Why Incomes are Stagnant or Declining

OK, it’s time for something completely new and original.  This began with the release of 2nd quarter GDP (gross domestic product) a couple of weeks ago.  The Bureau of Economic Analysis (BEA) announced that the economy grew at a 4% annual rate in the 2nd quarter – the most impressive economic performance of the supposed recovery from the deep recession of a few years ago.  Of course, that slightly bigger pie is now shared by slightly more people – 1% more each year – so in per capita terms the economy grew by 3%.  But even that is decent growth.  Here’s a chart of real (adjusted for inflation) per capita GDP:   Real Per Capita GDP.  Looking at the chart, you can see that per capita GDP has recovered, but is barely above the level of 6-1/2 years ago.

Last week, the BEA also announced that the economy added more than 200,00o jobs in July, adding to a string of such results.  But the report also noted that wages barely budged in July, rising by only a penny per hour.  When you consider that the top 1% of wage earners are rolled into that data, you realize that wages for 99% of us are in decline.

What gives?  How is it that wages aren’t rising in an economic environment of 4% growth and consistent monthly job gains of 200,000 plus?  It’s a question that has vexed economists and the Federal Reserve.

It boils down to a question of what drives the demand for labor.  Growth in per capita GDP should translate into growth in the demand for labor.  But there’s another factor at work that I touched on in Five Short Blasts but I’ve barely mentioned since – productivity growth.  So I thought it would be interesting to go back and calculate the annual rate of growth in per capita GDP, minus the rate of growth in productivity.  Although GDP and population data go back further, productivity data is only available as far back as 1947.  So that’s the base year for my data, and is assigned a value of “1.”  Each succeeding year, that figure is reduced or increased, depending on whether the combination of per capita GDP growth and productivity growth yielded a slightly positive or negative percentage change in this “demand for labor.”  Here’s the chart of the results:  % Change in GDP per capita minus productivity.

From 1947 until 1963, there was a general downward trend.  Then, over the next 36 years, an upward trend reversed the losses of the previous 16 years, reaching a peak in 1999 at a level clearly above that of 1947.  But what really blew me away was what happened next.  Beginning in 2000, this figure fell like a rock and, in ten short years, wiped out all of the gains of the previous 36 years, and continued falling to a record low reached in 2010.  Since then, it’s begun to recover, but ever so slowly.  Last year it was still below the previous low reached in 1963.

Now this is a piece of data that rings true.  Doesn’t it feel like what’s been going on?  Remember the “jobless recovery” for which President Bush took so much criticism?  This shows you that it was real.  And it shows you just how much damage the recession that began in 2008 did to the economy.

What’s driving this decline?  The growth in per capita GDP has fallen dramatically since 2000.  It’s no longer keeping pace with the growth in productivity.  To illustrate the point, here’s the average change in per capita GDP by decade:

  • 1950’s = 2.43
  • 1960’s = 3.17%
  • 1970’s = 2.17%
  • 1980’s = 2.20%
  • 1990’s = 2.21%
  • 2000’s = 0.62%
  • 2010-2013 = 1.50%

Meanwhile, productivity growth has remained fairly constant at around 2.2%.

This slow-down in per capita GDP is even more remarkable when you consider the extraordinary measures that have been taken in the last few years to prop up the economy.  Since 2000, the national debt has more than tripled from $5.7 trillion to over $17 trillion today.  And, in the past few years, the Federal Reserve has poured in an additional $4 trillion.  That’s over $15 trillion of “stimulus” since 2000.

One has to consider the possibility that the inverse relationship between population density and per capita consumption is at work here, and we’ve reached the tipping point where leaning on population growth to fuel the economy is backfiring and eroding per capita GDP.

 

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