income distribution

Today’s release by the Census Bureau of its annual Earnings and Poverty report has some interesting information in it that should give us all pause as we consider public policy options for the next few years.

Not surprisingly household incomes have taken a beating over the last twelve months: the median household income adjusted for inflation dropped from $52,163 in 2007 to $50,303 in 2008 – a decline of 3.6%. Such a drop is not unusual during a recession. This business cycle has seen a deep cutback into both the average work week and benefits considered as worker incomes . Throw in the more normal loss of wages and the result is quite steep loss of earnings. Also: this is household, not per capita, income so some of the loss stems from jobs being lost by one or more of the ‘householders’.

By comparison, however, the decline in incomes is less than that suffered through the 1973/75 recession which saw incomes decline by 5.7%, or the 1980/82 recessions which saw a 6.0% drop. This calls for a bit of explanation since the current recession is generally regarded as being more severe than both of those. The answer lies in the comprehensive nature of the 2007/09 decline: it is fairly well spread across all groups in the economy. This is a generalized drop in buying power, which is why it is so hard to predict a strong return to the levels of growth we had become familiar with. There were a few regional differences: the entire country saw losses except for the Northeast where there was no change. In the past the losses were much more concentrated in manufacturing, which meant that large sections of the economy were relatively untouched and thus able to help sustain a recovery, and also implied a fairly rapid recovery in incomes after the recovery had begun – manufacturing being much more cyclical in its employment pattern.

Or at least that’s what I imagined until I reached page 18 of this report.

Then I was brought to an abrupt halt.

On page 18 is a chart that plots inflation adjusted incomes [expressed in 2008 dollars] over the past few decades. The chart is depressing. Why?

Because it shows clearly that incomes have stagnated for longer than I originally thought. I think we are familiar with the notion that wages have been on an unhealthy trend for some time – since the Reagan years – but to see that the problem actually stems from the early 1970’s is sobering.

The chart shows separate data for male and female workers. It is the line for male workers that stands out most: it is virtually unchanged since about 1972. Wages for female workers have gained steadily, with blips during recessions, so the ratio of wages for women to those of men has risen sharply over the past four decades – there remains a stubborn disparity – but male workers are no better off in ‘real’ terms than they were in 1972. Yet productivity has grown throughout that period. Obviously the additional wealth implied by that productivity went to someone else other than the average male wage earner. Women were paid a substantial piece, but the rest must have gone to capital – profits are taking a much larger share of business incomes than they did back then.

When I look at this chart is hard for me not to conclude that the decades immediately following World War II were an anomaly, and any expectations built upon the experience of those twenty to thirty years is simply irrelevant to our thinking today. Static real incomes lie at the root of many of our current problems: the only way to re-create the advances in living standards of the 1950’s and 1960’s has been through debt for many people.

Further the ‘social contract’ made with the returning veterans of WWII that wages would claim a larger portion of profits – as is implied by the numbers – was set aside after the 1970’s oil shocks, trodden on further by the Reagan/Bush deregulatory and corporate bias, and buried by globalization.

The middle class created after WWII has stagnated. the only advance coming through the wider participation of women in the workforce and through their simultaneous wage gains. Since both those trends are one time adjustments – we will reach a point where the workforce is closely balanced with respect both to gender mix and wage equality – neither will provide future impetus.

So where will improved living standards come from in the future?

The usual answer is from productivity – the invention and deployment of new technologies. But in the absence of a strong social commitment by business to pass on those gains to a broad swathe of the workforce it is quite likely that what gains there are will be highly concentrated.

And this is what we have seen happen in the Reagan/Bush era. During the last two or three decades a disproportionate part of the nation’s increase in earnings was syphoned off into the pockets of a very small number of people – about two thirds of the increase of the last few years has gone to the top 1% of income earners. The rest were left behind. The result has been a huge distortion in the distribution of income and along with it an erosion of social cohesion, or at least an increase in the harshness of political discourse.

The figures for poverty support this story: while it is normal to expect an increase in the poverty rate as we go through a recession, what is more interesting, and disappointing, is that the poverty rate ticked up slightly throughout the last decade – even before the recession. So we entered the current crisis already losing ground – again I see this as a direct outcome of the redistributive nature of the policy choices made during the Bush years, especially the tax cuts that disproportionately benefitted the wealthy. Having said that the poverty rate remains below that of the recent peak reached after the recession of the early 1990’s. Perhaps the most distressing news about poverty is that the age of the poor has shifted radically as a result of public policy: it is a triumph of the post-war era that the poverty rate amongst the elderly has been reduced to low levels – in the late 1950’s it was as high as 35%, and it is now down to about 10%. The social safety net of Social Security and Medicare account for much, if not all, of this gain. Unfortunately we have paid nowhere near as much attention to the young: the poverty rate for those under 18 years of age dropped during the years of prosperity after WWII, crept up in the 1980’s, was forced down somewhat in the 1990’s and is now rising again – it is now about 19%. It seems our priority focus on the elderly have come at the cost of the young, which is a trend that will be worsened as the population ages and the elderly claim an ever increasing share of our wealth for health care.

The final point to be made from today’s report is directly supportive of the need for health care reform: while the total numbers of people wit health insurance were relatively stable between 2007 and 2008, the make-up of the total shifted slightly: there was an increase in the number covered by government programs and a similar drop in those covered privately – 29% of the population were covered by government programs [Medicare and Medicaid] in 2008, compared with 27.8% in 2007. Fortunately, the proportion of the population without insurance didn’t move much during the year – the number rose, but so did the population and seems to be stuck at about 15.4%.

Lastly for the million or so people who have lost their employer provided health care coverage – I refuse to call it ‘insurance’ since is clearly simply an employer benefit and not an actual insurance policy – the current dispute over reform of the health care system must seem larger than life. Their problem is not ideological or abstract it is immediate, real, and potentially devastating.

The notion that someone can find themselves unable to pay for health care simply because they have just been fired is absurd. Truly absurd. It distinguishes this country from all the other industrial and advanced nations – we just don’t care. That’s not the ‘rugged individualism’ Obama referred to in his speech last night it is rugged lunacy and cold-heartedness. It is immoral. Adhering to a broken system just because it’s the way things have been done traditionally is beyond plainly silly, it is stubbornly self-destructive. It’s certainly not sensible.

Funny how a dull government report can trigger so much discussion.