Transmission Problems With The Economic Engine Of Prosperity For All

Several decades ago, as I completed earning a university degree in Economics, I contributed to a white paper for the White House and detailed in several newspapers the fact that U.S. living standards were only being maintained because most households had two earners, and I lamented this fact signaled the decline of America’s ability to provide generation after generation with a steadily improving life — that it signaled a sputtering in the economic engine of progress.

Back then, I believed that a monetarist policy at the Fed combined with a supply-side policy instituted by the Reagan administration would be just the right formula to clean out the engine valves and boost the octane fueling the economic engine.

Now, in the second decade of the twenty-first century, it requires well more than two earners working to equal the wages of a one-income household of 40 years ago. In fact, wages have plummeted so low that a two-income household is now (on average) 15% poorer than a one-income household of 40 years ago.

Wages & Standards

With the year 2000 as a base, real wages peaked in 1970 at around $20/hour. The average worker today earns $8.50/hour — more than 57% less than real earnings in 1970. Moreover, as the average wage directly determines society’s standard of living, it may accurately be said that the average standard of living in the U.S. has plummeted by more than half over the last 40 years.

The green line shows average wages, discounted by inflation calculated with the same methodology for all 40 years, properly comparing any data over time… applying identical parameters to it each year.

Then, there is the blue line: showing wage data discounted by the “official” inflation rate. Why two inflation deflators? What’s the problem? The methodology used by government to calculate inflation in 1975 is different from the method used in 1985, which is different than the method utilized in 1995, which is different than the method of 2005.

Technology & Standards

To be certain, technology has improved such that the “standard” has shifted and provided a lifestyle unimaginable or unattainable in the past; i.e., today, nearly all persons of age have a personal cell phone and internet access (hence access to instant communications); access to music proliferates on numerous mobile devises (not just families able to afford large stereo systems, or further back, their own music chambers); and the list goes on.

As they say, though, all things are relative. And, thus, to say that one has access to “absolutely” more of something now, or to something that never previously existed, is not to say that they have access to more or better… relative to what their predecessors had relative to their own time. Standards change.

If the death rate from cancer devolved back to that from 1960, would it be correct to say that’s acceptable because even then it was better than the survival rate from the 18th century? Of course not. Standards improve, and if the average person in a period can’t maintain their relative position over time in that moving standard, then we have declined as a society. Here is where America rests today.

99 To The One

Back to the chart; inflation for the last 40 years has hidden the 57% collapse in the standard of living for the average person. Nonetheless, if you’re fortunate enough to be at or successful enough to have earned a place at the top of the income charts, the situation is significantly reversed in your favor. While average American workers have seen their wages plummet by 57% over the past 40 years, in just 15 years (1992-2007) the 400 wealthiest Americans saw their incomes rise by 700%.

Now we have the complete picture: wages crumbling steadily lower year after year, decade after decade for “The 99%,” while earnings skyrocket for “The One Percent.” Is that acceptable? I don’t know… is going back to the cancer death rates of 1960 acceptable to you because that’s still better than it was in 1700?

Transmission Problems

Suffice to say that even after our massive economic/financial collapse of 2007/2008, our economic engine is running strong as the economy has fully recovered… as an engine (output and profitability exceed the high before the collapse). However, as could be observed after recovery from the 2000/2001 recession, ours is no longer an engine of economic progress broadening prosperity. The problem it seems is with our transmission, as the power of the engine is not distributed to improve the standard of life for all — or even just the majority — of Americans.

To this point, the causes of our transmission problems are equally obvious in terms of categories, although the actual analysis of those causes is more complex and beyond a simple blog post.

1) Taxation repression. As has been noted in this Presidential runnup, Romney’s 15% income tax rate because he doesn’t “earn it” though work but through investing his funds in the right slot machines on Wall Street is inherently unjust and inequitable. Billionaires now maintain the largest fortunes in history — while ordinary people who “earn” their income have been turned into “the working poor” paying significantly higher tax rates than the slot machine winners on Wall Street.

2) Systemic/structural unemployment. Technology always eliminates jobs faster than it creates new opportunities. With time though, technology tends to offer up more and better jobs, historically, given a long enough time horizon to adjust to the technological leap. In the meanwhile, gaps and dislocations occur. Given contemporary, unceasing acceleration in technology, our economy is in effect “permanently” reducing jobs (and creating structural unemployment). Today, the technological change and productivity increase is nearly continual…along with job redundancies.

 In our past, we as a society offered up income support and training programs to assist in the transition. Most importantly and effectively, we dealt with this structural unemployment by shortening the work week every few decades…until our current time. The basic work week at the Dawn of the Industrial Revolution was 7 days a week, 12 hours a day — an 84-hour week. For 200 years, our government steadily shortened the work week to our current 5 days a week, 8 hours a day — a 40-hour week — and our society grew steadily more prosperous.

Refusal of our government to shorten the work week (which is really voters’ economic and historic memory lapse put into practice by the reps they elect) is a systematic path that maintains massive unemployment — the strongest downward driver of average wages. Voters support and reinforce this process with a mantra of less government and hopeful/naive belief in the sanctity and divination of unfettered “free markets.” I’ve read other columnists and economists in Europe refer to their own version of this mantra as “Merkel’s Economic Taliban.”

3) Oligopolies. It is elementary (meaning basic Econ 101) capitalist theory that monopolies and oligopolies are cancers to be prevented. By definition they are caustic and anti/non-competitive — they have absolutely no productive place in any capitalist economy. Yet today, the global economy is overwhelmingly enmeshed with gigantic, non/less-competitive oligopolistic entities…the revered multi-nationals. Diminishment of our societies is an inevitable result.

4) Indebtedness. Most Western governments are well past the Rubicon in indebtedness. Nonetheless, it makes no sense to completely hollow-out and starve economies with some form of Milton Friedman-Hayek/Mises Austrian Economics Austerity (as done in Greece and Spain and Italy) — only to end up with an even larger default in the end. Had bond vigilantes accepted a 50% haircut at the beginning of Greece’s debt-crisis, Greece’s economy would have remained intact, and they would have salvaged a larger share of their debt obligations (rather than the 75% default with which they ended). In the end, around the world, all sovereign debt bond holders will take a haircut. It’s a fact. Reality. OK. Build up reserves and get ready for it. Once done, we can implement a proper system of running surpluses in good years and deficits in economic down years…and we the people will have to accept that this is as it must be.

It is time to address and correct this tragedy of the collapse in our standard of living…time to address the transmission problems with the economic engine of prosperity for all.

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