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In the Shadows of Prosperity

Money: Who Has How Much and Why

by Andrew Hacker
Scribner, 254 pp., $25.00


Andrew Hacker’s new book, Money, arrives at a propitious time. With the US unemployment rate now around its lowest level in twenty-five years, inflation subdued, and stock prices high, many commentators are gushing over America’s economic performance. The contrast with languishing European economies, where unemployment rates are two and three times higher than in the US, is making the economy look all the more enviable. A characteristic recent analysis by the brokerage firm Merrill Lynch, for example, was entitled “Paradise Found: The Best of All Possible Economies.” Fortune Magazine exceeded even this optimistic appraisal when it pronounced this June that the US economy is “stronger than it’s ever been.”1

The US economy is, indeed, more buoyant than almost anyone anticipated. The reduction in unemployment to about 5 percent of the American work force this summer, roughly its lowest rate since 1973, is all the more impressive because few economists believed it was possible for unemployment to fall much below 6 percent without causing more inflation. Despite a sharp slowdown in growth in the quarter ended this June, the economy has been growing at an average annual rate of roughly 3.5 percent for a year and a half, and average wages adjusted for inflation are at last rising, if only moderately.2 Moreover, growth rates may well be revised up at the end of July.3

But claims that the US economy is performing ideally, or that, according to Fortune, “these are the good old days,” are unwarranted and misleading. Consider the basis of Fortune‘s assertions. The magazine points out that real Gross National Product per capita (adjusted for inflation) is higher in the US than it was in the past. But Fortune could have made the same claim about real GNP per capita in 1987 or 1977. This measure, which is the output of goods and services per person, is almost always higher than it ever was before; it falls essentially only in recessions. In other words, by this measure, the economy is usually stronger than it has ever been.

What Fortune fails to point out is that real GNP per capita, or the more commonly used real Gross Domestic Product (GDP) per capita, has grown on average nearly one-half percent a year more slowly since 1973 than in the preceding hundred years. Despite more rapid growth recently, per capita GDP has continued to increase at the same rate in the 1990s as it has since 1973, and further adjustments to the data will probably only raise this rate of growth marginally this decade. A shortfall of one-half percent a year can make a great deal of difference. Had the economy grown one-half percent faster since the early 1970s, for example, federal tax revenues would have been so much higher that there would have been no budget deficit by the early 1990s, a time when the deficit was in actuality nearly $300 billion.

Moreover, more than 50 percent of the population now works, compared to only 40 percent between 1870 and 1970. As baby boomers have come of working age, families have had fewer children, and many more spouses have taken jobs to maintain family income. With more workers in the economy, real GDP per capita should probably be rising faster than it did between 1870 and 1970 if the economy were as robust as is now being claimed.

The measure that tells us more about the inherent strength of the economy, and its potential to grow further, is the output of goods and services per worker—roughly the equivalent of what is called labor productivity (output per hour of work). But labor productivity has grown even more slowly compared to its historical norm than has GDP per capita. It has risen at an average rate of only 1 percent a year since 1973, compared to an average rate of growth of 2.25 percent between 1870 and 1973. (Inflation was relatively low for many of these years and, in some, prices went down.) It has continued to rise consistently in the 1990s at only 1 percent a year. Even in 1996, when overall economic growth was relatively high, productivity rose by less than 1 percent.

As a result of the slowdown in productivity growth, adding people to the payroll simply no longer increases output the way it once did. When the unemployment rate was routinely under 5 percent in the past, the economy grew much faster than it is growing today. So, as a result, did living standards. The current economic expansion, now in its seventh year, has been so moderate that average hourly earnings, adjusted for inflation, have still not attained the peaks reached in the mid-1980s before the last recession, even including corporate benefits such as pensions and health insurance. The income of the typical family is only just now reaching its 1989 high, even though most families have two workers. The official poverty rate, though falling at last, is still above its 1989 low. And even savings and capital investment have remained historically low as a proportion of GDP.

A recession any time soon would reverse even these modest gains. And the much-publicized high-technology revolution, at least as yet, has raised productivity in too few sectors to have by itself lifted economic growth to its former rates. Total purchases of electronics products, it should be remembered, amount to only 2 percent of all consumer expenditures. By any basic measure, then, the American economy is not growing as strongly as it once did.

Andrew Hacker, a political scientist, does not try to assess the health of the US economy by analyzing traditional economic measures of growth and productivity. Rather, Hacker is interested in money—who has it, how much they have, and why. But by examining the many aspects of this issue, and not being afraid to ask the questions economists find naive, Hacker often sheds more light on the nation’s financial condition than traditional economic commentators do. It should come as no surprise that he finds present-day America is hardly reminiscent of the good old days.

During the past twenty years or so, the nation has experienced one of the greatest accruals of private wealth in its history, despite the slow growth of output and income by historical standards. Hacker has no animus toward those who make fabulous fortunes. But he is plainly astonished at the wealth that has been created in the past couple of decades. About 68,000 families have incomes of $1 million a year today, he calculates, which is five times as many as did so in 1979 (adjusted for inflation). The least wealthy member of the Forbes 400 list of the richest Americans was worth over $400 million in 1996. In 1982, when the list was started, only 110 of the richest 400 had a net worth of $400 million or more. The poorest member of the Forbes 400 has a net worth, adjusted for inflation, about three times larger than that the least wealthy member had fifteen years ago. Nor are rising incomes and wealth limited to the very rich. Twenty years ago, families whose annual earnings were in the highest five percent of American households had an annual average income of nearly $123,000. Adjusted for inflation, the average pre-tax annual income of the upper 5 percent currently equals nearly $189,000, a rise of about 50 percent.

Meantime, however, much of America has lagged badly behind. “It is one thing for the rich to get richer when everyone is sharing in overall economic growth,” writes Hacker, “and it is quite another for the better off to prosper while others are losing ground or standing still.” During the last twenty years, average wages, even when corporate benefits such as health insurance and pensions are included, have grown very slowly and, for many, have fallen. Those at the bottom have fared least well, especially the young and less well educated. The result is that the distribution of income between high-and low-paid workers is more unequal than it has been in fifty years—indeed, it is the most unequal in the advanced industrial world.

Matters also have become mostly worse for the poor. The poverty rate, which decreased from 22.4 percent of the population in 1959 to 11.1 percent in the mid-1970s, rose to 14.5 percent in the mid-1990s. During this period, Hacker notes, poverty levels rose for all age groups except the elderly, who are protected by Social Security. Children are now the poorest demographic group in the nation, with one out of between four and five officially growing up in poverty. Even the proportion of workers who work full time and still earn poverty-level wages has risen rapidly. The proportion of people with incomes below the poverty level edged down to 13.8 percent in 1995 and probably to a lower level in 1996 (the data are not yet available), though it still stands above its 1989 level of 12.8 percent.

The proportion of those who do not have medical insurance has also consistently risen even during economic expansions over the past two and a half decades and now amounts to more than 17 percent of the population. America has the highest incarceration rates among the world’s industrialized nations, except for Russia: the proportion of men of working age either in prison, on parole, or on probation is about 6 percent. As Hacker and many others have pointed out, the state of California spends more on building and maintaining prisons than it does on higher education, and other states will soon do the same. Are these really America’s good old days?

One of Hacker’s key points is that Americans who are badly off include more than those legally defined as poor. A three-person family living on $235 a week, which was the federally defined poverty level in 1995, earns just enough to ward off hunger, Hacker writes. In search of a more realistic measure of deprivation, he cites a Roper-Starch poll in which only 45 percent of the respondents believed that a family of three could just get by on an income of $25,000 a year. A Gallup poll had similar results. It would have been helpful if Hacker had analyzed more thoroughly what $25,000 a year can, and can’t, buy; but $25,000 seems at least a plausible estimate of the minimum income a family would need just to survive intact. In 1995, more than 28 percent, or twenty million, of America’s approximately seventy million families earned $25,000 or less.

One third of this lower tier, or nearly seven million families, receive all of their income from Social Security or other kinds of public assistance. About 43 percent, or about 8.5 million families, receive their annual income from only one earner, usually a woman who is the sole support of the family. About 20 percent, or more than four million lower-tier families, have two or more earners. Each of these workers probably works sporadically for about the minimum wage. In addition, fewer men in 1995 earned $25,000 to $50,000 a year than was the case twenty-five years earlier. Some of those no longer in this income bracket earned more, some less. But Hacker puts his finger on the main point. “In more halcyon times,” he writes, “it was assumed that each year would bring a measure of upward movement for people at the bottom of the income ladder and a diminution of poverty.” This is clearly no longer the case. As Hacker points out, one third of all full-time jobs pay less than $20,000 a year. Half of the jobs for male workers pay less than $28,000, barely enough to provide a minimal standard of living for a family.

  1. 1

    Bruce Steinberg of Merrill Lynch, June 2, 1997. Fortune Magazine, June 9, 1997.

  2. 2

    This average includes the rapid rate in the first quarter of 1997. I assume that real GDP growth in the second quarter of 1997 will be between 2 percent and 2.5 percent on an annual basis.

  3. 3

    There has been an unusual discrepancy in the government data that is discussed in The Economic Report of the President 1997, US Government Printing Office, pp. 72-73. The collection of data on income has not as yet been coordinated with the data on production. But an adjustment will probably be smaller than the discussion in this report suggests, though it will raise estimates of productivity growth slightly for the 1990s.

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