Remember when Ronald Reagan was elected president in 1980? I do. Reagan was elected arguing that if we just reduced taxes on America's wealthy that they would take their "extra" money and invest it in the economy. The subsequent surge in economic activity would "trickle down" in the form of more jobs and greater demand. Increased economic activity would generate greater national income levels, which would lead to more tax revenue, in the process offsetting tax cuts for the rich.
Instead, what we got was a pampered and entitled elite who believe it's government's duty to both stay out of their way and to guarantee their financial nest eggs. Favorable legislation, corporate bailouts, and hair-brained accounting schemes sanctioned by government agencies have replaced hard work, real investments, and market integrity.
Worse, we have come to believe that economic growth for growth's sake is good, as long as wealth in America expands. What we don't see is how an economy - as Clifford Cobb, Ted Halstead, and Jonathan Rowe wrote in The Atlantic Monthly 15 years ago - can produce as much "illth" as it does "wealth," even as economic activity and incomes grow.
The following illustrates how this happens.
In classes I use a standard story to explain how we should look at economic data if we want to understand what's happening with incomes and wealth in society. It goes something like this ...
Let's say you and 9 of your friends are in a room. As a group your income will usually average out to between $30-$50,000 per year. This will usually be the case, even if you have one or two friends unemployed, or underemployed. As a group you're considered middle-class.
But then Bill Gates, or some other corporate CEO, walks in the room. If you use the same math model to determine general income level every one's now considered a high income earner, and wealthy. You're also considered part of America's economic elite.
This is why we don't, or shouldn't, always look at cumulative numbers, and then assume distributions will remain symmetrical. Wealth creation, and it's distribution, are as much a product of government favors as they are a product of supply and demand.
Put more simply, just because you make a bigger pie doesn't necessarily mean that pie slices will be cut the same (as they were previously), or that everyone will get a slice.
This is what makes the following Good News/Bad News information so interesting.
GOOD NEWS: In the first quarter of 2010 Americans are on pace to take home $12.60 trillion for the year. This would be the second best national income year ever, according to the Federal Reserve's June, 2010 Statistical Release (p. 14/p. 21 on PDF file scroll). It looks like America is doing real good, especially since $12.60 trillion out paces every national income year (by far) before 2008.
BAD NEWS: The vast majority of the income gains are wrapped up in corporate profits, with significant gains going to our bailed out financial sector (p. 14/p. 21 on PDF file scroll; lines 27 & 31). So, while America seems to be doing fine, we find ...
WORSE NEWS: According to U.S. Census Data, real median (again, the middle) household income in the United States fell from $52,673 to $52,029 between 2007 and 2008 (a 1.2%). This means that more Americans are making less than they did the year before.
What does all of this mean? While it appears that America is doing fine, ordinary Americans aren't doing too well.
Part of the reason for these payouts is that pre-tax profits for corporate America are up. Specifically, they're on track to hit about $1.81 trillion in 2010 (up from $1.46 trillion, 2008). This explains why larger and larger corporate payouts, and executive bonuses, are occurring. Corporate America is literally swimming in it ...
In our bailed out
Imagine that. Wall Street almost wrecks the economy by fraudulently underwriting contracts they couldn't support, and then our bailout-drenched financial sector gets to swim in record profits. Must be nice.
But with unemployment hovering around 9.5%, bank failures on the rise, personal bankruptcies on pace to set a record, collapsed housing values, crashing home sales, record foreclosure levels, falling real wages, increasing wealth gaps in America, pension problems, and other looming challenges, it's hard to argue that an American recovery is around the corner.
What was it that Ronald Reagan said about a "rising tide lifting all boats"?
Favorable legislation, our corporate bailout culture, and fancy accounting schemes approved by friendly government agencies go a long in explaining why our "rising income tide" isn't raising all income boats (while it floods others).
I'll be discussing how and why this happens over the next few months.
NOTE: Those of you who read an earlier draft of this, and see more information in this version, you should know that I originally wanted to "save" but - apparently - hit "publish" instead. This version has a bit more background. It happens.