Thursday, November 02, 2006

Anxious middle: why ordinary Americans have missed out on the benefits of growth - Financial Times

David Seaton's News Links
The unprecedented political stability of postwar Europe and the USA has been based on a huge and satisfied middle class. If this middle class is impoverished they will in turn destabilize the society. That simple. DS

Abstract: the Republican party is not getting the political credit that policymakers in the administration of President George W. Bush think it deserves for the state of the US economy. At a time when the party is already under siege over Iraq, failure to win credit for economic growth could prove costly. The nub of the problem for the Republicans is this: since 2000 there has been a striking disparity between growth in productivity and gross domestic product on the one hand and growth in wages for the average American worker on the other. Economists call this phenomenon median wage stagnation. Median measures give the best picture of what is happening to the middle class because, unlike mean or average wages, median wages are not pulled upwards by rapid gains at the top. As the joke goes: Bill Gates walks into a bar and, on average, everyone there becomes a millionaire. But the median does not change. Between 2000 and 2005, the US economy grew by 12 per cent in real terms and productivity, measured by output per hour worked in the business sector, rose 17 per cent. Over the same period, the median hourly wage - the wage the average American takes home - rose only 3 per cent in real (inflation-adjusted) terms. That compares with a 12 per cent gain in the previous five years. Real median family income fell every year from 2000 to 2004. It increased last year but is still lower than it was in 2000. Jared Bernstein, an official in Bill Clinton's administration and now at the Economic Policy Institute, says the gap between productivity and median wage growth "is the most significant economic challenge of the day". He adds: "Workers have a right to be concerned about the large and growing gap between productivity growth and their pay cheques. They are working harder and smarter, baking a bigger pie more efficiently, but ending up with smaller slices."(...) even if average wages start to catch up with productivity gains, median wages may grow at best sluggishly, reflecting an increasing gap between the average American and the high-salaried elite. Glenn Hubbard, dean of Columbia business school and another former chairman of the Bush council of economic advisers, says most explanations for this revolve around the "familiar culprits - globalisation and technology". Increased global competition has eaten away the economic "rents", or excess returns, earned by US manufacturing workers, he argues. Meanwhile, the growth of global corporations and markets allows "superstars" - whether in business, finance, sports, law or entertainment - to apply their talents across a much bigger base, increasing the economic return to their skills. The most potent force, though, may be technology rather than globalisation - though the two are inextricably linked. Larry Katz, a Harvard professor who worked in the Clinton administration, says information technology is essentially "complementary to workers at the top, a substitute for workers in the middle" and of minimal relevance to those at the bottom of the income scale.

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