Serious Implications

“The most important contributor to higher profit margins over the past five years has been a decline in labor’s share of national income.” – Goldman Sachs Report, quoted in the Washington Post, 2006

In 2006, the U.S. Congress was dominated by Republicans and we had a Republican President. Wages were at their lowest share of GDP on record. Corporate profits were at their highest rate since the 1960s. Speculators were about to drive fuel prices through the roof. The housing bubble, despite warnings, would continue to grow and finally burst. The Dollar Index was on track to reach its lowest level in history.

According to this New York Times article written four years ago

In the first quarter of 2006, wages and salaries represented 45 percent of gross domestic product, down from almost 50 percent in the first quarter of 2001 and a record 53.6 percent in the first quarter of 1970, according to the Commerce Department. Each percentage point now equals about $132 billion.

Do the math and we find between 1970 and 2006, over $1.095 trillion of GDP shifted away from wages to corporate profits, which is in line with the Goldman Sachs statement, above. It should come as no surprise that the big problem in the economy today is lack of demand.

A hundred years ago, Henry Ford started his car factory and offered twice the going wage for new hires. His competition was furious. Ford hired all the best mechanics, craftsmen, and clerical staff away from other firms. When asked why Ford offered such high wages, he replied, “if you don’t pay the people, they can’t afford the cars.” This was a brilliant statement that recognized the relationship between the producer and the consumer.

I’m not anti-corporation or anti-profit but, like Ford, think the benefits of corporate success need to be distributed to the workers, or else the economy will suffer from a fall-off in demand.

Republicans, for the most part, have opposed mechanisms that have lifted wages for Americans. They have a record of blocking and busting unions and opposing hikes in the minimum wage. During the 36 years from 1970 to 2006, the time of falling wage share of GDP, Republicans held the White House 24 years, to the Democrats 12. They had some help from the other side, but it’s been primarily Republicans that set up the policies that have mostly benefited corporations at the expense of bottom 90 percent of American workers.

The pace of economic recovery has been slow and voters are understandably frustrated, but electing a GOP-controlled Congress this year will only make things worse.

As Reagan ended the PATCO strike, the federal government began a policy of cheap labor.

In an interesting lecture delivered at UC Berkely two years ago called How a Low Wage Economy with Weak Labor Laws Brought Us the Mortgage Credit Crisis, Damon Silvers explained the radical changes in labor policies carried out by the federal government since 1935 and the passage of the National Labor Relations Act, which encouraged collective bargaining.

As Silver’s graph shows, from the end of World War II until about 1980, wages kept pace with productivity. Workers took home the fruits of their labors. The more productive they were, the more they made. Seems fair doesn’t it? That all changed drastically about 30 years ago when Reagan decertified the PATCO air traffic controllers union. At that point, Reagan made a clear signal that had huge repercussions: the federal government was busting unions and corporations could too.

After that, wages and productivity were de-coupled. Worker productivity increased nicely, but those workers’ wages went flat. Is that fair?

(Damon Silver) For thirty years, America’s economic elites and their political allies have pursued a combination of economic and social policies designed to produce a low wage economy. These policies—our labor laws and our broader system of labor market regulation, our tax policies and our approach to globalization, have yielded decades of stagnant wages and rising economic inequality.

But at the same time, policymakers of both parties have sought, with some success, to maintain high levels of consumer spending. The pursuit of the contradiction of a low wage, high spending economy has systematically destroyed the various ways we individually and collectively save and invest. Instead of an income driven economy, we have become an economy driven by asset bubbles fueled by cheap debt. The ultimate unsustainability of this strategy has brought us to our current economic crisis. (Emphasis added)

We can blame greedy Wall Street bankers and financiers, blame Freddie and Fannie, the ratings agencies, Greenspan and all the rest, but we need to realize all of those bugus financial policies were supported by massive borrowing at cheap rates and used to keep a low-wage consumer economy growing. Borrowing became the replacement for growing wages. Again, here’s Silver:

The key thing to understand about the U.S. economic strategy of the recent past is that so long as cheap credit flowed from our trading partners, energy suppliers, and financial engineers, our economy looked much healthier than it really was. Vast amounts of economic activity in areas such as housing construction and other real estate, the transportation, marketing and sale of consumer goods, and government related spending was an artifact of our ability to borrow, not a measure of our overall productiveness as a society or our sustainable ability to support our national consumption…

We must understand that there is a choice, a different direction we can go in – a direction that leads to revitalizing the middle class, putting the great energies of this nation to work to solve the crisis of energy and the environment, and really having a strategy for how the American people can prosper in the global economy. At the heart of the choice that we face is a choice about whether we want to pretend that consumption can go up while real wages fall.

So far, it looks like the nation is still pretending.

The Stagflation Index (SFI) for September fell to -15 as cost of living increases outpaced wage gains. This bit of bad news for workers comes during a week when the Dow Jones Industrial average broke 10,000 and the price of oil topped $75 per barrel.

The September data from the Bureau of Labor Statistics indicate that wages failed to keep pace with inflation for non-managerial workers in the private sector, those of us who make up about 80% of the American workforce. The key data:

Consumer Price Index (CPI) +0.2%
Average Hourly Earnings (AHE) +$0.01 or +0.05%
Average Hourly Wage $18.67/hour

Calculating the September increase in wages adjusted for inflation:
(AHE – CPI) = (0.05 – 0.2) = -0.15
September Stagflation Index = -0.15 X 100 = -15

I’m not optimistic about the current economic “recovery.” The last time unemployment was this high was the early 1980s. The recovery that followed that recession was supported by three major factors:

1. The Baby-Boomers” were in their peak earning years.

3. Growth in defense industries, computer technologies, and financial services during the 10980s put a lot of people to work and earned a lot of money.

Now, the Baby-Boomers, faced with under-funded retirements, are hanging on to their jobs, making for a very tough job market for young workers. High unemployment will keep wages low. Low wages will keep consumer spending low.

Demand for oil will keep prices high. “Drill baby drill” will not lower prices like in 1982. Demand is higher now, supplies are lower. Oil companies don’t want lower prices, anyway.

The only potential technological saviour is green technology and infrastructure. As the oil companies and their surragates fight to maintain the status quo, nations less entrenched in old, dying technologies will develop, patent, and build the renewable energy systems they will eventually sell to a crumbling and no longer industrialized America.

I hope I’m wrong about all of that. I see what the makers of Harry and Louise did to health care reform in 1993, others, like George Will, who deny the climate change warnings from the scientists at the UN Intergovernmental Panel on Climate Change (IPCC), are doing to energy reform now.

Those of us for sustainability: economic vitality, environmental quality, and equal opportunity, we have to keep hammering. Keep hammering.

(Click on graph for larger image)

The March Stagflation Index (SFI) rose as wage gains outpaced the change in cost of living, which actually fell slightly. This bit of good news ended two months of rising prices and slower wage growth.

The March data from the Bureau of Labor Statistics indicates that wages rose faster than inflation for non-managerial workers in the private sector, who make up about 80% of the American workforce. The key data:

Consumer Price Index (CPI) -0.1%
Average Hourly Earnings (AHE) +$0.04 or +0.22%
Average Hourly Wage $18.50/hour

Calculating the March percent increase in wages adjusted for inflation:
AHE – CPI = 0.22 -(-0.10) = 0.32
March Stagflation Index = 0.32 X 100 = 32

For a fascinating discussion on our “shadow financial system” including reckless banking and commodities deregulation, listen to Michael Greenberger on NPR’s Fresh Air with Terry Gross. Greenberger explains how we got into the current financial collapse.

To date, the Obama Administration has done little to remedy the legal and regulatory problems Greenberger describes.

This past week, President Barack Obama called for a $500,000 salary cap for bank executives. Some complained that this kind of “straight jacket” would force a lot our brilliant bank CEOs to find employment elsewhere, where they pay better. Fancy that. Seems the first rule should be “do no harm.” What with the recent banking collapse, I’d rather see our border collie running the nation’s banks. The fact is, a lot of Americans just don’t buy the idea that anybody is so indispensable they deserve millions, or even billions in annual compensation.

But can we do anything about it? I believe we can and here’s how:

Any company wanting to contract with the government, whether state, federal, county, or municipal shall submit along with their proposal, data on individual employee compensation. The total annual compensation including salary, benefits, profit share, bonuses, and stock for each employee would be ranked from the lowest paid to the highest paid. The names of each employee would be omitted to protect individual privacy. From that data, a number of summary statistics could be calculated such as minimum, maximum, mean (average), median, and standard deviation.

Simple indicator metrics such as the ratio of highest to lowest pay, highest to median pay and median to lowest pay would give us simple numbers to compare from one company’s compensation policies to another.

Here’s an example:

Borax Automotive Corp.
Maximum compensation paid to an individual: $5,000,000
Median compensation (50th percentile): $50,000
Maximum to Median Ratio: 5,000,000/50,000 = 100.0

Acme Automotive Corp.
Maximum compensation: $500,000
Median compensation: $75,000
Maximum to Median Ratio: 6.7

If this plan were implemented, and because both Borax and Acme were benefiting from fat government contracts, selling cars and trucks to government agencies, then their employee compensation data and summary statistics would be published on a public website. Anyone shopping for a new car or truck could check the compensation statistics to determine which company did a better job of “spreading the wealth around.”

All things being pretty much equal, I think more people would buy an Acme.

Would this be seen as unreasonable intrusion into the affairs of private enterprise? It might, but the problem is easily solved. Any company wishing to keep their employee pay data private could just confine their business activities to the private sector. No government contracts.

This is a market-based approach to promote reasonable corporate policies toward their workers. It requires that consumers be given a little more information. With information comes empowerment.

Simplified Stagflation Index for 2008

The November and December Simplified Stagflation Index (SFI) jumped due to negative inflation and wage increases. Given all the bad news about unemployment, cuts in factory orders, foreclosures, and bank insolvency, this was some good news for those of us who hung onto our jobs. The positive SFI numbers mean that workers are rebuilding some economic strength to buy, save, and invest after several years of losing it. That sunny thought, however, and hope for economic recovery, requires we continue to keep our jobs and create a lot of new ones.

The December data from the Bureau of Labor Statistics indicates that wages rose faster than inflation for non-managerial workers in the private sector, who make up about 80% of the American workforce. The key data:

Consumer Price Index (CPI) -0.7%
Average Hourly Earnings (AHE) +$0.05 or +0.27%
Average Hourly Wage $18.36/hour

Calculating the December percent increase in wages adjusted for inflation:
AHE – CPI = 0.27 -(-0.7) = 0.97
December Simplified Stagflation Index = 0.97 X 100 = 97.

The 12-Month Cumulative SFI = 317, with big increases coming since August and lower fuel prices. Real estate prices, in general, are also down over that period.

When the experts boil down all the details about the economic crisis, they will likely find three main culprits: (1) rising fuel costs (gas prices over $4 per gallon); (2) banking deregulation leading to the securitization of bad debt; and (3) the Commodities Futures Modernization Act of 2000. The problems we face as a result were preventable.

We could have avoided this mess by getting serious about energy efficiency, redesigning cars to meet higher CAFE standards, and developing renewable energy. We could have avoided the current bank bailout fiasco by keeping intact the banking regulations that separated commercial banks from investment banks. We could have kept commodities prices, including oil, from skyrocketing by requiring sane margin requirements for speculators.

For a fascinating discussion on the banking and commodities deregultion, listen to Michael Greenberger on NPR’s Fresh Air with Terry Gross

The October Simplified Stagflation Index (SFI) was 122, up from 17 in September. This was very good news for those who hung onto their jobs. This was the third month in a row with positive stagflation values. With lower gasoline prices, consumers have money for other things.

The October data from the Bureau of Labor Statistics indicates that wages rose faster than inflation for non-managerial workers in the private sector, who make up about 80% of the American workforce. The key data:

Consumer Price Index (CPI) -1.0%
Average Hourly Earnings (AHE) +$0.04 or +0.22%
Average Hourly Wage $18.21/hour

Calculating October percent increase in earnings adjusted for inflation:
AHE – CPI = 0.22 -(-1.0) = 1.22.

October Simplified Stagflation Index = 1.22 X 100 = 122.
12-Month Cumulative SFI = -9, an improvement over the past several months.

The 12-Month Cumulative SFI means that over the past year, prices have risen slightly faster than wages for 80% of the workforce.

The June Simplified Stagflation Index (SFI) fell to -77, down from a revised -26 in May.

The June data from the Bureau of Labor Statistics indicates that inflation rose much faster than wages for non-managerial workers in the private sector, who make up about 80% of the American workforce. The key data:

Consumer Price Index (CPI) +1.1%
Average Hourly Earnings (AHE) +$0.06 or +0.33%
Average Hourly Wage $18.01/hour

Calculating June’s increase in earnings adjusted for inflation:
AHE – CPI = 0.33-1.10 = -0.77.
June Simplified Stagflation Index = -0.77 X 100 = -77.
12-Month Cumulative SFI = -125.

The 12-Month Cumulative SFI means that over the past year, prices have risen faster than wages for 80% of the workforce, resulting in less purchasing power and less money to save. Only four of the past twelve months have seen positive SFI values.

The vast majority of Americans are becoming less affluent and will need to limit their spending to essential goods and services and forego discretionary spending. This will likely continue to slow the economy until wages catch up with rising costs.

There’s more about the Stagflation Index here.

Related Bloomberg Article: Stagflation, Not Strong Growth, Justifies Pause: Gene Sperling

The May Simplified Stagflation Index (SFI) fell to -32, down from a revised -9 in April.

The May data from the Bureau of Labor Statistics indicates that inflation rose considerably faster than wages for non-managerial workers in the private sector, which are those who make up about 80% of the American workforce. The key data:

Consumer Price Index (CPI) +0.6%
Average Hourly Earnings (AHE) +$0.05 or +0.28%
Average Hourly Wage $17.94/hour

Calculating May’s increase in earnings adjusted for inflation:
AHE – CPI = 0.28-0.60 = -0.32.
April Simplified Stagflation Index = -0.32 X 100 = -32.
12-Month Cumulative SFI = -44.

The 12-Month Cumulative SFI means that over the past year, prices have risen faster than wages for 80% of the workforce, resulting in less purchasing power and less money to save. Only two of the past nine months have seen positive SFI values.

The vast majority of Americans are becoming less affluent and will need to limit their spending to essential goods and services and forego discretionary spending.

There’s more about the Stagflation Index here.

Related Bloomberg Article: Stagflation, Not Strong Growth, Justifies Pause: Gene Sperling

In his 2007 book The Trap: Selling Out to Stay Afloat in Winner-Take-All America, author Daniel Brook makes the argument that there is no freedom without equality. Too many college graduates are abandoning their social consciences in favor of more lucrative careers, no doubt, in part, because of the rising price of higher education. But beyond that, financial pressures stifle personal freedom and ambition to pursue one’s dreams. Not that it was ever easy, but lately, perhaps the marketplace has been a place where dreams go to die. Some quotes:

“In 1970, starting teachers in NYC made just $2000 less than starting Wall Street Lawyers. Today, they make $100,000 less…

“When the best and brightest cannot afford to serve the public good, what are we selling out: an individual’s career, or the very promise of America?…

“Today as we compete ever more fiercely to buy our human rights – good educations, decent housing,, and adequate health care – at the ever higher prices demanded by the market, only those who stifle their altruistic urges can claim these things; those who do not must forfeit them.

“Only by changing the rules to rebuild the middle class and provide health care and quality education for all can we create a society in which you need not be a saint to live in harmony with your values should you happen to dissent from the reigning order.

For those who dream of a career in the arts: photography, poetry writing, music, education, or human services such as hospice, or drug and alcohol counseling – they can’t make a living, or they can’t afford to grow families. Instead, the market wants managers, lots of managers. People good in meetings and good over the phone. Seller-doers. Soft skill specialists. Nothing wrong with that, but how sad would it be to lose our most altruistic and creative citizens? Lost to the hustle, relegated to unfullfilled lives.

The April data from the Bureau of Labor Statistics indicates that inflation rose faster than wages for non-managerial workers in the private sector, which are those who make up about 80% of the American workforce. The key data:

Consumer Price Index (CPI) +0.2%
Average Hourly Earnings (AHE) +$0.01 or +0.06%
Average Hourly Wage $17.88/hour

Calculating April’s increase in earnings adjusted for inflation:
AHE – CPI = 0.06-0.20 = -0.14.
April Simplified Stagflation Index = -0.14 X 100 = -14.
12-Month Cumulative SFI = -38.

The 12-Month Cumulative SFI means that, over the past year, prices have risen faster than wages for 80% of the workforce, resulting in less purchasing power and less money to save. This spells trouble for at least certain sectors of the economy, which will see downward pressure on prices. Falling prices will have a positive feedback on wages, causing them to fall in sectors linked to discretionary spending. It remains to be seen whether or not these changes in the U.S. economy will result in the Democrats retaking the White House with a mandate to rebalance the economy.

There’s more about the Stagflation Index here.

Many of those who land on this website do so as a result of searching on the question, “what is middle class?”. In a recent televised debate between Hillary Clinton and Barack Obama and moderated by ABC’s George Stephanopolous and Charles Gibson, “middle class” came up in a discussion of the capital gains tax. Gibson and Clinton were throwing income figures of $100,000 to $250,000 supposedly earned by the middle class. Barack Obama correctly said that only 6-7 percent of Americans earned that much. In my view, that ain’t the middle, nor is it the focus of concern on this website. The American middle class is stressed and the Gibson-Clinton characterization of it is false and misleading. Like television, their comments project a distorted idea of America around the world, with Americans much better off than they really are. I’d like see Charles Gibson try to live a year on $40,000. It would make a good story for ABC.

A New York Times study, Class Matters, published in 2005 examines components of “class” and U.S. Census data to estimate class status. The Class Matters study focuses on four components of class: Occupation, Education, Income, and Wealth. An interactive chart is available at this New York Times page. Once there, click on the tab “Components of Class” to get to the chart that looks like this.

Each of the four components are ranked in percentiles, 1 to 99. Here are some examples within each major component:

Occupation – Percentile Rank
Physicians – 99
Credit Analyst – 48
Retail Sales – 25

Education – Percentile Rank
Doctorate – 99
Bachelor’s Degree – 91
High School Diploma – 48
12th Grade no diploma – 19

Income – Percentile Rank
$100,000 – 93
$40,000 – 56
$20,000 – 18

Wealth – Percentile Rank
$1 to $5 Million – 98
$50,000 to $100,000 – 55
$0 to $5,000 – 25

After choosing a specific category or dollar value, Components of Class calculates an average percentile. Perhaps one of the weaknesses of the calculator is it does not offer a choice for negative wealth. It may be that the New York Times doesn’t think that massive debt should detract from class status. Nor is it clear how they calculate “wealth.” Is it based on the fair market value of our “stuff” or replacement cost?

Despite need for some clarification, the Class Matters Components of Class calculator is a reasonably fair method for characterizing the “ladder” of American social and economic status. It also makes pretty clear that Americans in the bottom 2 quintiles (40% of workers) are in tough shape due to lack of education and low wages.

The March data from the Bureau of Labor Statistics indicates that inflation rose faster than wages for non-managerial workers in the private sector, who make up about 80% of the American workforce. The key data:

Consumer Price Index (CPI) +0.3%
Average Hourly Earnings (AHE) +$0.05 or +0.28%
Average Hourly Wage $17.86/hour

Calculating March increase in earnings adjusted for inflation:
AHE – CPI = 0.28-0.30 = -0.02.
March Simplified Stagflation Index = -0.02 X 100 = -2.

There’s more about the Stagflation Index here.

The Simplified Stagflation Index (SFI) fell 27 points from last month to end at -17. This is bad news for non-managerial workers in the private sector, which is about 80-percent of the work force in the United States.

The SFI is derived from the Consumer Price Index and Average Hourly Earnings published monthly by the U.S. Bureau of Labor Statistics

Over the past 12 months, the SFI has been negative eight months and positive four months. Overall, wages have not kept up with prices.

More about the SFI and how I calculate it can be found here.

Forget the futile and fiscally irresponsible temptation to stimulate the economy by borrowing more money. The tax rebate currently being discussed would be nice to have show up in the mail, but it is just another loan. If the politicians really believe that it’s key to put money into the hands of lower income families who will spend it, then the right thing to do is raise the minimum wage.

Today, the U.S. minimum wage is $5.85, although some states have set higher standards.

In Canada, minimum wage is set by the ten provinces. In Quebec and Ontario, the two most populus provinces, the minimum wage is $8.00 (Canadian dollar) per hour. The Canadian and U.S. dollars are close to parity.

In the U.K., minimum wage is 5.52 Lbs per hour for workers over 22 years of age. That’s about $10 per hour U.S.

The minimum wage in the U.S. should be no less than $8.75 per hour (about half of the average pay for non-managerial workers in the private sector) and this change could be made immediately.

No more ATM cash advance economics; no more credit card prosperity to grow the budget deficit.

Our economy should reward work by paying a living wage.