Now we are engaged in a great tug-of-war over a few points in the top tax rate in Washington. But even if the White House pulls hardest, it won't amount to much of a victory for the long-suffering middle class. The sources of their income stagnation are too deep, too varied, and too long-term for Clinton-era tax rates to cure them.
The middle class crisis -- and its resulting income inequality -- is perhaps the most important economic story of our time. There are a million ways to tell it, and here's another: an annotated slide show, culled from the amazing 2012 edition of the State of Working America from the left-leaning Economic Policy Institute.
"There is a huge amount of focus on progressive taxes in our policy world but progressive taxes are not much of a solution to this," EPI president Lawrence Mishel said. "We need to get unemployment down rapidly. We need to greatly change our labor standards. We need to raise the minimum wage."
EPI's narrative isn't complete. For example, they don't account for worker-replacing technologies like software and robotics, which have made some jobs like factory workers and office assistants replaceable in the last few decades. But they do have a comprehensive and compelling explanation for what they rightly call the three "wage-gaps": (1) The growing gap between the top 1% and everybody else; (2) The growing gap between the typical family and the poorest 10%; and (3) And the gap between the between the top and the middle.
Here we go:
ANNOTATED CHART-GUIDE TO THE MIDDLE CLASS CRISIS
The income of a typical working-age family grew considerably in the late 1990s. Around 2000, it stopped growing. In 2007, it started falling.
Adding to the mystery is the remarkable de-coupling of productivity and real hourly compensation for all workers, including college graduates. Productivity kept growing through the 2000s. Compensation didn't. It even hit a wall for college graduates.
Where did the gains from productivity go? Well, they went to the top. Household income, adjusted for inflation, has grown 12X more for the top 1% than for the middle 20% ... and 24X more than the bottom 20%.
The full story of income inequality cannot simply be told with wages, where the 40-year growth gap between the top 10% and the rest is "only" about two-to-one.
To understand the full story, you have to look at capital income -- from assets like housing and stocks and bonds. This is where income growth for the top 1% has positively exploded, taking income inequality to record highs.
This is not a new trend. This is an old trend going back to before the Reagan administration. Since 1979, the top 5% took home more than half of total income growth. The top 1% took nearly 40%.
EPI's conclusion that health care costs and technology have nothing to do with stagnating wages for the middle class is controversial (see here and here for other takes). But its diagnosis for the three "wage gaps" is still compelling. Slide here, graphs to follow.
First, let's look at the gap between the super-super rich and the rest. About 60% of the increase in the top 1%'s share of total income seems to come from the expansion of the financial sector and the explosion in executive pay in non-financial compensation.
At the same time that their incomes have grown, effective tax rates on the super-super rich have fallen, especially since our laws give preference to income from capital gains. This is huge, because the top 1% has controlled more than 40% of stock market wealth since the 1980s. The next 9% owns another 40%. Stock wealth hasn't exactly democratized.
Since 1960, average effective tax rates have fallen dramatically for the top 0.1% -- much of it thanks to preferences for capital gains income. Progressive taxation won't fix the middle class crisis, Mishel pointed out to me over the phone, but it can discourage sky-high CEO salaries and provide more public funds to pay for infrastructure, education, and a safety net.
We're moving from the tippy-top of income to the very bottom here. As taxes have fallen at the top, the minimum wage has fallen at the bottom. As a share of average hourly earnings, the MW fell from 50% to 37% between 1964 and 2011.
Although the minimum wage probably has a light effect on middle-class wages, it goes a long way toward explaining the falling market wages of the very poor -- especially among women, for whom it explains about two-third of the "50/10 wage gap" change in the last 40 years.
Explaining the stagnation of the middle class is more complicated. According to EPI, the story begins in manufacturing, where trade with less developed nations (who can produce cheaper goods with cheaper labor) hurt wages among the non-college-educated class that once relied on manufacturing jobs.
As manufacturing eroded, so did unions, whose coverage fell from 27% in the early 1970s to just 13% in the late 2000s. Without unions, middle class workers without skills to move into higher-paying jobs lacked the collective power to bargain for higher wages.
An under-rated source of income growth for the middle class in the last 30 years, in face of slow-growing hourly wages, has been increased hours and the rise of dual-earner households, where the mother and father supplement each others' income. As a result, household income might actually *understate* the middle-class crisis by counting the rising participation of women.
Upshot: Middle-class household income grew by about 19 percent between 1979. But after accounting for rising health care costs ($1 buys less care every year), subtracting government transfers like unemployment insurance, and adjusting for rising hours worked ... you find that middle-class household income actually grew by only 4.9% across four decades.
So, there's your crisis. And it's not something we can fix with a tax tweak for the top 2%. The fiscal cliff might be "the biggest story in town," but it's not the biggest story.
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