The Have's and the Have Not's

Reality bites. The rich continue to get richer while the middle class and the poor are falling behind. That’s the Democratic narrative, and it is true. Some of this is a continuation of long term trends driven largely by globalization and technology; some is an aftermath of the 2008 Financial crisis; some is a result of Obama administration policies such as Obamacare’s disincentive for small-businesses to grow and hire. Small wonder that we have Downton Abbey and a remake of The Great Gatsby.

The history:

Income: From World War II into the 70s all layers of society progressed at about the same pace with after-inflation family income roughly doubling over three decades. From 1973 to 2008 the top 5% is up another 50% while the middle group is up 20% and the bottom 20% is essentially flat. The ascendancy of the super rich is stunning, with the top 1% tripling their real income between 1979 and 2007 and garnering almost 25% of the national income – about the same as the Roaring Twenties and up from 10% in the sixties and seventies.  Many factors are present – the growth of two income families; global competition for low income jobs; the knowledge society; the decline of private sector unions; a favorable tax code. The trend crossed parties lines and business cycles.

Wealth: Family wealth – the result of past income – is even more concentrated, with the top 1% controlling 35% of the national wealth in 2007, while the bottom 90% of the people control just 27%.  Wealth is more concentrated than in any European country or Japan; China is actually a bit more concentrated than we are.

The poor: The poverty rate (an income of about $22,100 for a family of four in 2010) has declined significantly since the 50’s. Between 1984 and 2004 the number of families below 150% of the poverty line declined from 36% to 25%, largely due to the Earned Income Tax Credit and the Child Tax Credit. Reagan, Clinton (welfare reform), and the Bushes all deserve credit.

The present: There are confusing cross-currents.

–  The stock market is at record highs, home prices have recovered to an average of 70% of inflated 2007 levels; unemployment for college graduates is under 4%; sales increases for Louis Vitton are back in double digits.

–  Unemployment is “down” to 7.5%, in large part because discouraged workers have left the official numbers. Workforce participation – the portion of working age folks actually working in the above-ground economy – is down to a 34 year low at about 63%, with some 90 million folks on the sidelines. A bit of this is democraphics with Baby Boomers retiring, but not much.

–  Almost 5% of workers between 18 and 64 are now on Social Security disability.  In April there were nearly 11 million people collecting federal disability payments, up from 1.3 million at the end of 1968 as a legal industry has emerged to help people get settled in to lifetime incomes of about $13,000 plus Medicare.

– For many in the middle class the decline has yet to hit. With IRAs and 401k plans largely replacing company-sponsored pension plans, prudent retirement planning calls for a portfolio with 50% or more in bonds. With the fed holding rates near zero indefinitely and a high probability of significant inflation at some point, those who endured the dot.com bust and the frinancial crisis of 2008 are due for another shock.

And what is to be done?

For a start, Republicans should not fall on their swords to protect tax rates for the top 1% – many of whom vote Democratic anyway. Then it’s the usual stuff – education reform; Research and Development; support for small business and foreign trade; entitlement reform; trusting the individual to make the decisions that determine their success rather than relying on the goverm=nment to do what it cannot. Unfortunately, it is another few years before we can get on the path.


This week’s video is for those who wanted to see Newt Gingrich debating Barack Obama – Ted Cruz grilling Eric Holder. The issue is that we have used drones to kill American citizens in Yemen without a finding of probable cause or an imminent threat. Rand Paul and others had been unable to get the administration to commit that this would be illegal on US territory.




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