Wednesday, July 21, 2004

The standard of living is falling because of the concentration of wealth

Title: Alan Greenspan's bi-annual meeting with Congress
Date: July 20, 2004

Yesterday, Alan Greenspan met with Congress, as he does every six months, to report on the economy and answer questions. Here is one exchange from that meeting:
    Senator: "[U.S. Workers] are seeing corporate profits go up dramatically, they are getting very little share of those corporate profits..."

    Greenspan, interrupting: "I think what you are going to find is that their share will start to increase."

    Senator: "Now one of the reasons you propose that their share increases in that labor force is because employees will spend more for health care and other benefits, which workers appreciate, but that still doesn't increase take home pay."

    Greenspan: "I agree with that. What I am saying is that, as I indicated the last time I was here, that virtually all of the increase in productivity during the years starting in the first quarter of 2003 shows up not as real wages, but as increased profitability. That stopped sometime in the last several months, and what history tells us is that the shift now goes in the other direction, and you get with a delayed effect the increased productivity showing up as real wages overall, and I would think that while supervisory workers are going to share significantly, it will also be true of the 80 percent of payrolls which are non-supervisory workers as well."
There is a great deal to digest in this little exchange. Here are some of the high points:
  • "virtually all of the increase in productivity during the years starting in the first quarter of 2003 shows up not as real wages, but as increased profitability." That is a direct statement that wealth is concentrating. Nearly all of the profit goes to shareholders and executives.

  • "employees will spend more for health care and other benefits" -- that's because companies are cutting way back on benefits as a way to further concentrate wealth.

  • "supervisory workers are going to share significantly." These workers are executives, and they will continue getting big salary hikes.

  • "I think... it will also be true of the 80 percent of payrolls which are non-supervisory workers as well." 80% of the workforce -- the non-executives -- may get pay increases, if the upper 20% deigns them worthy.
Greenspan also says, "[the concentration of wealth] stopped sometime in the last several months, and what history tells us is that the shift now goes in the other direction."

Here's an important question: Is that true? Is "the shift now going in the other direction," as Alan Greenspan says?

Not according to this article from the NY Times:

Hourly Pay in U.S. Not Keeping Pace With Price Rises

From the article:
    On Friday, the Bureau of Labor Statistics reported that hourly earnings of production workers - nonmanagement workers ranging from nurses and teachers to hamburger flippers and assembly-line workers - fell 1.1 percent in June, after accounting for inflation. The June drop, the steepest decline since the depths of recession in mid-1991, came after a 0.8 percent fall in real hourly earnings in May.

    Coming on top of a 12-minute drop in the average workweek, the decline in the hourly rate last month cut deeply into workers' pay. In June, production workers took home $525.84 a week, on average. After accounting for inflation, this is about $8 less than they were pocketing last January, and is the lowest level of weekly pay since October 2001.
Alan Greenspan must have missed this report from the Bureau of Labor Statistics. Wages are going down, not up. Also:
    Spending is still holding up, led by strong corporate profits as well as higher salaries and bonuses at the upper end of the income distribution. But the lagging earnings at the bottom end are making for a somewhat lopsided expansion.

    The upper echelons of consumer spending, at places like Saks Fifth Avenue, Neiman Marcus and Nordstrom department stores, are reporting gangbuster business. "I'm surprised by how well we've sold high-priced fashion at this stage," said Pete Nordstrom, president of Nordstrom's full-line stores.

    But at the other end, sales at stores open at least a year at big-box discounters like Target and Wal-Mart have disappointed, while sales of used cars are declining year over year, government figures show. "We're not seeing the traffic, not even the same volumes of sales calls," said Richard Cooper, a sales manager at Jones Ford in Charleston, S.C. [See this post for details]
What we see here is remarkable. Salaries for the top 20% are growing so fast that "Spending is still holding up", but the bottom 80% are seeing "the steepest decline [in wages] since the depths of recession in mid-1991." That is a very strong testament to the concentration of wealth occurring today.

Later in the session, Greenspan says this:
    Greenspan: "We are in a global economy and increasingly so, and it has been to the advantage of the United States to be in this global economy and indeed in the position of leadership that we have been in, and it has led in my judgment to a very significant increase in the standards of living of the average American."
Let's ask this again: Is that true? Is the standard of living increasing for most Americans?

To answer the question, let's look at the two most expensive items most Americans purchase: houses and cars. And let's look at them by comparing prices for houses and cars in the 1970s and today.

Cars

In 1971, the average cost of a car in the U.S. was $3,430.

In 2000, the average cost of a car in the U.S. was $24,730.
(this article is the source of this data. Its source is the National Automobile dealers' Association.)

Adjusted for inflation to the year 2000 (using this calculator), the car in 1971 cost about $14,700.

So the price of the average car in 2000 is 7.2 times greater than the
price of the average car in 1971 in absolute dollars, and about 1.7
times greater in inflation-adjusted dollars.

There are two ways to look at what has happened to wages.
  1. In 1971, the minimum wage was $1.60. In 2000 it was $5.15. So it rose
    by a factor of 3.2 in absolute dollars. In inflation-adjusted dollars,
    the minimum wage actually fell. Since the minimum wage acts as the foundation of the wage scale for the 80% of Americans who work in non-supervisory jobs, this is important. If the minimum wage is not rising, chances are that their wages are not rising either.

  2. If you look at the "Average hours and earnings of U.S. production workers" in the World Almanac (whose data came from the U.S. Dept. of Labor), the average wage of a production worker was $127.31 per week in 1971, and $456.78 in 1999. In absolute dollars it rose by 3.58 times (roughly the same as minimum wage), but in inflation-adjusted dollars it also fell.
If you multiply $127 by 52 to get an annual wage in 1971, an average worker in 1971 made $6,620, or roughly two average cars per year.

If you multiply $456 by 52 to get an annual wage in 2000, a worker in
2000 made $23,750, or roughly one average car per year.

In other words, if cars are the measure, an average worker in 2000 can
buy only one half of what an average worker in 1971 could, in terms of
cars.

If cars are the measure, the standard of living of a typical American worker -- 80% of the population -- fell by 50%.

Houses

By looking at this report from the census bureau(page 720) and this report, you can see that the median sales price of a home in 1971 was $24,800. The average annual wage in 1971 was $6,620 (see previous section). So it took 3.74 years of labor for the average worker in 1971 to buy the average home.

The median sales price of a house in 1999 was $133,300. The average annual wage in 1999 was $23,750. So it took 5.61 years of labor for the average worker in 1999 to buy the average home.

The amount of house that a worker can buy with his/her labor is falling, not rising. The standard of living in America, in terms of housing, is also falling by this measure.

A bit more distressing is the fact that median home prices in 2003 had moved up to $169,900. In other words, between 1999 and 2003, prices rose by 27%. Wages for the average worker certainly did not rise by 27% during the same period -- in June they actually fell.

So the "average worker" is able to buy less and less house as time goes by, and home prices are rising quickly right now. Things seem to be getting worse for the average worker today when compared to 1970, not better.

When Alan Greenspan says that there has been a "very significant increase in the standards of living of the average American," what is he talking about? Over the last 30 years, it appears that the standard of living for average Americans has fallen significantly in terms of housing and transportation.

The only way to reverse this trend is to end the concentration of wealth. See also: