Friday, February 15, 2013
Stagnant Incomes Leading to Economic Decline
If you're wondering why attempts to reinvigorate the American economy have been so ineffective, you can blame it on the evisceration of the middle class. The emergence of a vibrant middle class had previously allowed the U.S. to become the dominant economic power in the world. The rapid collapse of our middle class is leading to a historic economic decline.
The facts are striking.
According to Census Bureau data, a record number of Americans – nearly 1 in 2 – have fallen into poverty or have earnings so low that they are classified as low income.
Pause for a moment and let that sink in.
About 97.3 million Americans fall into a low-income category, commonly defined as those earning between 100 and 199 percent of the poverty level, based on a new supplemental measure by the Census Bureau that is designed to provide a fuller picture of poverty. Together with the 49.1 million who fall below the poverty line and are counted as poor, they number 146.4 million, or 48 percent of the U.S. population.
When nearly half of your population is defined as low income, you are merely clinging to 'first world' status. Yet, the whittling down of the middle class has been underway for decades.
Since 1980, the typical hourly wage for a worker has increased just $1.23 cents, after accounting for inflation. The effects of this have been felt most broadly by those on the bottom of the income scale.
The inflation-adjusted average earnings for the bottom 20 percent of families have fallen from $16,788 in 1979 to just under $15,000, and earnings for the next 20 percent have remained flat at $37,000.
Though the problem of falling incomes has been decades in the making, it accelerated during the financial crisis and worsened in the alleged recovery.
Despite record-high corporate profits, the inflation-adjusted median wage continues to drop. And the share of the economy going to wages rather than to profits is the smallest on record.
Median household income in America has fallen for four consecutive years, according to the Census Bureau. Overall, it has declined by over $4000 during that time span.
Remarkably, approximately one out of every four American workers makes 10 dollars an hour or less. That makes growing the economy very difficult because it is choking off demand.
Though salaries and wages have essentially been stagnant, the cost of living has been continually rising. For example, inflation was 27 percent from 2000 to 2010. That's a hidden tax on all Americans, young and old, rich and poor. However, it disproportionately affects the poor and middle class, who can least afford it.
Historically, from 1914 until 2012, the United States inflation rate averaged 3.36 percent. This means that your money has been losing roughly a third of its buying power each decade. This is having punishing affects since incomes have not kept up with inflation.
The Federal Reserve's aggressive monetary policy (money printing), in which it has expanded its balance sheet by $3 trillion (on its way to $4 trillion by year's end), has set the stage for a massive devaluation of the dollar.
When you hear your parents or grandparents talk about how cheap things like bread and milk or cars and houses used to be when they were young, you can blame this on the dollar's continual loss of buying power due to the Federal Reserve's well-orchestrated inflation objectives.
The Fed intentionally creates inflation by printing more money, which devalues all of the money already in circulation. This is not hidden or secretive. In fact, the Fed is quite open about this.
On January 25th, 2012, Fed Chairman Ben Bernanke announced a 2 percent target inflation rate. Simple math reveals that over the course of a decade, this would add up to 20 percent, meaning your money would lose one-fifth of its buying power.
Since wages and salaries for most Americans have not kept up with inflation for many years, this has punished the poor and the middle class (or, what's left of it), while hindering the economy.
Safety-net programs (such as food stamps and unemployment benefits) and tax credits have kept millions of out of poverty, masking the true magnitude of the problem.
Many middle-class Americans continue dropping below the low-income threshold – roughly $45,000 for a family of four – due to the loss of a job, pay cuts and/or a forced reduction of work hours.
A continually growing segment of Americans can be described as 'low income' and the affects of this a can be seen throughout the economy.
Since consumer spending drives 70 percent of U.S. economic activity, lower incomes and falling demand are obviously impacting the broader economy. By and large, Americans have less disposable and discretionary income to direct back into the economy, which is why it no longer operates smoothly.
We are learning about the limits of growth.
Decades of massive debt accumulation masked stagnant and falling incomes. Americans were forced to live on credit just to pay for essentials, such as food, gas, medicine and doctor's bills.
But people have learned that the accumulating interest makes paying off this debt difficult to impossible. As a result, Americans have been defaulting at record rates over the past five years. This has made credit issuers more cautious and made credit more difficult to obtain.
The point is, we can no longer count on debt to propel the economy — nor should we. Despite decades of debt accumulation (total U.S. household debt reached a whopping $13.8 trillion by 2008), it still wasn't enough to stop the long term decline of the U.S. economy.
Historically, from 1948 until 2012, the annual GDP growth rate in the U.S. averaged 3.22 percent. However, since 1973, the U.S. economy has experienced slower growth, averaging 2.7 percent annually. And this slowdown has accelerated in recent years.
In the 1950s and 1960s the average growth rate was above 4 percent. In the 1970s and '80s it dropped to around 3 percent. Yet, in the last ten years, the average rate has been below 2 percent.
After contracting in 2009, the U.S. economy expanded 2.8% in 2010, 1.7% in 2011 and 2.2% in 2012. The Congressional Budget Office projects GDP to increase 1.4% this year.
As GDP growth rates have tumbled, personal disposable income growth has fallen even more precipitously.
In the 1970s and '80s personal disposable income for the average American was rising 10 percent a year. From 1990 to 2008, income growth rate had dropped to an average of 5.8 percent. And since the recession in 2009, when it actually declined, income has been growing an average rate of 3.6 percent.
As incomes have declined, the middle class has declined. Quite predictably, the U.S. economy has declined as well.
That's where we find ourselves in 2013, on a long road to continual economic decline.