Is Capitalism Broken?
One Percent Earns 18.7% of annual income, while the lower 55% Earns 16.2%
2% Owns 50% of private wealth and the lower 50% own 1%
This graph shows who received the growth since 1949. Pavlina Tcherneva created it, see this essay and her web page, and the article at Bill Moyers.
The U.S. economy does not pay workers adequately; we could raise wages and improve life for most Americans --- the conclusion. This is a long essay. I suggest you break it into parts. Skim it first, and then take in the sections. Take it slowly, go to the links at times for more graphics.
The picture that emerges in the course of this essay is that the economy is below real functionality for about 40% of the population, especially the younger adults. More importantly, it's unjust. See if you do not agree. The economy has become the master of the society, and that should be reversed. Democracy is needed, and some real deep understanding of the profiles of the economy, which is what motivates my inquiry.
Average earnings for the lower-earning 90% of the U.S. population (real inflation adjusted) has not changed in over 45 years, says this 2015 report from the Congressional Research Service. I can't get the graph to reproduce, so readers will have to link to site. Here's a quote from the Q and A portion: "5. From 1970-present, how did overall wages change for the bottom 90% of earners?
The reported income of the bottom 90% of tax filers in the United States decreased from an average of $33,621 in 1970 to $30,980 in 2013 for an aggregate decline of $2,641 or a percent decline of 7.9% over this 43 year period.
6. From 1970-present, what was the net change in the share of income held by the bottom 90% of the U.S. income distribution?
The share of income held by the bottom 90% of the U.S. income distribution declined from 68.5% in 1970 to 53.0% in 2013, an absolute decline of 15.5 percentage points over this 43 year period."
The question then one would ask, how much income was lost individually owing to the 15.5% decrease? --- $2,247,500 million in all, divided by 144 million taxpayers, or $15,607 per tax payer unit in the lower-earning 90%. Or per household $19,977 per household, call it $20,000 per household lost to 90% of American households. -- The CRS report is short, you might read it. And the corollary is a web interactive page from the Economic Policy Institute, "What Should Be Your Pay?". You'll find much the same answer, about $20,000 per household for those with incomes below $70,000 a year.
A look at the income distribution, pre-tax and pre-transfer, called "market income", 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. I find this disturbing, something is gravely amiss.
Taxpayers with income below $50,000 earn 16.2% of all income, and taxpayers reporting income over $500,000 earn 18.7%, or 22.0% per the other report.
Presumably income is derived from work. The contribution and value of one great worker is 67 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. Wages are on a race to the bottom. Wage reward is 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 45% of workers earn less than 6% of total income . This was more or less the case in 1990 when the SSA began these reports. I don't think readers believe this, so here is a screen shot from the report. The total income for 71 million workers, the 45%, is less than $750 billion, less than 6% of $13.287 trillion.
|Wage earners||Net compensation|
|Net compensation interval||Number||Cumulative|
|Aggregate amount||Average amount|
|$0.01 — 4,999.99||22,574,440||22,574,440||14.27075||$46,647,919,125.68||$2,066.40|
|5,000.00 — 9,999.99||13,848,841||36,423,281||23.02549||102,586,913,092.61||7,407.62|
|10,000.00 — 14,999.99||12,329,270||48,752,551||30.81961||153,566,802,438.45||12,455.47|
|15,000.00 — 19,999.99||11,505,776||60,258,327||38.09315||200,878,198,035.07||17,458.90|
|20,000.00 — 24,999.99||10,918,555||71,176,882||44.99547||245,317,570,246.88||22,467.95|
(If the blog does not reproduce pdf file "copies", graphs can be found in the original documents.)
The real change began when the lower-earning 90% saw their wages stall, around 1980, in this graph. And between 1980and 2015 the economy grew on a per person basis by 90%, see here. Why did wages stop growing? 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 for 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 out of the paychecks of the lower-earning 90%. The labor share of income has stayed constant at 80%, 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):
For more on the declining labor share of income, you can read this PERI report by James Heintz, here.
Compare the flat red line, 1970 to 2015, with a graph from the Federal Reserve, "Real Disposable Personal Income: Per Capita", --- per capita income doubles (increases by a multiple of 2.35 between 1970 and 2015, from $16,518 to $38,889).
The median per capita income in 2010 was $18,700 (see here). This is roughly the same as the Pew Research, see here, amount, $72,520, for a 4 person family. The average "disposable income per capita" was $36,274 in 2010 (see BEA.gov, personal income, Table 2.1), and that is about double the median income amount. And the total income (before taxes) per capita was $45,342. So -- the middle person's income was about 41% of the average (18,700 / 45,342 = 41%).
That means -- the typical income per person is less than half of the average income person.
That means extreme inequality.
Half of U.S. families struggling to get by?
The Basic Family Budget -- Calculator
It looks like about half of the U.S. live in households who cannot afford a modest lifestyle. The EPI.org has a family budget calculator, and Des Moines, Iowa, has the median expenses for the nation. A four person family, with 2 children, needs an income of $63,741. This budget calculates "the dollar amount necessary for families to live securely but modestly in various communities across the nation." No frills! No savings!
The author of the U.S. Census report on poverty, the Supplemental Poverty Measure, states that 140% of poverty is the actual poverty level (see page 23), not the official amount. These nearly 100 million Americans, in a population of 325 million, she states, are "not able to meet their basic needs and achieve a safe and decent standard of living."
- if the graphic does not display, look below to the section on the Supplemental Poverty Measure -- it shows that 52.8% live with more than 2 times the poverty level income, so I'm guessing that around 50% live with less than 2.4 times the poverty level, which is the "modest" lifestyle level, below which people are struggling to get by. (See the EPI report.)
The author of the SPM says, "This suggests that families with resources below approximately 140 percent of the SPM threshold, rather than 200 percent, may be characterized as not able to meet their basic needs and achieve a safe and decent standard of living, or as families with ‘low income’." NOT ABLE TO MEET THEIR NEEDS -- 30% of Americans, after taxes and transfers -- and 50% living below the modest lifestyle threshold.
The graph from the Levy Institute is almost identical to the separation of wages from productivity, an EPI.org graph, see here.
Is this a sign that capitalism is broken? Since 1989, when the incomes of the lower 90% and the top 10% had clearly parted company, the
"real disposable per capita income" has grown by 54% (see BEA.gov, Table 2.1 or this graph from the Fed), and the
GDP per capita has grown by 45%, see here, the
median household income has grown by 0.006% -- it's flat. That's 26 years and no growth at the median.
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?
Here's a graph showing unequal growth trends, a reflection of the first graph of this essay on growth distribution, from the U.S. Census:
The Urban Institute (who co-sponsors the Tax Policy Center) has nine graphs demonstrating income and wealth inequality (see here). Between 1970 and 2013 the incomes for the 10th and the 50th percentiles of households decreased, the 90th percentile increased by 36% or $43,000. The web page Measuring Worth shows that per capita GDP increased by 92%.
The wealth graph is pretty amazing, well worth the bother of clicking the hyperlink. Wealth holdings for the top 1% since 1983 have doubled to nearly $8 million, the 50th percentile showed no movement, the lower went from +$750 to -$2,050.
The income of the top 1%, according to this report from the Economic Policy Institute, increased by 200.5%, while the bottom 99% grew by 18.9%. !!! Ouch !!!
The most comprehensive explanation to be found is in this Economic Policy Institute report, here, a set of 9 graphs 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, as they had between 1946 and 1973.
U.C. Berkeley professor Emmanuel Saez again provides (below) a new finding that underscores the not-even-glacial movement of income for 90% of U.S. families over 35 years. Their average income increased by $12 -- twelve dollars! During these years "disposable personal income" per capita increased by 80%, from $28,325 to $50,820 according to Measuring Worth. But none of it reached 90% of the 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%.
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 EPI.org, 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).
This graph from the Congressional Budget Office report shows dramatically unequal growth in family wealth: (I'm not able to load the graphic, so you must click for the title page. When looking, remember that $89.1 trillion is the Fed's Flow of Funds total net worth, page 2, not this one in the graphic.)
The Flow of Funds reports, FRB, all of them going back to 1996, show the growth of financial assets, Table B100. In 1996 total financial assets were valued at $24 trillion, which is $36 trillion adjusted for today's inflation. Today the total is $72 trillion, double. The economy has grown by 15% of a per capita basis, see Measuring Worth. Again:
Financial Assets: grew by 100%
Economy grew by 15% -- over a 20 year period.
Financial assets should be taxed. See James Kwak essay on how to.
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