Most economists and too many policy makers are ignoring what I think is the real reason the economy is not improving much. The reason consumption expenditures and the economy not recovering more is found in the current distribution of income in the U.S. Let me explain.
According to the Bur. of Census, in 1977, during the good times of the housing bubble, 58% of households got only 25% of the income. 25% was not much. Now, the situation is worse.
If we assume real unemployment of 17.5%, and assume that the unemployed have no income and came from the bottom 58% and that they used to earn the average of those in and below the 58th percentile, then we can determine now, with the recession, the bottom almost 60% are getting only about 21% of the income, instead of 25% and the upper 40% is getting 79% of it.
This is a major problem too many do not address. Here is why, in my opinion. The three major consequences for the economy of this deterioration in distribution are:
- The consumer base in the U.S. and therefore consumption expenditure has markedly deteriorated and is now too small --
(a) because the majority of Americans have less income to spend, that is, they have a smaller share of a shrinking income pie, and
(b) because higher income households spend a much smaller percentage of their income on consumer goods and services than lower income households, that is, their average propensity to buy especially consumer goods is much less, - Much more income and dollars are now being rerouted into secondary financial markets, worldwide, by these higher income families that do not use most of their income for consumption, driving those assets prices up worldwide, and,
- Government programs to stimulate and aid consumption and aggregate demand are not getting enough traction where it matters to seriously jump start the economy. It is not helping the lower 60% enough to seriously raise their consumption expenditures, given the income distribution we now have.
The economy is becoming ever more dysfunctional because of these problems.
Too, the anecdotal evidence is not only suggestive and supportive, but it is devastating as well: people not having enough food at the end of the month, as Wal-Mart (WMT) executives and other food retailers are saying. Worse, a report was released in the last day or so saying that 49 million Americans, or almost 1 in 6, are not getting enough food to eat regularly. A teacher in a U.S. elementary school asked a young boy what he had for breakfast that morning and he said, “Nothing. Today is not my day.” That is how bad the distributional problem is.
Congress has been taking care its members and the well-to-do, with their highly paid lobbyists, for so long, the income distribution has thereby become badly skewed. Tax cuts for the wealthy and virtual elimination of the estate tax are only the more conspicuous, direct examples. The problem has reached the point where I suspect the country, especially with the governmental regulation we have, can no longer function well as a capitalistic, entrepreneurial society.
Until we collectively address this point and our huge trade deficit I think we are going to stay largely stuck where we are or close to it. Only Congress can permanently fix this problem by using the tax system and possibly a negative income tax to correct the maldistribution. Otherwise, we may just have to wait for the next bubble to feel better for a little while.
We are in a major jam that is different than most recessions we have encountered, but on the fiscal side we tend to think only of orthodox solutions and are not as inventive as we have been on the monetary side.
Disclosures: none
