Thursday, May 17, 2007

Ignore per capita GDP - look at Median Hourly Income

Here is why the public doesn't think the economy is doing well. That's because it's not doing well. From Monster dot com story back in September 2006:
This week, the New York Times ran a story (log in required) that detailed just how much the economy has grown -- and how little the average Joe’s wages have kept up with this growth. It’s not a new topic, but the article revealed some sobering facts:

* After factoring for inflation, Americans’ median hourly wages have declined 2 percent since 2003, while productivity, the amount an average worker produces in an hour, continues to rise.

* Workers’ pay now makes up the lowest share of GDP since the government began recording the data in 1947. In the meantime, corporate profits are at their highest share since the ’60s.

In plain English: Most of us are working harder but being paid less (comparatively speaking) for it. According to the article, the disparity has a lot to do with factors like the decline of unions, globalization and outsourcing, and technology.
As pointed out by Kevin Drum, Gross Domestic Income divided by the total number of people in the U.S. gives the number usually reported as saying the economy is doing well. Unfortunately, that is an average figure. Averages are effected badly by outliers, that is, a single number that is a long way from the average/

Say three people earn $100 a week each. The total paid is $300. Then a month later, two get pay cuts to $75 per week and one get a raise to $150. The total paid is still $300 and the average paid per worker is still $100 a week, but two workers are worse off.

But in the second case, the Median wage, that is the wage of the middle wage earner is $100 in the first case and $75 in the second case.

So look at the second paragraph quoted from the New York Times above. While GDP has gone up, the net profits are all going to corporation rather than to labor. The corporations are either hording the money, spending it on capital or on buying other companies (more of the latter) or increasing the payments of dividends and top management pay. The economy is becoming more productive, but the results of the productivity are not being shared with the workers who actually make the products and services. This is a distribution problem. And since the economy has been being supported by consumer spending rather than investment spending, the economy cannot expand as rapidly.

In the long run, the economy produces to feed demand, and most demand is consumer demand. When consumer demand slows, so does the economy. Much of the increased consumer demand in the last few years has come from the housing boom, but with the slow collapse of the housing bubble, that source of funds is drying up. [I suspect this is why I have been getting a lot more offers for refinancing or second mortgages on my house.]

I am not going to predict an economic collapse. Things are too complicated for that. But the economy is slowing down its rate of growth, and will not pick up again soon. All I will really say for sure is that the general population that thinks the economy is not getting better is right and has been for several years. What we have been getting has been propaganda to try to get us all to spend more, but since the median income has been stagnate or even dropping, that is silly.

Right now sensible people will be getting out of debt as fast as possible. Individually that is the best idea. For the economy, it means that wages have to go up or we are all in trouble.

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