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PeakTrader:

I wonder how he explains when U.S. income inequality increased dramatically from 1982-07, U.S. living standards, along with labor standards (or working conditions), and environmental standards also improved dramatically.

Of course, people need to generate income before that income can be redistributed, and more people generating more income means more income can be redistributed.

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Edward, the “financial sector” is a broad term. Are you talking about financial firms that facilitated U.S. firms to become more productive, which raised U.S. living standards, and earned substantial profits as a result? Or, are you talking about offshoring older U.S. industries, while facilitating growth in U.S. emerging industries, which boosted profits and also raised U.S. living standards? Maybe, you’re talking about the moral hazard Congress created in the housing market or Fannie and Freddie?

Yes, the tax rate on capital gains fell and the economy boomed. Also, government collected more tax revenue and spent more. There should’ve been more “middle class” or working class tax cuts instead. Real wages were stagnant, while real compensation rose, and some estimate inflation was overstated substantially. Low prices and interest rates induce demand. So, Americans spent and borrowed rather than saved. Certainly, Americans lived better in the 2000s than in the 1970s.

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Marko, yes, they created a lot of debt, but created even more assets. Chart:

http://en.wikipedia.org/wiki/File:Graphic.png

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Edward, the aggregate supply curve can be shifted to the right through lower prices (of goods & services), not for lower wages, unless they’re too high.

Real compensation increased, and I’ve explained before there are other mechanisms that raise living standards than just a rise in wages.

Also, I’ve stated before, low-wages haven’t kept up with productivity growth. Also, there’ve been changes in the economy, since the Information-Age accelerated after 1982, that suggest inflation has been increasingly overstated.

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A high level of inflation in health care reduces real compensation. And, some workers are overpaid and some are underpaid. However, that doesn’t necessarily mean a CEO, musician, or sports star earning $10 million a year is overpaid.

It’s more accurate to say inflation in health care slows real compensation, because more businesses, including new businesses, cannot afford a high quality PPO and buy a lower quality HMO, etc..

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Marko, the data you cite support my statements above, e.g. lower prices and interest rates induce demand and reduce saving. So, lower income Americans overconsumed and undersaved or overborrowed.

And, real median household income increased, while income inequality increased. Chart:

http://research.stlouisfed.org/fred2/graph/?id=MEHOINUSA672N

Note, since the government has attempted to reduce income inequality over the past few years, it achieved the opposite effect and also reduced aggregate real income.

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Income or wealth inequality is a red herring. We should focus on how to raise living standards for lower income Americans, even if it means creating economic conditions that allow many more new billionaires.

I suggested raising the minimum wage up to $15 an hour, deregulating substantially, and reducing tax rates, particularly for the “middle class,” who start most businesses.

Furthermore, we need to promote incentives to work and get rid of disincentives to work.

Over the 1982-07 economic boom, there were many immigrants from poor countries with little education, who through hard work were able to buy a nice house and a new, or almost new, car, truck, or SUV. They also had health insurance from their employers. They may have been hired at a low wage initially. However, after five or 10 years, their wages and benefits increased substantially and many were willing to work overtime.

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Daniel Becker, you’re making an assumption based on very little economic data and your charts don’t support your assumption.

Real median household income rose sharply in the 1982-00 bull market and maintained that high level in a bear market, until recently.

Also, there were many other mechanisms that improved living standards for the masses, e.g. the U.S. consuming increasingly more than producing in the global economy (which subtract from domestic income growth); refinancing mortgages at lower rates to increase discretionary income, along with equity extraction, borrowing at lower interest rates with easier lending standards, falling prices for many goods & services, along with discounts, e.g. up to 75% off, etc..

Obviously, many Americans saved too little for retirement, because of induced demand. Also, capital gains have benefits, not only in raising 401(k)s and IRAs, and raising home equity, it lowers interest rates for households and firms to facilitate both consumption and production.

The U.S. created a tremendous amount of capital, since 1982, including through efficiencies in production, which allowed the U.S. to invest heavily in emerging industries, and move quickly from the Agricultural and Industrial economic revolutions into the Information and Biotech economic revolutions.

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EMichael, your inaccurate charts don’t support your statement.

Median income of the top 20% (not top 10%) of households (and households have become smaller over time) is over $150,000 (not substantially less than $150,000).

Also, real median household income rises and falls with business cycles. Note, when Clinton left office, after the Clinton economic boom, real median household income was a little over $54,500 and falling. When Bush took over, it fell only to $54,000 and then rose to $55,500 on top of the huge 1990s boom and increasingly larger 2000s trade deficits, which subtract from domestic income, because the U.S. consumed more than produced in the global economy.

Chart of real median household income and article:

http://research.stlouisfed.org/fred2/graph/?id=MEHOINUSA672N

Rising riches: 1 in 5 in U.S. reaches affluence
December 6, 2013

“New research suggests that affluent Americans are more numerous than government data depict, encompassing 21% of working-age adults for at least a year by the time they turn 60. That proportion has more than doubled since 1979.

Sometimes referred to by marketers as the “mass affluent,” the new rich make up roughly 25 million U.S. households and account for nearly 40% of total U.S. consumer spending.

In 2012, the top 20% of U.S. households took home a record 51% of the nation’s income. The median income of this group is more than $150,000.”

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run75441, you continue to ignore the real economy, dismiss other economic mechanisms, and the “pie” (in both quantity and quality) grew faster at the height of the Information Revolution from 1982-07. Moreover, you continue to cling to the same assumptions I’ve proven false to you before.

Furthermore, I stated many times to you before, low-wage income hasn’t kept up with productivity growth, and raising the minimum wage, up to $15 an hour, would go a long way to correct a “market failure.”

Also, I explained how a higher minimum wage would reduce income inequality, boost productivity, lower other production costs, and raise real income. Moreover, I explained how a higher minimum wage would likely reduce employment and how other policy changes can more than offset lower employment and expand the economy.

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run75441 and EMichael, a piece or two of a puzzle doesn’t provide you a clear picture of a large multidimensional puzzle, where everything fits together perfectly.

I’ve explained my statements before and more than once and yet your comments reflect that you either completely ignored them or dismissed them entirely.

For example, Y = C + I + G + NX. Negative net exports (NX) subtracts from Y. Trade deficits reduce income = GDP = output. The U.S. has been consuming more than producing in the global economy and in the long-run. I’ve explained related equations, which are supported by the data, with no contradictions. Yet, your statements continue to imply the opposite, e.g. U.S. income is low, and therefore, living standards or consumption is also low.

Also, I may add, you often respond to my statements with economic variables that are much less significant (or really insignificant in an equation or idea I’m stating).

Moreover, rather than declaring I’m wrong, or using one piece of economic data to explain it all, why don’t you prove I’m wrong?

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“When investment returns exceed economic growth, the rich get richer, increasing inequality.”

That inequality can make the poor richer.

For example, say, the U.S. offshored all its old manufacturing industries, imported those goods at lower prices and higher profits, and then employed those profits in emerging industries with market power to export, improving its “terms-of-trade.”

U.S. workers earn higher real wages in those new industries, the creation of capital allows more investment, and the U.S. is able to exchange fewer domestic goods for more foreign goods.

Over time, those new industries become more efficient, redeploying limited resources to produce more output with fewer inputs.

There’s a low g and a high r, because of huge U.S. current account deficits and capital account surpluses, while government maintains anti-g policies slowing the economy and keeping unemployment too high.

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EMichael says: “Among married couples, the combined weekly hours of husbands and wives are rising. In 1969, couples age 25-54 worked an average of 56 hours a week. By 2000, this had increased to 67 hours....average combined hours have increased by almost 20 percent over the past 3 decades for both groups."

U.S. household size is also 20% smaller.

http://www.infoplease.com/ipa/A0884238.html

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