June 7, 2016

Economic Reality and Political Anger

In my last blog post, written two days after my 87th birthday, I began reminiscing about the changes I've seen in our country. I wrote about our biggest federal welfare program by far -- the GI Bill -- and its success in greatly enlarging the American middle class, which in turn helped create the “golden years” for our economy, generally thought to be the two decades from 1947 to 1977.

Once I got to that point in the narrative, I decided not to spoil my happy birthday mood by writing about the turnaround I've seen since 1977… changes that have flipped the American character from the happy optimism of those earlier years to the anger we see being played out in the election campaigns of Donald Trump and Bernie Sanders.

I grew up believing America was the land of opportunity. Our history showed each generation doing better than the one before. I was sure -- even in my teens -- that I would end up doing better economically than my father. And I was right.

My career started and developed during those golden years of the postwar economic boom. Worker productivity rose every year, and so did incomes and benefits. Millions of low-income people moved up into the middle class.  

Much of today's mean-spirited anger comes from the realization by this generation of workers that they are not going to achieve their parents’ level of economic security. Researchers have repeatedly found that in the United States, we now have less economic mobility than in Canada or much of Europe.

A child born in the bottom quintile of incomes in America has only a 4 percent chance of rising to the top quintile, according to a Pew study. A similar study in Britain found that such a boy has about a 12 percent chance. By another measure, "intergenerational income elasticity" (social mobility) is twice as great for Canada as for the U.S.

The income gap between rich and poor in this country has been growing wider and wider. Now a new study documents a corresponding lifespan gap: in the United States, the richest one percent of men lives an average 14.6 years longer than the poorest one percent. For women in those same wealth percentiles, the average difference is 10.1 years. And this eye-opening gap is growing rapidly.

Our business leaders often  respond to these negative reports by pointing out that the U.S. economy outperforms that of all other countries except China. So I'll conclude with this interesting report.                                                                                                                                  
Donald Trump: Listen Up 
A few months ago,  The Economist detailed an interesting problem with American capitalism. Here's an excerpt from that report:
One problem with American capitalism has been overlooked: a corrosive lack of competition. The naughty secret of American firms is that life at home is much easier: their returns on equity are 40% higher in the United States than they are abroad. Aggregate domestic profits are at near-record levels relative to GDP. America is meant to be a temple of free enterprise. It isn’t.
High profits might be a sign of brilliant innovations or wise long-term investments, were it not for the fact that they are also suspiciously persistent. A very profitable American firm has an 80% chance of being that way ten years later. In the 1990s the odds were only about 50%. Some companies are capable of sustained excellence, but most would expect to see their profits competed away. Today, incumbents find it easier to make hay for longer.
You might think that voters would be happy that their employers are thriving. But if they are not reinvested, or spent by shareholders, high profits can dampen demand. The excess cash generated domestically by American firms beyond their investment budgets is running at $800 billion a year, or 4% of GDP. The tax system encourages them to park foreign profits abroad. Abnormally high profits can worsen inequality if they are the result of persistently high prices or depressed wages. Were America’s firms to cut prices so that their profits were at historically normal levels, consumers’ bills might be 2% lower. If steep earnings are not luring in new entrants, that may mean that firms are abusing monopoly positions, or using lobbying to stifle competition. The game may indeed be rigged.

1 comment:

Anonymous said...

I think you are right on the mark, John. I enjoy your post.