|Image source: Center for Financial Social Work, 2013.|
According to former Secretary of Labor Robert Reich, some businessmen are looking at the economic data, and they’re worried. The problem, from their perspective, isn’t taxes. The problem isn’t regulation. No; from what they can see, the problem is that the middle class — the people who buy their products — don’t have enough money.
Mirabile dictu, some people are finally beginning to connect the dots.
As I’ve noted in this blog before, since 1999 real income has been declining for everyone in the bottom 80%. For those who need the explanation, you get paid today in nominal dollars; real dollars are nominal dollars after inflation has been taken into account. Theoretically, real wages stay flat when income increases match price increases, and rise when wage increases outpace price increases.
And in fact, nominal wage increases did outpace price increases throughout the Clinton Administration, such that the real wage increase by 2000 was 15.79% across the bottom 80%. But from 1999 to 2012, real wages declined an average of 10.59% across the bottom 80%, until they were only marginally better than they had been in 1980; in the case of the bottom 20%, almost all gains were wiped out.
Real wages only tell part of the story. Between January 1983 and November 2013, personal savings dipped alarmingly, from 10.4% of disposable income to 4.2%, while the real consumer debt per household more than doubled, from $11,386 to $23,238. Between 1980 and 2012, the middle classes’ share of aggregate income diminished from 51.7% to 45.7%; as of 2010, the bottom 80% had only 11% of total net worth and 5% of financial wealth. And while median net worth and financial wealth decreased across racial lines, for the average black and Hispanic household such things practically disappeared between 2006 and 2010.
|Image source: Fed. Reserve Bank of San Francisco, 2013.|
Meanwhile the top 20%’s income increases far outpaced inflation; even after two recessions, mean real income for the top 20% had increased 47.5% from 1980 to 2012; the top 5% had seen a real increase of 72.5%. The top quintile’s share of aggregate income had increased from 44.1% to 51.0%, the top 5%’s from 17.0% to 22.3%. As of 2010, almost three-quarters of the nation’s total net worth and financial wealth was in the hands of the top 5%, while almost three-quarters of the nation’s debt was in the hands of the bottom 90%.
Arguments tend to focus on the top 1%. As Kevin D. Williamson points out, the actual membership of the top 1% keeps changing, and only 15% of this small fraction benefit from inherited wealth. What this tends to obscure is that people in the top 1% don’t usually slide down into the lower 80%; people in the upper 20% have as little chance of becoming poor as the people in the bottom 20% have of becoming rich. The membership of the 1% may not be all that stable, but I’m willing to bet the membership of the 5% is more consistent.
The point of the matter, in case you’re not paying attention, isn’t who is benefitting from the trickle-up of our nation’s wealth. Rather, the point is that our wealth is trickling up and being replaced by debt. The point is that an increasing percentage of our personal consumption is fueled by consumer credit — over 26.5% of it, as of the first quarter of 2014 — as is an increasing percentage of our GDP (18.3%, compared to 12.6% in the first quarter of 1980).
Do you need it sharpened a little more? The point is that the wealth gap is weakening the financial health of the middle class. This is the problem Reich’s businessmen are concerned about … and the problem the conservative chatterati aren’t seeing.
The dots the businessmen are connecting are between workers’ paychecks and consumers’ wallets. Seemingly, conservative talking heads have this idea that consumers and workers are two separate sets of people with little to no intersection; money paid for wages simply disappears, while money spent on purchases comes out of nowhere. People who are paid more can buy more; the top 5% simply do not and cannot buy enough to sustain the economy. In fact, that’s why the upper 20% can do more investing and saving: they don’t have to spend as big a proportion of their paychecks on food, clothing, shelter, utilities and transportation.
The people Reich writes about — Lloyd Blankfein of Goldman Sachs, Bill Gross of Pimco, Warren Buffett of Berkshire Hathaway and Stanley Druckenmiller of Duquesne Capital Management — all back increased taxes on the wealthy, including a higher capital gains tax, and a higher minimum wage. But whatever other merits these proposals have, they don’t get money back into the middle class; the money goes either into the bottom 20% or to the government … or both.
At this point, the argument tends to get misdirected into how much people deserve to be paid. But whether CEOs deserve to get paid more than mail clerks or firefighters or associate vice presidents isn’t really in dispute any more than is whether the CEO of McDonald’s deserves to be paid more than the President of the United States. Rather, the point is that by directing so much of so many companies’ revenues towards the people at the top of the hierarchy rather than the middle and the bottom, Corporate America is undermining the ability of the middle classes to sustain them: to use a popular metaphor, they’re sawing away at the tree branch on which they sit.
Another misdirection is in the rebuttal, “How much wealth is too much?” This is supposed to shut us up and get us stuttering, “Well … you see … that — that’s not the point!” Why? Because there’s supposedly no objective way you can set such a benchmark. But in fact, once you can come to a common consensus, the benchmark decided on becomes just as objective a fact as a log lying on the road.
 and is currently the biggest driver of income inequality. We could theoretically agree to benchmark ratios between 20:1 (say, for an investment firm) and 45:1 (quick-service restaurant chain), which would be far less than the current American average of 296:1 and allow for greater distribution of labor dollars across a given company’s salary bands yet still allow for generous executive compensation. And you can have different benchmarks for different industries, so long as none of the benchmarks exceed the common ceiling (45:1).
This is not the only strategy possible; other strategies, such as more widespread employee ownership, could (and should) be developed and pursued. In any event, to avoid the blunt-axe approach of Keynesian measures, such as tax and minimum-wage increases, Corporate America owes it to itself to rethink how it pays its employees and get more wages into the middle class before the government acts.
And the conservative/libertarian chatterati need to pull their heads out and recognize that the increasing wealth gap really is a problem.
 Unless otherwise noted, figures are taken from the Census Bureau, Current Population Survey, Annual Social and Economic Supplements, 2013, or from data supplied by the Economic Research Division, Federal Reserve Bank of St. Louis.
 Domhoff, G. W. (2013, February). Wealth, Income and Power. Retrieved January 3, 2014 from University of California-Santa Cruz: http://www2.ucsc.edu/whorulesamerica/power/wealth.html.
 Domhoff, 2013.
 Bengali, L. & Daly, M. (2013, March 4). U.S. Economic Mobility: The Dream and the Data. Retrieved June 23, 2014 from Federal Reserve Bank of San Francisco: http://www.frbsf.org/publications/economics/letter/2013/el2013-06.pdf.
 Mishel, L. & Davis, A. (2014, June 14). CEO Pay Continues to Rise as Typical Workers Are Paid Less. Retrieved June 23, 2014 from Economic Policy Institute: http://www.epi.org/publication/ceo-pay-continues-to-rise/.