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Posts Tagged ‘middle class’

AEI interviewed University of Chicago economist Steven Kaplan about income inequality and the perception of unfairness in American’s economy. Below is a portion of the interview.

JP: I want to start off with a quote from presidential candidate Bernie Sanders. He gave a big speech recently on democratic socialism and what it means. And here’s just a few sentences of what he said.

Democratic socialism means that in a democratic, civilized society the wealthiest people and the largest corporations must pay their fair share of taxes. Yes, innovation, entrepreneurship, and business success should be rewarded. But greed for the sake of greed is not something that public policy should support. It’s not acceptable that in a rigged economy in the last two years, the wealthiest 15 Americans saw their wealth increase by $170 billion, more wealth than is owned by the bottom 130 million Americans.

But let’s not forget what Pope Francis has stated. We have created new idols. The worship of the golden calf of old has found a new and heartless image in the cult of money and the dictatorship of an economy which is faceless and lacking any truly humane goal.

So from your research, what do we really know about income inequality and what’s driving it in the United States today?      

SK: There is, I think, some truth in what he’s saying and then some real problems in what he’s saying. So here is my view of what’s happened in the last really 30-35 years. We’ve had a huge amount of technological change. And that has coincided with globalization. And they’re related. Technology allows you to do a lot of things overseas that you couldn’t do before. And so the combination of technological change and globalization has put pressure on the middle class and particularly the less skilled in the developed countries. So it’s the U.S. and Western Europe.

And I think there’s some anxiety and clearly anger about that happening. And at the same time, the people at the top have done very well in the United States. So that’s, I think, the problem that Bernie Sanders has stated. Now what he doesn’t state, and I think is extremely important to recognize is that the world is hugely better off – hugely. And Angus Deaton, who recently won the Nobel Prize in economics and is, you know, archconservative, wrote a book called “The Great Escape.” And that book starts by saying, and I quote, “Life is better now than at almost any time in history. More people are richer and fewer people live in dire poverty. Lives are longer and parents no longer routinely watch a quarter of their children die.”

So the system and capitalism in particular, around the world, has been spectacularly successful over the last 30 or 35 years. The number of people who are living above the poverty level – actually, take the number of people living below the poverty level – has declined in absolute terms and has declined hugely in relative terms.

The world is so much better off. And I think for Sanders and politicians to say that that’s terrible is really just morally abhorrent. … So now the question is, okay, we have this – so it’s great. Around the world, I would not give this up. This has been spectacular. Now, you do have the issue of what do you do in the United States and Western Europe, where you have had – it has been uneven in how the benefits have been distributed.

Folks on the left, they don’t much talk about the role of capitalism bringing  hundreds of millions of people in Asia out of really deep, extreme poverty. They focus really more on the U.S. story and they’ll even concede that there’s been economic growth. But they also that it really hasn’t helped the vast majority of the middle class for 30 or 40 years. They talk about stagnant wages. If the median person, the average person, they’re not getting richer, what’s the point of it?

So the median person in the world is much better off. Let’s be clear. So now, let’s go to the median person in the US and try to figure out what to do about him or her.

So first of all, the after-tax numbers are much better than the pre-tax numbers. And this is also, you know, kind of ignored to some extent, is that if you look at – I think these are Congressional Budget Office numbers or they’re not the IRS numbers that are pre-tax that get a lot of play – the increase in inequality, when you include taxes and transfers, is not as high as it is pre-tax. And that’s because there is a safety net. There are transfers.

But even that said, let’s say there has been an increase. Now the question is what do you do about it. And the real issue is you do have this headwind of technological change and globalization. And so now the question is, what do you do about it?

And one set of proposals which I think Bernie Sanders and Hillary Clinton and the Democrats in general push [is] to raise the minimum wage. And that’s precisely the wrong thing to do here because if you’ve got a headwind of technology and globalization, which is making it harder to hire people and it makes jobs more difficult to create, raising the minimum wage exacerbates that. It’s exactly the wrong thing to do.

If you want to encourage job creation, I think job creation is the most important thing. And I know your boss at AEI, Arthur Brooks, is very articulate on this, the way you encourage jobs is, you know, have an Earned Income Tax Credit or something of that nature, rather than raising the minimum wage. Because raising the minimum wage, you just put more headwinds into job creation.

I would say the same thing about mandated leaves, which is also a big campaign plank among the Democrats. Because, again, that makes jobs more expensive. It makes employment more expensive. And what are companies going to do in response to making jobs more expensive? Well, let’s apply more technology. Let’s try to find jobs in places where the costs are lower. So that is – you know – it is a real conundrum what to do with technology and globalization, but the answer is to make it easier to hire, rather than harder.

At the same time, where I think the Republicans sometimes are not quite so sensitive is [that] you do need to have safety net. If you think this is going on, you really want to make sure you have a solid safety net, so that people do not, you know, go too far down.

Read the rest of the interview here

to perhaps answer their own question, AEI posed some graphs on income earns in America:

income1

They wrote:

“Perhaps the stagnation and decline in US household income that gets so much media and political attention isn’t necessarily the result of the usual negative factors that get cited so frequently: stagnating wages, reduced economic and employment opportunities for the average, middle-class American, the increased share of rising income or wealth going to the top X%, the hollowing out of the middle class, the claims that the middle class is shrinking/losing ground/disappearing/declining, etc. Rather, perhaps there’s a less-nefarious, demographic-driven reason that household incomes have been stagnating/declining in recent years — the increase in the share of US households with no earners, which is largely driven by the aging US population and the increasing number of retired workers, and to a lesser extent by the increasing number and share of disabled workers. Finally, there’s been nearly a six percentage point decline in the share of US households with two or more earners since 1999, which could be another demographic change that has contributed to a decline in median household income.”

We’d love to hear your opinions on what AEI is presenting. Enter them in the comment section, and don’t forget to follow our feed.

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The Pew Research Center recently published a report called “The American Middle Class is losing ground.” They cite data from the U.S. Census Bureau and the Federal Reserve Board of Governors to determine household incomes to suggest the Americans who once made up the majority of hardworking, moderate income Americans comprise now less than half the adult population.

Share of adults living in middle-income households is falling

Approximately 120.8 million American adults are considered “middle class”, which Pew defines as their income is 50-66% the media income based on household size.

Who is “middle income” and “upper income”?

 

These findings emerge from a new Pew Research Center analysis of data from the U.S. Census Bureau and the Federal Reserve Board of Governors. In this study, which examines the changing size, demographic composition and economic fortunes of the American middle class, “middle-income” Americans are defined as adults whose annual household income is two-thirds to double the national median, about $42,000 to $126,000 annually in 2014 dollars for a household of three.3 Under this definition, the middle class made up 50% of the U.S. adult population in 2015, down from 61% in 1971.

Basically what’s happened is that those who once comprised the solid middle class of Americans- people who made enough to live comfortably but not enough to live luxuriously- had eroded. An increasing number of people either move into the top 10% (often known as the ‘professional’ class due to the high number of post-graduate degrees this group has earned) or into the bottom 30%, the ‘working poor’, families struggling to pay for even the most basic of expenses.

Older people, married couples and black adults improved their income status more than other groups from 1971 to 2015

 

 

 

 

 

 

 

 

Black adults, many of whom start with little or nothing, have gained because the number who were well-to-do in 1971 was very small. Those with less than a bachelor’s degree have been hurt economically, as have younger adults and the unmarried (many of whom are young). Older, married White couples are the most likely to do well, though not having children has helped some married couples.

Predicting the future is tough, but the data suggests America already is a class-based system, and will become even more so as the earnings between college graduates (particularly those with a master’s or doctorate or equivelant) increase much faster than those near the bottom (fast-food workers, construction workers, those whose jobs can be more easily replaced via computer or immigration) can keep up, which will widen income inequality. The Minimum Wage argument will actually serve to hasten this gap, as business owners obtain the means and desire to replace so-called ‘low-skilled’ workers with automation.

The positive is that the number of ‘upper middle’ and ‘highest’ has grown as a percentage, which suggests that for some there is economic mobility that was not present in 1971.

What do you think? What does the data suggest about American earnings and our future?

 

 

 

 

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Bernice Whaley, director of the Delaware Economic Development Office (DEDO), recently provided a glowing assessment of Delaware’s economy in a News Journal article. Ms. Whaley cites a current unemployment rate of 4.7% and growth over the last two years of 4% in Delaware jobs and 6.5% in personal income. And she notes recent increases in high technology employment in the state.

It might be helpful to put these statistics in perspective relevant to the average Delaware household.

The Delaware unemployment rate has thankfully fallen from a high of 8.7% in 2009 to 4.7% today. Two things are worth noting. First, in the year prior to the recession the state’s unemployment rate was 3.4%. Second, according to the most recent Census data, the percent of Delaware residents age 16 to 64 working dropped from 80.7% in 2009 to 76.7% in 2013. In other words, one major reason for a lower Delaware unemployment rate is that a large number of working age individuals have simply stopped looking for employment.

Total jobs in Delaware have expanded by almost 4% (2% per year) over the past two years. While it took more time to get there, this is similar to the job growth rate following the last recession in Delaware. Many of the jobs being added, however, are lower paying positions in such industries as temporary services and restaurants. The result from the Census is that between 2009 and 2013 the inflation adjusted median earnings of working Delaware residents with a high school degree has dropped 7% while that of residents with a bachelor’s degree or more has dropped almost 3%.

The earnings of Delaware workers are on average moving backwards.

Delaware personal income has grown at least 6.5% over the past two years. This compares to 13.8% growth following the last recession. More disturbing, the slowest growing component of Delaware personal income during the past two years has been earnings by residents while the fastest growing component has been transfer payments (e.g., Social Security, Medicaid, Medicare, food stamps, TANF).

Finally, growth in high technology industries in Delaware is positive, but it provides few opportunities for the almost two-thirds of working age Delaware residents who have less than an associate’s degree. Tests of Delaware public school students from 4th grade through high school evidence that the majority of students are not proficient in reading or math.

Obviously it is the job of DEDO to be positive and sell Delaware. And in all fairness DEDO has little control over the poor performing public schools, the green energy policies that have driven Delaware electric rates 35% above the nation, and the lack of a right-to-work law.

Nevertheless, a victory lap seems premature.

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United States one dollar bills are curled and inspected.

Today’s post is on income inequality. Since we’re heating up in election season, candidates are pushing forth their economic plans for America.

The dangerous separation of the American upper middle class

click here for the full article

“The American upper middle class is separating, slowly but surely, from the rest of society. This separation is most obvious in terms of income—where the top fifth have been prospering while the majority lags behind. But the separation is not just economic. Gaps are growing on a whole range of dimensions, including family structure, education, lifestyle, and geography. Indeed, these dimensions of advantage appear to be clustering more tightly together, each thereby amplifying the effect of the other.

For many, the most attractive class dividing line is the one between those at the very, very top and everybody else.  It is true that the top 1 percent is pulling away very dramatically from the bottom 99 percent. But the top 1 percent is by definition a small group. It is not plausible to claim that the individual or family in the 95th or 99th percentile are in any way part of mainstream America, even if many of them think so: over a third of the demonstrators on the May Day ‘Occupy’ march in 2011 had annual earnings of more than $100,000.

For others, the most important division is at the other end of the spectrum: the poverty line. The poor have not fallen behind the middle class in recent decades. But they have not caught up either. There is a case to be made that whatever is happening towards the top of the distribution, the gap we should care most about is between families struggling to put food on the table and those with adequate, middling incomes.”

Senator Bernie Sanders has made addressing income inequality one of the principle components of his campaign, and even other populist candidates like Donald Trump have called for raising taxes on the rich, or at least certain groups of wealthy Americans. Most voters, particularly Republican voters, oppose raising taxes on the rich, but here’s the question:

Is income inequality a problem in America?

The answer is, it could be: One of the ways America has been able to become the most powerful nation on earth in such a short period of time is because we are one of the few societies where economic mobility is possible. Someone born poor, even without tremendous musical, athletic, dancing, or tech genius talent can still earn a solid living and move from the bottom 10% to the top 1%. Herman Cain and Ben Carson are two such examples. Abraham Lincoln went from being born in a one-room cabin to President of the United States. That gives people hope that they too can achieve the “American Dream”, however it is defined for them. For some, earning a salary of $250,000 or more per year is unrealistic. But they may find happiness moving from $20,000 a year to $60,000 a year.

However, the American Dream only works if people believe economic mobility is feasible for them. And right now, many Americans do not believe it’s possible, or at least is becoming more difficult. Some Conservatives and “1%ers” will just say those people don’t work hard enough, or make poor decisions which cause them to stumble. Those may be true for some people, but not for all.

And that’s not the point of this discussion. It’s ‘do you believe you can move up the economic ladder’? And if people are answering no, then the question is, ‘why?’ and if people think the system is rigged against them, populist candidates like Sanders and Trump will absolutely win because the “hard work+perseverance=success” mantra will ring hollow to people who believe we are slowly moving away from an economically mobile society to one based primarily on who your parents are or who believe some people are ‘privileged’. That’s part of the reason entrepreneurship activity is down overall. Onerous government does hamper economic activity, but if people do not believe they can succeed, most will not even try.

This is something both major political parties will have to come to terms with. Certainly no productive society can function under Communism, where everyone (except the Party leaders) is equally poor and miserable. But too much inequality fuels populist and radical candidates who promise to fix the problem.

So take a look at the above graphic and try to answer for yourself, “is income inequality a problem in America”?

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Since 2008 America has seen a greater number of businesses close than open. According to Gallup, roughly 6 million businesses out of 26 legally recognized actually function; the rest are inactive or exist only on paper. Of these 6 million “real” businesses, 3.8 million employ 1-4 employees. Only about 108,000 businesses in America (2% of “real businesses”) employ 100+ people. If we continue to kill off small business with over-regulation and over-taxation, how will the government be able to pay its bills, short of more printing, borrowing, and cancelling debts?

From Gallup: (article truncated for space)

“The U.S. now ranks not first, not second, not third, but 12th among developed nations in terms of business startup activity. Countries such as Hungary, Denmark, Finland, New Zealand, Sweden, Israel and Italy all have higher startup rates than America does.

We are behind in starting new firms per capita, and this is our single most serious economic problem. Yet it seems like a secret. You never see it mentioned in the media, nor hear from a politician that, for the first time in 35 years, American business deaths now outnumber business births.

The U.S. Census Bureau reports that the total number of new business startups and business closures per year — the birth and death rates of American companies — have crossed for the first time since the measurement began. I am referring to employer businesses, those with one or more employees, the real engines of economic growth. Four hundred thousand new businesses are being born annually nationwide, while 470,000 per year are dying.

You may not have seen this graph before.

Until 2008, startups outpaced business failures by about 100,000 per year. But in the past six years, that number suddenly turned upside down. There has been an underground earthquake. As you read this, we are at minus 70,000 in terms of business survival. The data are very slow coming out of the U.S. Department of Census, via the Small Business Administration, so it lags real time by two years.

Here’s why: Entrepreneurship is not systematically built into our culture the way innovation or intellectual development is. You might say, “Well, I see a lot of entrepreneurial activity in the country.” Yes, that’s true, but entrepreneurship is now in decline for the first time since the U.S. government started measuring it.

Because we have misdiagnosed the cause and effect of economic growth, we have misdiagnosed the cause and effect of job creation. To get back on track, we need to quit pinning everything on innovation, and we need to start focusing on the almighty entrepreneurs and business builders. And that means we have to find them.”

No matter how much some people will try to convince you the Roaring Twenties are back, the reality is that we have far too many businesses closing and not enough replacing them.Businesses do open and close all the time, but a lot of business closings are small businesses getting shut down because of government policy via regulation and taxation. A lot of these policies are Cronyist policies pushed by big business to weaken their competition, which is smaller stores. Thus for example, a big chain like Costco can safely come out in favor of the minimum wage increase knowing it will end up hurting the roughly 80 percent of businesses which employ nine or fewer people, while at the same time reaping the benefits of “caring” for their employees (note: we don’t object to Costco paying its employees well; we applaud it. But just because Costco might be able to afford a wage increase doesn’t mean every business can).

Crony business policies, government bureaucrats who make new regulations to justify their jobs, politicians who want to “do something” to get votes, and a well-intentioned but misinformed public which votes for things like minimum wage hikes  all result in a decline in new business startups and jobs lost and never created in the first place. We at CRI support economic policies which make it easier for people to start businesses and create new (hopefully well-paying) job opportunities without sacrificing necessary regulations and basic standards of decency. But unless we fundamentally change the way our country is operating, that 70,000 per year decrease in total businesses operating in America will increase in number.

Help support CRI! Your support allows us to research and provide analysis to the public on policies which will best grow the economy and create jobs. An end to the prevailing wage, Right to Work legislation, an end to Delaware’s gross receipts tax and lower corporate income taxes and personal income taxes, health care reform which encourages innovation from the private sector, and energy policies which would give people more choices would go a long way to helping Delaware, and America, make a sound economic recovery for all. Please consider making a contribution today.

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