Wednesday, October 31, 2012

Middle Class Battered, Social Mobility Declining

More than five years after the start of the Great Recession, its lingering after-effects continue to diminish the standard of living of the once-thriving American middle-class.

Median household income, after adjusting for inflation, fell 1.5 percent last year to $50,054, according to the Census Bureau's annual report on income and poverty, which was released in September. Meanwhile, the poverty rate, at 15 percent, remained stuck at the highest level since 1993.

The erosion of the middle-class has been a long and continual process. Median household income, adjusted for inflation, has been steadily dropping for 13 years.

While the median income slipped last year, those at the top of the income ladder continued to move ahead. The top 5 percent of incomes rose by 5.3 percent last year, according to government data.

The fact that the rich continue to get richer should surprise no one. What may be a surprise, however, is that the notion that hard work can lead a person from rags to riches is largely a fantasy. The famed Horatio Alger stories were, after all, works of fiction from the 19th Century.

The U.S. has less economic mobility than Canada and much of Western Europe, according to economic research cited by The New York Times. Seven in ten Americans that start out in the bottom fifth of family income stay in the lower class as adults, and more than six in ten Americans that start out in the top family income quintile stay in the upper class as adults, according to a July report by the Pew Charitable Trusts.

In other words, if you are born rich or poor you are likely to remain that way throughout your lifetime. America is simply not the "land of opportunity" that many believe it is.

A new report from the Organization for Economic Co-Operation and Development (OECD) finds that America is 10th in social mobility between generations, dramatically lower than in nine other developed countries. This means that America is now 10th in the world in the American dream.

Just 35 percent of American households can be classified as upwardly mobile, meaning they have a higher household income than their parents at the same age and are at a higher point in the income distribution ladder than their parents had been.

This means that roughly two-thirds of Americans are financially stagnant and will not have a higher standard of living than their parents, which was the norm for generations.

Work and income are the means by which most people historically extricated themselves from the lower classes — not inheritance and not the lottery. However, such a rise up the social ladder is becoming increasingly difficult.

Entry-level wages for high school graduates are actually lower than they were in the 1970s. For college grads, starting wages are below what their counterparts pocketed in the late 1990s. Today, the average wage for all these young adults, no matter education level, is about $15 an hour.

How can a young person start a family or buy a house on that income?

Out of 34 industrialized countries, the U.S. had the highest share of employees toiling away at low-wage work in 2009, according to OECD data.

Remarkably, one in four U.S. employees were low-wage workers in 2009, according to the OECD. That is 20 percent higher than in the number-two country, the United Kingdom. Low-wage work is defined as earning less than two-thirds of the country's median hourly wage.

Low-wage jobs are replacing jobs that can sustain a middle-class lifestyle, according to a new study by the National Employment Law Project. Most of the jobs lost during the recession paid middle wages, while most of those gained during the recovery are low-wage jobs.

However, while the lower and middle-classes continue to struggle and even fade, the wealthiest Americans continue to prosper.

The U.S. now has the biggest income disparity gap of any industrialized country in the world

According to a recent study by University of California economist Emmanuel Saez, based on an analysis of American tax returns, in 2010, 93 percent of all new income growth went to the top 1 percent of American households. Everyone else, the bottom 99 percent, divided up the remaining 7 percent.

Clearly, the problem of wealth inequality in America continues to worsen. The evidence abounds.

American CEOs saw their pay spike 15 percent last year, after a 28 percent pay rise the year before. That's in line with a trend that dates back three decades.

CEO pay spiked 725 percent between 1978 and 2011, while worker pay rose just 5.7 percent, according to a study by the Economic Policy Institute released in May. That means CEO pay grew 127 times faster than worker pay.

Last year, CEOs earned 209.4 times more than workers, compared to just 26.5 times more in 1978. That disparity is mind-boggling and it is indicative of the way in which incomes have been siphoned off to the richest Americans and away from the common workers.

"We've always had inequality, but the magnitude of our inequality has actually increased dramatically," says Nobel Prize-winning economist Joseph Stiglitz. "The fraction of the income that goes to the upper 1 percent has doubled since 1980. The fraction that goes to the upper .1 percent has almost tripled since 1980. So yes, we've always had inequality, but not of this magnitude.

"The United States has become the most unequal country among the advanced industrial countries," says Stiglitz. "Some people have said, 'We don't care about equality of outcome, what we really care about is equality of opportunity. America's the land of opportunity.' We have less opportunity than not only the countries of all of Europe, but any of the advanced industrial countries for which there's data. And what that means is very simple: The life chances of an individual are more dependent on the income and education of his parent than in other countries. And an implication of that is people born in the bottom, who unfortunately chose the parents who were poor or not well-educated, will be more likely not to be able to live up to his potential."

Yet, this is more than just a matter of inequality. It has implications that effect the broader economy.

Rising income inequality is resulting in lower levels of economic growth. In a consumption-based economy, the masses must have adequate resources to maintain the economy. Consumer spending represents 70 percent of U.S. GDP, which is plainly unsustainable given current trends.

Undoubtedly, having a healthy middle class is a requisite to having a healthy economy.

But an abundance of low-wage jobs will not get us there. The vast majority of Americans are in long term economic decline. It should surprise no one that our economy is following right along.

"The tidal wave of low-wage jobs is dragging us down and the wage problem is not going to go away anytime soon," says Peter Edelman, director of the Georgetown Center on Poverty, Inequality and Public Policy.

Our gross inequality will lead to social instability. Obviously, those at the top are heavily invested in maintaining the status quo. But eventually that will lead to societal breakdown.

The American dream is falling further and further out of reach for far too many Americans, and our once-great economy is suffering for it. As that suffering works its way up the economic pyramid, there will be a critical mass, a mass movement for change. But by then it will be too late.

The America that our parents and grandparents grew up in will be irrevocably altered, for the worse.

Friday, October 19, 2012

U.S. Economic Growth Has Been Slowing For Many Years

With the global economy decelerating and much of Europe already in recession, the focus has shifted to China, where a series of recent indicators reveal that the world's second largest economy is also slowing.

For example, Chinese manufacturing contracted in September for the 11th consecutive month, according to the HSBC purchasing manager's index (PMI). The HSBC PMI was 47.9 for September, slightly up from 47.6 in August. The index measures manufacturing activities on a 100-point scale, on which numbers below 50 show a contraction. The August reading was the lowest level since March 2009 — a 41 month period.

China's National Bureau of Statistics reported Thursday that gross domestic product grew 7.4% in the third quarter compared to a year earlier, slowing from the second quarter’s 7.6%. It marked the slowest pace of growth since the first quarter of 2009.

However, though China's growth is indeed slowing, it is still extraordinary by any measure.

What's truly remarkable is that a growth rate of 7.4% is actually part of a slowing trend. Such a reading in the U.S. would be historically exceptional and greeted with national jubilation.

From 1948 through to 2009, the United States economy grew by an average of 3.28% per year.

The last time the U.S. economy grew at least 7.4% over the course of a full year was 1951, when it expanded 7.7%. But that kind of growth is now a distant memory in the U.S.

The best year for the U.S. economy since 1948 came in 1950, when the economy managed to expand by 8.7%.

Here are the top five years of GDP growth since 1948:

1950, 8.7%
1951, 7.7%
1955, 7.2%
1959, 7.2%
1984, 7.2%

As you can see, it's been three decades since the U.S. economy grew at a pace even resembling China's, which is currently slowing.

Yet, since 1973, the U.S. economy has experienced slower growth, averaging 2.7% annually. Meanwhile, household incomes increased by just 0.3% annually over that period.

That stagnation, coupled with persistent inflation, has hurt growth and lowered the standards of living for millions of Americans.

After contracting in 2009, the U.S. economy expanded 2.8% in 2010 and 1.7% in 2011. This year, U.S. GDP increased 2.0% in the first quarter and 1.3% in the second quarter.

At the same time, the ballooning national debt now exceeds $16 trillion. Typically, the US would attempt — or hope — to grow its way out debt. However, that seems to be an impossibility at this point with the rates of growth and debt moving in opposite directions. The federal debt will continue to increase at a faster pace than the economy can grow.

If not for all the government spending in recent years, the U.S. economy would still be in recession. Excluding the government's unbridled deficit spending, real GDP has been flat for 15 years. In fact, without the growth in government debt, the U.S. would likely be experiencing a depression.

Advanced economies are mature economies, and therefore harder to grow. The sad reality is that growth has been rather slow for a number of years and we may have now entered a long-term period of lower growth and higher unemployment.

Since the second quarter of 2006, there has only been one quarter in which GDP was at least 4% — the fourth quarter of 2009. Yet, that 5.6% growth rate was largely the result of government stimulus spending.

The problem is that economic growth needs to be at least 2.5% to improve the nation's dismal unemployment situation. Anything lower won't even keep up with population growth.

The U.S. economy needs to create 250,000 new jobs per month for a year to drop the unemployment rate by a little more than 1%. However, in order for that to happen, the economy needs to grow north of 3% per year. That kind of expansion is proving to be increasingly difficult.

According to a recent McKinsey Global Institute study, the economy is likely to remain slow for decades to come.

McKinsey argues that the economy is likely to remain slow because as labor force participation drops—as more and more baby boomers retire and the number of new women entering the workforce slows—Americans who do work will have to support the increasingly large proportion of Americans who don’t.

Moreover, the decline in spending associated with the progressive retirement of the Baby Boomers will reverberate through the economy and create a major drag on growth.

The lack of adequate job creation conflates with our nation's slowing growth. In fact, the two are creating a feedback loop. Job creation has been slowing for decades and that's a very bad omen.

According to the Economic Cycle Research Institute, during periods of American economic expansion in the 1950s, ’60s and ’70s, the number of private-sector jobs increased at about 3.5 percent a year. But during expansions in the 1980s and ’90s, jobs grew just 2.4 percent annually. And during the last decade, job growth fell to 0.9 percent annually.

And it's taking longer and longer to recover from each successive recession. The last time the jobless rate reached double digits, in the early 1980s, it took six years to bring it down to normal levels.

The historical precedents and current trends make it very difficult to feel optimistic about the future.

For decades, the U.S. has been losing jobs to developing nations (i.e. China) due to their lower labor costs. This off-shoring has particularly decimated the manufacturing sector and led to a massive trade imbalance.

Since 1976, the US has sustained trade deficits with other nations. Simply put, we buy more from abroad than we sell abroad. This is largely because exports account for just 12 percent of GDP and manufacturing just 11 percent of GDP.

A trade deficit acts as a drag on economic growth because it means the U.S. is earning less on overseas sales of American-produced goods while spending more on foreign products.

Such an imbalance has been able to exist for 36 years only because the U.S. has run a surplus in the trade of services (tourism, financial services, telecommunications, etc.). However, the overall trade deficit is unsustainable in the longer term.

These problems are not easy to rectify. They can't be fixed in a quarter, a year, or even during a president's term. These are structural problems, not merely cyclical ones. They have been decades in the making and at this point they seem to be baked into the cake.

The growth of the U.S. economy over the past 30-plus years was all funded by unsustainable consumer debt. Those days are over.

The reality is that you can forget the notion of the U.S. growing its way out of debt. Economic growth simply can't keep up with new federal debt. But that's almost besides the point.

Based on the very nature of our monetary system, perpetual debt is a way of life. All money is loaned into existence. But only the principle — not the interest — is created. The entire system is out of balance from the outset.

To offset weak levels of growth, there has been an exponential expansion of the monetary base (the money supply), courtesy of our central bank. All of this freshly created money erodes the value of the dollars in our pockets and bank accounts. It's a matter of too much money chasing too little demand for goods and services — the byproducts of a slow economy.

The central bank has also forced near-zero interest rates upon us. Federal Reserve policy has forced millions of Americans — including retirees — to make big gambles with their life savings. Low rates have pushed them into buying risky assets in the quest for returns that will beat inflation.

What is going on in the U.S. is a massive reordering; a historic, economic correction that has the potential for an eventual monetary collapse.

While our economic growth trend has been slowing for many years, China's has taken off like a rocket.

Yes, China's growth rate is unsustainable. But even if its growth falls to 6% annually — a major decline from current levels — it would still be more than twice the present U.S. growth rate.

The major story of our era is that the United States, which has dominated the world’s economy for several lifetimes, is in relative decline. According to International Monetary Fund calculations, the U.S. is on track to lose its status as the world’s biggest economy — when measured in real, purchasing-power terms — to China by 2017.

That would be a stunning development, but not an unforeseen one. We've already been warned.