Ali’s blog

Mostly quant stuff with occasional digressions

Stuck in the Middle

Posted by alifinmath on October 29, 2008

An exceptionally well-crafted essay by Edward Luce in the FT (my own comments follow at the end of the quoted extract):

Economists call it median wage stagnation. Others dub it the “silent recession”. Mr Obama, who has struggled since the start of his campaign to speak in an economic language that strikes a chord with blue-collar voters, recently put it this way: “We are now being battered by a very serious economic storm and for many Americans it has only deepened the quiet storms they have been struggling through for years.”

At this stage, the impact of the financial meltdown on the longer-term structural problem of income stagnation can only be guessed at – although it is highly unlikely to improve the situation for most American households. But the political effect has been apparent for some time.

In 2006, almost 70 per cent of American voters said their country was on the wrong track. Now, more than 90 per cent do. Then, a narrow majority believed their children would be worse off than they are – an astoundingly bleak sentiment for a country built on optimism. Now, a clear majority say so. For most Americans, the financial meltdown is only the cherry on a very familiar cake.

“You have to question whether conventional measures of economic growth mean anything when most people’s incomes have either been stagnating or declining for many years,” says Jared Bernstein, an economist at the liberal Economic Policy Institute and an adviser to Mr Obama. “The fact that wage earners are no longer getting the benefits of their improving productivity in the workplace is something we have never experienced [before] in modern America.”

The data are stark and go some way towards explaining why so many Americans felt so disaffected even during the most robust years of economic growth under the Bush administration. Between 2000 and 2006, the US economy expanded by 18 per cent, whereas real income for the median working household dropped by 1.1 per cent in real terms, or about $2,000 (£1,280, €1,600). Meanwhile, the top tenth saw an improvement of 32 per cent in their incomes, the top 1 per cent a rise of 203 per cent and the top 0.1 per cent a gain of 425 per cent.

Part of this was because the latest period of economic growth failed to create jobs at nearly the same rate as in previous business cycles and even led to a decline in the number of hours worked for most employees. Unusually for a time of expansion, the number of participants in the labour force also fell. But mostly it was because the fruits of economic growth and soaring productivity rates went to the highest income earners.

Economists such as Lawrence Summers, who was President Bill Clinton‘s last Treasury secretary and is tipped by some to return to that role in an Obama administration, say the income stagnation crisis is America’s most troubling long-term economic problem.

In contrast to the Clinton years – when there was some growth in median income, although still at lower rates than productivity growth – people such as Mr Summers and Robert Rubin, his predecessor, are now openly sceptical of the market economy’s ability to distribute socially desirable rewards.

“It is critically important that the next administration makes it a priority to focus on the structural causes that hold back growth in workers’ wages,” says Mr Summers. “That means reversing the perverse Bush tax cuts, empowering labour in strategic ways, as well as investing in healthcare, education and infrastructure.”

But Mr Summers, along with many of his peers, concedes that finding the right policies will prove difficult for such a complex and deep-seated problem. Many reach for parallels with the “gilded age” of the 1920s that gave rise to unprecedented Great Gatsby-style incomes at the top and was brought to a close by the 1929 stock market crash and the ensuing Great Depression.

Franklin Roosevelt actually tried to balance the budget in the mid-1930s and it is safe to say it was not his finest hour,” says Douglas Elmendorf, head of the Hamilton Project, a non-partisan think-tank that addresses median wage stagnation. “I would say this is the worst economic problem America has faced since at least the recession of the early 1980s but, in retrospect, median wage stagnation is a far more difficult and complex problem to address.”

But perhaps the biggest change is in intellectual fashion, which is still in the early stages of a big change. Last week, Alan Greenspan, once the toast of the economic world, admitted that he was mistaken about the benign effects of financial deregulation. Yet for years the former Federal Reserve chairman has been warning of the unsavoury impact the combination of widening income inequality and income stagnation could have on a democratic society.

Mr Bernstein, who has been focusing on income stagnation for more than 20 years, says that alarm about the problem has finally gone mainstream. “I remember giving a presentation to Bob Rubin in the early 1990s and he was concerned about it but nothing more,” he says. “Now he pays very, very close attention to the problem. It can no longer be ignored.”

For a college-educated mortgage broker named Jill living in Marietta, Georgia, there is little hope that politics will change what appears to be a grim future.

As she sits alone at a cheap Chinese diner picking at a dish full of rice and broccoli, she explains that her Friday shift has been cut to just three hours because business is so slow. While she used to get a commission of 0.01 per cent on every mortgage sold, she now gets none. On weekends, she delivers pizza to make extra money.

Her husband lost his management job last year. He now works as a substitute teacher when he can but has not been able to find regular work even at a local McDonald’s. Neither has health insurance. Jill says she does not foresee things getting better any time soon.

I consider the pious and sanctimonious statements and concerns of the above politicians and policy-makers as so much hogwash. The reason why income stagnation is such an intractable problem is quite simple: the American rich have political control, and the American working class is almost completely impotent. This is why the rich keep hogging an increasingly large percentage of the nation’s income and wealth. No need to engage in lofty abstractions on how “income stagnation” should be addressed: this nonsense is a red herring, intellectual camouflage for the brute exercise of power that allows the American rich to become even more so in a plutocrat’s paradise.

In what sense is the US an “advanced country” when its income and wealth distribution rivals those of third-world banana republics?


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