It is a wonderful chart, but the accompanying article focused only on the triviality that median family incomes now are lower than ten years ago and completely ignored the obvious major inflection point, 38 years ago, in the mid 1970's, at which point the long term compound growth rate in median family incomes dropped from about 3.3% to about 0.33%. The 3.3% growth rate came in the post WWII years when the US was the undisputed economic leader of the world, oil was cheap, imports were scarce, and positive attitudes prevailed. Then we had the Vietnam War, Watergate, an expensive and doomed War on Poverty, globalization, and the 1974 oil crunch which increased the cost of everything and just about put Detroit out of business as Toyotas, Hondas, and Datsuns began flooding into the US market. The only reason the current number is lower than ten years ago, the major focus of Times writer David Leonhardt, is that the dot com boom artificially inflated incomes at the end of the 1990's. So, thanks and compliments to The Times for the chart, apologies to them for marking it up, and shame on them for ignoring the major trends and focusing on the noise.
In an atmosphere of healthy GDP growth, positive mental attitudes, and growing real incomes, most people are pretty happy. When incomes stop growing on average, obviously lots of incomes begin decreasing while others increase, and that diversion causes a lot of unhappiness. And this in spite of the fact that we have clear Biblical warnings against both greed and covetousness. Oh well.
I did a posting earlier, Exit Blocked, No Way Out about the impact of 1974 on our national debt. I highlighted it also, in a longer term view, in History of Federal Debt in the USA. Many people don't really understand or care about our national debt, but most people care very much about their incomes, especially if they seem to be falling behind their neighbors or failing to earn comfortably more than the new folks entering the workforce. I would argue that both national debt and family income are dependent variables, both going the wrong way because of government errors on its three major independent economic variables, tax policy, government spending, and regulatory environment. It may well be that our days of true prosperity and contribution to the economic well being of the world are over and that the next step is to just divide up and spread around the wealth and hope that China and India look favorably on us. But, with courageous leadership in Washington on those three independent government variables, that outcome can be avoided.
I developed a model of the actual data just to illustrate what might have been. In a time when "Are you better off now than you were four years ago?" passes as a sophisticated and important question about ones financial situation, the power of compounding is often misunderstood or ignored. The chart below illustrates the power of continued compounding at a 3.3% rate which would have resulted in median family incomes in 2011 of $180,000, about three times the actual. Had we been able to continue that, greed and envy and wealth spreading would be on the back burner today rather than in the headlines. A rising tide really does lift all ships, and productive and meaningful work is a lot more satisfying than class warfare.
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You might add a sentance or paragraph as to why the top 10% income earners saw their income rise substantially higher than the .33% during the last 35 years
ReplyDeleteWell, I think the top 10% saw their incomes rise a lot faster than 3.3% in the 1950 to 1974 time frame also. The market is almost always good for those with exceptional skills or education or talent. There is an absolute lower limit of zero, but on the upside, the sky is the limit. And perhaps our excessive worship and compensation of sports and entertainment figures may have an impact on the top salaries even in other fields. I'll think about it.
DeleteIt always seems that the conservative argument about any bad occurence is that it is the fault of US tax and regulation polices. The top, and the middle both have had apprecialbe tax cuts in the last 35 years. They both have lived through the same government expenditures and regulations.
ReplyDeleteYour are right in that talanted and gifted people do well in most economies. I never worked much harder than my much lower income neighbors and relatives but had a God-given talent for math and engineering. So if we lower taxes even more, and drastically cut government expenditures we will see even more disparity in the average family income. The problem is not taxes.
Much of the reason for the lower family incomes is the demise of unions, although the recreation of unions wouldn't necessarily help at this point.
The larger problem is that the type of jobs that were good paying have been continually moving to various emerging nations where the labor factor of production is much cheaper. Even when the technology is discovered or fostered in this country, the manufacture is done somewhere else (Apple). Other large consumer nations are much more protectionist than we are as well, so it is more difficult to export. Some how we need to get smarter and even more productive, and create newer type jobs in newer industries. We are slowly moving to a world where the products of supposedly American companies are consumed by non-Americans, and there is even more of incentive to move production overseas.
I am uncertain as to what needs to be specifically done to turn things around (other than education, and what I mentioned previously) but a couple percent of tax cuts and giving up on regulatary and health protections of our citizens is really couter-productive in the long run in my view.
Changes in attitudes might help. Story in the news today about a guy who just bought ten new trucks and can't find anybody willing to drive them.
DeleteYou mentioned the high salaries of sports figures. Most of the major league athletes have organized and demaded an equitalbe (?) share of the revenue from the franchise. It's commonly half of the revenues that needs to be distributed to the athletes.
ReplyDeleteIn many industies today with substantial record profits, the vast majority of the income goes to the managers and executives, and some to the stock holders. The rank and file employee, who is not organized, has to be satisfied with whatever management is willing to give him as he is competing with much cheaper labor in other countries. Higher rank and file salaries don't have to increase the cost of production if the cost of labor is distributed in a different way. CEO and executive salaries have exploded over the last 40 years.
Some, but very few employers, like my own, give his employees up and down the line 33% of the profits, after paying them good salaries. that includes engineeris, secretaries, and laborers.
We need to carefully distinguish between revenue, income, and profits. Any money paid to executives and CEO's is from the revenue before profits and reduces the tax bill which is only on profits. All the profits go back into the business or to shareholders. Normally if "profits" are shared, that is a calculated number that actually comes from revenues, is treated as compensation, and reduces profits and the tax bill. Only case in which a vast majority of the income would go to managers and executives would be a proprietorship or family owned business or maybe something structured like a law firm with lots of partners. I guess sports are sort of like that if the taxpayers have picked up the cost of the arena or field because there is then little capital investment in anything other than the players.
DeleteMy mention of sharing profits was isolated to the last paragraph in which I was alluding only to the company for which I worked.
ReplyDeleteI do know that revenue is used to pay salaries as an expense, and did inadvertently say income......my point is that itis the management which decides what to pay themselves as well as the rank and file. They have more and more decided to reward themselves for the sometime even marginal success or failure of the company as the stockholders are quite dispersed primarily with little power. That is why in many instances the rich get richer. They have decided more and more to devote increased revenue to the rank and file salaries, and have demanded cut backs. (See Caterpillar et. al. I did err in coupling stockholders with management, and how they derive benefit.
The primary difference in sports are that the players are organized. Capital investment is a canard; other than the auto companies, capital investment is not a substantial part of revenue. Stadiums are financed and depreciated over many many years.
Well, being an engineer, I had to look up "canard," but I guarantee you that the large capital investment required by the chemical industry is not an "unfounded rumor," and the capital for sports facilities is a very real cost to taxpayers no matter how many years they are financed for. Our city is now trying to figure out how to build a baseball stadium in order to attract a farm team.
DeleteWhat to pay is not a simple decision made in a vacuum. Companies always try to pay only what is required to attract the employees they need. The market controls. If, for example, requirements for teachers were tightened so that it was very difficult to qualify to be a teacher, teacher salaries would start a steady climb. Sports figures command a lot not because they are organized but just because there are very few people who can do what they do and because the paying public, ticket buyers, and advertisers/sponsors demand winning teams or at least respectable performance.
Places like Wal-Mart and Home Depot provide a valuable employment opportunity for the poorly qualified since it is fairly easy to get a job there and have an opportunity to prove oneself and begin getting regular promotions and raises. But it is very competitive and not easy.
Your really incorrect except in theory regarding the very top star professional players but for the most part most professional athletes, including the stars, organize and join together in negotiating a CBA that gives them collectively a high percentage of leagues revenue. They also have a great deal collectively to say regarding how the percentage that is agreed upon will be distributed in salaries, pension, etc. Most of your claims are correct in theory but it's not always the case as to how it works in the real world. The NHL is currently not playing because they have no agreed upon CBA, regardless as to whether the owners are willing to pay the top players big money - no one is getting anything.
ReplyDeleteRegarding Walmart; a model employer....everyone should work there.