Thursday, November 21, 2013

Meet the New Middle-Class (which Peaked in 1979)

In the "good old days" dad went to work at places like U.S. Steel or IBM, earning enough to pay the mortgage and meeting the payments on a car loan; all while mom stayed home to raise the kids, giving them milk and cookies after they returned home from school.

This was a time in American history when the top 1% paid a higher marginal and capital gains tax rate, and when the major corporations paid a higher tax rate as well (see historical rates) — when "big government" had the resources to do things, such as building the national highway system, or putting man on the Moon.

Nowadays, both parents must work to pay the rent and feed the kids, when dad might be working at Walmart, while mom is picking up the kids from a daycare center after leaving her job at McDonalds — while the government (for lack of revenues) has been cutting back on everything.

Today 50% of all wage earners takes home $27,519 a year or LESS (this is the REAL middle, and they aren't "middle-class"). But as it is now in 2013, before making any attempt to save for college or retirement (or to buy a home), a two-income, two-child family needs to earn nearly $72,000 per year to reach economic security. In a U.S. labor force of 153.6 million wage earners, only 2.06 million earn this or MORE — or 13.5% of all American wage earners.

And government spending is now down faster than since WWII, and we have less federal workers than since 1966. Government spending and waste, fraud and abuse hasn't been our biggest problem—we could actually use MORE government, paid for with a more fair tax code.

The U.S. population has grown by over 1/3 (over 100 million people) since the 1970s — but not enough tax has been paid by the top income earners over the past 40 years — when their tax rates should be DOUBLE than what they are today.

The Great Middle-Class only grew, lived and peaked over a period of 30 years (say, from 1949 to 1979). Over the last 40 years, after peaking in 1979, this was when the Era of the Great Middle-Class began its long and steady decent into oblivion --- and this was when the Age of Economic Anxiety began.

Research done by Emmanuel Saez and Thomas Piketty show us that inequality is nearly as acute today as it was before the Great Depression.

Below is an updated chart from Emmanuel Saez, of Berkeley, which shows the share of pre-tax income enjoyed by the top one per cent of earners over the period from 1913 to 2012. The data comes from the Internal Revenue Service.

1913 to 2013 - Income for the top 1%

After rising in the Roaring Twenties, the income share of the top one percent fell sharply in the post-World War II period. Since about 1978-79, it has been climbing again. The top earners’ share of overall pre-tax income peaked in 2007, fell back during the Great Recession, and then recovered strongly since then.

Income gains for the top 1% is breaking records: U.S. income inequality reached its highest level since 1928. A new economic study reveals income inequality between the wealthiest Americans and the rest of the population continues to increase — as the population increases — as a greater share of all economic activity has resulted in a greater of income going to the very top (nothing has "trickled down" to the very bottom).

How has everybody else been doing? A second chart from Emmanuel Saez (shown below) tells us the answer. Going back 100 years, we also see the inflation-adjusted pre-tax incomes for families in the bottom 99 percent compared to the top one percent.

The 99% vs. The 1% for Income Distribution

The long-term trends are clear. Between the start of the Second World War and the first oil-price shock of 1973, families in the bottom 99 percent saw their incomes rise sharply. With the exception of the late nineteen-nineties, the past 40 years have been marked by slow wage growth for the bottom 99 percent.

The past 40 years was not by accident, but by design. According to the U.S. Bureau of Labor Statistics, manufacturing in the U.S. peaked in 1978-79 when union membership had peaked --- because the better-paying jobs have since been outsourced to low-wage countries --- and as union workers, they usually earned more. (Read my full post: Unions, Big Business & the Powell Memo)

For those at the very top of the income distribution, recent history has been very different. After only growing modestly in the postwar decades, the incomes of families in the top one percent took off in the late nineteen-seventies, and have skyrocketed ever since the Clinton era. (Read the full post from the New Yorker: American Inequality in Six Charts)

From the President and Chief Executive Officer of Federal Reserve Bank of Atlanta:

"Long-term unemployment is at historically high levels. And the number of people working part time while looking for full-time work remains elevated. There are about 4 million more people unemployed today than before the recession. And there are significant numbers of discouraged workers who are not counted in the labor force who would return if conditions were more encouraging...there are real concerns about whether the recent modest pace of GDP growth is enough to maintain employment momentum...I expect things to pick up in 2014, but it's possible the economy will stay on its current track and we'll see no acceleration."

The chart below is just a reminder about the condition of the current labor market (Someone should do something.)

Current labor market

GOOD READ: The Single Best Argument Against Inequality
by David Callahan 

GOOD READ: Capitalism Redefined
By Nick Hanauer & Eric Beinhocker

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