Searching for the Global Middle Class

The latest hype, designed no doubt to take attention away from declining living and working conditions in core economies, is that a new global middle class is emerging.  The implication is that capitalist globalization continues to work its “magic,” although now it is happening in the so-called third world.  Reality doesn’t match the hype.  Search all you want—it is hard to find real evidence of the emerging new global middle class.

Steve Knauss highlights the talk:

Over half the world will be middle class by 2030, predicts the United Nations Development Program (UNDP) in its report on “the Rise of the South.” The Economist, not known to be shy, claims we’re already there, thanks to “today’s new bourgeoisie of some 2.5 billion people” across the global South that have become middle class since 1990. The OECD, perhaps the boldest of all, postulates that India – currently one of the poorest countries on earth – could find more than 90 percent of its population joining this “global middle class” within 30 years, from around 5 or 10 percent today.

It all sounds pretty impressive until you learn how membership in the new global middle class is determined.  It includes those whose real income (in purchasing power parity dollars) is at least $10 per day.  That means at least $3650 in annual earnings gets you membership in the new global middle class.

To appreciate how low that figure is one has to know what purchasing power parity means and how it is used to calculate income.  There are two main ways to make comparisons in earnings across countries, something needed for global claims.  One is to convert national earnings into dollars using the exchange rate.  However, this is not considered very reliable.  Exchange rates move all the time, making comparisons unreliable.  Even more problematic, many of the goods and services people consume are not internationally traded so changes in exchange rates do not affect their well-being.

The other method, the one most commonly used, relies on purchasing power parity calculations.  In brief, the World Bank constructs a basket of consumer goods and services and determines its dollar cost in the United States in a particular year; the most recent year was 2011.  Then, it determines the national cost of a similar basket in other countries.  Finally, it calculates a purchasing power parity exchange rate for the dollar and the currencies of these other countries using these relative costs.

An example: suppose that the constructed basket of goods costs $200 in the US.  And suppose that the “equivalent” basket of goods costs 800 Rupees in India.  We can then can construct a purchasing power exchange rate between the two currencies.  In my example, 1 Rupee equals $0.25.  Or said differently an Indian with 4 Rupees is said to be able to command the same value of goods and services as someone in the US who has $1.  Thus, an Indian earning 8000 Rupees would be said to earn the equivalent of $2000.

Of course this method has its own difficulties.  For example, imagine how hard it is to develop national indices that are equivalent.  How do we calculate the average price of a good or service in a country?  And are the goods and services in one country, say the US, really equivalent to the goods and services in another country, say India?

Regardless, putting doubts about the methodology aside, we can now return to our standard for reaching the global middle class.  Our international agencies seek to count individuals who earn the annual equivalent of $3650 in the US as middle class.  That certainly seems like a stretch!

The following chart highlights the distribution of global income in purchasing power dollars using development agency categories.

earnings

As Knauss explains:

Even taking the data at face value, 71 percent of humanity is poorer in real terms than the $10 PPP threshold. . . . This is compared to 79 percent in 2001, owing to a modest increase in families crossing the $10 PPP line but remaining concentrated very close to it . . . . There was consequently an expansion of those living on between $10 and $20 per day from 7 percent of humanity in 2001 to 13 percent today.

That’s it. That’s the whole basis for the “global middle class” hype. If one were to select even a slightly more reasonable standard – for example, $20 PPP, or the real living standard equivalent of a family of four in the United States with a total income above $29,200 – there is no global middle class to speak of whatsoever. Only 16 percent of humanity – 13 percent in 2001 – enjoys this standard of living, composed of the majority of the population across the West, where real substantial middle classes exist, and the elites in the South, very rarely more than 15 or 20 percent of the population, and much more often substantially less.

Still, a look at the chart does show a significant fall in the share of world population that made less than $3 a day.  This however appears largely due to “the historic wave of ‘depeasantization’ throughout the neoliberal era.”  In other words, as people are forced off the land and into urban areas they become part of the cash economy.  Whether their higher money wage compensates for their loss of access to land is another issue, one that should make us pause before declaring them better off.

More generally, the gains over the 2001 to 2011 period were driven by international processes that are now moving in reverse.  The global economy is clearly slowing.  Already declines in exports of manufactures and commodity prices are undoing past gains in poverty reduction in Asia, Africa, and Latin America.

Capitalist globalization does indeed appear to be working magic.  But, as Oxfam’s recent report shows, only for the benefit of those at the top of the income scale.

  • In 2015, just 62 individuals had the same wealth as 3.6 billion people – the bottom half of humanity. This figure is down from 388 individuals as recently as 2010.
  • The wealth of the richest 62 people has risen by 44% in the five years since 2010 – that’s an increase of more than half a trillion dollars ($542bn), to $1.76 trillion. Meanwhile, the wealth of the bottom half fell by just over a trillion dollars in the same period – a drop of 41%.
  • Since the turn of the century, the poorest half of the world’s population has received just 1% of the total increase in global wealth, while half of that increase has gone to the top 1%.
  • The average annual income of the poorest 10% of people in the world has risen by less than $3 each year in almost a quarter of a century. Their daily income has risen by less than a single cent every year.

inequality

 

US Policy Fails To Protect Our Climate

Governments were charged by the UN to develop national plans for combating climate change in advance of the upcoming 2015 United Nations Climate Change Conference, which will be held in Paris from November 30 to December 11.  These “Intended Nationally Determined Contributions” are to be used by the climate treaty secretariat to create a draft agreement for discussion and approval at the Paris conference.

The US government submitted its Intended National Determined Contribution in May.  In it, the government stated that the US intends to reduce its economy-wide greenhouse gas (GHG) emissions 26-28 percent below 2005 levels by 2025.  It calls this target “fair and ambitious.”

However, as the just released report–Captain America, US climate goals: a reckoningauthored by the New Delhi Center for Science and the Environment, makes clear, this commitment is anything but fair and ambitious.

As the report points out, the 2005 baseline is key to US claims of climate change progress.  Most importantly, US greenhouse gas emissions hit a post-1990 peak in 2005 and trended down over the following years.  Setting its target against this base year rather than the 1990 base year that was widely endorsed in past UN meetings greatly eases the ability of the US to meet its own self-declared target.  This recent decrease in emissions has also allowed the US to falsely present itself as part of the climate change solution not problem.

As we can see in the graph below, despite the reduction in recent years, US emissions were still greater in 2013 than they were in 1990.  Thus, the US has not actually begun reducing its emissions relative to 1990.

picture 1

Moreover, as we see in the next graph, US emissions fluctuate yearly and the post-2005 reduction is likely more the result of the recent major recession and weak economic expansion, not a restructured and more environmentally stable economy.  In fact, emissions have begun to grow again.

picture 2

As the Center for Science and the Environment explains:

Whereas 1990 is the baseline fixed in the global climate convention for nations to reduce GHG emissions, the US’ choice is 2005. It is the first mask the US wears to veil its climate-inaction. The US has cleverly used 2005 as its base year because, 1990-2005, the US allowed its emissions to grow, whereas it should have actually been reducing its emissions. The masking effect of 2005 as a base to reduce emissions translates to millions of tons of CO2 emissions the US has cloaked — that, for some reason, the world has failed to notice.

If we calculate the US emissions target using a 1990 baseline, its pledge translates into a far more modest reduction of 13-15 percent by 2025. This is even lower than what it had pledged at the 2010 Cancun UN climate meetings.  In percentage as well as absolute terms, the US INDC trails that of many countries, including that of the EU-28.

The year 2005 was important to the US for yet another reason.  It was the last year that the US was the world’s largest yearly emitter of greenhouse gasses.  China now holds the title.  This development has helped the US shift public attention from its own historical responsibilities for our global climate change crisis to the rising emissions of emerging economies like China and India.

However, the US still remains one of the world’s top greenhouse gas emitters on a percapita basis, as we can see in the following graph.

picture 3

And, the US is still the biggest historical emitter of greenhouse gases.  As the Center for Science and the Environment explains:

So far, we have looked at the ‘flow’ of US emissions. But what of the stock: 411 billion tons CO2, emitted 1850-2011?  The US has borrowed from the global commons a share of other countries’ carbon space to become the economic powerhouse it is today. This is its natural debt. And, as with a financial debt, the natural debt needs to be paid. Try as it might, the US cannot erase its historical emissions from its climate action record. CO2 is a gas with a past, present and future. Once emitted, it stays in the atmosphere. So, the US’s past emissions are a legacy that must be accounted for in any future emissions reduction plan or move. 1850-2011, the US was responsible for 21 per cent of CO2 emissions in the atmosphere.20 emissions have caused the warming we see today, whose impacts are now devastating the lives of the poorest. It has the capacity. But it also has the responsibility to reduce emissions. Not by tinkering year-to-year, or creating a perceptual veneer of reduction, but rather through drastic reductions that make space for the rest of the world to grow.

picture 4

The report, which examines US energy production, consumption, and policies in great detail, makes clear that the US has yet to take meaningful steps to create a more ecologically responsible economy.  In fact, as we see next, the US has become the world’s biggest producer of oil and natural gas and its fossil fuel consumption continues to grow.

picture 5

Tragically, US determination to continue with business as usual will likely mean that the upcoming UN conference will once again be long on speeches and short on meaningful action. Unfortunately, there is no fooling the climate or avoiding the consequences of inaction.

Down, Down Goes Income

The Federal Reserve has announced that it is holding off on an interest rate hike; the last time it raised rates was in 2006.  The reason for the lack of action: the Federal Reserve believes the economy remains fragile and, since inflation remains low, it doesn’t want to do anything that might bring the expansion to a halt.

In reality our economic problems go much deeper than slow growth and economic fragility.  Bluntly said, most workers are losing ground regardless of whether the economy is in recession or expansion.

The following chart, from a New York Times article, shows the movement in real, inflation adjusted, median household income from 1999 to 2014.

income trends

The median household income was $53.657 in 2014.  That was 1.5 percent below what it was in 2013.  Perhaps even more disturbing, as the New York Times article notes:

The 2014 real median income number is 6.5 percent below its 2007, pre-crisis level. It is 7.2 percent below the number in 1999.

A middle-income American family, in other words, makes substantially less money in inflation-adjusted terms than it did 15 years ago. And there is no evidence that is reversing. . . .

The depressing data on middle-class wages is true across almost all groups based on race and age. (One exception is a 5.3 percent gain in median wages among Hispanics in 2014, though that is within the statistical margin of error and so may not be meaningful).

And there is good reason for believing that things are unlikely to improve in the near future.  As a recent study by the National Employment Law Project makes clears, real wages are continuing to fall for most workers.

The authors of the National Employment Law Project study “calculated the percentage change in real median hourly wages from 2009 to 2014 for 785 occupations, which were grouped into quintiles, each representing approximately one-fifth of total employment in 2014.”  Figure 1 shows the change in real wages for each of the five quintiles over the period.  As we can see, real median hourly wages fell across the board, with the overall median wage falling by 4 percent.

occupation 1

Figure 2 keeps the same wage groupings but shows the change in wages for both the highest (90th percentile) and lowest (10th percentile) earners in each wage quintile. As we can see, with the exception of occupations in the lowest paid quintile, the fall in wages was greater for those in the bottom percentile than for those in the top percentile.  That said, the most striking fact is that all suffered declines in real wages.

occupation 2

Steady as she goes, which seems to be the strategy of most policy-makers, is unlikely to turn things around.

Not A Happy Labor Day

Sadly most working people in the U.S. continue to lose ground despite overall economic growth.  As an Economic Policy Institute report makes clear, wage stagnation has deep roots in the workings of the economy and policies simply designed to spur growth are unlikely to change things.

Figure A from the report shows trends in economy wide net productivity and average hourly compensation for production/non-supervisory workers over the period 1948-2014.

Figure A

Productivity is a measure of the national output produced by an average hour of work.  Its increase over time highlights the potential for raising majority living standards.  Here, and in the following figure, we are actually looking at net productivity, which shows output after subtracting depreciation of plant and equipment.  The “typical” worker is represented by production/non-supervisory workers who comprise approximately 80 percent of the U.S. labor force.  Their real hourly compensation includes wages and employer-paid benefits.

The trends in Figure A show that over the period 1948 to 1973 the typical worker enjoyed gains in real compensation commensurate with the increase in productivity.  However, the situation from 1973 to 2014 is far different. In this latter period, the typical worker received little if any benefit from their contribution to increased net output.  Said differently, they suffered from wage stagnation despite a growing economy.

We can learn more about why from Figure B, which covers only the latter period.

Figure B

While Figure B has the same measure of productivity as Figure A it includes two different measures of compensation: the real average hourly and the real median hourly compensation for all workers.

Median hourly compensation is probably the variable that best captures the “typical” worker’s earnings.  It was not used in Figure A because data for this variable only dates to 1973.  Figure B shows that real median compensation for all workers has actually been trending down over the last few years of our so-called expansion.

Growing income inequality is one reason for this wage stagnation.  As we can see, there is an ever larger gap between hourly average and median compensation.  This gap reflects the fact that a growing share of labor compensation is going to a small percentage of the labor force, thus driving the average up but not the median.  This divergence between the two compensation series is not surprising since we are looking at wage trends for all workers, which means we are including the salaries paid to managers and CEOs and their earnings from stock options and bonus pay.

But, as we can also see, there still remains a widening gap between compensation and productivity even accounting for the explosion in compensation inequality.  This remaining gap is explained by two developments.  The first is that there has been a change in power relations between owners of capital and workers, which has enabled the former to shift the distribution of national income to their favor at the expense of the latter. In other words, corporations are now keeping a larger share of national income for their own use, increasingly to fund mergers, stock buy-backs, and dividend payments.

The second is the divergence between consumer and output prices.  Real labor compensation is measured relative to the prices of consumer goods and services.  Real output, the basis for the productivity calculation, is measured relative to the prices of all goods and services produced, consumer and non-consumer.  Since consumer goods prices have been rising faster than overall prices, real labor compensation grows more slowly than productivity.

The authors of the Economic Policy Institute report estimate the relative importance of these three factors in explaining the overall gap between median labor compensation and net productivity.  Over the entire 1973–2014 period, 58.9 percent of the gap was due to compensation inequality, 11.5 percent to the loss of labor’s share of income, and 29.6 percent to the price divergence.  Looking just at the period 2000-2014, the totals were 45.2 percent, 38.8 percent, and 16 percent, respectively.  The results for the latter period make clear that wage stagnation is increasingly caused by the growing strength of corporate power.

The takeaway: an end to wage stagnation will require worker organizing aimed at curtailing the power of corporations and those at the top of the income scale, who of course largely represent business interests.  The increasingly successful struggles across the country to win $15 an hour minimum wages and new rulings by the National Labor Relations Board that strengthen worker and union rights are important steps in the right direction.

Taxes and Militarism

Tax day has come and gone.  And there is indeed a lot to complain about: our corporations and the wealthy have successfully minimized their own tax responsibilities, leaving us to support a powerful and profitable military-national-security-industrial complex at the expense of needed public services and social programs.

Let’s start with who pays taxes.  Individuals and corporations both pay income taxes to the federal government.  However, as the chart below shows, corporations have been able to take advantage of increasingly lenient income tax laws and a corporate friendly globalization process to significantly lower their tax obligations.  If we add payroll taxes which are paid by individuals to support specific programs like Social Security and Medicare, the overall individual contribution is approximately 80% and the corporate share about 11%.

ind_and_corp_tax_line_chart_large

Lower corporate taxes were supposed to unleash the power of the market and make us all better off.  Unfortunately, but not surprisingly, all they have done is boost corporate profits at the public expense.

Of course, income tax burdens are not equally divided among individuals.  In fact, our federal income tax code has become increasingly favorable to higher income earners.  As the next chart shows, the top marginal income tax rate has been dramatically reduced.  The top marginal tax rate was 50 percent in the mid-1980s and even higher in the 1950s.  Currently, the top rate is 39.6 percent; it is paid by individuals making more than $406,750 and couples making more than $457,600.  And then there are tax breaks that disproportionately benefit top income earners.

11economist--folbre2-blog480

The combination of more income going to top earners, lower top marginal tax rates, and specially crafted tax breaks cannot help but reduce federal tax revenues and drive up our federal deficits.

The payment of income taxes is one thing—how the federal government uses the money it receives is another.  As we see next, military related activities absorb a heavy share of federal spending.

tax_dollor,_labels_edited_large

Direct spending on the military accounted for 27 cents of every dollar spent.  Including spending for veterans benefits and approximately two-thirds of the interest on the federal debt adds another 16.05 cents, which brings the overall military total to 43.05 cents out of every dollar spent.  This is a conservative estimate because it does not include spending on activities that fall under the broader heading of national security such as homeland security and certain “foreign aid” expenditures.  No wonder our infrastructure and social programs are starved for funds.

Federal spending can be divided into non-discretionary and discretionary items.  In the case of the former, spending is mandated by law, such as payment of the national debt.  In the case of the latter, the federal government has discretion in how it spends our tax money.  Looking just at discretionary spending reveals even more clearly the dominant position of the military in our budget priorities.

discretionary-desk

Moreover, political pressure keeps working to push the military share higher.  Both House and Senate budget proposals call for spending some $530 billion on defense in Fiscal Year (FY) 2016.  That is the most that can be spent without triggering automatic spending cuts due to sequestration.  But – happily for the military – there is an exception to the sequestration process.

The exception allows Congress to authorize unlimited spending for current military operations or what is officially known as Overseas Contingency Operations.  House and Senate proposals include more than $90 billion under this heading.  Significantly, there is no similar exception when it comes to spending on non-military, discretionary items.  Apparently our non-military needs don’t rise to the same level of urgency as our military ones.

A few key changes in the tax code and federal spending priorities and a better 2016 tax day is not hard to imagine.

The Rich Rule

The dominance of the 1% is now widely accepted.  What is often missed is the fact that their dominance was built on a major transformation of the U.S. economy beginning in the early 1980s and that U.S. policy, which helped to usher in that transformation, has largely been committed to reinforcing it.  An NPR Planet Money post includes two charts that vividly highlight this transformation.

The chart below shows trends in the average inflation-adjusted pre-tax income for both the bottom 90% and the top 1% of the U.S. population.  From the early 1940s to the early 1970s, the bottom 90%—the great majority of the population—enjoyed a steady growth in their average real income while the top 1% saw little growth (to their already substantial total).

However, beginning in the early 1980s, thanks to the intensification of globalization, privatization, deregulation, and attacks on unions and social programs, things dramatically changed.  Now it was the top 1% that saw all the income gains.  In fact, as the chart makes clear, the real average income of the bottom 90% has actually been in decline.

Income inequality trend

 

The following chart offers an even more dramatic way to see this change in relative “fortunes.”  Each data point represents the average real pre-tax income of the bottom 90% and the top 1% for the given year.  The vertical greenish line illustrates the fact that between the early 1930s and 1970s only the bottom 90% saw income gains.  The horizontal red line illustrates how beginning in the early 1980s all the income growth went to the top 1%.

 

Inequality by year

 

One take away: no change in policy, no change in income distribution.

The Disappearing State Unemployment System

Business has failed to create the jobs we need and our public policies are failing to protect those who are unemployed.

As an Economic Policy Institute report explains:

The drop in the official unemployment rate overstates the overall improvements made in the underlying labor market. The United States lost 7.8 million jobs between December 2007 and October 2010 but the working-age population continued to grow over that period. As a result, even with steady job growth in recent years, the current labor market is still short 5.6 million jobs needed to keep up with the growth in potential labor force (see Figure A).

 Jobs

And, as of December 2014, only 23.1 percent of unemployed workers received any state unemployment benefits (see Figure B).  One reason is the nature of many of the recently created jobs: they are short term and low paying; this leaves workers without the work record or earnings necessary to draw benefits.  Another reason:

since 2011 nine states have cut the maximum available number of weeks of regular UI benefit duration [to below the long-accepted norm of 26 weeks] : Arkansas, Florida, Georgia, Illinois, Kansas, Michigan, Missouri, North Carolina, and South Carolina. Except Illinois, all these states made other legislative changes to their programs which may have reduced benefit recipiency.

 Unemployment

Times are not easy even for those lucky enough to receive the benefits they earned:  As the Economic Policy Institute report notes:

Many states pay low benefits. There were 11 states with maximum weekly benefit levels of $350 or less in 2014, meaning that workers earning more than $700 a week (well below the median weekly earnings) do not get half their pre-layoff wages replaced by UI benefits. Average benefits overall were only $315 a week in 2014 with average weekly benefits below poverty levels in the poorly performing states.

Corporations in Control

President Obama continues to press for a form of fast track approval to ensure Congressional support for two major trade agreements, the Trans-Pacific Trade Partnership Agreement with 11 other countries (Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam) and the Trans-Atlantic Trade and Investment Partnership Agreement with the entire European Union.

Both agreements, based on leaks of current negotiating positions, have been structured to promote business interests and will have negative consequences for working people relative to their wages and working conditions, access to public services, and the environment.

These agreements are being negotiated in secret: even members of Congress are locked out of the negotiating process.  The only people that know what is happening and are in a position to shape the end result are the U.S. trade representative and a select group of 566 advisory group members selected by the U.S. trade representative.

Thanks to a recent Washington Post blog we can see who these advisory group members are and, by extension, whose interests are served by the negotiations.  According to the blog post, 480 or 85% of the members are from either industry or trade association groups.  The remaining 15% are academics or members of unions, civil society organizations, or government committees.  The blog post includes actual names and affiliations.

Here we can see the general picture of corporate domination of U.S. trade policy as illustrated by the Washington Post.

color codes

distribution

committee structure

In short, corporate interests are well placed to directly shape our trade policies.  No wonder drafts of these treaties include chapters that, among other things, lengthen patent protection for drugs, promote capital mobility and privatization of public enterprises, and allow corporations to sue governments in supra-national secret tribunals if public policies reduce expected profits.

The Long Wait for Wage Gains

Officially, the U.S. economy has been in expansion since June 2009.  Many people find this hard to believe. One reason is that wages have either been flat or falling for much of the period.

A recent study of real hourly wage trends over the period 2007 to 2014 by the Economic Policy Institute (EPI) documents this reality. The 2007 period marks the end of the previous expansion; the recession started in December 2007.  The charts below highlight the results of their study.

This first chart shows that only those in the top wage percentile have enjoyed an increase in real hourly wages since 2007.  Moreover, almost all groups are currently experiencing real declines in earnings. The exception is the bottom percentile and, according to the EPI, “a series of state-level minimum wage increases” is the main reason for their recent gains.

real wages

The following two charts separate the labor force by gender.  Again, we see gains only for the top percentile.  Men have experienced steeper declines in hourly earnings than women, although male wages remain higher than female wages.

Male wage trends

Female wage trends
The last chart looks at real wage trends by education.

Education trends

As the EPI study explains:

It is clear that those in every education category experienced falling or stagnant wages since 2007. In fact, real hourly wages have declined for 90 percent of the workforce with four-year college degrees since 2007 (not shown). From 2000 to 2014, real wages of the 90th percentile of this group only increased 4.0 percent cumulatively.

The data do show that college graduates have fared slightly better than high school graduates since 2007. This is not because of spectacular gains in the wages of college graduates, but because college-graduate wages fell more slowly than the wages of high school graduates. Notably, despite wage declines in both 2013 and 2014, those with advanced degrees are the only ones who have returned to their 2007 real wage levels.

 These trends only highlight the mean spirited nature of current attacks on unions and resistance to raising minimum wages.

 

The Federal Budget In Pictures

The following charts, taken from a National Priorities Project post, highlight our federal budget priorities.

As the post explains:

President Obama recently released his fiscal year 2016 budget proposal. Budgets are about our nation’s priorities: What are we going to spend money on? How are we going to raise the money we want to spend?

Though the budget ultimately enacted by Congress may look very different from the budget request released by the president, the president’s budget is important. It’s the president’s vision for the country in fiscal year 2016 and beyond, and it reflects input and spending requests from every federal agency.

 Here’s a look at the overall proposed budget:

2016-budget-chart-total-spending2_large

 

2016-budget-chart-discretionary-mandatory-interest-on-debt2_large

 

Here’s a look at the allocation of discretionary tax dollars:

2016-budget-chart-discretionary_large

 

Here”s a look at the relative balance of military and non-military discretionary spending over time:

2016-budget-chart-military-non-military-discretionary_large

 

Here’s a look at the structure of taxes supporting federal spending:

2016-budget-chart-individual-corporate-tax-line-chart_large