Growing Economic Inequality the Root Cause of Economic Stagnation

Growing economic inequality as we have had in America for the past three decades directly impacts million of lives and destroys millions of dreams. It's not just about economic policy. It's about right and wrong.
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Last Friday's jobs numbers showed a net growth of only 18,000 new jobs nationwide -- while the economy must produce 150,000 jobs each month just to absorb population growth. Clearly the economic recovery has stalled and Republicans are pointing to the slowdown as evidence that American economic policy must once again turn sharply to the right.

Trouble is, rather than being a solution to our country's economic woes, the growing economic inequality their policies have caused was the root cause of the 2008 economic collapse and the economic stagnation that America has experienced since. That burgeoning economic inequality must end if we are to restore the American middle class -- and give our children an opportunity for a prosperous future.

The chief characteristic of private sector economic activity is that it is incredibly responsive to consumer demand. At its best, that's what makes it such an innovative, efficient and powerful engine of economic growth. If private sector entrepreneurs and businesses can identify even a glimmer of consumer demand for some new product or service, someone will figure out how to provide it. But there's a hitch. The consumers who want the product or service need to have the money to pay for it.

So the private sector's greatest strength is also potentially its greatest weakness -- its Achilles Heel. If, for whatever reason, consumers as a group don't have the money to buy a growing number of products and services, the private sector economy will stagnate.

Right now there are plenty of people out there who desperately need all sorts of products and services that they don't have the money to buy. The problem isn't that businesses don't have the capital to meet the demand. Corporations are sitting on almost two trillion dollars in cash. They are looking for somewhere to deploy that money where it can earn them a return -- where consumers have the money to buy some new product or service.

The problem is that there aren't enough consumers with money in their pockets.

But that is not simply a problem that has resulted from the financial crash and subsequent loss of eight million jobs. This problem has been developing for many years.

The bottom line is that most of the considerable economic growth of the last several decades has gone into the pockets of a tiny percent of the population. As a result, wages and consumer buying power have stagnated, and consumers don't have the money to buy the new products and services upon which economic growth depends.

This generates a vicious cycle -- laid-off workers, lower wages, less consumer demand, less economic growth and so on.

You can't fundamentally break this cycle without addressing the root cause -- the increased concentration of wealth that is strangling economic growth and destroying the American middle class upon which long-term economic growth completely depends.

Let's look at this process in a little more detail.

The incomes of the middle class Americans, and those who aspire to be middle class -- 90% of Americans -- have been stagnant for almost three decades. This trend, which was briefly interrupted during the Clinton Administration, is the chief defining characteristic of our recent economic history.

The stagnation of middle class incomes has not happened because our economy has failed to grow over this period. In fact, real (adjusted for inflation) per capita gross domestic product (GDP) increased more than 80% over the period between 1975 and 2005. In the last ten years, before the Great Recession, it increased at an average rate of 1.8% per year. That means that if the benefits of economic growth were equally spread throughout our society, everyone should have been almost 20% better off (with compounding) in 2008 than they were in 1998.

But they weren't better off. In fact, median family income actually dropped in the years before the recession. It went from $52,301 (in 2009 dollars) in 2000 to $50,112 in 2008. And, of course it continued to drop as the recession set in.

How is that possible?

Was it -- as the right likes to believe -- because of the growth of the Federal Government? Nope. In fact, the percentage of GDP going to federal spending actually dropped during the last four years of the Clinton Administration. When Bush took office it began to increase again as the Republicans increased spending on wars. Over the last 28 years, federal spending has averaged about 20.9% of the GDP and varied within a range of only about 5%, with the high being in 1983 (in the middle of the Reagan years) and the low in 2000 before Bush took office. It has never even come close to the 43.6% of GDP that it consumed during World War II in 1943 and 1944, or the 41.9% it consumed in 1945. The percent of GDP that goes to Federal spending went up in 2009 and 2010 -- but that was mainly because the economy shrunk on the one hand, and a major, temporary stimulus bill was need on the other to prevent another Great Depression.

Was it because taxes have skyrocketed? No again. In fact, according to the Census Bureau, the median household tax burden actually dropped from 24.9% in 2000 to 22.4% in 2009.

Was it that labor became less productive? No. In fact, there has been a major gap between the increase in the productivity of our workforce and the increase in their wages. Even when wages were improving at the end of the Clinton years, productivity went up 2.5% per year and median hourly wages went up only 1.5%.

From 2000 to 2004, worker productivity exploded by an annual rate of 3.8% but hourly wages went up only 1% and median family income actually dropped .9%.

The bottom line is that people who work for a living (most of us) are getting a smaller and smaller slice of the nation's economic pie.

In August of 2006, the New York Times reported that a Federal Reserve study showed that "(w)ages and salaries now make up the lowest share of the nation's gross national product since the government began recording data in 1947; while corporate profits have climbed to their highest shares since the 1960's."

So the answer to the question is simple. Virtually all of the increase in our gross domestic product over the ten years before the Great Recession went to the wealthiest 2% of the population.

These changes in income distribution are not the result of "natural laws." They are the result of systems set up by human beings that differentially benefit different groups in the society.

Economist Paul Krugman has summarized the history of income distribution in America.

At the beginning of the Great Depression, income inequality, and inequality in the control of wealth, was very high. Then came the great compression between 1929 and 1947. Real wages for workers in manufacturing rose 67% while real income for the richest 1% of Americans fell 17%. This period marked the birth of the American middle class. Two major forces drove these trends -- unionization of major manufacturing sectors, and the public policies of the New Deal.

Then came the postwar boom, 1947 to 1973. Real wages rose 81% and the income of the richest 1% rose 38%. Growth was widely shared, but income inequality continued to drop.

From 1973 to 1980, everyone lost ground. Real wages fell 3% and income for the richest one percent fell 4%. The oil shocks, and the dramatic slowdown in economic growth in developing nations, took their toll on America and the world economy.

Then came what Krugman calls "the New Gilded Age." Beginning in 1980, there were big gains at the very top. The tax policies of the Reagan administration magnified income redistribution. Between 1980 and 2004, real wages in manufacturing fell 1%, while real income of the richest one percent rose 135%.

The single largest contributor to this stagnation of middle class incomes has been the corporate attack on organized labor. The percentage of private sector workers in unions has shrunk from 35 % to 7%. The exception has been the public sector, where 35% of teachers, firemen and public service workers now have access to collective bargaining.

What is the economic effect of this growing inequity?

Economies are in balance if productivity gains result in commensurately higher salaries for employees that allow them to buy the larger number of products and services that those productivity increases allow corporations to manufacture and sell. If they don't have increased buying power -- if all of the income growth goes to the top 2% -- then a demand deficit will inevitably develop that will lead to stagnation, recession -- or depression. That gap in buying power can be filled for a while -- as it was in the early 2000's -- with greater consumer debt. But after a while the bubble bursts and the house of cards comes tumbling down.

And of course this isn't all about cold economic theory. Growing economic inequality directly impacts million of lives and destroys millions of dreams. It's not just about economic policy. It's about right and wrong.

The growing inequality can be seen in the explosion of the ratio of average worker salaries and the compensation paid to corporate CEO's. In 1980 the average CEO made 42 times more than the average worker. Today he (or sometimes she) makes 262 times as much as the average worker.

New numbers just came out showing that CEO pay last year skyrocketed by a whopping 23%. The new top earning CEO is Gregory Maffei of Liberty Media Corporation who was compensated $87,493,565 for his services. That's about $42,064 per hour.

Of course that's nothing compared to hedge fund manager John Paulson. According the Wall Street Journal he made $5 billion last year. That's $2.4 million dollars an hour -- or $40,064 per minute. So Mr. Paulson made as much as a minimum wage worker every 23 seconds. Note also that Mr. Paulson and all hedge fund managers paid Federal taxes at only 15% instead of the 35% due to a special tax break.

What do people like Mr. Paulson and Mr. Maffei do with their massive incomes? Like many executives they might choose to purchase a Rolex Oyster Perpetual Submariner Date Watch for about $8,000.

You might remember that many of the CEO class have spent a good deal of time lately telling America that we have to trim back Social Security benefits. The average Social Security benefit for retirees is the princely sum of $14,160 per year -- $38.79 per day (for all 365 days per year).

It would take the average beneficiary 206 days of benefits to pay for that Rolex watch. It would take Mr. Maffei 11.4 minutes of his compensation.

In order to generate new jobs and get the economy moving over the long haul, America needs to assure that everyday Americans receive the fruits of productivity growth. Otherwise our economy will continue to stagnate. That means more unionization, trade and tax policies that encourage higher wages, and right now it requires a massive jobs program to put America back to work.

The Republican notion that we can't burden the "job creators" like Maffei or Paulson with new taxes is mortally dangerous for our economy and our future. Just the opposite is true. The "job creators" are the everyday consumers that have to have money in their pockets to create the demand to make our economy grow.

But this is not just bad economics. It's morally wrong.

The idea of asking Social Security recipients or people on Medicare or Medicaid to sacrifice a part of their meager income to assure that people like Gregory Maffei can afford to buy a new Rolex watch every 11 minutes -- or get a taxpayer subsidy to ride in a corporate jet -- is simply obscene.

The outcome of the current budget debate can be judged by only one central criteria. What will a budget deal do to create new jobs and get the economy moving again? That is not mainly about giving "confidence" to the markets or cutting the ratio of long-term debt to GDP. To truly address the root problems of our economy, a budget deal must help increase the incomes of the middle class and reduce the swelling economic inequality that is a cancer growing on our society and our economy.

You don't do that by cutting Social Security or Medicare benefits -- or by slashing Medicaid as the Republicans have proposed. You do it, as President Obama has proposed, by asking the new economic aristocracy to dip into their vast stores of wealth and help pay their fair share for the society from which they have so richly benefited.

Robert Creamer is a long-time political organizer and strategist, and author of the book: Stand Up Straight: How Progressives Can Win, available on He is a partner in the firm Democracy Partners. Follow him on Twitter @rbcreamer.

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