Market Magic

An article in the New York Times highlights the following two charts which were taken from an article soon to be published in an economics journal.

 

 

 

It is pretty apparent that for some time only a small segment of the US population gains from our economic expansions, the period when our economic system is supposed to be working well.  And of course few people enjoy any benefits from periods of recessions. 

 

It kind of makes you wonder why ordinary people would want to defend our existing system. 

Immiserating Growth

Federal Reserve Board survey data on wealth certainly imply that it is getting harder and harder to succeed in our economy.

Steve Roth has created some great charts using this data, which is based on surveys done every three years beginning in 1989.  The chart below looks at the median real (or inflation adjusted) household net worth by the age of the head of household. Each line shows the real net worth of a household headed by the relevant age group.  In other words it allows us to compare the real net worth of a representative household headed by a 35-44 year old in 1989 with the real net worth of a similarly representative household headed by a person of the same age range in 2013.  We are not looking at the fortunes of the same household as its head ages, but rather at households at different periods to see how age cohorts have fared over time.

The chart shows that households, with the exception of those headed by people 65 years and older, were worse off in 2013 than they were in 1989.  For example, the representative household headed by someone 35-44 had far less wealth in 2013 than the representative household headed by someone from the same age range had in 1989.

The following chart makes it easier to see such trends by focusing on changes over the period 1989 to 2013.

When a line falls below 100 it means that the representative household in the specific age grouping was poorer that year than it was in 1989. It is striking that many household groupings grew poorer over the decade of the 2000s, years before the 2008 crisis, when our economy was supposed to be the envy of the world.

The growth in inequality might be one reason this immiseration has been missed.  While the representative household defined by the age of its head might be growing poorer over time, a small number of households in each group might be enjoying ever greater riches, thus possibly confusing people about the nature majority experience.

The next chart looks at changes over time in the mean: median ratio for the different household groupings.  The greater the ratio, the more inequality within the household grouping.  Inequality within all household groupings, except those headed by someone 75 years or more, has grown over time.  The real standout is the household grouping headed by those 35-44 years of age; while the income of the typical household has been falling (see the chart above), some of its members have really been hitting it rich (as illustrated in the chart below).

 In sum, while wealth does grow with age, trends strongly suggest that the American experience is moving in reverse.  Households with similar aged heads are growing poorer not richer over time.

Minimum Wage Hikes Work

As workers battle to raise the minimum wage it is nice to see more evidence that raising the minimum wage helps low wage workers and state economies.

Thirteen states raised their respective minimum wages in 2014:  AZ, CA, CT, FL, MO, MT, NJ, NY, OH, OR, RI, VT, and WA.  Elise Gould, an economist at the Economic Policy Institute, compared labor market changes in these thirteen states with changes in the rest of the states from the first half of 2013 to the first half of 2014.

Economic analyst Jared Bernstein summarizes the results as follows:

Elise compares the 10th percentile [lowest earners] wage growth among these thirteen states that increased their minimums with the rest that did not. The results are the first two bars in the figure below.

Real wages for low-wage workers rose by just about 1% over the past year in the states that raised their minimum wages, and were flat (down 0.1%) in the other states.

OK, but did those increases bite into employment growth, as opponents typically insist must be the case? Not according to the other two sets of bars. They show that payroll employment growth was slightly faster in states that raised, and the decline in unemployment, slightly greater.

In short, raising the minimum wage did boost the earnings of those at the bottom of the income distribution.  Moreover, workers in states that raised the minimum wage also enjoyed greater employment growth and a greater decline in unemployment than did workers in states that did not.

Privatization Failure

Swedes will be going to the polls Sunday, September 14, and according to the Guardian it appears that they will vote the ruling center-right coalition out of power.  The main reason: the privatization of public services has not produced good results.  If Americans can learn from this experience we might avoid a real disaster.

Excerpts from the Guardian article:

Over the past three years, cracks have shown in the Nordic model, most notably with last year’s riots in the suburbs of Malmö and Stockholm, and the rise of the far-right Sweden Democrats, which is polling at almost 10%. Income gaps have increased by a third, more than in any other OECD country, and unemployment benefit has fallen below the European average.

Formerly called John Bauergymnasiet, Grillska used to be one of Sweden’s publicly funded but privately run friskolor (free schools) until its owner, the Danish private equity company Axcel, filed for bankruptcy last April.

Since then, the school has been managed – and improved – by Stockholm’s Stadsmissionen, a non-profit charity. But the John Bauer scandal has made many Swedes question the pro-privatization policies of the government, led by the Moderate party’s Fredrik Reinfeldt. . . .

A series of scandals has made many Swedes question the private sector’s role in public services. Axcel was accused of trying to maximize profits by saving on teachers’ wages and lowering the teacher-student ratio below the national average; the privately run Hälsans chain of preschools was reported to serve its pupils crispbread and water for lunch, having budgeted only nine kronor (87 p) a student for food.

No other state in Europe had been as generous in allowing the private sector free access to its pupils. The proportion of employees in privately provided services rose from 5% in 1993 to 23% in 2011.

“Overnight, the debate changed,” said Roger Jakobsson, Grillska’s head of education. “For years, people had been accusing schools run by private equity of pocketing the state’s money and putting it into their offshore bank accounts. But now it looked like these companies weren’t even capable of running a business properly.”

The education changes ushered in by the conservative government in 1992 promised to improve the quality of teaching in Swedish schools. Instead, the Programme for International Student Assessment saw the homeland of the Nobel prize drop below the OECD average in maths, reading comprehension, natural science and problem solving. Grade inflation, meanwhile, was rampant.

The care sector also suffered a privatisation scandal in 2011, when the Dagens Nyheter newspaper reported that an elderly care centre in Koppargården, run by the private company Carema, was catastrophically neglecting its customers, allegedly weighing their diapers to see if they could be used for longer, thus ensuring maximum usage and lower costs. . . .

Complaints about poor service and frequent delays on the high-speed train between Malmö and Stockholm also swung the mood against rail privatisation of the railways. How was it, some asked, that information centres were closing at train stations while Sweden’s popular, 100% state-owned Systembolaget alcohol stores could afford staff who advised on which wine went best with reindeer stew?

Under prime minister Reinfeldt, Sweden for the first time discovered an appetite for tax cuts. Wealth tax, income tax and corporate tax were slashed. Tax breaks for domestic services such as cleaning or babysitting (RUT) and relief on household renovations (ROT) have been popular with the middle classes. . . .

But surveys show that Swedes’ willingness to pay higher taxes has risen recently. As columnist Fredrik Virtanen said in Aftonbladet newspaper: “Taxes are the price we pay for civilisation. Not only is it cool to pay taxes, it’s sexy.”

Even Reinfeldt has bowed to the polls and vowed there would not be further tax cuts until 2018. Finance minister Anders Borg is still popular, and Sweden’s public debt, at 40% of GDP, is half that of Germany, but unemployment remains a problem in spite of liberal reforms in the labour market.

“The Moderates and their allies have gradually lost the argument about the future,” said Eric Sundström, political editor of Dagens Arena website. “They have failed to recognize how even the middle class is upset with the perceived general decline of schools and welfare services.”

No Light, No Tunnel

People are slowly but surely recognizing that there is no economic light at the end of the tunnel.  In fact, it appears that we may be looking into a cave not a tunnel.

The U.S. economy has undergone a major transformation.  Globalization, financialization, privatization, deregulation, and liberalization, to mention just a few of the developments that define this transformation, have created an economic system that rewards only a very few people.

The chart below shows these are good times for those at the top–economic profits are up and the stock market is soaring over this expansion period.  But what about for the great majority? Growth is slow and even more importantly median household (HH) income has actually fallen by 3 percent.

The following two charts highlight some of the pressures facing working people.  The first shows that the average earner, the one at the 50^th percentile, has suffered a 2.7 percent real decline in hourly wages since 2007.  The decline has actually been much greater since 2009, when the recession allegedly ended and the good times began.  Even those at the 95 percentile have suffered real hourly declines since 2009.

The second shows that family income has fallen for almost all income groups over the period 2007 to 2012.  We can get some idea of the transition period by comparing income trends in the three periods shown. Suppressing wages is one way to boost profits and stock prices in a period of slow growth.

As I said above, people are beginning to recognize that current trends are no aberration.  A recent Rutgers University poll asked Americans how they viewed the Great Recession and its aftermath.  The figure below present the results.

Here is what the Rugers researchers had to say:

The survey finds 71 percent saying the recession left us with “a permanent change in what are normal economic conditions in the country.”  Moreover, the belief that the economic downturn created irreversible shifts in the economy grew from 49 perent in November 2009 to 56 percent in September 2010, and to 60 percent in Janary 2013.  Now, 71 percent of Americans think the economy has changed permanently, which represents a broad consensus.

At least some people are drawing the appropriate conclusion—they are taking direct action to improve their working and living conditions.  As the Guardian reports: 

America’s fast food workers are planning their biggest strike to date this Thursday (September 4^th), with a nationwide walkout in protest at low wages and poor healthcare.

The strike is the latest in a series of increasingly heated confrontations between fast food firms and their workers. Pressure is also mounting on McDonald’s, the largest fast food company, over its relations with its workers and franchisees. . . .

Workers from McDonald’s, Burger King, Pizza Hut and other large chains will strike on Thursday and are planning protests outside stores nationwide, in states including California, Missouri, Wisconsin and New York.

The day of disruption is being coordinated by local coalitions and Fast Food Forward and Fight for 15, union-backed pressure groups which have called for the raising of the minimum wage to $15 an hour for the nation’s four million fast-food workers.

Thursday’s strike will be the seventh since fast food workers in New York walked out on their jobs in November 2012. Each walkout has been bigger than the last and have been credited with spurring President Barack Obama to focus on an increase in the minimum wage.