inequality on Steroids
  The Money Chart -- a graphic on Income Distribution
  Functional Finance, around since 1946. Money is a flexible human artifact, and  government may simply issue currency, debt free, for projects that increase the common welfare.

This is a long blog post, many words. Central is the fact from the Congressional Budget Office that the top 1% increased their income from 8% of total personal income in 1979 to 17% in 2007, and the lower-earning 80% of households in the U.S., which include 93 million households, would have more than $11,000 per year more income if the distribution rates had remained at the 1979 rate levels. That's the consequence of growing inequality. It is important on many levels, even for people who are happily well-off, who disdain public intrusion in the economy, and disparage government programs benefitting the poor among us. They are blissfully, and perhaps arrogantly insouciant (worry free). But even the top 20% of households in income would be far better off, living in a far happier society, though they care not a single acorn about economic fairness. Such is stubborn arrogance and indifference among many Americans who lack a social conscience. What can one do to make a dent in these minds and hearts?

A Tale of Two Thirty Year Periods, Income Distribution from
Center for Budget and Policy Priorities. Between 1976 and 2007, the U.S. gross domestic product (GDP) grew 66 percent per person, adjusted for inflation.  But the average income for the top 1 percent of Americans increased by 280 percent, in inflation-adjusted terms, while the average income of the bottom 90 percent of Americans stagnated, growing just 8 percent over this 30-year period [see graph].

Chart: Real median family income, 1947-2009

The third graph comes from the Center for Budget and Policy Priorities, an excellent article by Stone, Shaw, Trisi and Sherman.

In 1979 the top one percent's collective yearly income was $920 billion, and today it is $1,955 billion, adjusting to today's dollar value. Their share of the national personal post-tax and post-transfer income increased from 8% to 17%, according to the Congressional Budget Office (see this report, page xiii and pages 35, 36, 37). The shift of 9%, from 8% to 17%, coincided with a decrease of 9% in the incomes of the lower-earning 80%. This amounts to $1.035 trillion shift in after tax income that today goes to the top one percent  that in 1979 went to the lower-earning 80% of households. Reversing this $1 trillion transfer would 1) be fairer, 2) would create more purchasing demand and stimulate growth in employment, and 3) workers would tend to serve and produce for themselves not for the super wealthy, and this would create a healthier society. 

What if?  
What if the same income distribution held as in 1979? 
The incomes for all 80% of households, (93 million households) would be about $11,000 more per household. evenly distributed.
I have to state that "evenly distributed" is not the same as "same income distribution". The lower-earning groups would not receive a full $11,000 more by restoring the earlier distribution rates, but indeed they would if we took the composite transfer, the 9% shift that the top one percent took to their own incomes during 1979 - 2007, and evenly distributed it across the entire lower-earning 80% of households. All households in the lower-earning 80% receive $11,000 a year.  

In other words, the 20th percentile household would earn today, before taxes and transfers, not $14,851 but almost $26,000 per year. 
Maybe it's income would grow to $30,00 a year. In 2007 the 20th percentile received income of $14,851, and post-tax and post-transfer its income was $18,979, or $4,000 higher than pre-tax. The market is flexible in income levels, as can be seen by comparing 1979 levels with 2007 levels. The Earned Income Tax Credit added to this income group's annual income. But the growing inequality took away from its income which would have been $26,000 a year instead of $14,851. 

The 40th percentile would earn today not $28,618, but almost $40,000. In 2007, after all taxes and transfers, the 40th percentile  income was $29,729, $1,000 higher than its market income, but it was not the $40,000 a year level it would be if 1979 ratios were in effect.

The 60th percentile would earn today not $45,192 but $56,000.  Its 2007 post-tax and post-transfer income was $42,202, about $3,000 less than pre-tax income).

The 80th percentile would earn today not $70,578 but almost $82,000. Its 2007 post-tax and post-transfer income of $60,557, was almost exactly $10,000 less than pre-tax income. 

These figures do not include state and local taxes, which include sales taxes, property taxes, etc.  For 40% of U.S. households their post-transfer income is higher than their market income due to government transfer, mostly the Earned Income Tax Credit that was funded at $58 billion in 2011. 

The 80th to 99th percentile would not be effected by the hypothetical transfer back to the 1979 distribution ratios. 

The top one percent would earn not today's $347,421 but 165,049.  Their 2007 post-tax and post-transfer income  was $252,607, about $95,000 less than pre-tax income. Of course the $347,421 figure is the threshold into the top one percent who in 2010 earned on average over $1,300,000 per household. Their share of total income would decrease from 17% to 8%, the 1979 level, and they would see a collapse of income. But this would benefit the economic health of the nation.   

Mainstream economists do not condemn the disastrous effects of extreme inequality. Read below about the U.S. gini coefficient as it compares to other nations. These effects harm output growth, output itself, employment levels and societal health. The book The Spirit Level by Pickett and Wilkinson does make this case, as does The Acquisitive Society by Tawney. Read about them at, where Tawney states that the human energy of a nation is "diverted from serious work, which enriches it, to making trivialities, which impoverishes it." Too Much is a great web page that I recommend to all readers. 

The line graph above comes from State of Working America, the growth of family income. Note that from 1979 to 2009 the growth has been negligible, only 11%. The economy doubled its output in inflation adjusted dollars. The total GDP in chained dollars increased by 117%. The first graph above states that per capita GDP grew by 66%. Concurrently women in the workforce increased from about 51% to 56%. 

Lawrence Mishel, co-founder of the Economic Policy Institute wrote recently, "Over the 1970-2010 period, the output of goods and services per hour worked [productivity] rose 119 percent and per capita disposable [after-tax] income grew 114 percent." Now this is a bit confusing. He uses a period that is 9 years greater than the CBBP report above that states a 66% gain per capita of the GDP. Instead of 66%, Mishel states 114%, with only 9 more years included in his span. Mishel's knowledge of the economy is prodigious, he knows more than just about anyone. Either way, 66% or 114%, the vast majority of the population did not keep up. The top one percent saw a rise in income by 280%. And the Gini coefficient measuring inequality of income for the country was high to begin with, and it's higher now.   

Inequality -- On Steroids? 

The Difficulty in Finding the Yearly Average Worker Income

Go to State of Working America, to see rise in household median income, 15% between 1973 and 2009, 36 years. Mishel states that productivity of workers rose by 119%, and after-tax income per capita rose by 114% between 1970 and 2010, 40 years. 8 times faster: the per capita income increased almost 8 times faster than the median household income. 
Yes it is very complicated, and statistics are often manipulated, but doesn't this give any and everyone an uncomfortable feeling?  

Average Income per U.S. Worker?
But what is the average income for all 154 million in the workforce? Dividing the "disposable income" for 2011, $11.5 trillion, by the workforce, 154 million, equals $74,670, the average income per worker. But since only 140 million were working daily, that yields an average of $82,000 annual income. See BEA site. (Click Table 2.1 for disposable income and 1.1.5 for GDP) The ratio for average worker income, $82,000, and average worker  contribution to GDP, $109,000 equals 75%. ($82,000 divided by $109,000 equals 75%) This roughly matches the gross figures. The ratio for disposable income divided by total GDP  ($11.613 trillion disposable personal income divided by $15,294 trillion GDP) equals 75%. --- So, $82,000 a year is my average income for the 140 million who are working each day. Yet over 150 million work each year, according to the Social Security Administration.

James Crotty article in In These Times
This article proposes a progressive government response to the Austerian -- cut spending -- program that both Obama and the Republicans are promoting. It's an important read, and a clear road-map to greater equality and prosperity. 

I'm afraid I can't solve the "average worker income" problem. Whether it's $82,000 or just below $75,000 a year, it definitely is not near, any way near, the $26,363 figure given by the Social Security Administration as the median income for 150 million workers. See here for a link to the SSA figures.  

The Floyd Norris article in the New York Times shows that wage and salary income today is trending lower as a percentage of GDP, while corporate profits may be at an all time high. (You must click the link to see the entire line graphs.) 

As far as I can tell "average worker income" in the U.S.A. is never mentioned in BEA or other economic studies. I've only seen the median income mentioned at the Social Security Administration site, and this includes only salary and wage income. But this is not good enough. According to the Statistical Abstract for 2010, salary and wage income was 64% of total personal income.  One often  sees the figure for median household income, below $50,000 a year in 2011, and this includes all sources of income.  

I take the total national income (including wage and salary income, capital gain income, proprietary income and other income) and arrive at $75,000 for the average post-tax income per U.S. worker, all 154 million workers. 

The Federal Reserve Bank of San Francisco states the average worker contribution to GDP at $109,000 per year. 

The Social Security Administration released figures on income for 2010, showing that of the 150 million workers submitting W-2 forms, the median income was $26,363. One sixth of workers earned between $0 and $5,000, one sixth earned between $5,000 and $15,000, and one sixth earned between $15,000 and $26,362. For a breakdown of income figures, salaries and wages only, go to this site.  

So how does one make sense of $109,000 per worker contribution to GDP, and the $75,000 average income per worker, and the $26,363 median wage income per worker for 150 million workers? It is a complicated subject. Call it inequality on steroids.  

Originating at the S.F. Federal Reserve Bank,

"Trends in Distribution of Household Income Between 1979 and 2007" by the Congressional Budget Office, CBO, shows precisely how much household income levels have  gained over that 28 year period.

The CBO report states, page 37, the growth of income per quintile of households, between 1979 and 2007. I tediously calculated income gains for the four lower quintiles, and the top 1%. This is from page 37 of CBO report, "Market Income Plus Transfers Minus Federal Taxes" 1979 to 2007. The figures show the threshold incomes between one quintile group and its next higher quintile -- Quintile 1, up 23% from $15,411 to 18,979, 2 up 30% from 22,851 to 29,769, 3 up 39% from 30,341 to 42,202, 4 up 47% from 41,075 to 60,557, and top 1% up 118% from 115,965 to 252,607. In pie-shares or income shares, the lower 80% of households lost 9% of the pie, the top one percent gained 9% more pie in its share, from 8% to 17%, post-tax and post-transfer income.  

Households in the lower-earning 80% would have incomes greater by 23% today if the distribution ratios of 1979 still held today. The  maximum income for the lower 20% of households would not be $19,000 but $25,650, and the other quintiles maximum incomes would also increase. This is to say that income distribution is flexible according historical factors, which includes tax burden allocation. It can also be changed by direct government intervention, such as the EITC or other transfers.  This indicates  that income share is already subject to government intervention by way of taxation and transfer. 

To put this into a better context, the beginning, 1979, level of inequality was already high. The Gini index for income distribution in the U.S. is amazingly high. The CBO report, page 5, states "The Gini index for household market income rose from 0.479 in 1979 to 0.590 by 2007, and increase of 23 percent." Most of Europe has a Gini around the low 0.30s. Some countries are below 0.30. 

A Money Chart, including income distribution:

For a very interesting view of income distribution one can "google" the following: xkdc Money Chart, because the link from this blog does not connect.  
You will see that 1.3% of U.S. households, the top earners, received 20% of all income,
the next 9% received 20% of all income, 
the next 16% (74 percentile to 90 percentile) received 20% of all income,
the next 24% (50 percentile to 74 percentile) received 20% of all income,
and finally, the lower-earning 50% of households received the last 20% of all income.
The year is not given, but there is a reference site listed. It's a large interesting chart, the distribution section is in "Billions" area in the middle of the chart. 

This entry on my blog is irregular. I usually try for a more deliberate article on some topic. But this short entry will give readers some indication of worthy economic solutions that can be pursued.

About Unemployment, February 2012 
-- 20.6 million jobs needed

Writing about the recent unemployment report, Joe Persky, a professor at Univ. of Illinois, Chicago, states, “If we take a longer-run view, this last year has seen an increase of about 2 million jobs, or 166 thousand per month. That is better than the year before and the year before that. But this modest growth in employment is just doing a little better than population growth. The (seasonally adjusted) employment population ratio last January was 58.4%. This January, as noted above, it is 58.5%. In January, 2007 the same figure was 63.7%. At this rate it will take us half a century (52 years) to just get back to where we were before the panic and deep recession took hold. And keep in mind that the labor market in 2007 hardly represented full employment. In that year about 8.5 million workers were unemployed or underutilized by the BLS’s own measure. ”

If we had the same employment/population ratio as Jan. 2007, some 10.8 million more jobs would exist. If we had the same ratio as Jan 2000, 67.1%, some 20.6 million more people would be working.
1933-1937 the unemployment rate dropped from 25% to 9.6% because of public job creation according to this article by Marshall Auerback:

Functional Finance -- or How to Avoid Deficits 

--- Instead of increasing the national debt by borrowing from private parties, the government instead can directly create revenue without taxation or borrowing. Congress directs the Federal Reserve to loan the U.S. Treasury x billion dollars for projects that serve the nation, and then directs the Fed to cancel the debt. This is creating money out of thin air, Functional Finance. The banks do not like it, the wealthy like it not. But the country can manage along quite well this way. 
Doesn't this dilute the value of the currency? Of course, but since it also strengthens the overall economy, it strengthens the currency. It facilitates financing of needed physical and/ or social infrastructure, and it re-balances income distribution by providing employment to perhaps 1 in 6 who do not have adequate employment. Both these developments far out-weigh the negative effect of diluting the currency. It democratizes the economy in part allowing democratic choice to allocate resources for needed projects. It does not overwhelm the private sector and create socialism. 

The World Wealth Report sponsored by Credit Suisse Bank, September 2011, states (page 14) that 0.5% of the world's adults own 38.5% of all wealth, and 8.9% of adults own 82.1% of the humankind's monetary wealth. The allocation of the world's resources -- capital, human and physical -- is determined by a motive for profit. But humans need a new way to choose which resources should be allocated for which advances and improvements. The profit motive must be modified by a more intelligent directive power.  Functional Finance is one such contribution. 

The Earned Income Tax Credit, EITC, issues money directly to low income families, and cost the federal government  approximately $58 billion in 2011 and helped more than 26 million workers, while another 6  million failed to access the "free money".  Some 21% of the workers get or qualify for "free money" from the government simply because the government determined their wages were too low and they were raising children. See my January 2011 essay on a University of Massachusetts' plan to double the EITC. Functional Finance issues the money not to families directly but to government employment projects that serve society, and by-passes the taxation or borrowing routes. 

The poverty rate in 2010 was 16.0 percent (a newer revised figure), higher than it's been since the 1965 (see U.S. Census, page 14), and it would double without government transfer programs. The official poverty, most critics find, understates the actual poverty level. A doubling would means 1 in 3 Americans would live in poverty but for government action. According to this article at CBPP, "With anti-poverty programs under serious attack in Washington, here's something to keep in mind: a major new study from the National Bureau of Economic Research (NBER) finds that public programs keep one in six Americans out of poverty -- primarily the elderly, disabled, and working poor --- and that the poverty rate would double without these programs."

"Economic Crisis and the Fiscal Challenge of the State" describes a program for Functional Finance. This article by William Van Lear appears in Challenge Magazine, December 2011. I give the article another sub-title, "The Benefits of 'Functional Finance' Explored". The article is not available on the Internet. Van Lear is an economics professor at Belmont Abbey College in North Carolina. 
Van Lear's article and an article by Roubini, Hockett, and Albert,  "The Way Forward," are truly excellent, and with both I can  conceptualize our economy's ultimate solution.  

Van Lear's describes the economy's stagnation over the decades and the growing concentration of income, i.e., growing inequality.  He offers two solutions, 1) the historical New Deal type policy  actions, and 2) Functional finance. Central to Van Lear's and Functional Finance's premises are that 1) governments have to intervene, the economy is not self-regulating, and tends to stagnation; 2) the state's responsibility is to ensure a prosperous economy, 3) money is a creature of the state, it has to be managed, 4) government spending or fiscal policy should be directed in the light of its impact on the economy, 5) taxes should be levied for their economic impact, rather than to raise revenue. Most of that sentence I drew from the wikipedea article on Functional Finance. 

This provides for, in Van Lear's words, the "Unencumbered spending levels [of functional finance to] achieve full employment, and [such] financing flexibility ends the power of [private] finance capital to charge high interest rates and continually threaten financial crises." Much of this is occurring in Europe as private bond markets threaten sovereign nations' economies. Michael Hudson published an article about the antisocial behavior of banks at Alternet, February 3, 2012. In 1970 financial corporations' debt total equaled 10% of GDP and in 2007 it equaled 116% of GDP according to The Great Financial Crisis by Magdoff and Foster. Why so much more debt, 10 times more? This is symptomatic of concentration of wealth and inequality, leading to harmful, dangerous credit fueled asset inflation. 

Rules of Functional Finance, extracted from the wikipedia article: 
1. Government shall maintain a reasonable level of demand at all times. (This is a Rooseveltian notion about the economy.) 
2. By borrowing money when it wishes to raise the rate of interest and by lending money or repaying debt when it wishes to lower the rate of interest, the government shall maintain the rate of interest that induces the optimum amount of investment. 
3. If either of the first two rules conflicts with principles of 'sound finance' or of balancing the budget, or of limiting the national debt, so much the worse for these principles. The government press shall print any money that may be needed to carry out rules 1 and 2. 
The issue is who allocates resources, capital seeking nothing but profit or society seeking social benefits? 

Van Lear states, "Controlling inflation becomes a political economy issue of income distribution and reaching agreement on income shares." 

The wikipedia article on Functional Finance , states,
"Principles of 'sound finance' apply to individuals. They make sense for households and businesses, but do not apply to the governments of sovereign states, capable of issuing money."
The sovereign state can issue money without taxation for purposes beneficial to the economic security of the nation, avoiding the usual taxation or borrowing avenues. 

In the book Web of Debt  author Ellen Brown discusses President  Lincoln issuing "greenbacks" to finance the Civil War as an example of functional financing.

Perhaps issuing a financial transaction tax would raise enough  financing to fund government job creation, and option one, New Deal type programs. But Van Lear's analysis is worth looking at. And Roubini's paper, The Way Forward, suggests "Three Pillars" for reform, 1) public job creation, $1.2 trillion over 5 years in infrastructure upkeep, 2) resolution of the debt overhang afflicting households and financial corporations. If banks had to "mark to market" they would be bankrupt. And 3) resoloving the U.S. trade deficit through a comprehensive new financial architecture 

agreement similar to the  Bretton Woods agreement.

This blog has several articles on direct job creation. See here and here. And my seven point reform essay here.  

1 comment:

Andrew said...

There is a lot here.

I don't think that anybody denies that income disparities have increased substantially. This has translated into asset disparities, as you note elsewhere.

I believe that this is the single fundamental reason why things have gotten harder for many Americans (and Greeks, and Spaniards, etc.).

You suggest some ways to to deal with the situation (EITC reform, government spending to increase demand, setting of interest rates, etc.) You also suggest that government hiring would be helpful.

I think that you grasp the most of the problems, but I'll add some thoughts for you to consider.

First EITC is hated by many for one reason - it's a selective handout to people that the rich don't like - the poor. This is a problem politically - not economically. A simple solution is to make the handout non-selective - give it to everyone on a monthly basis. Who doesn't want money? Some will scream "inflation," but, of course, those in debt could use a little inflation, and it would put small monthly amounts into people's hands to be spent on goods that could be produced easily - it would pump demand. Until everyone is employed and the economy is humming, the likelihood of real inflation is small anyway (barring a real energy shortage). The amount could be adjusted as necessary as the economy rises and falls.

I have no problem with a government jobs program AS LONG AS THERE IS IMPORTANT WORK TO BE DONE WITH A PUBLIC PURPOSE. We do have roads to fix and social services have shrunk for those that need. I don't know if everyone who wants a job can be employed in this way and for how long. The great arrival of leisure promised by automation and productivity gains somehow never showed. What to do?

Have the government hire for those jobs that need doing. If people are still unemployed, mandate vacation for all - maybe 5 weeks to start. This will spread the available work around to more people and provide leisure time for all. Employers will balk, but it would apply to all, so there would be no competitive disadvantage for employers hiring workers in this country. People concerned about further offshoreing could perhaps be appeased by that terrible tax known as an import duty.

Taxation is a troublesome issue politically, so why tackle it? What matters, always, is RELATIVE wealth. It makes no difference if you decrease the wealth of the rich or increase that of the poor - the result is the same. You are aware, I think, that the government doesn't need money in order to spend, so it doesn't NEED to tax. Still, some sort of a VAT which might exclude things that cost less than $100 doesn't seem too unreasonable.

We should work for two reasons: to produce things that we need or want AND to stimulate our minds and satisfy our passion to create and learn. People in the US, however, think that we need to work to consume. This is silly.