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.
In order to cope with stagnating and often falling incomes, and less stable jobs, many and perhaps most Americans have had to change their lives in ways that twenty years ago would have been seen as a fall in their status and in their standard of living. And for most Americans, a flurry of new and varied products and services, many though not all of them deriving from computer technology, has not compensated for these changed circumstances, as some have claimed.
How do Americans manage? “The short answer is to double up,” writes Hacker. Spouses now work in nearly three quarters of the thirty-five million marriages between people aged twenty-five to fifty-four. The reduced ability of the men of the family to be the chief breadwinner has no doubt strained marital and family relationships severely, a fact rarely considered by economists when they assess the economy’s strength. Young adults share living quarters more frequently or stay at home with their parents as well. Parents and grandparents increasingly support their children well into adulthood.
Hacker writes that fewer Americans can buy their “dream home.” The average size of a house may have increased, especially as those who already own houses trade up on the basis of the large capital gains made on their original purchases. But a smaller proportion of the population lives in single-unit homes than did in 1970. There is a good reason for this, Hacker writes. In 1970, the price of an average new house was twice a young couple’s income; it is now four times that income. New cars cost about half of a young couple’s income today compared to only 38 percent in 1970.
Hacker could have added that as a result typical Americans buy far fewer new cars as well, a trend that started in the 1970s long before the durability of cars was improved. The cost of a college education is also a higher proportion of average income. In order to earn tuition, many students take more than four years to go to college; and tuition is often supplemented by help from grandparents. “Perhaps the chief accommodation Americans have made to this new economic fact of life,” Hacker points out with characteristic insight, “has been to postpone marriage and having children.”
Who, then, is earning all the money? Hacker somewhat grandly defines the rich today as anyone earning $1 million or more a year. When I watched the popular TV show called “The Millionaire” as a boy in the 1950s, a check worth $1 million was thought to be enough to solve any problem. By the early 1980s, Wall Street money managers were earning as much as $6 or $7 million in a single year. By the late 1980s and early 1990s, some were earning $100 million and eventually even $1 billion in a single year.
As Hacker points out, only about 13,500 American households reported incomes of $1 million or more in today’s dollars in 1979. The 68,000 or so who earn $1 million a year today are a diverse group. Hacker estimates that about 2,500 corporate officers reported $1 million or more of income in 1995, as well as some 1,500 men and women from Wall Street securities firms, about 1,000 lawyers, another 1,000 or so athletes, a couple of hundred movie stars, and a handful of doctors.
But these account for only a small minority of the new millionaires. Most of the remainder are probably small businessmen who employ one or two hundred workers. Others have inherited their money. Many, no doubt, also fall in and out of the category each year. In other words, many more than 68,000 earn $1 million at least once. A growing portion of the income of these millionaires, however, comes from work, confirming that at the very high end of the income scale earnings are rising rapidly. But most of the income of those who make $1 million or more a year is derived from stock dividends, interest on bonds, and the sale of assets such as a house or a portfolio of stocks. The average income of the 68,000 people who earn more than $1 million is $2,483,081. Of this Hacker finds that “a very hefty $1,663,664 flows from sources other than employment, reflecting their ownership of much of America’s wealth.”
One often-mentioned reason for the rising accrual of wealth in recent years is that taxes have been lower; but Hacker overstates this argument by concentrating only on those who make $1 million or more. A general tax cut for upper brackets under President Reagan resulted in a sharp reduction in tax rates for those in the upper 1 percent of earners. This may well have contributed to the growing income disparity in the 1980s and early 1990s. But after 1993, when President Clinton raised upper-income tax brackets, tax rates for the highest earners were again raised to levels substantially above those for earners in the broad middle of the pack,4 with the top 10 percent paying about 59 percent of taxes.
Hacker may make too little of another important factor, however, namely the steep rise in stock and bond prices. Stocks have gone up, on average, by six or seven times since the early 1980s, for example. This unusual inflation of financial assets, which far exceeded the growth in the economy or corporate profits over the same period, has added enormously to the wealth, and ultimately to the annual incomes, of the rich over these years. The rise in stock prices is to some degree a catch-up with the rapid price inflation of the 1970s, which initially left financial assets behind; for this reason, it seems unlikely that increases in financial assets will continue at the same pace.5
But basically incomes for top earners rose much more rapidly in the past twenty years or so than did incomes for the rest of the population. Unfortunately, Hacker does not analyze those who make up the top 5, 10, or 20 percent as closely as he does the super-rich. He does show, however, that average incomes for the top fifth, or quintile, of earners rose significantly over this period, while the average earnings of those in the bottom 80 percent grew only marginally. In fact, the proportion of the nation’s growing income earned by those in the lower four fifths actually fell during these years. This is in decided contrast to most of the nation’s modern economic history, when a family’s income would typically rise considerably even if it remained in the middle of the pack. By contrast, during the past twenty years, one generally had to rise into a higher income group in order to improve one’s annual earnings significantly.
How financially mobile are Americans? Some analysts have recently claimed that many workers ascend into the high-income categories rapidly, while others as rapidly fall out. Hacker does not address this issue. But several comprehensive analyses, which take account of the normal increases in wages that occur as a worker gains experience, find that while many Americans still make it out of the lower income brackets, they rarely rise very far for the rest of their working lives. According to Peter Gottschalk, an economist at Boston College, a fairly high number of people rise from the lowest fifth, in large part because it is dominated by young workers in their first jobs. Nevertheless, after seventeen years, more than 40 percent of those in the lowest quintile remain there, and only 20 percent ascend to the fourth or fifth quintiles. Of those originally in the fifth quintile, nearly 80 percent remain in either the fifth or fourth quintiles seventeen years later.6 A study by Stephen Rose, a former Labor Department economist now at the Educational Testing Service, shows that the degree of income mobility has progressively fallen in the past twenty years or so compared to what it was in previous decades. 7
Sluggish productivity growth accounts for a great deal of the historically slow growth of incomes in general. But economists have no simple answer for why the distribution of income has become so unequal. Hacker proposes a familiar list of possible causes. International competition with low-wage countries has put pressure on wage levels in the US, as have rising levels of immigration. The decline of unionization has probably contributed to reduced wages among workers. The failure to raise the minimum wage to keep up with inflation has also contributed to falling incomes for low-wage workers. For most mainstream economists, an increase in demand for skilled labor owing to technological change has been the most important cause of growing wage inequality, as those with only high school educations or less are left further behind.
But Hacker is far less ready than are most economists to agree that the distribution of income reflects a fair assessment of a worker’s skills or contribution to the economy. He questions, for example, whether the soaring salaries and bonus compensations of corporate chief executives—some of which are over $50 million a year—make economic sense. He concludes that the boards of directors who determine CEO compensation tend to be “members of an inbred club who look after one another.” No doubt there are exceptions who have made huge differences to their company earnings and stock prices; still, some would say that high-level lawyers, Wall Street investment bankers and money managers, and even today’s hospital administrators are members of a similarly privileged club.
Nor does Hacker entirely accept that education accounts for differences in incomes as technology becomes more sophisticated. The foundation for this widely held idea is that the gap between the income of workers with college degrees and those with high school degrees has steadily widened in the 1980s and 1990s. Among men thirty-five to forty-four, Hacker writes, a college graduate will make an additional $749 for every $1,000 the high school graduate earns.
But Hacker, a long-time university professor, doubts that a college education teaches the skills directly needed in the workplace. Rather, higher education demands that students accept discipline and acquire some basic abilities, such as a capacity to pass exams; but he finds that what college education supplies is not all that useful even in contemporary jobs. Few computer operators, he writes, “move beyond spreadsheets and word-processing programs into the more arcane terrain of invariant analysis and mathematical models.” And most of the jobs relating to these new, more esoteric products “can be mastered by anyone with an average intelligence and education.”
If Hacker is mostly right, then unequal wages are, to a large degree, based on a class system that favors those privileged enough to attend college, where they acquire not rare skills so much as good work habits, the right credentials, and a sense of how a college graduate should behave. Employers probably also rely on a college degree to be certain of a minimal level of literacy and arithmetic skills at a time when a high school diploma is no longer proof of such competence.
Hacker may be too cynical here about the benefits of higher learning. His other writings about education make it clear that he also believes college can introduce students to different value systems, expand their vocabulary of words and ideas, and stimulate their latent curiosity. Still, he makes an important point. Employers can use college degrees as a screening device for many other factors besides developed skills, and to shield themselves from the widely recognized failures of high schools. This is especially so when the economy grows as slowly as it has until very recently; the slack demand for workers leaves an ample pool from which employers can choose the best-qualified candidates without having to offer much higher pay.8 No doubt improved technology and the downsizing that goes with it have helped keep wages down. However it is probably not technology alone but rather technology in combination with slow economic growth and the declining quality of primary and high school education that accounts for the continuing wage gap.9
Prejudice also apparently continues to play a discernible part in setting wages. The ratio of female to male earnings rose moderately in the 1980s after having stagnated in the 1960s and 1970s. But Hacker points out that women still make much less than men in every job category. For African-Americans, the income of the typical family, as Hacker writes, was actually lower in 1995 as a percentage of a white family’s median income than it was in 1975. But Hacker ignores that the incomes of African-Americans are also becoming more unequal. It turns out that earnings for upper-income African-Americans have risen fairly rapidly, but have been offset by declines for lower-income African-Americans.
The upshot of Hacker’s argument is that there is no lack of ability or talent among American workers. If I read him correctly, he particularly wants to challenge the prevailing idea among both liberals and conservatives that what is holding America back, in the long run, is a shortage of able people; such a view distracts the nation from the necessary task, which is to incorporate far more Americans into the productive economy. To extrapolate from his argument, this may involve not merely getting people into college, but improving decaying urban and suburban neighborhoods, providing enough income to stabilize family life among the poor, and reforming education where it probably counts most, which is in primary and secondary schools. “Talent may be more widespread than we believe, and we may have blinded ourselves to that possibility,” he writes.
From Hacker’s quiet prose, it is sometimes hard to know what particularly disturbs him about the situation he presents so clearly. But the elitism he sees among well-intentioned reformers seems to bother him deeply. He criticizes Harvard University’s former president Derek Bok, for example, for the kind of thinking that he believes has particularly unfortunate effects. Bok has written that every society has only “a limited supply of highly talented people.” To a Harvard president, who picks his students largely from high school valedictorians and those with the highest test scores, Hacker points out, scarcity defines talent. So does it define the standards for hiring CEOs, for example, who must often already have been a CEO or at most one rung beneath on the corporate ladder in order to qualify for the job.
“Throughout history, most human talents have remained dormant,” Hacker wisely writes, “because societies have lacked the capacity or interest to uncover people’s fullest talents.” He continues: “Just as Florence of the Medicis felt no shortage of sublime artists, so classical Athens did not lack for gifted playwrights. Perhaps it is indicative of our more mundane times that we resort to talk of shortages.” In support of his view, Hacker reminds us that a considerable percentage of workers with only high school diplomas still do well, while a similarly large proportion of those with college degrees do not.10 With such arguments Hacker shows how fresh and suggestive his vision of a different kind of society can be.
Americans are undoubtedly more confident today as a result of the economic progress made in the past couple of years. But little is being said about how to improve productivity and sustain more rapid economic growth—the main question that should, in my view, now be the subject of public debate about the economy. Particularly disheartening during the past year and a half, for example, has been the fact that the recent rapid growth is the result of more people working longer hours; it is not the result of a significant increase in output per worker. Many unemployed workers who were not looking for jobs before are now apparently eagerly taking them as they become available. Others are working harder and longer. Overtime hours are surging, for example. But there are only so many unemployed workers, and those on the job can’t keep extending their hours indefinitely. The recent rate of growth cannot be sustained even partially unless productivity rises faster.
Some, of course, believe that productivity gains are not being measured properly. One such argument is that the output of some modern services, such as medical care, is hard to measure, and that their productivity is being underestimated. But Dan Sichel, a Federal Reserve Board economist, figures that even if these assertions are right, and many economists have their doubts, productivity growth would be increased by .25 percent a year at most.11
Moreover, the recent productivity gains widely attributed by economists and businessmen to aggressive downsizing of work forces and restructuring of companies are typically one-time improvements that cannot be duplicated. What extra productivity growth the economy has produced may, therefore, be short-lived even if it is undermeasured. 12 As for the proliferation of computers and related products, Sichel also points out that such investments are, for all the attention they attract, still too small a part of the nation’s capital stock to matter nearly as much as today’s high-technology evangelists insist that they should.13 Perhaps most important, as is frequently noted, savings and capital investment, the generally acknowledged sources of long-term productivity growth, are still historically low as a proportion of GDP.
What should we do to sustain more rapid growth? A good start would be to recognize that the economy, perhaps because labor is more plentiful than was expected, has grown much faster than most mainstream economists believed it could without generating inflation. Still more expansionary policies on the part of the Federal Reserve to reduce interest rates should therefore be seriously considered. Real interest rates—interest rates discounted by inflation—are still historically high, and may be impeding investment and consumer spending.
More important over the long run, in my view, is to increase some kinds of private and public investment which are being badly neglected. Spending on research and development is among the most important of these. Basic research, in particular, has been cut back. Among public goods, the US is lacking in the fundamental assets that will become increasingly needed as it moves into the next century, including high-quality day care, better primary and high schools for all income groups, and more modern transportation systems. All these would contribute not merely to well-being but to the growth of productivity over the long run.
Finally, the gross inequality of income in America is robbing millions of equal opportunity in education and experience, and the chance for a stable family life. The unequal distribution of income is also costly to a society that is losing potentially productive workers and must pay increased public assistance and unemployment insurance. In families with incomes of $25,000 or less, Hacker notes, only one out of ten children goes to college, in part because the quality of elementary and high school education is so poor. Higher wages for the lower tier would also increase incentives for them to work and become more productive. Hacker is most eloquent about children born into poverty. “The statistics are apparent to outside observers, and to the children themselves, who very early on become aware of the barriers they face,” he writes. “And from this realization results much of the behavior that the rest of society deplores. The principal response from solvent Americans has been to lecture the poor on improving their ways.”
Why are Americans still more angry at the poor than at the rich? The cuts in last year’s federal budget balancing package, which Americans generally approved, required more sacrifice from poorer Americans than from anyone else. A Treasury Department analysis concludes that more than 19 percent of the benefits from tax cuts and spending changes in the House’s proposed budget for next year would go to the highest 1 percent of earners while only 12 percent would go to the bottom three fifths.
Hacker attributes the equanimity of Americans toward the rich to self-reliant and materialistic traditions. But the animosity toward the poor seems to me evidence of the economy’s ongoing weakness. Most Americans probably still feel too pinched to consider generous investments in public goods or a costly redistribution of income. The demand for tax cuts becomes intense when most people believe they can only just make ends meet.
For these reasons, I think the great enemy of a more just society is slow growth itself, and the resulting income stagnation. Today’s liberal reformers should keep in mind that the reforms at the turn of the century and again in the Great Depression occurred during or immediately after eras of fast economic growth. America has now experienced nearly twenty-five years of historically slow growth since the time when confidence and generosity were high.
Much has been made of the contrast to Europe, where voters still seek to retain their generous social programs despite slow economic growth and high rates of unemployment. The high cost of these social programs to European employers may well have held back job growth, while the greater flexibility in hiring and firing in the US may be one of the sources of this country’s stronger performance. It is well to remember, however, that European policymakers are hamstrung by the restrictive fiscal rules required to join the new European Monetary Union, and the US, in its seventh year of economic expansion, may be at a cyclical highpoint. And European manufacturing productivity is, nevertheless, improving about as fast as, and in some cases faster than, American manufacturing productivity.
On the other hand, experience in the Netherlands, where unemployment rates are half what they are in the rest of Europe, suggests that there is a middle way that can make sense. The Dutch have tolerated much more temporary employment than the rest of Europe, and instituted more free-market reforms. But they have also retained much of their generous system of social services, allowing them to avoid a serious widening of the distribution of income without much sacrifice in economic growth. In this sense, the Netherlands example could be suggestive for the US with its low levels of public investment and growing inequality of income. Inequality has gone so far that some mainstream economists are urging the US to consider using the tax system to subsidize increases in income for low-wage workers.14
Even if the US defies history by avoiding a recession, current rates of economic growth make it difficult to solve such basic problems as severe income inequality, which leaves some 28 percent of the population in Hacker’s lower tier of deprived Americans. And, at current rates of growth, the bill for Social Security, Medicare, and defense commitments will raise the federal deficit to potentially damaging heights in the next century.
Unfortunately, most of America’s politicians see only an opportunity to congratulate themselves for the recent prosperity, while fewer and fewer people show interest in changing society through politics or even voting.15 “How a nation allocates its resources tells us how it wishes to be judged in the ledgers of history and morality,” writes Hacker. “With the legacy we are now creating, millions of men, women, children are prevented from being fully American, while others pride themselves on how much they can amass.” Contrary to what passes for informed economics today, such a national mood will sustain neither an adequate rate of economic growth nor economic fairness.
August 14, 1997
Bruce Steinberg of Merrill Lynch, June 2, 1997. Fortune Magazine, June 9, 1997. ↩
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. ↩
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. ↩
Lawrence Mishel, Jared Bernstein, and John Schmitt, The State of Working America 1996-97 (Economic Policy Institute/M.E. Sharpe, 1997), p. 108. ↩
Edward N. Wolff, Top Heavy: A Study of the Increasing Inequality of Wealth in America (Twentieth Century Fund, 1995). For an analysis of financial asset inflation, also see my own piece, “How To Succeed in Business,” The New York Review, April 18, 1996. ↩
Peter Gottschalk, “Inequality, Income Growth, and Mobility: The Basic Facts,” The Journal of Economic Perspectives, Vol. 11, No. 2 (Spring 1997), pp. 21-40. This is a valuable summary of the literature on income inequality. ↩
Stephen Rose, “On Shaky Ground: Rising Fears About Income and Earnings,” National Commission for Employment Policy, Research Report No. 94-01, 1994. ↩
We should keep in mind that the cause of the wage gap is not that salaries for college graduates have risen rapidly. Many must settle for low-paying jobs. Rather, average high school graduate salaries have sharply decreased. The average weekly earnings for college graduates rose by only 5 percent between 1979 and 1994. The gap was largely caused by a decline of 20 percent in the average wage for high school graduates. ↩
Economists are not oblivious to this argument. For a somewhat though not entirely contradictory point of view, see John Tyler, Richard J. Murname, and Frank Levy, “Are Lots of College Graduates Taking High School Jobs?” National Bureau of Economic Research, Working Paper No. 51 27, May 1995. ↩
There is revealing contemporary economic research offering additional support for Hacker’s point of view that he doesn’t cite. These studies show that there is roughly as much inequality of income among those with college degrees and similar levels of experience as there is in society as a whole. This suggests that additional factors are at work in determining income, including abilities that may lie unused or unencouraged, especially among the disadvantaged. See Gottschalk, “Inequality, Economic Growth, and Mobility.” ↩
Daniel E. Sichel, The Computer Revolution (The Brookings Institution, 1997), p. 99. ↩
Some argue that unmeasured productivity is accounting for today’s surprisingly low level of reported inflation because it keeps business costs low. But significant unmeasured productivity gains would mean that real GDP growth is much higher than is reported. If that were true, then wages should be rising more rapidly than surveys suggest they are, or reported inflation should be much lower. The current subdued inflation requires other explanations, which may include a plentiful labor supply, international competition, tight monetary policy, and the slow growth of consumer demand. ↩
See, for example, “The Long Boom,” in the July issue of Wired. ↩
See Edmund Phelps, Rewarding Work (Harvard University Press, 1997). ↩
Only 49 percent of eligible Americans voted in the 1996 Presidential election. The turnout was worst among those with low incomes. For a further discussion of the declining interest in political participation among the less well-off, see Sidney Verba, Kay Lehman Schlozman, and Henry E. Brady, Voice and Equality: Civic Voluntarism in American Politics (Harvard University Press, 1995). ↩