Income Inequality Makes a Mockery of the American Dream

The American economy has not worked for the average family since the end of the Clinton administration. Adjusted for inflation, median earnings of men working full-time year-round are where they were in 1980. That’s unfair because productivity has been rising for two decades but the benefit has been confined to the already well-off. Today, income inequality in the U.S. exceeds any other democracy in the developed world. Two-thirds of American families earning less than $30,000 a year are often in crisis mode when the bills come in, but the misery

 is conspicuously not shared. In 1944 the top 1 percent earned 11 percent of all income. By 2012, it was 23 percent of the nation’s income. The mismatch between reward and effort makes a mockery of the American dream.

Here it is in a nutshell for our disappointing new century. Real output per person from 2000 to 2011 rose nearly 2.5 percent a year, but real pay increased less than 1 percent over the same period, according to the Bureau of Labor Statistics. Adjusted for inflation, incomes in 2014 are still roughly $2,100 lower than when President Barack Obama took office in 2009 and $3,600 lower than when President George W. Bush took office eight years earlier.

Nationally, inflation-adjusted wages at the median of the earnings distribution curve have either fallen or barely risen in 35 years going back as far as 1979. Thirty-five years! So when were the good times? It wasn’t so bad from 1947 to 1973. Labor productivity rose 2.8 percent per year but real hourly compensation was only a little behind then, rising 2.6 percent. But now we are well and truly in the age of inequality with little prospect of a high-pressure economy boosting the demand for labor, and hence pay.

The Great Recession from 2007 to 2009 seems to have initiated an era of 2 percent annual growth, well below our historical average. Even prolonged low interest rates have not enticed a new consumer credit cycle. Nor have capital gains in the hands of the wealthy generated meaningful growth in spending. Though productivity has outpaced wages, it has not been that great. Right now the predictions are that productivity will stay in the low range of around 1.6 percent annual growth, even with the explosion of the digital world. As MIT economist Robert Solow defines it, “evidence of the importance of the digital revolution is everywhere except in the productivity numbers.” The United States is now a 1 percent to 2 percent growth economy – a low-growth level more commonly associated with Europe

The consequence is a pattern of low-wage and, often part-time jobs, replacing high-wage, full-time jobs. The number of full-time jobs last year was still 2.3 million below where it was back at its peak in 2007. Today’s jobs are 23 percent lower in pay than the vanished jobs, according to the U.S. Conference of Mayors and IHS Global Insight – a fact well known personally to workers in hospitality, health care and administrative support. Part-timers are a stunning 19 percent of the employed U.S. population. Alas, here, too, low pay is the new norm.

When we look at figures for average incomes we see a rise, but that’s misleading. The number is driven by gains for the wealthy, which is why median income is stagnating. Somewhat more than half the population say they are losing ground financially, their incomes unable to keep pace with the cost of living. Only 5 percent of those surveyed by the Pew Research Center said their income is rising faster than the cost of living; 45 percent of Americans said they have lived through one serious financial hardship over the last year, an event such as a job loss or falling behind on bills or not being able to afford medical care. Two-thirds of American families earning less than $30,000 a year faced one of these economic challenges recently.

The low-wage phenomenon is the symptom of a deep-seated malady, an erosion of American competitiveness. Have you driven a Ford lately? Nearly half the Ford 2015 Escape model was not made in North America. The U.S. auto industry is booming in sales, but a striking analysis in the Wall Street Journal, by James R. Hagerty and Jeff Bennett, tells us more and more of the cars we make rely heavily on imported parts from low-wage economies – 33 percent of the Dodge Charger, 30 percent of the Honda Accord, 35 percent of the Ford Explorer. And these percentages have all increased since 2010. In 1990, the industry spent $31.7 billion on parts from Mexico and China and elsewhere. Last year it spent $138 billion. That quantum leap is not a fluke. It’s an accelerating trend, further impelled by a runaway dollar that makes imports cheaper.

It is no use telling the industry it should buy American. There wouldn’t be an industry if we tried to do that; global competitors like Germany, Japan and South Korea have no scruples about buying parts where they can get them at lower cost and neither should we. We are selling more cars abroad – last year, we exported 2 million vehicles for the first time. But the impact on the wages of the Americans who make them has been marked: nonsupervisory hourly pay below $30 in what was once a prized job. And this is just one industry.

Americans may be resilient but not resilient enough to take all this with a smile. In a poll last November, roughly 80 percent said they were either very worried or somewhat worried. Some 71 percent of adults think the country is on the wrong track, and 60 percent believe the U.S. is in a state of decline

Now the public has moved beyond the plaintive cry of “feel our pain” to the more angry pronouncement of “you are causing our pain,” as one commentator put it. The pessimism is not confined to the poorest. It is shared by many in the middle-income range. The couple who graduate from high-school to earn college degrees can expect to see their income jump by approximately $58,000 per year, but hourly real wages have stalled even for college-educated Americans, and it is only those with advanced degrees who are seeing gains.

The political fall-out is evident in public opinion polls; candidates please note that 60 percent today support raising the minimum wage; 75 percent favor increased spending on infrastructure projects; 80 percent think college should be more affordable and that there should be more flexibility for paying off college debt.

The U.S. for years had been the most competitive economy on the earth, with famously great infrastructure, an educated workforce and a strong middle class. No longer does America seem to have the special advantage in human capital, when our workers could out-produce and out-innovate the world’s best in a competitive global economy. As we try to resist the erosion of these relative strengths, we should focus on the leverage provided by small businesses, as large businesses have the ability to look overseas for better opportunity

We still have strong entrepreneurship and innovation, world-class research universities, high-quality management and vibrant capital markets, but we are weighed down by the humiliating and dangerous neglect of infrastructure, the decline of our workforce skills, a reform-resistant public school system and a xenophobic immigration policy which denies us enrichment from talent, putting American business at yet another competitive disadvantage with international rivals.

Indeed since 2006 a Manpower Group survey shows that as much as 40 percent of U.S. employers reports difficulty in filling positions. It is this lack of skilled labor, especially those with technical skills, that provokes businesses to move outside of the U.S. The skill issue is at the heart of the deteriorating competitiveness of the U.S., especially since middle-skilled jobs now require more education and training than a high school diploma even though less than a four-year college degree. These jobs account for as much as 48 percent of all positions in America.

Meanwhile a survey from Harvard Business School finds businesses are focusing on outsourcing or automation because of high corporate taxes, high regulatory compliance costs, and high employee health care costs. Today the canary in the coal mine is the travails of the small business world. The rate of formation of new firms has declined in every U.S. state during the past three decades. The prospects for broadly lifting living standards remain dim as smaller businesses, important job generators of the U.S. economy, are especially disadvantaged, particularly when financing is more available to big businesses than it is to small businesses.

According to Gluskin Sheff, the share of respondents in the National Federation of Independent Business’ small business optimism index who see economic improvement ahead has gone from a net of plus 12 in December to zero in January and to minus one in February. And alarmingly, consumer confidence is slipping and retail sales have fallen at a rate over the past three months that has, with the exception of early 1987, coincided with recessions.

Let’s remove the impediments and disincentives to start businesses, to invest and hire and to reinvest. But prosperity will elude America as long as the elite income class is the only one economic group making gains. America will not advance if it slides back to the not-so-Gilded Age.

Mortimer B. Zuckerman

Source: http://www.msn.com/en-us/money/markets/income-inequality-makes-a-mockery-of-the-american-dream/ar-AAa63Rj