America Betrayed

Increasing Inequality: for he who has, to him more shall be given

 a Gini for your thoughts?

Income inequality has been growing since 1974, and it is currently as bad as it was during the 1920s.  Now, unless you are the Great Gatsby himself and have money to burn, this means trouble. [1]

Income inequality is encapsulated in a number called the Gini Coefficient (GC): “0” is perfect equality, where everyone earns the same income, while “1” is perfect inequality, where one individual earns everything (leaving none for anyone else).  All you need to know is that a higher GC means more inequality.

Now, do not misunderstand me: inequality is not necessarily a bad thing, but too much (or too little) is.[2]  Too much inequality leads to corruption, crime, and political instability (think Brazil or Russia), while too little inequality leads to onerous and odious governments (think the USSR or Sweden). [3]  Both extremes are bad—a healthy balance must be struck.

Historically, most Western democracies have had GCs somewhere between 0.25 and 0.45, and only rarely has this range been violated.

America long obeyed this rule.  From 1950 to 1974 the GC dropped from 0.421 to a low of 0.394— America was becoming more equal as the economy grew at record pace.  But something changed.  For the last four decades the GC has increased relentlessly, smashing through the “stability range” in the mid-1990s. [4]

America now tops the charts among Western democracies, with an income GC of 0.48.  But do not worry, we are in good company with the likes of Russia, Mexico, and China.

Adios functional democracy, hola political instability.

 Sisyphus’ curse

 For most Americans, wages have been falling since 1973.

In 1973 the median[5] hourly wage was $4.14, while in 2014 it was $20.74. [6]  Looks good right?  Wrong.  Although it went up in nominal terms (the number got bigger), in real terms (what you can buy with it), it went down.

If we convert 1973’s median hourly wage into 2014 dollars, it works out to $22.07—which is 6.4% higher than 2014’s median wage ($20.74).  That may not sound like a lot, but it is: over a year it is almost three grand.  This is a huge blow to the middle class and the working man.

That being said, not all wages went down.  Since 1974 most of the economic gains have gone to the top 20% of earners, which is why inequality has been increasing. [7]  If today’s income was dispersed like it was in 1973, then the average middle class household would earn a whopping $90,943 per year, as opposed to $74,434—an eye-popping difference of $16,509 per household. [8]  You could buy a new car every year with that kind of money.

No matter how hard Americans work, their wages just keep falling. [9]

being Benjamin Button

When wage stagnation meets the real world, the consequences are ugly.

Between 1901 and 1985 the portion of their income that the mean American household spent on wants, as opposed to needs (food, clothing, shelter), increased from 20.2% to 48.6%.  In other words, they were spending more money on things that made them happy, on things they liked. [10]  Living standards improved.

Since then, this pattern has stagnated, which is bad.  But it gets worse.  If we look at median household spending (which is less skewed by rising inequality), we find that spending on wants has actually been declining since the 1980s.  In fact, it is now down to 36.7%—a level not seen since the 60s. [11]

Look at that chart.  You can literally see our economic progress melt away.  At the end of the day, the middle class is spending less and less on stuff it wants, and more and more on stuff it needs.  That benefits no one.[12]

Time for us to hit rock bottom.

If you love burgers, pop, or chocolate, look away.  In 1985, you could buy 19,208 McDonald’s hamburgers, 10,791 bottles of Pepsi, or 27,440 Hershey Bars with the median household’s disposable income.  Now that is a meal.  However, in 2014, you could only buy 11,619 McDonald’s hamburgers, 7,532 bottles of Pepsi, or 15,140 Hershey Bars.  We live in dark times. [13]

[1] Unless otherwise stated, the figures in this sub-section are from:  Townhall.com “The Major Trends in US Income Inequality Since 1947.”  & United States Census Bureau. “Income and Poverty in the United States: 2014.”

[2] Some degree of inequality is necessary for society, and the economy, to function, because it imposes a set of intrinsic rewards and punishments.  It is what allows the free market to price goods, and motivates people to work hard.  Inequality is necessary for the free market itself.

[3] The Soviets were able to achieve a fairly equal society, with a Gini Coefficient in 1989 of only 0.275, but it came at an unreasonable political price.  See: Alexeev & Gaddy , “Income Distribution in the USSR in the 1980s.” 29.

[4] Here is the data-set, by decade.  The nadir was in 1974 (GC 0.394), the apex is today (0.48).  It is only getting worse.

[5] I use the median because it gives a more accurate picture, because it cannot be skewed by a few hyper-rich people (as can the mean).

[6] Desilver, “For most workers, real wages have barely budged for decades.”

[7] Bivens et al. “Raising America’s Pay”, 11.  In raw numbers, the top quintile incomes grew an average of 0.65% per year, while the bottom four quintile’s incomes grew at an average of 0.2% per year.

[8] This is not an idle fantasy. Between 1950 and 1973 the median income rose faster than inflation, meaning that they were able to buy more stuff with the median income—their lives improved.  In 1950 the median wage was ~$1.40/hour, which translates into $2.58 in 1973 dollars.  In 1973, the median wage was $4.14, which is 60% higher.  This means that the standard of living improved dramatically during this period.

What changed was that since 1973 pay has stopped rising in tandem with productivity.  Between 1948 and 1973 the average productivity of an American worker increased by 96.7%, while hourly wages increased by 91.3% (ie. if you did more work, you were paid more).  However, between 1973 and 2014 productivity increased by 72%, while real wages only increased by a meager 9.2% (real wages per hour actually declined, the increase was made by working more hours).  Furthermore, this trend appears to be accelerating: between 2000 and 2014 productivity increase 21.6%, while wages only raised 1.8%.

See: Bivens & Mishel, “Understanding the Historic Divergence Between Productivity and a Typical Worker’s Pay,” 3.

[9] Data for graph from Federal Reserve Bank of St. Louis. —“Average Hourly Earnings of All Employees: Total Private, Jan 1964- Oct 2016. & Desilver, “For most workers, real wages have barely budged for decades.”

[10] Chao, “100 Years of US Consumer Spending, Data for the Nation, New York City, and Boston.”

[11] Author’s calculations based on data from Chao, “100 Years of US Consumer Spending, Data for the Nation, New York City, and Boston.”

[12] It should be noted that this is not because of inflation in general: not all goods have increased in price.  In fact, the Consumer Price Index has tracked remarkably closely with the median household income (both increased by ~2.2x during the period).  It is the cost of housing which has engulfed an increasing percentage of the middle class’s income.  In August 1985 the median new home price was $83,300 (3.5x the median household income), whereas in 2014 the median new home price was $291,700 (5.5x the median household income). Overall, the cost of housing grew by 3.5x during the period, greatly outpacing inflation.

For graphs, see: Brown, “Money Income of Households, Families, and Persons in the United States: 1985,” 1. & Bureau of Labor Statistics “Inflation Calculator,” & DeNavas-Walt & Proctor & Smith. “Income, Poverty, and Health Insurance Coverage in the United States: 2012 current population reports.” & United States Census Bureau, “Median and Average Sales Prices of New Homes Sold in United States.”

[13] Olver, “The Food Timeline.”  Pepsi bottles equated to 1 metric litre in volume. For pictograph, income data is from Chao, “100 Years of US Consumer Spending, Data for the Nation, New York City, and Boston.”