One reason why inequality has remained seriously under-researched for decades, especially in the USA, is that it is a prime ideological battle (you can read a history of inequality studies here). Those intending on praising the current system are not going to get involved in a subject that proves its failures (see Jason Hickel’s figures here and J.K. Galbraith’s comments here). This article deals with the American economy. We heard a lot of good about it lately. The economy is growing, wages are rising, consumer spending is up and unemployment is decreasing. It all looks good, until one just looks a bit further. Not only is the recovery extremely weak, it does nothing to reverse the trend of rising inequality. Those at the bottom of the income distribution are being left behind.
- The US economy in figures
In the beginning of this year, the IMF predicted a growth of 2.2% of the American economy. The 1.2% growth rate in the second quarter, combined with a downward revision of the first three months of the year, produced an average growth rate of just 1 percent. It cannot be denied that there are positive trends: consumer spending showed a robust 4.2 percent gain (see here). This is the biggest increase in a year and a half. The employment cost index, a Labour Department measure, rose at a 0.6 percent quarterly rate, which is in line with expectations and reflecting an annualized increase of 2.3 percent in employee compensation costs. Business investment, however, fell 2.2 percent, its third consecutive quarterly decline. Gross private domestic investment tumbled 9.7 percent and residential investment, which had been on the rise, reversed course and declined 6.1 percent, its first decline since 2014. Those numbers act as a counterweight to the official declining jobless rate, which is down to 4.9 percent (see here). Seven years after the recession ended, the current stretch of economic gains has yielded less growth than 9 out of the 11 previous business cycles. In terms of average annual growth, the pace of expansion has been by far the weakest of any since 1949.
According to the latest report by the US Census Bureau, last year Americans reaped the largest annual gain in nearly a generation: poverty fell, health insurance coverage spread and incomes rose sharply for households on every rung of the economic ladder, ending years of stagnation (see here). The median household’s income in 2015 was $56,500, up 5.2 percent from the previous year — the largest single-year increase since record-keeping began in 1967. The share of Americans living in poverty saw the sharpest decline in decades. The average incomes of the poorest fifth of the population increased 6.6 percent after three consecutive years of decline. The official poverty rate declined to 13.5 percent from 14.8 percent in 2014, the sharpest decline since the late 1960s (see here). So, what is the problem? It becomes abundantly clear if we take a closer look.
2.1. Productivity growth in the second quarter of 2016
Non-farm business sector labour productivity decreased at a 0.6-percent annual rate during the second quarter of 2016 (all data can be found here). Output increased 1.1 percent and hours worked increased 1.7 percent (these figures are seasonally adjusted). From the second quarter of 2015 to the second quarter of 2016, productivity decreased 0.4 percent. This is the first four-quarter decline in the series since a 0.6-percent decline in the second quarter of 2013.
Labour productivity (output per hour) is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors and unpaid family workers. Unit labour costs in the non-farm business sector increased 4.3 percent in the second quarter of 2016, reflecting a 3.7-percent increase in hourly compensation and a 0.6-percent decline in productivity. Unit labour costs increased 2.6 percent over the last four quarters (the Bureau of Labour Statistics calculates unit labour costs as the ratio of hourly compensation to labour productivity) (see here).
Manufacturing sector labour productivity decreased 0.4 percent in the second quarter of 2016, as output and hours worked decreased respectively 0.8 percent and 0.4 percent. Output per hour increased 2.4 percent in the durable goods manufacturing sector reflecting a 0.7-percent increase in output and a 1.8-percent decline in hours worked. Productivity decreased 4.4 percent in the non-durable goods sector in the second quarter of 2016, following a 4.0-percent first-quarter increase. Over the last four quarters, manufacturing productivity increased 0.9 percent, as output increased 0.3 percent and hours declined 0.6 percent. Unit labour costs in manufacturing increased 6.7 percent in the second quarter of 2016 and rose 2.5 percent from the same quarter a year ago. Hourly compensation increased 6.3 percent in the second quarter of 2016 (see here).
Following two consecutive monthly increases, the index for utilities fell back 1.4 percent in August. Even so, the index was 1.7 percent above its year-earlier level, as hot temperatures this summer boosted the usage of air conditioning. The output of mining moved up 1.0 percent in August, its fourth consecutive monthly increase following an extended downturn. The index, however, was still about 9 percent below its year-ago level. At 104.4 percent of its 2012 average, total industrial production in August was 1.1 percent lower than its year-earlier level. Capacity utilisation for the industrial sector decreased 0.4 percentage point in August to 75.5 percent, a rate that is 4.5 percentage points below its long-run (1972–2015) average. In short, it is hard to see a recovery in any of these figures (see here).
Figure 1: Labour productivity growth compared internationally (Source: PERI Institute, Cambridge, MA).
2.2. The official unemployment figure
The official US unemployment rate refers to a figure from the Labour Department’s Bureau of Labour Statistics which is called the U-3 number (see here). The U-3 rate is defined as the “total unemployed as a percent of the civilian labour force.” It excludes many categories of unemployed. A broader figure is the U-6 rate, which many economists rely upon as a more accurate portrayal of employment. The U-6 rate stood at 9.7 last May. The U-6 rate is defined as all unemployed as well as “persons marginally attached to the labour force, plus total employed part time for economic reasons, as a percent of the labour force.”
The U-6 rate is basically a measure of the unemployed, the underemployed and the discouraged. The U-6 is always ca. double the U-3 rate. There is no doubt that the U-6 rate also underestimates real unemployment. The picture would still be different if poor, marginalised and long-term unemployed people would on average live as long as the average population, if they would not have more health problems, if they would not be disproportionately incarcerated, if people sanctioned by the social welfare agencies would be counted as unemployed and if (some of) those who disappear from the social grid altogether would be counted. The labour participation rate shows a shimmer of this. The civilian labour force participation rate is the number of employed and unemployed looking for a job as a percentage of the population aged 16 years and over. Despite the improvement that government statistics show, some economists think that the employment situation is much more dire, partly because of the sluggish participation rate. That rate fell by 0.2 percentage points in May to 62.6 percent (see here).
It is true that a rise in the unemployment rate is not always a bad thing. The one-tenth point rise in the U-3 rate in March, for example, was widely seen as a function of more potential workers getting out and looking for jobs. Previously marginalised workers are seeing progress in the job market and are coming in off the sidelines. But is this explanation adequate? In May, average hourly wages increased by 5 cents to $25.59. Aside from that, if more unemployed people find work, one would expect wages to rise as employers compete against each other for the remaining qualified candidates.
2.3. Consumer spending – on what?
Consumer spending in the US is up, but on what? It is not on new construction or on manufacturing output. There are roughly 321 million people in the United States. Roughly 120 million of them are covered under Medicare and Medicaid. This leaves 200 million to be covered by private health insurance plans. The Obama-care plan aims to provide people with a subsidy, so that health insurance becomes affordable, while it also guarantees market competition of health care providers at state level. But Obama’s Affordable Health Care Act has been failing on both counts (see here). A study of the Brookings Institution found that middle-income households now devote the largest share of their spending to health care ever (see here). Since 2007, middle-class families have been forced to increase the share of their overall spending on healthcare by nearly 25%. Many have been forced to cut back on other necessities to cover the difference (see here and here). In the meantime, the number of states with only one health care option left has been steadily growing (see here).
Figure 2: Percent change in American middle income households’ spending on basic needs (Source: Wall Street Journal).
3. Strange recovery indeed
So, what is the problem? As Roberts says, the numbers offer a lopsided picture, with a gargantuan share of income rising to the top. While the bottom fifth of households increased their share of the nation’s income, by the census’s definition, to 3.4 percent from 3.3 percent, the richest 5 percent kept 21.8 percent of the pie, the same as in 2014 (see here).
Roberts refers to a McKinsey report which found that in 2014, between 65 and 70 percent of households in 25 advanced economies were in income segments whose real market incomes —from wages and capital—were flat or below where they had been in 2005 (see here for the McKinsey study). In the preceding years, between 1993 and 2005, this flat or falling phenomenon had been rare, with less than 2 percent of households not advancing. In absolute numbers, while fewer than ten million people were affected in the 1993-2005 period, that figure exploded to between 540 million and 580 million people in 2005-14. Eighty one percent of the US population were in groups with flat or falling income (see here).
Figure 3: Real household income at selected percentiles, 1967-2015 (Source: Michael Roberts here).
As Roberts writes, currently, incomes in the middle (measured in 2015 dollars) were still 1.6 percent below the previous peak of $57,423 a household, which was attained in 2007, just before the Great Recession erupted. Today, US median household incomes are still 2.4 percent below the absolute peak they hit in 1999. According to Elise Gould of the Economic Policy Institute, the income of American households in the middle of the distribution last year was still 4.6 percent below its level in 2007 and 5.4 percent below where it was in 1999. Men’s earnings from work increased 1.5 percent. But they are still lower than in the 1970s (see here and here).
And, as Michael Roberts also writes, households at the 10th percentile — those poorer than 90 percent of the population — are poorer than they were in 1989. Across the entire bottom 60 percent of the distribution, households are taking home a smaller slice of the pie than they did in the 1960s and 1970s. The 3.4 percent of income that households in the bottom fifth took home last year was less than the 5.8 percent they had in 1974. By contrast, households in the top 5 percent have gained hugely from America’s expansions. In 2015, they took in $350,870, on average. That is 4.9 percent more than in 1999 and 37.5 percent more than in 1989 (see here).
Figure 4: Poverty rate and number in poverty, 1959-2015 (Source: Michael Roberts here).
And yes, in 2015, the US poverty rate dropped by 1.2%. In real numbers this means that there are – officially – 43.1 million people living in poverty in the US, up from 38 million in 2007 (see here).
Michael Roberts concludes by writing that:
“(G)lobal growth of incomes has been concentrated in China, and to a lesser extent and more recently, India. (…) (S)ince the beginning of the millennium, most households in the top capitalist economies have seen their incomes from work or interest on savings stagnate and must rely on transfers and benefits to improve their lot. These outcomes are down partly to globalisation by multinational capital (…) and partly due to neo-liberal policies in the advanced economies (…) (I)t is also down to regular and recurrent collapses or slumps in capitalist production (…) (R)ising inequality is the result the drive of capital to reduce labour’s share and raise profits and to the recurrent and periodic failures of capitalist production” (see here and here).
It would take some explanation to make clear what causes these periodic failures. In my opinion Roberts is completely correct. Meanwhile, if you call this a recovery, go ahead. But this is not what we need.