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Saturday, 29 April 2006
Economics: The American Dream and the Economic Facts of Life
Topic: The Economy

Economics: The American Dream and the Economic Facts of Life

In these pages back in late August, 2003, there was a dialog concerning economic issues, as a few conservative friends out here had said some things about what was dysfunctional in our economy.

It was pretty standard Reagan economics, and it ran something like this -

First, there was the great economic Satan - FDR's social policies to get us out of the Great Depression failed miserably. The idea was, and is, all those spending programs to get people into any kind of work - the WPA and all that, and starting up the Social Security Program - made people believe the world, or at least the government, owes them something. These policies and programs took away their initiative and made them into whining "victims" who always expect a bail-out and don't want to actually do anything. FDR is thus the most evil of American presidents, as his policies pretty much destroyed the character of the "frontier" American who was, previous to this, a self-reliant self-starter who, when he saw a problem, fixed it himself and didn't expect some paternalistic government to save his butt. The only thing that saved America is that FDR realized all this crap wasn't working and got us into World War II when we didn't actually have to fight. He finally figured it out - getting in was the only way to cover the total failure of his economic policies. You might have heard that here and there.

And most of us have heard a conservative friend say this of the current Social Security Program, where people have had part of the wages set aside during all their working lives to cover rent and food and such when they retire - "I don't see why my tax dollars should pay for someone else's retirement when they didn't have the brains to set aside money for their old age. Why should I pay because they were just stupid?"

This of course is based on the idea that the funds available after the next decade or two won't cover the contractual obligation to cover the monthly check to the retiree. The demographics are the problem - aging folks who live longer. FDR didn't see that one coming.

Another is the more rarely heard, "Why should I pay for your kids' schooling?" The idea there is that if you choose to have children you should take the responsibility, the personal responsibility, to acquire sufficient money to pay for their education, or school them at home. Why are you turning to the government to provide what you are too lazy or too cheap to provide for your own children? Why do insist on using MY money to educate YOUR kids? The education of your children is your responsibly - there should be no government funding for any of it, and no standards imposed by any government bureaucrats at any level. It's your responsibility and as such, the government has no business regulating it, or even considering it as an issue. And public schools are a dismal failure anyway, as all can see. And over the last three years the calls for home schooling have increased, but oddly enough, not based on any economic argument but rather on a religious one - home schooling will keep the kids from those who undermine the revealed and literal truth of the Bible with evolutionary biology, and the geology that supports it, and the math and chemistry that support the geology (the deeply and sincerely religious who also understand the concept of metaphor, and don't confuse it with the literal, have less problem with publicly funded general education). The number of private Christian academies has exploded, of course.

But the religious issue aside, for now, the Reagan argument has won the public. As he tersely put it, government isn't the answer to anything, it's the problem. And thus the general idea has been that the government should tax as little as possible, provide only essential services - national defense and road repair and such - and get otherwise get out of everyone's lives. And pretty standard laissez-faire economic policy follows, where unfettered business competes to provide goods and services, driving price down and quality up, and no one much gets any support from the government, so no one plays the victim and everyone works hard and everyone achieves what they can. Reagan was fond of mocking "welfare queens" - with their Cadillac sedans, popping chocolates and watching soap operas, when they weren't popping out babies so their welfare check would get bigger.

Sure, there was the not so hidden racism in his comments, but that was beside the point, as Reagan himself was far too genial for sustained racial hatred. He just did little bursts of that. The bigger concept, now ascendant, was the rages-to-riches Horatio Alger view of the American Dream - anyone could be successful without handouts from the government, or support services that provided "special assistance." All you had to do is "take personal responsibility" (and quit whining) and get off you fat, pampered ass and make something of yourself. He had done something like that himself, and so all his supporters and followers said they had. That was the ticket - make something of yourself, and do it yourself. That's what responsible people do. No racism involved.

This of course ties into the long-standing Republican opposition to everything associated with civil rights legislation - from opposing segregation until it was inevitable to affirmative action and all the other anti-discrimination legislation. They were troubled at being called racists, and they had a point. The modern Republican Party, not the Republican Party of Lincoln, operates from a philosophic and economic place where race is simply irrelevant - in a free market an employer should be able to hire whomever he or she wants, for any reason, a landlord should be able to rent his own property to whomever he wishes, for whatever reason, and so on. The government has no business in any of that. And there are, after all, examples of blacks and Hispanics who, in the past, made something of themselves by just working hard and using their brains and talents. These were proof of the ideas - these people took personal responsibility, ignored the slights and abuses, and became successful. Those who didn't? They didn't have the right attitude, that sunny all-American positive outlook.

So that's what we believe. Work hard, be positive, and you can achieve anything.

Then there are the facts of the matter.

Our economy, under this model, directed by a president who considers himself a self-made man, in spite of his life of privilege and power and being the son of a former president, is humming along. Cutting taxes for the wealthy who hold substantial capital, and taxing corporations at the lowest rate in history, seems to have produced results.

On the last Friday of the month there was this from Reuters -
The U.S. economy grew at its fastest rate in 2-1/2 years during the first quarter on strong spending and investment, while moderate price rises reinforced hopes for a pause in U.S. interest rate rises this summer.

Gross domestic product grew at a 4.8 percent annual rate in the January-March quarter, the Commerce Department said on Friday, more than twice the fourth quarter's 1.7 percent rate.

It was the best quarterly GDP performance since a 7.2 percent spurt in the third quarter of 2003.

"This rapid growth is another sign that our economy is on the fast track," President George W. Bush told reporters. Growth is expected to moderate as the year wears on, giving the Federal Reserve room to pause in its rate-rise campaign.
That sounds great, except later in the item we get this -
Separately, the Labor Department said employment costs measuring what employers pay in wages and benefits rose at the slowest pace in seven years during the first quarter, which should temper concerns about potential wage-induced inflation.

Its Employment Cost Index rose 0.6 percent in the first quarter, down from a 0.8 percent rise in the fourth quarter and well short of the 0.9 percent gain that had been forecast.

Financial markets on Friday faced an avalanche of data - not all of it strong - including a University of Michigan survey showing the consumer sentiment index slipped to 87.4 in April from 88.9 in March. In addition, a Chicago Purchasing Managers Index fell to 57.2 in April from 60.4 in March.
In short, business is great, and wages and benefits aren't. So for those who aren't in executive management, or shareholders, hard work gets you what, exactly?

In an item printed in anticipation of Friday report, the New York Times noted this -
In the most recent CBS News poll, conducted last month, 55 percent of respondents rated the economy as good, even though 66 percent of Americans said the country was on the wrong track. In 23 years of polling by CBS, only once - in late 2005 - did a higher percentage of people say the country was on the wrong track.
That's interesting. People aren't dumb. They know the general economy is doing just fine, and it's not doing them much good.

The Times tosses in this -
Spending by upper-income families appears to be driving much of the economy's growth. The average hourly wage for rank-and-file workers - who make up roughly 80 percent of the work force - has fallen by 5 cents in the last four years, to $16.49, after inflation is taken into account.
Eighty percent of the work force has lower wages now, and they know it. Heck, it's hard not to notice, and with gas prices skyrocketing it's getting worse.

Curiously, the new White House chief-of-staff, Josh Bolten, has his new five point recovery plan to boost the standing of his boss, the president. One of the five points is "brag more" - specifically about the economy. The plan is to hit all the business shows and get the talking heads talking even more about how well the economy is doing. Brit Hume on Fox News is always bemoaning how people are so dumb saying the economy is bad in all the polls, when they just don't see how strong the economy really is, based on the data anyone can see.

Of course it's a matter of perspective, and a bit of an 80-20 thing. Perhaps this Bolten should be bragging to the eighty percent, as they are the ones being polled. But then, bragging becomes difficult.

By way of Political Affairs, an openly Marxist magazine, here, they reprint an item from the Labor Research Association - the folks who provide research and educational services for trade unions. So consider the source.

On the other hand, the item cites data from Mercer Consulting and PricewaterhouseCooper's Saratoga Institute, and those of us with long years in the business work know Mercer and Saratoga and have dealt with them. They're basic consulting and research firms with no political axe to grind. They're in business to make money by figuring out what's going on.

The item opens with this -
The new spike in oil and gasoline prices is the last nail in the coffin for workers who hoped to see any real improvement in wages this year. Inflation for 2006 is likely to remain in the 3.4 percent to 3.8 percent range, wiping out average wage increases of 3.0 percent to 3.5 percent and leaving workers with less purchasing power.

Over the past five years, as gasoline prices have steadily increased, profits for U.S. oil production and refinery companies have jumped by an average of more than 30 percent per year, according to the Fortune 500 list released in April.

Revenues per worker are highest in the oil industry, where the top pipeline company pulls in $15.6 million per employee. Exxon Mobil generates $4.1 million in revenues for every worker.

New data released by a number of different sources demonstrate that the rise in profits and the decline in real wages extend well beyond the oil industry.
And those data?

It's not pretty.

"New data on salaries for exempt employees from Mercer Consulting shows that pay for salaried workers at 350 large companies barely kept pace with inflation in 2005" - planned salary increases for salaried employees average 3.5 percent for 2006, "which means that their gains will be obliterated by higher consumer prices."

Production workers? "New data on salaries for exempt employees from Mercer Consulting shows that pay for salaried workers at 350 large companies barely kept pace with inflation in 2005. Planned salary increases for salaried employees average 3.5 percent for 2006, which means that their gains will be obliterated by higher consumer prices."

Corporate profits? "As wage increases for exempt employees fell to 3.4 percent in 2004 among the 350 companies studied by Mercer, profits at those companies rose 23 percent. In 2005, the average salary increase of 3.6 percent for exempt employees was wiped out by the 3.4 percent increase inflation, but profits rose 13 percent."

The CEO guys? " the same 350 companies saw their salary and bonus jump 14.5 percent in 2004 and 7.1 percent in 2005. This does not include their stock grants and other long-term incentives that add millions to their pay packages and represent more than 60 percent of total CEO compensation."

What the worker provides? "The new 2006 Fortune 500 list of the largest companies reveals that median revenues per employee for the Fortune 500 hit $400,000 in 2005, up from $300,000 in 2003 and 2004." And this - "Corporate profits per full-time equivalent employee jumped 190.7 percent from 2001 to 2004."

General employment? There's lot of data, but this jumps out - "Overall, the Fortune 500 increased their number of employees by just 2 percent in 2005, but revenues rose 10.2 percent and profits jumped 18.8 percent."

So for the eighty percent, who work hard and take personal responsibility for their own success, they get... well, they get not much for it, actually.

There may be something wrong with the Reagan model, the current version of the American Dream. Bragging may not help much, nor mocking the "losers" with their "bad attitude," telling them their lack of success is really their own personal fault.

People are catching on. The polls show it. They look in their wallets and figure out those Horatio Alger stories were fiction, after all. You don't base economic policy on a series of turn of the century short novels for readers in their early teens. But we have done that.

But wait. There's more.

That would be this from Reuters -
America may still think of itself as the land of opportunity, but the chances of living a rags-to-riches life are a lot lower than elsewhere in the world, according to a new study published on Wednesday.

The likelihood that a child born into a poor family will make it into the top five percent is just one percent, according to "Understanding Mobility in America," a study by economist Tom Hertz from American University.

By contrast, a child born rich had a 22 percent chance of being rich as an adult, he said.

"In other words, the chances of getting rich are about 20 times higher if you are born rich than if you are born in a low-income family," he told an audience at the Center for American Progress, a liberal think-tank sponsoring the work.

He also found the United States had one of the lowest levels of inter-generational mobility in the wealthy world, on a par with Britain but way behind most of Europe.

"Consider a rich and poor family in the United States and a similar pair of families in Denmark, and ask how much of the difference in the parents' incomes would be transmitted, on average, to their grandchildren," Hertz said.

"In the United States this would be 22 percent; in Denmark it would be two percent," he said.
Oh. So that part of the story wasn't true either.

Maybe the methodology was wrong, as this was sponsored by "a liberal think-tank."

No - "The research was based on a panel of over 4,000 children, whose parents' income were observed in 1968, and whose income as adults was reviewed again in 1995, 1996, 1997 and 1999. The survey did not include immigrants, who were not captured in the original data pool. Millions of immigrants work in the U.S, many illegally, earnings much higher salaries than they could get back home."

And Reuters quotes Bhashkar Mazumder, a senior economist at the Federal Reserve Bank of Cleveland, an expert in this field - "This debunks the myth of America as the land of opportunity, but it doesn't tell us what to do to fix it."

No, it doesn't. It's just data.

And there was the survey for the New York Times last year they mention - the one that found that eighty percent of those polled believed that it was possible to start out poor, work hard and become rich, compared with less than sixty percent back in 1983. The Reagan view of the American Dream not only persists, it is growing to overwhelming proportions.

The facts run the other way. There's a collision coming.

So what's the problem?

This -
Hertz examined channels transmitting income across generations and identified education as the single largest factor, explaining 30 percent of the income-correlation, in an argument to boost public access to universities.

Breaking the survey down by race spotlighted this as the next most powerful force to explain why the poor stay poor.

On average, 47 percent of poor families remain poor. But within this, 32 percent of whites stay poor while the figure for blacks is 63 percent.

It works the other way as well, with only 3 percent of blacks making it from the bottom quarter of the income ladder to the top quarter, versus 14 percent of whites.

"Part of the reason mobility is so low in America is that race still makes a difference in economic life," he said.
So race isn't irrelevant, and maybe undermining public education might be a bad idea?

That seems to be the implication. The modern Republican Party is on the other side.

The full study is here, if you're interested.

Ezra Klein here covers some interesting comparisons Reuters doesn't cover - our peculiar "American lack of fatalism, the belief in opportunity and mobility" -
When asked if people get rewarded for their effort, 61 percent of Americans agreed, versus 49 percent of Canadians, 33 percent of the British, and 23 percent of the French (weirdly, the Philippines wins this one, with 63 percent agreeing). But of all these societies (save the Philippines), America is one of the least mobile, which is to say the least dependent on hard work rather than social station. In Denmark, the relationship between your parent's income and yours is 15% percent or so. In Canada, it's 19% percent. In France, it's 41 percent. And in America, it's 47 percent. The only country more hidebound and hierarchal is ... England (50 percent), also the country most closely approximating the American economic model.

As it is, if you're born in the lowest income quintile, you have a 1 percent chance of reaching the top 5 percent. If you're born rich, you've a 22 percent shot at remaining there. For the middle class, hard work and productivity have begun to count far less. In 2003 and 2004, years when the GDP saw strong growth, the median household was no more upwardly mobile than in 1990-91, during a deep recession. Think about that for a second: Inequality has reached such a height that the average household is actually worse off during today's expansion than yesterday's recession.

There's been a serious increase in downward mobility, too, with only 13 percent of families seeing a $20,000 (in real terms) loss during the 1990-91 recession, while nearly 17 percent experienced such a drop during the 2003-04 expansion. By contrast, households in the top 10 percent have seen a reduction in downward mobility during the same period. And while it used to be the case that you could combat stagnation through hard work, even that's dying out. Households where the adults worked more than 40 hours a week were able, during 1990-91 and 1997-98, to translate their labor into upward mobility. Now, the correlation has disappeared. Americans may believe that hard work ends up offering great rewards, but the data shows that that's simply not the case. Remember that next time you hear some conservative flack - maybe one named Tony Snow? - trumpeting the economy's underreported strength. Why should folks appreciate a muscle-bound economy if it's using those biceps to pummel the working class?
That's good question, but the more interesting question is whether there will be a shift in the core support for the Republican Party, the "values voters." Yes, those in power do the work of Jesus, and they'll keep the gays and the swarthy ones away, and unlike the Democrats these guys will start a major war with any other nation on earth that looks at us funny, but then, when you've worked hard and been positive and asked no one for anything, and you're down to you last dollar no matter how hard you work, and you can't afford the gas to get to work, maybe you start humming Woodie Guthrie songs. Things can change.

Posted by Alan at 18:01 PDT | Post Comment | Permalink
Updated: Saturday, 29 April 2006 18:09 PDT home

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