Owning The Economy

The stock market looms large in our understanding of the economy.  The business news is often little more than a report on the movement of the market.  High school economics classes often introduce the study of the economy to students by encouraging them to pick and follow a favorite stock.  Managers of corporations are judged by how well their actions result in higher stock prices.

All this could easily lead one to think that the great majority of Americans are stockholders.  In fact, as the chart below shows, very few Americans own significant shares of stock and therefore directly benefit from the market’s rise.  

  

It is easy to understand why the top earners are happy with this identification of the economy with the stock market.  It ensures that economic activity is largely organized and outcomes evaluated with their interests in mind.  What is not so easy to understand is why the great majority of working people continue to accept this identification.

 

Taxes And The Wealthy

There are those that argue that lowering the top marginal tax rates on “ordinary” income (from wages or salary) and capital gains will stimulate economic growth.  Thomas L. Hungerford, in a Congressional Research Report, tests and rejects this claim.

He finds no statistical relationship between changes in either of these top tax rates and private savings, investment, productivity, or real per capita GDP growth.  However, he does find a strong statistical relationship between changes in these tax rates and income inequality.  More specifically, raising top tax rates can be expected to promote greater income equality without causing harm to the economy. 

Tax Trends

There are two main tax concepts—the marginal tax rate, which is the tax paid on the last dollar of income received, and the average tax rate, which is the proportion of all income that is paid in taxes.  How much a person pays on the last dollar received depends on whether it is classified as ordinary income or capital gains.

Most importantly, as the chart below shows, the very top tax payers have enjoyed a steady decline in their average tax rate.

The next chart shows trends in top marginal tax rates on ordinary income and capital gains.  The top marginal tax rate on ordinary income has clearly been on the decline: from 91% in the 1950s, 70% in the 1960s and 1970s, to a low of 28% in 1986.  It now stands at 35%.  The top marginal capital gains tax rate has not changed as much.  It was 25% in the 1950s and 1960s, 35% in the 1970s, and is now 15%.

The Tests

Hungerford used econometric methods to test whether changes in top marginal tax rates affect private savings, investment, productivity, and/or per capita GDP growth.  Simply plotting the movement of top tax rates and each of these variables suggests that a decline in top tax rates is associated with a positive movement in each of these economic variables.

However, as Hungerford correctly states, correlation is not the same as causation.  Using regression analysis, he found that the relationships were only coincidental or spurious; there was no statistically significant connection between changes in the top tax rates and movements in any of the variables.

Hungerford also tested to see if changes in top marginal tax rates had any effect on the distribution of income.  The first chart below shows the scatter plot of top tax rates and the share of income going to the top 0.1% for the years 1945-2010.  The second shows the same with the top 0.01% of income earners.

As we can see the fitted lines suggest a very strong relationship between the variables.  As before, Hungerford used regression analysis to determine whether the relationships were statistically significant.  This time his answer was yes in both cases; changes in top marginal tax rates do affect income concentration.  In other words, lowering the top rates increases income inequality, raising them reduces it.

It is time for us to start agitating for raising the top tax rates.

 

The Continuing Relevance of Class

Politicians always seem to be talking about the middle class.  They need some new focus groups.  According to the Pew Research Center, over the past four years the percentage of adult Americans that say they are in the lower class has risen significantly, from a quarter to almost one-third (see chart below). 

Pew also found that the demographic profile of the self-defined lower class has also changed.  Young people, according to Pew, “are disproportionately swelling the ranks of the self-defined lower classes.”   More specifically some 40% of those between 18 to 29 years of age now identify as being in the lower classs compared to only 25% in 2008.

Strikingly the percentage of whites and blacks that see themselves in the lower class is now basically equal.  The percentage of whites who consider themselves in the lower class rose from less than a quarter in 2008 to 31% in 2012.  This brought them in line with blacks, whose percentage remained at a third.  The percentage of Latinos describing themselves as lower class rose to 40%, a ten percentage point increase from 2008.

And not surprisingly, as the chart below shows, many who self-identify as being in the lower class are experiencing great hardships.   In fact, one in three faced four or all five of the problem addressed in the survey.

 In short, there is a lot of hurting in our economy. 

 

 

 

Low-Wage Employment Recovery

The media has focused on the lack of jobs as a major election issue.  But the concern needs to go beyond jobs to the quality of those jobs. 

As a report by the National Employment Law Project makes clear, we are experiencing a low wage employment recovery.  This trend, the result of an ongoing restructuring of economic activity, has profound consequences for issues of poverty, inequality, and community stability.

The authors of the report examined 366 occupations and divided them into three equally sized groups by wage.  The lower-wage group included occupations which paid median hourly wages ranging from $7.69 to $13.83.  The mid-wage group range was from $13.84 to $21.13.   The higher-wage group range was from $21.14 to $54.55. 

 

The figure below shows net employment changes in each of these groups during the recession period (2008Q1 to 2010Q1) and the current recovery (2010Q1 to 2012Q1).   Specifically:

• Lower-wage occupations were 21 percent of recession losses, but 58 percent of recovery growth.
• Mid-wage occupations were 60 percent of recession losses, but only 22 percent of recovery growth.
• Higher-wage occupations were 19 percent of recession job losses, and 20 percent of recovery growth.

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The next figure shows the lower-wage occupations with the fastest growth and their median hourly wages.  According to the report, three low-wage industries (food services, retail, and employment services) added 1.7 million jobs over the past two years, 43 percent of net employment growth.  According to Bureau of Labor Statistics projections these are precisely the occupations that can be expected to provide the greatest number of new jobs over the next 5-10 years.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As the final figure shows, the decline in mid-wage occupations predates the recession.  Since the first quarter of 2001, employment has grown by 8.7 percent in lower-wage occupations and by 6.6 percent in higher-wage occupations.  By contrast, employment in mid-wage occupations has fallen by 7.3. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Significantly, as the report also notes, “the wages paid by these occupations has changed. Between the first quarters of 2001 and 2012, median real wages for lower-wage and mid-wage occupations declined (by 2.1 and 0.2 percent, respectively), but increased for higher-wage occupations (by 4.1 percent).”

A New York Times article commenting on this report included the following:

This “polarization” of skills and wages has been documented meticulously by David H. Autor, an economics professor at the Massachusetts Institute of Technology. A recent study found that this polarization accelerated in the last three recessions, particularly the last one, as financial pressures forced companies to reorganize more quickly.

“This is not just a nice, smooth process,” said Henry E. Siu, an economics professor at the University of British Columbia, who helped write the recent study about polarization and the business cycle. “A lot of these jobs were suddenly wiped out during recession and are not coming back.”

Steady as she goes is just not going to do it and changes in taxes and spending programs, regardless of how significant, cannot compensate for the increasingly negative trends generated by private sector decisions about the organization and location of, as well as compensation for production.