Monday, October 17, 2011

An Economic Crisis (and Miracle) Revealed

Wages and Salaries as a Portion of Gross Domestic Product
So I took the predictable flack from my “liberal” friends on Facebook after my recent comments on the “occupy Wall Street” business. There has also been much discussion of the protests elsewhere on the Internet. Eventually, these discussions turn toward uncomfortable things, such as facts and data.

An article cited made much out of the fact that the portion of U.S. gross domestic product (GDP) comprised of wages and salaries has shrunk quite dramatically over the last 50 years. While this apparent disparity isn’t necessarily a cause for concern, the article’s evocative graphic led me back to its source, the Federal Reserve Bank of St. Louis. There, I examined the data for myself and built some of my own graphs.

The Federal Reserve data yielded two interesting and somewhat unexpected facts. First, the sharp decline in income (adjusted for inflation) beginning in A.D. 2008 is one of historic proportions. That alone can explain the unprecedented anguish so many people are feeling. They are suffering, or at least they’ve received quite a shock after decades of relative prosperity. It also explains why “occupy Wall Street” took me personally by surprise, as I will explain shortly.…

Real Personal Income
Second, the overall growth in real income was equally unexpected. I had long subscribed to the “liberal” economic theory that real wages had been generally flat or even declining for several decades, driving the proliferation of the two-income household. Now, if the data are to be believed, that notion must be largely false. Yes, we can surely parse the numbers to show how certain segments have not benefited, but that would turn us toward other uncomfortable things, such as personal choice and responsibility.…

However, my own observations have now been confirmed, repairing a troubling logical contradiction. Since the late 1980s, I have watched a dramatic increase in personal wealth among the general population. Since that increase only rarely applied to me, I explained it away as a personal sampling error. Nevertheless, the people around me in a variety of income brackets seemed to have plenty of food, personal electronics, and expensive telecommunication contracts. Indeed, prices in these sectors were either fairly flat or even declining in some cases.

Real Income, 1991–2010
I’ve been a formal member of the workforce for 20 years now. As the graph above shows, change in real income was entirely positive during this period … until the financial crisis. My personal experience was very different. Though my working life has seen only three official recessions, my real income has been recessionary in nine of those 20 years. In other words, coping with declining wages has become normal for me.

The time when I felt the richest came shortly after I finished college and before my wife and I bought our house. Working full time, our disposable income increased rapidly but was still moderate. This allowed us to pay off our vehicles and student loans on time or early, so we were effectively debt free until buying our house.

M. D. Van Norman’s Real Disposable Income
That brief window of perceived prosperity came to an end when we became homeowners. In fact, the opening phase of my next personal recession was part of what enabled us to buy into an affordable housing program. Thereafter, my income continued to decline in real terms for six out of eight years. When it arrived, the great recession was simply treated as more of the same in my household.

Without digressing into those other uncomfortable matters, the moral of this post is that the financial crisis has had a profound effect on real income, much more so than I had thought. (Consider me properly chagrined.) However, the data also show the heretofore dramatic and largely sustained growth of that income. This latter fact should not be forgotten as we find our way out of the current crisis.

Tuesday, October 11, 2011

Occupying Wall Street

As I’ve said before, emotions run high in hard times, and people look for someone (usually someone other than themselves) to blame for their financial woes. That observation has been starkly illustrated in the last few weeks as thousands of mostly young people have rallied to protest flaws in the American economic system. This so-called occupy Wall Street movement began in New York but has spread to other cities.

Actually, my description above is a charitable one. Most of the protesters don’t fully understand what they are protesting. Instead of challenging they very real problems within our economic policy and regulatory structure, they are lashing out at big corporations, free markets, and capitalism in general—and griping about having to repay their student loans.

The more strident critics of the “occupy” movement are quick to point out the apparent hypocrisies and contradictions among the protesters. The protesters, they note, have arrived wearing designer clothes, bearing the latest smartphones, and enjoying many other accoutrements provided by the very corporations that they’ve come to decry. However, such criticism is as misdirected as the protests themselves, even if the observation is an extremely important one for a different reason … which I will explore shortly.

Predictably, the “occupy” movement has been met with approbation from the leadership of the Democratic Party and generally favorable reporting by the mainstream news media. In his panegyric for CNN, Douglas Rushkoff writes that the protesters “are pointing the way toward something entirely different than the zero-sum game of artificial scarcity favoring top-down investors.…” While something different may be on the horizon, Mr. Rushkoff displays some of the same economic ignorance shared by the protesters he admires.

Before I explain why they are misdirecting their rage, I must confess my sympathy for the “occupiers.” I understand their desires and frustrations. It is perfectly natural to want more for oneself and to envy those who appear to already have it. Channeling those feelings onto productive courses is the challenge that we all face.

Now, here is where they’ve gone wrong. Economics is not a zero-sum game. In fact, capitalism itself is predicated on an increasing-sum paradigm. Therefore, investors aren’t trying to take wealth from others via any sort of zero-sum chicanery. They are instead risking some of their existing wealth to build even more for themselves and by extension for society at large. The evidence of this and for capitalism’s unmitigated success is so ubiquitous that it often escapes notice. Capital investments and market forces have created and distributed so much wealth in a few short centuries that it boggles the mind. Human expectations are only just now catching up with this economic accelerando.

So the wealthiest people who have ever lived are presently complaining about the very economic engines that have delivered their wealth. Yes, if you have fine clothes on your back, magical electronics at your fingertips, and thousands of calories easily within your grasp, you are rich in absolute terms. Some of us have more than others, but we are all rich beyond almost any previous imagination.

And that brings me to why so many people are so angry. Our imaginations and expectations can expand. Revolutions may be triggered when expectations rise more quickly than they can be met. That is clearly the environment we see today, even if many of the heightened expectations are still unwarranted … still belonging to a future that we can’t quite touch.

Nevertheless, a new economic revolution may be on the horizon. Unfortunately, revolutions are always an uncertain business, prone to failure and fraught with potential danger. If there will be change, we must identify the right targets for reform, but that is not what I see happening within the “occupy” movement. If this economic anguish remains misdirected, it risks being co-opted by the very forces that have always sought to maintain that anguish for political gain.

I don’t know what shape the new economic model for a “post-industrial” America will take, but I do know that the best course into the future won’t be the quickest or the easiest one. Let’s begin with an inventory of our enemies and allies on the journey forward. Capital investments and free markets are not our enemies. They are our tools for building and distributing wealth. (We just have to learn to use them correctly.) Our only real enemies are those who would abuse economics for political gain and those who would abuse politics for financial gain. They aren’t that hard to identify.

Meanwhile, here is the best way to occupy Wall Street.

Investing has never been easier.
If you have no stake in the system, then you have no right to change it. Fortunately, in a free market, you can buy yourself a stake. Your dollars will often speak louder than your votes or your misdirected rage.