In addition, many Americans—indeed, 27 million—are working part-time. More than a quarter of part-timers would prefer to work full-time. During the summer of 2014 the number of involuntary part-time workers reached 7.5 million, a figure that stood at 4.4 million seven years earlier. However, most prefer to work part-time as they balance the demands of work and family or juggle multiple jobs to get to the level of income they need.15
This decline in full-time, permanent employment is related to a larger transformation away from direct, centralized employment toward a “free agent” economy. According to Carl Camden, the CEO of Kelly Services, two in five American workers “were working as free agents, independent contractors, freelancers … temporary employees, self-employed professionals, [or in] small businesses of one or two” in 2014, a trend that “has been moving up steadily by 1 or 2 percent a year.” Tyler Cowen labels this accelerating change in the nature of employment the “freelancing explosion,” though The American Prospect’s editor Robert Kuttner labels it, more skeptically, “the TaskRabbit Economy.”16
All these changes in the new economy leave the labor movement greatly weakened and unable to push up wages in the workplace and to press government to make things better for working people. As a result, the unionized proportion of the labor force dropped from 20.1 percent in 1983, the first year the Bureau of Labor Statistics began collecting such data, to 12.4 percent before the financial crash. On top of that, unions took a big hit during the recession and recovery years when state governments slashed public employment and limited union bargaining rights. Union membership stood at only 11.3 percent by 2014.17
Ronald Reagan gave business the moral and legal support to actively fight unions when he fired and decertified the striking air traffic controllers’ union. As a result, America’s largest retailers made opposition to unions central to their identity and business strategy. The southern political and business leaders in particular decried any potential breach. Republican state lawmakers, Senator Bob Corker, and outside activists such as Grover Norquist mobilized to defeat Volkswagen’s momentary openness to union representation, going so far as to threaten to withhold tax incentives for the plant’s expansion should the workers choose UAW representation.
Wal-Mart exported that southern employment model during its rapid countrywide expansion. As the largest private-sector employer with 1.3 million workers in the United States, it has had major influence on wages in the U.S. job market and has blocked union inroads. Managers are directed to keep labor costs below the norm for the retail industry, and the company presses for the lowest costs throughout its supply chain. When Wal-Mart locates in a county, it demonstrably produces lower wages across all employers over the longer term.18
With big companies pressing for the lowest possible payroll expenses and unions significantly weakened, workers have not been able to leverage their rising productivity into wage gains.
The full employment and high growth coming out of World War II—propelled further by rapid urbanization, government spending on education and infrastructure, new immigration, and high upper-income tax rates—produced a broadly shared prosperity for three decades. By contrast, America of the twenty-first century leads the advanced world in inequality, and according to major indicators, it has returned to levels of inequality unseen since the 1920s. Thirty years ago, the top 1 percent earned just 12 percent of the nation’s income. But in the five years before the financial crisis, the top 1 percent took 65 percent of the total national income gain, and in the years after the recession they took virtually all of it (95 percent). The focus now is on the super-rich .01 percent because they took 90 percent of the income gains all on their own.19
Sitting atop the global economy are sixteen hundred billionaires. The number of billionaires has multiplied elevenfold since Forbes first compiled its list in 1987. While the growth of their total worth fell briefly during the financial crisis, it has mercifully recovered at an accelerated pace. Billionaire status no longer even guarantees you a spot on Forbes’s list of the four hundred richest Americans.20
EPI analysis of Bureau of Economic Analysis and Bureau of Labor Statistics data.
In Capital in the Twenty-first Century, Thomas Piketty argues that America and Europe are returning to a Gilded Age of inequality because income from capital (i.e., dividends, corporate profits, property sales, and rents) is rising above income from wages. Between 2000 and 2013, labor’s share of national business income—meaning wages, salaries, and benefits—fell from 63 percent to 57 percent, three times what it decreased between 1947 and the turn of the century.21
According to Robert Samuelson, the shift of roughly $750 billion from labor to capital leaves the economy with a lot of investment potential, though not much expendable income for consumer spending. It is no surprise then that stores that serve Middle America, such as Olive Garden, Red Lobster, Loehmann’s, and Sears, are in “dire straits,” says Nelson Schwartz of The New York Times. JCPenney is closing thirty-three stores and is laying off 2,000 employees, and its shares have lost half of their value since 2009. But in a sign of our times, shares of Dollar Tree and Family Dollar Stores have doubled, and so have shares of high-end retailer Nordstrom—stores that serve an increasingly polarized economy.22
When return on capital is greater than the rate of economic growth—and the falling population rates in most developed and emerging economies are added in—you have a recipe for surging inequality and, ultimately, an economy dominated by inherited wealth. What Piketty establishes irrefutably, Paul Krugman writes, is that “talk of a second Gilded Age, which might have seemed like hyperbole, was nothing of the kind,” and “incomes of the now famous ‘one percent,’ and of even narrower groups, are actually the big story in rising inequality.”23
Piketty goes further, saying that those with inherited wealth will come to dominate those who earned it. His central conclusion is that Europe and America are returning to a “patrimonial capitalism” where “the commanding heights of the economy are controlled not by talented individuals but by family dynasties.” That is not yet the American story, however.24
Piketty, who is fully immersed in American TV and literature, must have watched the 1944 classic Mrs. Parkington. The film depicts a very wealthy entrepreneur who makes his money in the West and returns to New York City, where the best “old money” families boycott a dinner for his wife at his new Fifth Avenue home. He maintains a list of “all those stupid, stingy little people” who “haven’t got brains enough to make money of their own. They can only inherit it” and seeks to wreak havoc on them for “trying to ruin this country. This great, blasted, wonderful country” by “trying to make it into a closed corporation.”25
But America’s 1 percent story is exceptional: propelled by earned income and CEOs. American inequality “is quantitatively as extreme as in old Europe in the first decade of the twentieth century,” Piketty acknowledges, though “the structure of that inequality is rather clearly different.” Two-thirds of their wealth is from income, not capital accumulation. Today’s economic titans are the CEOs and senior executives “earning” their “supersalaries,” not rentiers living off inherited wealth and capital gains. In other words, our inequality is driven more by people like Mr. Parkington than the wealthy inheritors he so despised.26
The wages of the American 1 percent are up 165 percent since the early 1970s, and that rises to 362 percent for the wages of the top 0.1 percent. The ratio between the compensation of the average worker and the CEOs of the top 350 American firms (ranked by sales) began to surge in the mid-1990s, interrupted dramatically by bursting bubbles, though headed to an unimaginable gap. The ratio in 2013 was 295.9 to 1.27
While the average worker has yet to receive a raise, the pay of CEOs of the top firms increased 21.7 percent between 2010, when the recession had ended for companies, and 2013. The CEOs of the two hundred largest U.S. firms received a median pay package of $15.1 million, up 16 percent from 2011. “In other words,” Gret
chen Morgenstern writes, “it’s still good to be king.”28
In the period between 1940 and 1970, the average American CEO earned under $1 million. But changes in corporate governance and tax rates in the 1980s and 1990s produced an unseemly race to the top. It multiplied CEO compensation fifteenfold, accompanied by surging pay in C-suites and on corporate boards.
Lawrence Mishel and Alyssa Davis, “CEO Pay Continues to Rise as Typical Workers Are Paid Less,” Economic Policy Institute, June 12, 2014. Authors’ analysis of data from Compustat’s ExecuComp database, Current Employment Statistics program, and the Bureau of Economic Analysis NIPA tables. CEO annual compensation is computed using the “options realized” compensation series, which includes salary, bonus, restricted stock gains, options exercised, and long-term incentive payouts for CEOs at the top 350 U.S. firms ranked by sales.
The Financialization Project of the Roosevelt Institute shows how the “shareholder revolution” allowed shareholders to defeat all other stakeholders and put “shareholder value” on a pedestal. When the top income tax rates were slashed and CEO compensation was linked to stock performance and capital gains were taxed at a lower rate than ordinary income, corporations made different choices: they now use their internal funds to boost executive pay or buy back stocks and put off raising wages or investing in their own companies. Having available credit no longer leads companies to invest, produce things, or hire people.29
Thus, the defining economic challenge in the United States is the stunning escalation of the compensation awarded to the CEOs of the country’s largest companies and the stubborn stagnation in the wages and salaries of their employees, not inherited wealth and capital accumulation. And as we shall see, the growing disparity and changes in corporate America are very visible to ordinary citizens.
The income gap is most vivid in America’s metropolitan centers, which attract the super-rich, top earners, and professionals, as well as new immigrants and those drawn to the expanding service economy. While these cities are the center of our economic and cultural dynamism, they are also ground zero for the country’s growing income inequality. The city of Atlanta has the largest gap between the top 5 percent and the lowest quintile of income earners. Boston, Miami, Washington, D.C., San Francisco, New York, Chicago, Cleveland, Detroit, and Dallas round out the list of the top ten most unequal American cities.30
The inequality story is allowed to play out remarkably undisturbed by the infusion of new people into the upper class. The rate of intergenerational income mobility in the United States looks very much like the old Europe of France, Italy, and the United Kingdom. Despite growing inequality, the probability that a child born in the bottom quintile will reach the top fifth of the income scale has not worsened over the past three decades and a child had an 8.4 percent chance of making it in 1971 and a 9 percent chance in 1986 of making it. Nonetheless, the pathetic pace of people up the ladder of opportunity and the growing gap between the rungs clashes with America’s presumptions about how this country is exceptional.31
It also makes itself felt in the real bottom line: how long you live.
Derek Thompson, “Get Rich, Live Longer: The Ultimate Consequence of Income Inequality,” The Atlantic, April 18, 2014. Data from Barry Bosworth, Brookings Institution, WSJ.com.
Men in the top 10 percent of income earners can expect to live six years longer than a man of similar means twenty years ago, but men in the bottom 10 percent will live only 1.7 years longer. Women in the top 10 percent can expect to live past ninety years old, three years longer than they did two decades ago. And here is the truly depressing news: women falling in the bottom 40 percent of income earners are now living shorter lives by as much as two years.32
The scale and consequences of American inequality, Joseph Stiglitz writes persuasively, “didn’t just happen”; “it was created.” While “economic laws are universal,” America’s “growing inequality—especially the amounts seized by the upper 1 percent—is a distinctly American “achievement.”33
Under Franklin Roosevelt and the New Deal regime, the United States went much farther than Europe to establish the progressive taxation that Piketty prescribes. The top marginal tax rate fluctuated between 70 and 94 percent from the mid-1930s until 1981. But Ronald Reagan won a mandate for across-the-board tax cuts, and his tax reform cut the top tax rate to 50 percent in 1982, 38.5 percent in 1987, and all the way down to 28 percent in 1988. The decrease in the top tax rate has proven to be “perfectly correlated” with the increase in the top earners’ proportion of the national income. Before the 1980s, there was little financial incentive for a CEO to press for higher pay but the dramatic drop in top rates “totally transformed the way executive salaries are determined.” “Executives went to considerable lengths to persuade other interested parties (as in, the compensation committees that the executive often appoints) to grant them substantial raises.”34
America’s conservative-led governments slashed taxes on corporations and taxes on inheritance. In the mid-1950s, corporate income tax contributed almost one-third of federal tax revenue, but accounting and policy changes such as offshoring brought it down to less than 10 percent by 2013. During the 1950s through the 1970s, the statutory tax rate was roughly 50 percent; then Ronald Reagan dropped it dramatically to 34 percent in 1988. The effective rate for profitable companies is now 17 percent, down from about 30 percent in 1980, and well below the OECD average. The inheritance tax was 77 percent from 1941 through the post–World War II period until 1976 and has gradually declined over the past three decades, settling at 40 percent in 2014.35
Obviously, politics is very integral to how this new economy works. And as in other areas of American life, “following the money” will give you your best clues to what is happening. The campaigns for president and the U.S. Congress cost $6.3 billion in 2012, with a growing proportion spent by tax-exempt organizations that do not disclose their donors and by independent Super PACs, now the vehicles of choice for corporations and America’s billionaires. Four-fifths of that outside money went to Republican-aligned conservative groups that in turn have backed Supreme Court decisions giving corporations a right to free speech—in particular, the “right to devote one’s resources to whatever cause one supports.” A decade ago, the Republican Party supported full disclosure of contributions and opposed the “soft money” that allowed special interest groups to influence elections. With increasing dependence on large undisclosed donations, the Republican Party now officially opposes any contribution limits and any disclosure rules.36
For better or worse, that money in politics is an integral part of the new economy.
THE NEW ECONOMIC CONSCIOUSNESS
These transformative economic changes are all too real for ordinary people, and they have forged a new economic consciousness to cope with them. They believe this new economy is governed by six principles.
The first is the most important, and nearly everything follows from it: jobs in the new economy don’t pay enough to live on. All of the economists’ data and accounts of long-term trends boil down to this simple reality. People are on the edge financially as they cope with stagnant wages, pay cuts, and the lack of middle-class jobs that pay well, and it means people will put together multiple jobs and come up with new strategies to get by.
The second principle says we live with an endemic cost-of-living crisis. Because people are right on the edge financially, they are consumed with the rising cost of everything. Top of mind are the costs of child care and student debt—expenses that can’t be avoided but are just inexplicably high and can send them into economic ruin.
The third principle says that hardworking people in this new economy can aspire to a “more comfortable life,” but not the middle-class dreams or Horatio Alger–style success, as in previous generations. People are very aware that the goalposts have been moved for their generation, and they are still determined to score. But scoring in this new economy has been recalibrated.
The fourt
h new principle says to pay attention to the growing number of people working independently as service providers, consultants, freelancers, and in their own small business, because that may be their ticket out. These new forms of self-employment provide many with added income to supplement their insufficient pay from today’s full- or part-time jobs. They also potentially grant greater autonomy and an opportunity to escape the constraints of this new economy.
Fifth, while people accept that they are now globally connected, they think globalization makes the economy more complicated and the job market more competitive, and hurts the little guy. Globalization only excites the big winners.
And sixth, big businesses and CEOs are the big winners in this new economy, and they are the villains of the piece. They broke the social compact with their employees and their country and enriched themselves. They use their money and influence with government to tilt the economy to work for them.
Principle One: Jobs don’t pay enough to live on
For the overwhelming majority of Americans, the core problem of the new economy is that jobs simply do not pay enough to live on. The new jobs and what they pay, or rather what they don’t, concentrate the mind. They think America’s ascendant trends are producing a fundamentally restructured economy with low-wage jobs at the center. How you cope with that low-wage reality determines how you survive and what kind of future is possible.
After the most successful year of job creation since the late 1990s and with employment levels back to precrisis levels, median income has barely budged. The dichotomy is perfectly illustrated by the change in people’s feelings about the macro-economy and their own personal economic situation. While people’s feelings about the state of the American economy have improved almost threefold between late 2008 and late 2014, their feelings about their personal finances are unchanged.37
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