TCS Daily

Are We an 'On Your Own Society'?

By James Pethokoukis - June 12, 2007 12:00 AM

America has become a heartless "On Your Own Society," Hillary Clinton argues, where "the fruits of our modern global economy are showing up in the corporate bottom line, not in workers' paychecks." This is hardly new rhetoric from Democrats. At the 1984 Democratic National Convention, Mario Cuomo memorably countered Ronald Reagan's lovely "shining city upon a hill" metaphor (taken from Puritan colonist John Winthrop) with his own dramatic "tale of two cities" analogy, one that depicted America as a Dickensian nightmare where middle-class parents watch the dreams they hold for their children evaporate."

So if Clinton isn't original, is she at least correct in her assessment? On her campaign web site, there's a "fact sheet" outlining her case that America is indeed two cities rife with inequality. So let's fact check the fact sheet. According to Hillary ...

... CEOs have seen their pay go from 24 times the typical worker's in 1965 to 262 times the typical worker's in 2005.

The numbers come from the liberal Economic Policy Institute. Interestingly, the EPI data shows that the one other time the pay disparity was bigger - when CEOs made 300 times that of the average worker - was back in 2000, the last year of her husband's presidency.

Assuming those EPI numbers are more or less correct, what explains the growing gap? The stock market is a big factor. According to a study by economists Xavier Gabaix of MIT and Augustin Landier of NYU, CEO pay rose six times between 1980 and 2003, the same as the market capitalization of large U.S. companies. That sure sounds like the CEOs have earned their pay.

So one key to helping workers catch up to their bosses would seem to be increasing their exposure to stocks so they can better capture those huge financial returns. (Plus getting better educated and trained to increase their personal productivity and take advantage of higher-wage, higher-skilled jobs.) Wage income by itself just won't cut it.

Oh, and if you confiscated the income of all the Fortune 500 CEOs, say $7 billion, and distributed it to America's 150 million workers, each would get a check for about $50. Enjoy that extra tank of gas

... Last year, the share of national income going to corporate profits was the highest since 1929 - while the share going to the salaries of American workers was the lowest.

In the first quarter of this year, workers' pre-tax share of national income was 64.3 percent. Unlike Clinton's narrow numbers, this stat also includes employer contributions and benefits like healthcare, not just take-home pay. Overall, the compensation pre-tax share of national income has fluctuated between roughly 64 percent and 67 percent since 1970 with an average of 65.6 percent, according to economist Ed Yardeni of Oak Associates, an investment firm. Likewise, corporate profits during the first quarter were 11.6 percent before taxes and 7.6 percent after taxes. Both numbers were actually bit higher in the late 1960s, Yardeni computes.

... Globalization and economic policy dynamics are generating rising income inequality. In 2005, all income gains went to the top 10% of households, while the bottom 90% saw their income decline - despite the fact that worker productivity has increased for six years. In 1970, the top 1% of households held roughly 9% of our nation's income. In 2005, they held 22% -- the highest level since 1929.

This data comes from economics researchers Emmanuel Saez and Thomas Piketty and are widely respected, with the notable exception of Alan Reynolds of the Cato Institute. But, again, let's assume the numbers are more or less accurate. Saez himself has linked the results to globalization rather than U.S economic policies. In a chat I had with him a few months back, he theorized globalization has increased the worldwide demand for top corporate managers and has made companies more valuable as it's spurred global economic growth and higher stock market values. And as CEA Chairman Ed Lazear told me recently, "It's a good thing when wages at the top grow because what that means is that investments in skills are paying off at higher rates than they paid off in the past. We like it when our investments pay higher returns." Again, the keys for helping workers would seem to be education and greater exposure to the stock market.

... Harder for America's middle-class and working-class families to make ends meet. Costs are up: health care premiums are up 87 percent since 2000. While productivity growth has gone up 18%, family incomes have gone down $1,300.

According to the Kaiser Family Foundation and the Health Research and Educational Trust, premiums for employer-sponsored health coverage are indeed up 87 percent during the past six years. But that annual rate of increase has fallen from 13.9 percent in 2003 to 7.7 percent last year. And so far the various healthcare plans from the 2008 Democratic contenders do little to deal with a key problem driving costs: employer-provided insurance that insulates us from the true costs of out healthcare decisions.

The income numbers come from the Census Bureau. And as they calculate it, real medium household income is down roughly $1,300 since 2000. But the 2005 number was up 1.1 percent from 2004. What's more, the tight jobs market the past two years - unemployment is at low 4.5 percent, 3.9 percent for adults - has begun boosting wages and income. Last month, wages rose at a 3.9 percent annual rate, while real income is up 1.1 percent over the past year, according to the Labor Department. And despite the housing downturn, Americans' net worth is rising. The most recent flow of funds data from the Federal Reserve showed that household net worth—the difference between the value of assets and liabilities—amounted to $55.6 trillion at the end of the fourth quarter of 2006, up $1.4 trillion from the previous quarter.

Maybe all this gloom will pay off for Clinton in the primaries and then the general election. But if the economy continues to grow as it has since the end of 2001 all the way until November 2008 -- with wages rising and the stock market setting new records -- such rhetoric may seem completely out of touch with the financial reality that most Americans are experiencing.


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