There’s an interesting analysis of the findings in president’s report on the economy on middle class income growth at RealClearPolitics. As it turns out only 15% of the slow growth can be explained by income inequality:
Given all the attention given to the issue of growing inequality, especially between those at the top and the other 90 percent you might think that was the major economic problem facing the nation. But no, it turns out that the biggest source of the slowdown is the poor performance of productivity since 1995 compared to the earlier postwar period.
The question the President’s Council of Economic Advisers (CEA) asks is what if productivity growth from 1973 to 2013 had continued at the rate of the previous 25 years from 1948-1973? The answer is that the typical household would have had an additional $30,000 in income. (CEA report, p. 33)
The CEA goes on to ask parallel “what if” questions about income inequality and female labor force participation. How much better off would the typical middle class household be if income gains had been broadly shared after 1973 and female labor force participation had not levelled off after 1995? These changes produce smaller effects on middle class incomes of $9,000 and $3,000 respectively. However, all three factors combined can explain a whopping $50,000 in income foregone by our typical family. In other words, these families would have almost twice as much income if it hadn’t been for the decline in productivity growth, the rise in income inequality, and the levelling off of female participation rates.
The very large role of slower productivity growth is surprising. After all, we have seen an explosion in technology fed by the increasing power of computers. Smart phones, driverless cars, computer-assisted design and manufacturing, robots, drones, and the innovations they have made possible should have boosted productivity smartly. But as Nobel-prize winning economist Robert Solow once quipped, ” You can see the computer age everywhere but in the productivity statistics.” So what’s going on here?
So, what is going on here? They offer several explanations:
- Exhaustion of “pent-up innovation”
- Reduced public investment
- Dislocations following the collapse of the Bretton Woods system
- Oil shocks
- They’re happening but you just can’t measure them
To those I would add globalization, the transition of business investment overseas, and major social change. And I don’t see how you can ignore the enormous rise in government transfer programs resulting in an enormous percentage of the American people becoming wholly or partially dependent on various government programs. That accounts for most of total federal, state, and local government spending nowadays.
However, please take note of something important here and courtesy of the president’s own economic advisors.
An important factor in prestidigitation is misdirection. The patter, the costumes, extraneous gestures, the pretty girl, and so on. The entire idea being to focus your attention on something other than what’s actually going on. The president’s advisors are telling us that emphasizing income inequality is misdirection. It’s not that it’s not a problem. It’s that our most signficant problems lie elsewhere.
Huh? This assumes that additional productivity would automatically be shared in terms of incomes; we don’t see that with the productivity we have realized. The President’s advisors also appear unaware that spending and productivity growth have a causal link.
What an exercise in circular reasoning.
I don’t think it’s a problem that there’s been a rise in “government transfer programs”. It’s that aside from defense and interest payments, there isn’t much government spending outside of Social Security, Medicare, Medicaid, agricultural supports, and the like. We’ve spent most of the last forty years trying to make government smaller, squeezing down on everything but transfer programs. Take a look at the chart here:
http://www.bloomberg.com/news/articles/2015-05-21/federal-r-d-spending-cuts-seen-causing-u-s-innovation-deficit-#media-1
Bear in mind that those blue spending bars don’t reflect inflation. Put in constant dollars, there wouldn’t be much of a rise between the 1960’s figures and the 2015 value. Although the USA population has doubled in that period, and there has indeed been considerable economic growth. But surely the most relevant thing is the drop of the dark line, showing Federal R&D as a portion of the overall budget, dropping from 11% in the Kennedy years to under 4% at this point in the Obama presidency. That’s a drop in the overall economy from about 2.25% to 0.75%, and it’s hard to believe there have been no consequences of that shift. It may come as great shock, for example, but we aren’t getting as much benefit — in new products or scientific knowledge or even raw employment — from space program spending today as we did during the 1960s, when in real terms NASA’s budget was twice what it is now. Nor are we getting much from oceanography. Or nanotechnology.
(Granted, much of the drop of Federal research spending has been taken up by increased R&D spending by businesses, but it’s arguable that businesses and governments don’t buy the same kind of R&D and don’t secure the same end up results.)
Those are all transfer programs.
The notion that government is smaller is sophistry. There are hundreds of thousands of “consultants” who don’t meet the IRS standards for outside consultants. They’re consultants in name only—employees who aren’t official government employees but are in every other way. Maybe even millions. Nobody knows how many there are.