US income of bottom 50% flat since 1970s as Big Ideas falter
Despite the US economy doubling in size in inflation-adjusted terms in the 34 years from 1980 to 2014, a new paper suggests that "almost all of the meager growth in real bottom 50% post-tax income since the 1970s comes from Medicare and Medicaid (the federal programs for old and poor people). Excluding those two transfers, average bottom 50% post-tax income would have stagnated around $20,000 since the late 1970s. The bottom half of the adult population has thus been shut out from economic growth for over 40 years, and the paltry increase in their disposable income has been absorbed by increased health spending."
Research by the economists Thomas Piketty of the Paris School of Economics, and Emmanuel Saez and Gabriel Zucman of the University of California Berkeley, provide the most extensive analysis to date of how personal income — such as salaries, dividends, rises in capital and food stamps — is divided among Americans.
The share of income of the bottom half of the population dropped 12.5% in 2014 from 20% of the total in 1980 while the top 1% saw their share nearly double to more than 20% during that same 34-year period.
Average income per adult, adjusted for inflation, grew by 61% from 1980 to 2014. However, almost $7 out of every additional $10 went to those in the top tenth of the income scale.
Inequality has rocketed and the economists say that an individual in the top 1% earned on average the equivalent of $428,200 a year in 2014 dollars — about 27 times more than the typical person in the bottom half, whose annual income equaled $16,000. By 2014, the average income of the bottom half remained around $16,000, while members of the top 1% earned on average $1,304,800 or 81 times as much.
The economists write:
This ratio of 1 to 81 is similar to the gap between the average income in the United States and the average income in the world’s poorest countries, among them the war-torn Democratic Republic of Congo, Central African Republic, and Burundi. Another alarming trend evident in this data is that the increase in income concentration at the top in the United States over the past 15 years is due to a boom in capital income. It looks like the working rich who drove the upsurge in income concentration in the 1980s and 1990s are either retiring to live off their capital income or passing their fortunes onto heirs.
The economists say there was almost no growth in real (inflation-adjusted) incomes after taxes and transfers for the bottom 50% of working-age adults over the period 1980-2014 because even as government transfers increased overall, they went largely to the elderly and the middle class. Second, the small rise of the average post-tax income of the bottom 50% of income earners comes entirely from in-kind health transfers and public goods spending. The disposable post-tax income — including only cash transfers — of the bottom 50% stagnated at about $16,000. For the bottom 50%, post-tax disposable income and pre-tax income are similar — this group pays roughly as much in taxes as it receives in cash transfers.
The economists also note that "in sharp contrast with the United States, in France the bottom 50% of real (inflation-adjusted) pre-tax incomes grew by 32% from 1980 to 2014, at approximately the same rate as national income per adult. While the bottom 50% of incomes were 11% lower in France than in the United States in 1980, they are now 16% higher."
Big Ideas lack punch
The Wall Street Journal says today that by all appearances, the US is in a golden age of innovation. "Every month sees new advances in artificial intelligence, gene therapy, robotics and software apps. Research and development as a share of gross domestic product is near an all-time high. There are more scientists and engineers in the US than ever before.
None of this has translated into meaningful advances in Americans’ standard of living."
The Journal says economies grow by equipping an expanding workforce with more capital such as equipment, software and buildings, then combining capital and labor more creatively. This last element, called “total factor productivity,” captures the contribution of innovation.
Growth peaked in the 1950s at 3.4% a year as previous breakthroughs such as electricity, aviation and antibiotics reached their maximum impact. However, it has steadily slowed since "and averaged a pathetic 0.5% for the current decade."
The Journal says that outside of personal technology, improvements in everyday life have been incremental, not revolutionary. Houses, appliances and cars look much like they did a generation ago. Airplanes fly no faster than in the 1960s. None of the 20 most-prescribed drugs in the U.S. came to market in the past decade.
The fall in innovation is a key reason the American standards of living have stagnated since 2000. "Indeed, absent a turnaround, that stagnation is likely to continue, deepening the malaise that has left the middle class so dissatisfied."
In particular, despite Trump's victory, the Republican control of the government means there will be limited if any increases in distribution and the poor who got insurance coverage for the first time under Obamacare, may lose it.