Thursday, April 19, 2018

The Results of Record Income Inequality

Financial FAQs

We know the results of trickle-down economic theory that says lower taxes and government regulations are supposed to lift all boats, as epitomized in Republicans’ latest tax bill. After the ninth year of this recovery, just 10 percent of American household benefited at all from subsequent economic growth.

In spite of the huge stock market recovery that has the S&P 500 index of largest US corporations up more than 25 percent since 2009, only the top 10 percent of income earners increased their net worth.
The busted housing bubble was a culprit, but also labor practices that have literally either outlawed collective bargaining for many workers, or enacted so called right-to-work laws that enable union members not to pay dues, even if they have benefited from union bargaining.

The result is that 25 percent of American workers earn less than poverty-level wages of $24,000 for a family of four, and household incomes haven’t risen faster than inflation since the 1980s. The national minimum wage hasn’t risen above $7.25 per hour since 2009, either.

Princeton’s Nobel laureate Angus Deaton has studied poverty and its causes for most of his professional live.
He said in a recent Project Syndicate article, a progressive journal: “Making matters worse”, he said, “more than 20 percent of workers are now bound by non-compete clauses, which reduce workers’ bargaining power—and thus their wages. Similarly, 28 US states have now enacted “right-to-work” laws, which forbid collective-bargaining arrangements that would require workers either to join unions or pay union dues. As a result, disputes between businesses and consumers or workers are increasingly settled out of court through arbitration—a process that is overwhelmingly favorable to businesses.”

This is while corporate America is expected to post its best quarter of profit growth in seven years, according to Marketwatch’s Ryan Vlastelica. “For the poorest American families, in the lowest fifth of wealth, their net worth shed 29 percent over that period. Drops of at least 20 percent were also seen in every income percentile except for those in the 80-89.9 percentile, where the decline was a more modest 5 percent. The wealthiest decile, however, saw a jump of 27 percent, as seen in the above chart.”
As I have covered in countless past columns, America actually ranks among the worst countries when it comes to income inequality, based on its Gini coefficient, a measure of the wealth distribution of a country’s residents. The coefficient for the U.S. is slightly less than 0.40, which puts it roughly even with Turkey and Botswana, and more unequal than nations as Israel, Greece, Spain, and Germany. Iceland, the most equal society measured by Deutsche Bank, has a coefficient below 0.25.

There are many remedies to this situation. One has but to look at past history. Our fastest growth period was during the 1950s and 1960s, when the top income-earners’ tax bracket was 92 percent, unions were strong, and corporate CEOs earned 25 times what their employees earned. This built both the physical and digital infrastructure that gave us the record prosperity of that era. We also developed the Internet, and landed on the Moon.That tax structure was a way of redistributing income where it would do the most public good. 

Today, corporate CEOs in the largest corporations earn on average 300 times what their employees earn. We enrich the already wealthy, in other words, and neglect to plant the seed corn that would create future prosperity.

Harlan Green © 2018

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Monday, April 2, 2018

Q4 GDP Growth Up 2.9% Q/Q

Financial FAQs

Fourth quarter Gross Domestic Product, the total value of the country's production of purchases of domestically-produced goods and services by individuals, businesses, foreigners and government entities, rose to 2.9 percent from 2.6 percent in its third and final revision by the Commerce Department, finishing off 2017 with a bang and raising total 2017 GDP growth to 2.6 percent.

It was mostly consumer spending, up 4 percent, but personal incomes are rising faster as well, which will boost spending and continued good growth in 2018. This is because Real Disposable Income (less inflation and taxes) rose 0.4 percent pushing the annual increase to more than 2 percent.

“The strongest news in the report comes from the wages & salaries component of personal income which posted a fourth straight sharp gain,” reports Econoday, “at 0.5 percent. This helped total income which rose 0.4 percent for a third straight month and also helped the savings rate which rose 2 tenths to a still modest 3.4 percent.”

This measure includes all forms of compensation including employer contributions to medical insurance and pensions and has been showing more life than average hourly earnings, which is part of the monthly employment report and is the most closely watched of all wage measures.

However, it did nothing to inflation, as the GDP’s price index rose 2.3 percent Q/Q, but is up just 1.8 percent annually, as is the Fed’s preferred Personal Consumption (PCE) index. So still no inflation, even though wage and salaries are beginning to surge, and labor costs account for 2/3rds of product costs.

The Fed has said it will probably raise their interest rate twice more this year, which will put the Prime Rate at 5.25 percent, raising credit card rates and crimping consumer borrowing.

But with wages soaring, that may not slow down consumer spending or the growing foreign trade deficit. The goods deficit from countries such as China is now $75B/per in February and growing. So why is this administration pushing for trade tariffs, which is already instigating a trade war, and making those same goods more expensive to Americans?

No one believes this will reduce the trade deficit, either, as the manufactured goods we export will become more expensive, as well, reducing the demand for exports.

Harlan Green © 2018

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