I have long wanted to collect my thoughts about some of the issues — masked in part, I believe, by the two bubbles we’ve had in the past 11 years — that are exacerbating our current crisis and will continue to forestall any semblance of a robust recovery.

This issue has been vexing me for a while.  I think the reason is that there are so many disparate yet loosely connected ideas banging around in my mind that it’s been a challenge to figure out where to start and how to tie it all together.  That and the fact that my anger at our collective indifference to these matters is probably clouding my thinking.  So, apologies in advance if this is a bit disjointed.  All this stuff is most definitely interconnected, and I’ve tried to bring it together as coherently as possible without turning it into my master’s thesis.

I’ve written previously (maybe here, for sure elsewhere) that my biggest concerns are always jobs (that we create them) and incomes (that they’re decent and rising), in that order.  We are failing on both fronts, and the asshats in Washington (both sides, to be sure) seem to have decided there are more pressing issues to address and/or that we’ve reached the end of the line and there’s nothing that can be done on either front so we’d just better suck it up and adapt.  Worse, what really worries me is that there are very disturbing long-term trends that no one seems to want to acknowledge, no less try to remedy, that contributed mightily to the crisis we just struggled through — and may well again if corrective measures aren’t taken.

We know from the NFIB that the “Single Largest Problem” facing their membership is Poor Sales.  We know that Poor Sales and the Unemployment Rate are very highly correlated (+0.86), as I demonstrated here in February.  Poor Sales implies a lack of demand (or poor business decision-making, like selling parkas in Hawaii) — not uncertainty about Obamacare, tax rates, or other government rules and regulations (which are, by the way, also potential answers to that same poll question).  Larger corporations have also indicated soft demand for their products.  How to increase demand?  Well, real disposable income could go up, but it isn’t — or Americans could borrow more, which they aren’t.  Let’s have a look under the hood.

Here’s a brief discussion of the disturbing long term trends have only exacerbated our problems and are rarely, if ever, mentioned in my regular econo-surfing.

Income Inequality

Our Gini Coefficient has been rising for decades, indicating growing income inequality.

(Bonus points to the commenter who, without a shred of evidence, attempts to link the current financial crises in Greece, Ireland, and Spain to the fact that their Gini Coefficients have declined over 20 years.)

Our own Census data (chart below for the United States only) would indicate that United States income inequality has increased even more than that measured by OECD (I calculate it at just over a 5% percent gain from mid-’80s to mid-’00s, but in either case the trend is not a good one):

Source:  Census.gov, Income Inequality, Table F-4

There are many footnotes to all the Census data presented in this post; please see them here.

How is it that the Gini Coefficient is increasing?  Here’s a look at exactly how:

The chart immediately above is, by the way, completely consistent with the stock of a company like Tiffany (NYSE:TIF) recently hitting an all time high — as have some other luxury retailers.  You see where I’m going here?  If not, see here or here.  Or here.

Beginning in the latter years of the Reagan administration, the income share relationship between those at the very top — the top 1% — and the vast majority of the country — the bottom 90% — began to shift dramatically:

Source: Paris School of Economics

It’s my personal opinion that we have worked our way toward the end of “trickle down” economics and, while of course others are free to feel differently, I label it a failure.  When it’s available, it will be interesting to add the most recent data to the chart above.

Spending Capacity

Here’s a look at families’ median income from 1947 to 2009.  It’s a replica of a chart Paul Krugman ran here that I’ve been meaning to get to for a while.  It is hard — if not impossible — to satisfy ever-increasing demand with stagnant income, unless one borrows more.

Source:  Census.gov, Income Table F-12

Credit is still contracting, and probably will for some time to come.  Even when it stops contracting and starts to expand again, I believe there has been a fundamental change in the way Americans are going to view its use.  Here’s Total Consumer Credit less Total Government Loans (i.e. student loans):

The Kicker — American Labor is Getting a Smaller and Smaller Slice of the Output Pie

Now, what’s most troubling is that among the reasons income is going nowhere is the simple fact that American workers are getting less of the spoils, as clearly evidenced by their “labor share.”  We can determine fairly easily what share of the fruits of our labor are coming back to us in wages, salaries, and benefits, as we see here:

Per the BLS (third article, Chart 5 reproduced below):

Labor share is the portion of output that employers spend on labor costs (wages, salaries, and benefits) valued in each year’s prices. Nonlabor share—the remaining portion of output—includes returns to capital, such as profits, net interest, depreciation, and indirect taxes. [Emphasis mine for later reference.]

When labor share is constant or rising, workers benefit from economic growth. When labor share falls, the compensation–productivity gap widens.

Labor share averaged 64.3 percent from 1947 to 2000. Labor share has declined over the past decade, falling to its lowest point in the third quarter of 2010, 57.8 percent. The change in labor share from one period to the next has become a major factor contributing to the compensation–productivity gap in the nonfarm business sector.

So, how are Americans doing?  Here’s the history of the series (PRS85006173 — Nonfarm Business: Labor Share):

NOTE:  BLS provides (and FRED captures) this series as an Index, not a Level, with 2005 = 100.  BLS advises me that the 2005 Level = 60.6.  Therefore, I have taken the entire Index (Series identified above) and multiplied it by .606 to get the percent Labor Share above; it is identical to what you will find in the Census document I cite (except that mine is through Q1 2011).  As an aside, it’s interesting to note that the peaks in this series generally coincide with recessionary periods — output (the numerator denominator) goes down while wages (the denominator numerator) generally remain a fixed expense (thanks for the correction, jaysan, and sorry for the error).  Of course, that pattern is now completely broken, and Labor Share stands at an all-time low of 57.5.

Dave Rosenberg wrote about Labor Share in his note June 3:

The labour share of national income has fallen to its lowest level in modern history — down to 57.5% in the first quarter from 57.6% in the fourth quarter of last year, 57.8% a year ago and 59.8% when the recovery began.  Some recovery it has been — a recovery in which labour’s share of the spoils has declined to unprecedented levels.  Look, we aren’t Marxists, but one has to legitimately wonder what the social consequences are going to be if this downtrend persists;  not to mention the political consequences.

This is a very disturbing development, and Dave finishes his commentary on this as follows:

Even if you are an ardent capitalist (which I am), the chart below [ed note:  Below in his commentary, above here] should be leaving you with a bit of a queasy stomach — extremes like this, unfortunately, never seem to lead us to a very stable place.

So, where’s the nonlabor share of the equation showing up (see reference above)?  How about, in large part, on the balance sheets of nonfarm nonfinancial corporations — in their liquid assets:

And those are the nonfinancial companies that weren’t showered with government largesse and arguably made their money the old-fashioned way:  They (presumably) earned it (unlike the banksters).

Like Dave, I consider myself an ardent capitalist.  But what we’ve got now isn’t capitalism — it’s some warped perversion of capitalism that is leading us to a very troubling place.  As long as Congress continues to play Jerry Mahoney to corporate America’s Paul Winchell, color me decidedly dour on the outlook.  The parasite has almost killed its host.

For another look, I would highly recommend this piece by NDD over at Bonddad’s blog.

Sources, Reference Material, Interesting Reading

The World Top Income Database

Census.gov databases on Income and Income Inequality

St. Louis Fed

OECD Statistics Portal and New Beta Version

Federal Reserve Flow of Funds, Z.1

NY Times article, March 2007

Category: Consumer Spending, Current Affairs, Cycles, Data Analysis, Economy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

34 Responses to “Whither (and Withering) Demand?”

  1. Isn’t this just proof of what we’ve known for a while now?

  2. BusSchDean says:

    “(Bonus points to the commenter who, without a shred of evidence, attempts to link the current financial crises in Greece, Ireland, and Spain to the fact that their Gini Coefficients have declined over 20 years.)”

    Some significant portion of incomes at the high end are escaping measurement due to fiction in self-reporting and/or the ability to exclude some forms of income from being reported. Of course every dime of transfer payments to low income households get measured.

  3. Greg0658 says:

    thanks for reading my wishes and provide’g the 2nd chart with quintiles .. I have to go fix a wall (like a _ nevermind) so thats to much blahblah to take in my working world day

    but the top 2 charts and the steady climb into prosperity for all .. with the slight dip – that is what we’re here to curtail .. so I think Thanks are in order to Invictus

    I wonder if there is a rebalance level in them to come with who, what, where, when (never mind the why – I already learned that – thanks BR)

  4. Math Teacher says:

    So, how do we communicate this reality to voters who can’t read charts and graphs, and who are awash in lies and propaganda? What’s the sound bite, or bumper sticker?

  5. dr.j says:

    read page 8 and 9 of: Census.gov databases on Income and Income Inequality in Ritholtz’s links.

    Part of the math behind the GINI is the upsurge in lower end wage earning illegal workers in the country.

    You have a 25 year upsurge in this type of worker and it affects the data. Those low wages earned by illegal immigrants from any country drag down the stats.

    The other interesting stat from that section of the Census report is that Asians are gaining on their advantage over all other racial groups in our country.

    Perhaps the secret to the GINI numbers “dilemma” is to copy whatever the Asian population seems to be doing. They are gaining in all economic areas. page 9 of the Census report.

  6. willid3 says:

    obviously its a problem with the statistics. just like it was obvious that Paul Revere was warning the British? some one just needs to go back over the statistics and ‘fix’ them some how. and obviously we need to cut the taxes on the top 1%. and corporations too.

  7. Robert says:

    In our global economy, aren’t we importing the lower wages from overseas along with the lower priced goods? This would obviously hit the lower income workers harder. If we placed import duties on everything we import the resulting higher prices would support higher salaries. A fix?

  8. overanout says:

    The economy since the mid90′s has been transformed by computer intelligence/technology/applications combined with outsourcing both jobs and plants. Knowledge workers were to be the next employment wave but computer intelligence does the job faster,better and cheaper. Universities advanced degree grads are finding fewer job possibilities as they are quickly suffering the same fate as skilled labor back in the 90′s-replaced by automation. The traditional 40 hour work week is disappearing and with it goes much of our traditional economic knowledge.

  9. SCTTD says:

    I would truly like to see the income charts reproduced EX Stock Options.

    It is my contention that corporate america has discovered how to loot the corporate treasury at the expense of investors and that is the true perversion of capitalism.

  10. Math Teacher says:

    What’s with all the comments rationalizing outsourcing, union-busting, criminal behavior (see mortgages; Wall Street), tax dodging, regulatory capture, Congressional bribery (see K Street), and just plain greed? The “causes” of American inequality cited in some of the comments are not confined to this country.

    Our educational achievement sucks compared to Europe because EU countries generally have a more robust social safety net. It’s not the schools, it’s poverty. In 21st century America, poor people, people of color, and their children are simply not considered members of the Elect. Goldman is doing God’s work, remember?

  11. BoulderPatentGuy says:

    Is the appropriate Republican/Libertarian response that the market will take care of itself? For example, if company A pays their employees more than Company B, Company A will employ smarter people and make better products, so Company A will ultimately be more successful? If that’s the case, I’d like to see some concrete examples. Also, I’d like to see how this plays out in industries that employ low-income workers.

    It seems to me that without solidarity of workers (union or otherwise), there is no incentive for business owners to increase salaries of their employees; the scenario above (higher income for smarter workers) only plays out for the smartest/best workers. The bottom 99/90/80% (pick your number for whatever industry you’re in) of workers don’t “really” matter to their employers, so there is no incentive for employers to increase the salaries of the bottom portion of workers in lieu of providing themselves with more income.

  12. Raleighwood says:

    If globalization meant that capital chased cheap labor and wages fell to the lowest common denominator – but consumer prices stayed somewhat stable (unless it’s housing, health care or higher education) – then wouldn’t the excess go into profits?

    Didn’t the owners of capital retain the difference? All that extra money sloshing around the globe and most Americans are worse off for it.

    Labor no longer has a place at the table and an entire generation has been taught that pro-labor is anti-capitalistic and therefor commiserate with communism.

  13. b_thunder says:

    It’s surprising to see that according to Chart #2 – Gini for Families – the inequality coefficient started its “uptrend” not during the Reagan’s 1980s, and not even during the inflationary 1970s, but in 1967/68. Was the “great society” the catalyst that caused the unprecedented (at least since 1929) inequality?

  14. Nuggz says:

    “But what we’ve got now isn’t capitalism — it’s some warped perversion of capitalism that is leading us to a very troubling place.”

    Demographics trump everything. These trends are as predictable as a sunrise. America’s response to everything from Medicare, Iraq/Afghanistan, infrastructure, education is one of geriatrics. Fear, rigid ideology, anti-intellectualism, and retribution are all trademarks of an overtly religious aging society.

    Demand destruction? Poor sales? Ha! Have you ever been to a grocery store on senior day? Cabbage is 50 cents a pound and they want the poor grocery manager to give them 1/2 of a head.

    Too funny…….

  15. Banner says:

    Here is the bumper sticker (and it’s on my car):
    “AT LEAST THE WAR ON THE MIDDLE CLASS IS GOING WELL”

  16. [...] The US economy has a demand problem.  (Big Picture) [...]

  17. DeDude says:

    I think that predatory capitalism is slowly killing itself. A predator needs lots of good healthy prey to survive. When the prey disappears, the predator starves.

    The corporations are destroying the consumers upon which they prey to get strong and healthy. But they are what they are and, therefore, cannot stop themselves. Not only that, but they have used their control of mass media and little sock puppets in the supreme court, to make sure that nothing short of a bloody revolution can stop them.

    Question is whether the “Arab Spring” will come to Europe or US first. Although we only have +25% unemployment among high school drop out compared to Spain having 40%+ among young people, they have a much better social safety net to keep desperation under control.

    There is an interesting discussion under this llnk from Barry’s Monday reading list. http://econfuture.wordpress.com/2011/06/05/could-fast-food-automation-replace-low-wage-workers/

  18. Invictus says:

    @DeDude

    Funny, I came thisclose to going with the Frog & Scorpion parable.

  19. DeDude says:

    Me too, but then I thought that people making so much money could not possibly be completely brain dead acting on instincts. I mean at least Buffet has acknowledged the class war and his class “winning”. Would he have done so if he didn’t realize that “winning” is losing.

  20. DeDude says:

    I have no doubt that the worlds billionaires for the most part understand what they are doing. But a lot of them are either not US citizens or have “palaces” on many continents (and ocean going yachts). If their little games were to collapse US as a place to milk they would easily just move somewhere else and take a loss in the US part of their world-diversified portfolio.

  21. ephone1 says:

    I think offshoring is the elephant in the room. Despite all of our recent economic problems, I can’t recall any politician or pundant in the mainstream media even mentioning it as a root cause to the unemployment problem.

    What stuns me is that that even microprocessors are produced overseas – the kind of manufacturing the US was supposed to excel at. What do we have left? I don’t believe that the standard free trade mantra can rationaly explain what has happened to the US over the past 20 years.

  22. cgercke says:

    I am no Marxist, but wasn’t there something about how important a role the financial system plays in re-allocating capital surplus? As capital increases its share of the spoils, its accumulated wealth must be redistributed or else there will be insufficient aggregate demand. If it doesn’t work, the result is political upheaval. Certainly the financial system hasn’t done its job, and it doesn’t look likely the political system will either. Isn’t that what China fears, Greeks and Arabs are protesting and what we are beginning to grapple with?

  23. socaljoe says:

    Well, of course… we have negative real interest rates, extreme (cyclically adjusted) P/E ratios, quantitative easing, record fiscal deficits, corporate bailouts, and record special interest spending… all of which accrue to the wealthy owners of financial assets.

    At the same time, the US middle class worker faces unprecedented competition from a global labor market.

    I expect the next 30 years of generally rising interest rates and declining P/E ratios (ie: financial asset valuations) to be less favorable for the wealthy owners of financial assets.

  24. zell says:

    by the..This process will not stop until financialization, free trade, the cenral bank, and an unsustainable deficit, debt spiral are brought under control. Volcker took on inflation which started a turn around, but then you can see Greenspans debut in 1987 which put a floor under the markets, and then his first foray into radical lowering of interest rates. Then the giant sucking sound was unleashed, the market bubble wasn’t managed- only downside moves got attention. Worship of markets began.Illusary budget surpluses were created- Greenspan was worried about surpluses getting too big- pop! The next interest rate plunge which along with other factors, including the hubris of Bernanke and his liquidity helicopter. No bubble that can’t be swept up afterward, and free trade is to everyone’s benefit. So mellon got his wish as labor has been liquidated, commoditized- not talking about abusive public sector unions and the likes of the uaw.
    Barry. Stop. You’re getting me crazy today. Fair trade not free trade. It has to be supervised and negotiated which will spawn imperfections but stop this nation state from having its throat cut. We need to keep intact the membrane that allows the economic organism called the U.S. to survive.

  25. Liminal Hack says:

    Good to see some “big picture” analysis. However I think this piece ignores the fact that the global gini co-efficient has been decreasing over the same period US gini has been increasing.

    More inequality in the US, and less in the developing world. From a species standpoint thats a win, although we could do a lot better.

  26. acockbur says:

    More or less the same thing destroyed Spain in the 16th/17th century and France in the 18th. In both cases the nobility and church were exempt from taxes and they kept accumulating resources. That left the peasants and merchants to pay all the taxes and they gradually got squeezed. The nobility had enough political clout to ensure that the situation wouldn’t change. Spain went from being the richest and most powerful country in Europe to a basket case. France imploded.

    England managed to avoid these fates. Henry VIII crushed the church and confiscated its wealth, so that drain didn’t exist. The nobility never got as much power in England, and the merchants were much more powerful. Things were dicey at times, but there seemed to be more of a sense that everyone was in it together.

    As long as one small class can control both the political system and most of the wealth, the long-term prospects for a country are dim.

  27. Winston Munn says:

    Barry,

    You have indentified almost exactly what Ravi Batra (SMU economics professor and author) has been saying for quite some time. The terms are somewhat different but the conclusion is the same: production gains have been horded and wages have suffered. Batra terms this a wage-productivity gap.

    I suggest you read his work if you haven’t already: “Greenspan’s Fraud” comes to mind as well as “The Myth of Free Trade”.

  28. dagmountain says:

    Invictus-
    Demand destruction will continue as the rate of technological unemployment continues to increase. Full automation, mergers and acquisitions, high freq. trading will continue to reduce real economy to the money that rich people move amongst themselves. Plutonomy is the term for it and as the plutonomists grow increasingly richer the Fed will continue to stimulate asset bubbles to try to bring down unemployment, thusly perpetuating a downward sloping business cycle trend. I believe Jeremy Granthem has it right that in about a year and a half or so , the S&P will be halved again. Until societies switches from a monetary based economy to a resource based economy our best and brightest in math and science will continue to go to Wall St. perpetuating this cycle of demand destruction.

  29. Lori says:

    Here is a quotation, which seems explaining very shortly what is going on in our era of globalization.
    ” Capital drives beyond national barriers and prejudices as much as beyond nature worship, as well as all traditional, confined, complacent, encrusted satisfactions of present needs, and reproductions of old ways of life. It is destructive towards all of this, and constantly revolutionizes it, tearing down all the barriers, which hem in the development of the forces of production, the expansion of needs, the all-sided development of production, and the exploitation and exchange of natural and mental forces.
    Capital posits the production of wealth itself and hence the universal development of the productive forces, the constant overthrow of its prevailing presuppositions, as the presupposition of its reproduction.”
    As there is no other more competitive than capitalism economic system , the ratio of the wages will be posit following the proper capitalistic principles. The old presuppositions for capital development and its growth are already destructed.

  30. Jimmy Doolittle says:

    Didn’t know of the Gini Coefficient. Thanks. Read the wiki entry. This bugged me, as it was my first question: How are social benefits measured?

    From the wiki:

    For example, some countries give benefits in the form of money while others give food stamps, which might not be counted by some economists and researchers as income in the Lorenz curve and therefore not taken into account in the Gini coefficient. Income in the United States is counted before benefits, while in France it is counted after benefits, which may lead the United States to appear somewhat more unequal vis-a-vis France.

    So, what sense in comparing countries? My guess is that this would change the US valuation a fair amount, but uncertain how the middle class getting boned from both ends would calculate out.

  31. xSiliconValleyEE says:

    Wow, don’t even know where to start on this one. I agree totally. We have a dysfunctional government that seemingly doesn’t care, with one side rigid beyond belief, and the other side unable to competently make headway on how to direct rewards to the working middle class in our country.

    The economic solutions of having both the fiscal policies (deficit) and monetary policy (ZIRP) floodgates WIDE open are having no effect other than temporarily cushioning the blow. It’s like economists don’t understand that shipping every possible job overseas and importing massive amounts of labor both legally (H1B, L1, …) and illegally just destroys our middle class.

    New York is doing well, with all the money the government is throwing at the problem stuck in speculative financial investments which don’t build or manufacture anything and provide minimal jobs outside the financial industry. The Washington DC area is also doing well with the incredible amounts of money thrown at “Homeland Security” over the last decade with 300K TS clearances in the area. You listen to the financial shows originating in New York where the commentators rarely grasp the depths of despair among such an incredible percentage of families in our country, and Washington political shows that don’t either. They seem to not feel the problem, it’s not directly around them, or they’re so blinded by their politics that they don’t care beyond what they are trying to politically achieve.

    I wish the “science” of economics was able to see the horrible damage done to people who love to work in our country by “free” trade shipping industries and jobs overseas to countries that artificially keep their currencies low, rather than having “fair” trade. Why can’t the “science” of economics see this? Sciences are supposed to make a theory, model it usually in equations, and test it to see if it is correct or not. Why can’t economic models see the damage that is continuing to be done to the middle class of our country? Why can’t the economic models produce a result that says what to do to solve these problems, other than to blindly throw money at bankers?

    Why can’t our political system get functional enough to direct the money that is being printed at the problem into productive uses, rather than just going into financial speculation? (Yea, I include stocks in financial speculation, that’s basically what it is) In every other lender-borrower transaction, the lender can dictate what the money is to be used for, but our government seems prevented from doing so. China seems able to direct where their money goes, throwing every Yuan they can into building stuff that directly improves their productive economy. Why can’t our politicians do this instead of just giving massive amounts of money without strings attached to already unbelievably rich bankers for them just to get richer?

    Yea, I totally agree with your blog post here, the lack of economic rewards going to the middle class through the lack of jobs, the temporary nature of jobs now, and the declining rewards for doing the jobs is THE basic issue. Too bad economists and our politicians don’t “feel the pain” that we’re experiencing. Politicians of both stripes ought to feel the pain in Nov 2012, but, even then, they will still be clueless about THE basic issue and how to address it. Argh.

  32. jaysan says:

    A hedge fund manager pal responded:

    This is what happens when there is a negative incentive for capital investment because of punitive taxes and then you get a major financial crisis that even further erodes capital investment – the productivity of labor does not rise. Meanwhile the share of labor is being forced down globally by massive capital investment in Emerging Markets. The US laborer is in big trouble as real and relative wealth are in a secular decline. The only cure is massive incentives for capital investment, innovation, and new business formation – the opposite of what we’re getting.

  33. jaysan says:

    Also, in the article, the roles of numerator and denominator in what he wrote about the chart of the history of labor share should be interchanged. It should read

    “… the peaks in this series generally coincide with recessionary periods — output (the denominator) goes down while wages (the numerator) generally remain a fixed expense.”

    He should also say that the main reason wages have not remained a fixed expense is that many workers have been laid off.

    Invictus: Disagree with your friend’s opinion (as detailed in your other comment). Thanks for the correction, and sorry for the brain fart. I have corrected the record.

  34. fraziert says:

    Forgive me kind worshipers of Barry, i must pose a question from those of us less informed: if extreme inequality in the US is the source of all our troubles, what then is the cause of the fiscal dismay in coutries where profits and incomes are taxed and redistributed?

    Invictus: Three things:

    1) I authored the post, not Barry.
    2) I did not claim that inequality is “the source of all our troubles.”
    3) To which countries, specifically, are you referring? And could you provide some evidence as to the taxes and redistribution to which you refer?