The Lost Quarter Century?

by Benjamin Studebaker

I’ve run across some fascinating statistics which, taken together, indicate that the average American earns little more than he did in the late 1980’s. Does this mean the American economy is experiencing a lost quarter century? Let’s take a look.

New Census data reveals that the median American’s income is now no better than it was in the late 80’s adjusted for inflation:

This indicates stagnant wealth for most people. What’s more, the rich seem to have done considerably better–the top 5%’s incomes are at late-90’s levels. Whereas the country as a whole has experienced a lost quarter century, the top 5% have only experienced a lost decade and a half. Yet, despite this, GDP is certainly higher than it was in the 80’s and 90’s:

What’s up with this? Is it purely a factor of population growth? No such explanation to be found there–even the per capita GDP figure is higher:

So how is it possible for incomes to be stagnant while GDP continues to grow? I see two contending explanations, both of which are supported by the data:

  1. Productivity–wages have been stagnant, but increases in productivity via technological improvements are still increasing consumer purchasing power, allowing consumers to buy more with an equivalent income.
  2. Biggest Gains at the Very Top–5% is not a high enough threshold. The most significant economic gains have not gone to the top 5%, or even the top 1%, but to the top 0.1% and the top 0.01%.

First, the productivity data:

It is often claimed that stagnant wages are not indicative of workers having been done a disservice, because productivity gains are still increasing their purchasing power. By this argument, even though wages are stagnant, workers are still better off, so claims of a lost quarter century can be dismissed. But this data, which shows not only the growth of productivity, but the growth of inflation-adjusted wages, illustrates the trouble with this argument. Prior to around 1973, increases in productivity were accompanied by increases in wages at a more or less even rate. Since that point, productivity has increased while wages have remained stagnant. While workers are better off than they were in the 70’s, 80’s, or 90’s, they are not as much better off as they should be if we take the 50’s and 60’s as the target. The picture worsens when we see that a very tiny portion of the population has enjoyed significant gains over this period in both purchasing power and raw income, according to data from a study by Piketty-Saez:

What we see here is that it is not merely the rich who benefit, but the richest of the rich. The top 5% have almost all of the gains of the top 10%, the top 1% have almost all of the gains of the top 5%, and so on. The top 0.1% have enjoyed half of the gains made by the top 10%.  This means that even most affluent people are being screwed over by still more affluent people. The top 0.1% has a household income of $1.6 million annually, and even in their case, around half of their gains go to the richest 1/10th of them, the top 0.01%. It was difficult to find the precise figure for the minimum amount of income the top 0.01% possess, but I managed to find it–$9.1 million. Given that, by definition, almost no one in the United States has an income of this kind, the vast majority of affluent people in the United States who believe themselves to be relative beneficiaries of the policies of the past 30-40 years are themselves victims of those still higher up the chain. The big fish eat the little fish, the bigger fish eat the big fish, and the biggest fish eat the bigger fish, yet all eating fish endorse the system, even though most eating fish are themselves eaten.

So while it’s a bit of an overstatement to say that the average American is no better off than he was in 1987 (he can thank outsourcing and the internet for making his basket of goods cheaper), I think it is fair to say that the average American is not as much better off as he ought to be, that he has not received his due. I would also argue that stagnant wages are gradually undermining baseline US growth rates. While US workers can and do buy more than they did in the 80’s, increasing GDP, they would be capable of buying still more than they did then if their wages were higher. They would also be capable of increasing their purchasing without the risky borrowing we have seen in recent years. The downward trend in average annual US GDP growth each decade supports this claim:

In the long-run, we need to re-link wage growth to productivity growth if we are to regain the economic vitality we experienced in the 50’s and 60’s. Every single person likely to be reading this blog would benefit from policies that move us in this direction. Those who oppose these policies who are not multi-millionaires are foolishly acting against their own long-term interests.