Straight Cash Homie...America's Income Problem
On my 40th birthday, in addition to all of the "you're old" gifts you get for reaching this age, one of my friends gave me a little booklet with the title, "1968". This was a fascinating little booklet. It described life in the year that I was born. The Beatles "Hey Jude" was the top hit of 1968, tragically, Martin Luther King Jr and Robert Kennedy were both assassinated, and the U.S. was bogged down in Vietnam. It showed advertisements, gave political information, and showed how much bread, bacon, ground beef, milk and other goods cost. It also showed average household income.
I have to admit some of these numbers threw me a bit. I had no idea that just 40 years prior the average household income was only about $7500. Can you believe that? Only $7500! And I thought, "Wow, look how far we've come", until I looked at average home costs in 1968. That number was about $15,000, about twice the household income. Suddenly, something didn't look right. What that means is that in 1968 average household income was roughly half the cost of the average home. If that ratio held true today then household incomes should be in the $100,000-$120,000 range. Well that's not even close to being the case. A little help from my friend "Google" showed the following information.
Costs today outpace incomes (purchasing power) today
- Median home cost is 200k as of Oct 2010 (census.gov)
- Avg household income between $46,000 and $50,000
So...to keep pace with home buying power from forty years ago, household incomes would need to be more than double what they actually are today from $46,000-$50,000 to $92,000-$100,000.
For me this was pretty staggering information about the lack of financial nourishment of "Main Street". The average American's buying power for items like homes, college educations, and automobiles is about half of what it was 40 years ago.
But it's actually worse than it looks. In 1968, the number of single income households was far greater than today. So in many cases, it is taking two incomes today to produce half the household income of 40 years ago.
My stomach is starting to knot up.
I did a little more research to find out why people are not making as much money as they once were. Well I can tell you, there are lots of theories out there. But it's not really that complicated.
First, in some cases a lot of money simply stays at the top and is used for executive compensation (see the data below). Basically the boss (or board of bosses) decides you are worth less and he wants to keep more of it. This can happen pretty easily with an eroding industrial base in the U.S. The erosion of the industrial base puts more workers out of jobs. So, with more workers than jobs in traditionally good-paying industrial workplaces, simple supply (workers) and demand (jobs available) tells you prices (in this case price of labor) goes down. And so, wages decline.
The declining manufacturing/industrial base is also partially in the hands of the boss, who also realizes that he can get people in other countries to build cars, TVs, make denim jeans, etc. for pennies compared to what you or I require for the American standard of living (and the American Dream). Add to this unfavorable Trade deals that only seem to be helping countries not named the United States and helping companies move out and you get.... an ugly mess.
CEO salaries vs worker incomes and the disparityAccording to the Economic Policy Institute report, in 1965, U.S. CEOs in major companies earned 24 times more than a typical worker; by 2007, they made 275 times more. U.S. CEOs also make far more than CEOs in other advanced countries, the report said. In some industries the CEO pay is 300-500 times the average worker.
According to another recent study, CEOs during the 1960s earned on average $42 for every $1 earned by wage workers. Today, that ratio is $344:1.
"When measuring for income inequality, the U.S. now falls within the ranks of Uruguay and Cameroon, according to the CIA World Factbook. Evidence from the Levy report suggests that middle class incomes have stagnated and as a result, households are increasingly relying on debt to finance normal consumption expenditures."Forbes Magazine 2/16/11 Eva Pereira
Now it would be easy to just write CEO's and corporations off as greedy and uncaring about their workers, but that wouldn't be entirely true and would be overly simplistic. The reality is that our system is set up in such a way that corporations by their nature are required to create higher profits for investors. To create higher profits, they will seek to increase revenues and decrease costs. These are perfectly logical and healthy ideas for a business.
The problem occurs when they go unregulated. These CEO's and Corporations wield so much power in our political system and government, that it's like leaving a kid in a candy store. Many people will start to feel nauseous at the word "regulation", and I understand why. Regulations on big business have not always been healthy and often have had unintended consequences that we all are bothered by. CEO pay for example rose in part due to regulation imposed by the government, according to writer Dan Ariely. He makes a convincing argument in his book, Predictably Irrational.
American citizens often complain about how high CEO salaries are. The SEC attempted to mitigate this, and required CEO salaries to be publicly disclosed. As a result, they increased approximately three-fold between 1976 and 1993, going from 36 times the average worker pay to 131 times the average worker pay. "It encouraged other CEOs to demand higher pay, since now they had hard data telling them they were underpaid."
Predictably Irrational by Dan Ariely.
It is precisely this kind of regulation that backfires when well-intentioned people act without thinking issues out thoroughly. However, bad regulation shouldn't mean throw out all regulation. You also end up with poor legislation when you have a polarized political climate where rather than discuss legislation rationally and God-forbid compromise, each Party ends up accusing the other of wanting to kill your grandma, and garbage legislation passes.
Effect on taxes and income taxes
So when you put all of this together, ceo incomes rose exponentially in proportion to the average worker. The average worker income, which in a perfect world should have also risen in proportional rates to ceo incomes, rose very slowly. The costs to live, drive, feed and educate Americans did not slow down. They rose too. Thankfully, for the American worker, they did not rise with the same velocity as ceo incomes. But as pointed out earlier, costs of buying a home and an automobile rose dramatically as a portion of household income today. Some may cite greater home ownership statistics and more automobiles, and more kids going to college to refute declining income issues. Well the explanation is simple, to make up for a lack of income Americans are given huge amounts of credit. Welcome to your debt crisis!
You could also pin a good portion of our national debt on the stagnating/declining income situation. Since government revenue is based on a percentage of incomes, and incomes are about half of what they were 40 years ago, that would mean a doubling of median income should translate into a significant increase in govt. revenue while tax percentages wouldn't move one bit...in fact, they could probably drop.
The same could be said for the financial troubles of entitlements like Social Security and Medicare. Both of these are funded by payroll deductions that are a percentage of income. Again...lower income would equal lower funding for these programs. Now, I wish I could guarantee that the Treasury would keep it's fingers out of the Social Security funding for other expenditures, but I can't ... that problem needs a solution as well.
Effects on moral fiber, education, child rearing, the family unit
Finally, I come to a part, that many may see as a bit of a reach, but I do not. And so I write. The stagnation of income's effects on the American tax base, the affordability of homes, cars, and education (the American Dream) is pretty clear. But what may not be as clear is the negative effects it may be having on crime, child rearing, morality, our schools and the family unit.
As I thought about this, and noted earlier the prevalence of dual income families, it occurred to me that with both mom and dad working (where both are present in the household), who is taking care of the kids? Who is home when the kids get home? Do mom and dad have the juice after a long stressful day at work to be the parents their kids need? Is it a reach to think they don't? Is it a reach to think they might use the television to occupy their kids so they can all veg out? After all it's been a long day, we deserve to relax right? Is it a reach to say that lower cost residential opportunities are usually found in places with underfunded schools? Is it a reach to say that people who's purchasing power has been cut in half probably compromise their choices in food?
I don't think it is a reach at all.
I don't have an answer to solve the problem, but much smarter people do. And as we look at our current economic problems, we cannot overlook that we not only have a serious jobs problem, we have an equally serious income problem. Without a resurgence in high paying jobs and some growth in manufacturing along with more favorable trade agreements, this isn't likely to change anytime soon.
It's been said that the next generation will be the first generation to do worse economically than their parents. Well, if you consider what your dollars buy, that has already happened.
I can only imagine what my kid's 40 year birthday party "2006" booklet, will say to her and what she might think.