Alternet has a good look at the two apparently contradictory mainstream stories about the American economy (and to a lesser extent, Australia's as well). The first is that the US is rich and successful, with a booming economy, a healthy stock market (at least up until a few days ago!), productivity and economic growth are up, unemployment and inflation under control.
But the second story is the opposite: the US can't afford to pay for a such luxuries as universal medical coverage, social security programs for the poor and unemployed, education, a safety net for the unemployed. While some circles of laissez faire conservatives and libertarians oppose such programmes on moral grounds, more commonly conservatives will claim that the country can't afford them, almost as if "Paris Hilton has to dig between the cushions of her sofa to buy a can of tuna". [link]
But, at the same time, we're also told that we don't have the money to pay for a robust social safety net. When it comes to paying for universal health coverage, affording retirement security for our elderly, investing in programs for the poor or educating our children, we need to pinch pennies. According to this story line, we face a looming "entitlement crisis" -- we won't be able to afford to keep the Baby Boomers in good health and out of poverty, we're told, unless we slash their benefits and privatize the programs that their elderly parents enjoy today.
This is the line we hear from the administration when it talks about entitlement "reform": Treasury Secretary Henry Paulson says that "the biggest economic issue facing our country is the growth in spending on the major entitlement programs: Medicare, Medicaid and Social Security." The solution, according to the Heritage Foundation, is to cut entitlement spending. "Reforming Social Security, Medicare, and Medicaid is the only way to get the budget under control," it says.
At first glance, it seems to be a paradox: how can a country so rich afford so little?
The solution to the apparent contradiction is to realise that the "we" who is doing well is a very small minority, and they don't get any benefit (or at least, they don't think they get any benefit) out of the programs that they say "we" can't afford.
There's no doubt that the US economy has grown by leaps and bounds. Between 1973 and 2005, the economy has grown by 160%, just a little short of the post-World War Two economic miracle between 1947 and 1973. Despite (or perhaps because of) the GI Bill, reconstructing Europe and Japan, cheap or free education for many, Social Security, the Cold War, the Moon landing, and the Korean War, the US economy not only grew by 176% but income inequality plummeted as American families' incomes shot up. At least the white families' incomes.
Following WW2, the US saw a quarter century of rapid economic growth and significant increases in income across most of the population. In the quarter century since 1973, the US has also seen rapid economic growth. Where has the money gone? Alternet gives some sobering statistics:
- After adjusting for inflation, nine out of ten American families have seen their income fall by 11% between 1973 and 2005.
- The bottom half of the richest ten percent -- those between the top 90% and the top 95%, with an average income of $85,000 per year -- have seen virtually no gains.
- The lion's share of income gains have gone to the richest one percent of Americans.
- But even that fails to give an accurate picture. While the richest one percent have done quite well, it is the richest 0.01 percent whose income has exploded by 250%.
(Note: Be careful interpreting these figures. It would be a mistake to multiply 0.01 percent by the population of the USA and conclude that it refers to just thirty thousand people who have shared almost all the economic growth between them. The income groups refer to percentiles of the population, not individuals. The richest 0.01% were not necessarily the same people in 1973 and 2005.)
- Although they are richer than ever before, the mega-rich at the top of the pyramid are paying less and less in taxes. Although the American tax system remains, in principle, progressive, in practice the working poor and middle classes pay proportionally more of their income on taxation than the rich -- essentially a regressive tax system in practice.
- Despite record company profits, corporations pay a smaller proportion of their profits, contributing only one third as much as they did in 1962 to the Federal government. Their avoidance of state taxes is even worse. Seventy-one companies on the Fortune 500 list managed to pay no state taxes during the period 2001 and 2003, despite making $86 billion in profit.
- While worker productivity has increased significantly, worker wages have remained flat. The difference has gone to greater corporate profits and higher CEO salary packages.
- The Gini Coefficient, a measure of the inequality of income distribution within a country, has increased to almost 0.5, making it on a par with, or higher than, such countries as Russia, Iran, Peru and Venezuela.
The majority of Americans have failed to see any economic gains from the last quarter century, despite working longer hours and taking fewer holidays. The average family works thirteen weeks more on average than families did a generation ago, just to avoid falling backwards.
A picture is worth a thousand words, never more so than when it comes to income distribution:
Each block represents a percentile of the population, where the width represents the percentage of the population and the height their average income. From left to right: the 20% of the population with the lowest income, then the next three groups (20-40%, 40-60% and 60-80%); then the 80-90% , 90-95%, 95-99%, 99-99.5%, 99.5-99.9%; and finally the tall spike at the end is the 99.9-100 percentile: the richest 0.1 percent.
Figures in the graph are adapted from data here [PDF]. See also here for additional data.
Even the ultra-conservative former Chairman of the Federal Bank, Alan Greenspan, told Congress that the every increasing concentration of wealth and rising inequality is a "really serious problem". The last time the US had this much inequality, it lurched from depression to depression, an average of three years out of every decade. Nations ignore history at their peril.
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Update, 2pm: corrected a miscalculation re the top 0.01% (not 0.1% as initially quoted).