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Why Household Income Is Down Five Years Straight

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
December 3, 2013

IN THIS ISSUE:

1. Two Key Economic Reports This Week

2. Household Income Continues to Decline

3. Worker Productivity Remains Below Trend

4. Over 27 Million Americans Under-Employed

5. The Latest (Illegal) IRS Attack on Non-Profits

Overview

Between 1999 and 2012, the typical US household lost over 9% in income. According to the Census Bureau, the median household income was $51,017 in 2012, compared to $55,080 at the peak in 1999. In short, most Americans are working harder but earning less. Today, we’ll look at the data and discuss why this trend continues even though the economy is in a slow recovery.

In a similar pattern, growth in US worker productivity is also in decline. Productivity grew only 1.5% in 2012 versus 3.3% in 2010. So far this year, productivity is up only 1.9%. While that’s a modest improvement over last year, it’s still quite low. We’ll take a closer look at this problem as we go along today.

The Bureau of Labor Statistics recently reported that there are over 27 million Americans who are “under-employed.” These Americans include those who are officially considered unemployed, plus involuntary part-time workers and “marginally-attached” workers – those who have not looked for work within the last four weeks. That is a new record high. And you’ll also be saddened to learn that almost half of college graduates work in jobs that do not require a college degree.

Next, the IRS is increasing its attack on non-profit groups. This news comes despite the fact that the IRS is still under investigation for targeting conservative non-profit groups ahead of the 2012 presidential election. You need to know what the IRS and the Treasury Department are about to illegally (in my opinion) hatch in an effort to silence Obama’s enemies.

But before we delve into the topics above, I want to alert you to two key economic reports that will be out this week. The second revision of 3Q GDP will be out on Thursday morning, and the November unemployment rate will be announced on Friday. I’ll tell you what to look for below.

Two Key Economic Reports This Week

This will be an interesting week for economic reports, and there may be some significant political implications as a result. Here’s why. The second revision of 3Q GDP will be out on Thursday morning, and the pre-report consensus suggests that the number will be revised upward from 2.8% in the first estimate to 3.1%. If correct, it will be the first GDP print above 3% since the 1Q of 2012.

So why is this important politically? If the GDP report is 3% or higher, you can bet that President Obama and congressional Democrats will proclaim that the economy is finally “fixed” and fully back on-track. The long-term trend in the economy is historically around 3%, and you can expect the Dems to take full credit for it.

The problem is, Democrats and the president had nothing to do with this expected improvement. The possible increase from 2.8% to potentially 3.1% is largely because inventory rebuilding in the 3Q is believed to have been even higher than reported last month. However, the more inventory increased in the 3Q, the more it is expected to drop in the 4Q.

So when you hear Obama and the Dems cheer about the economy being back on-track, just keep in mind that the 4Q GDP number is expected to be disappointing again. But we don’t get the first estimate of 4Q GDP until late January, so the Dems have a couple of months to brag.

The other key economic report this week is Friday’s unemployment report for November. The pre-report consensus is that the unemployment rate will drop from 7.3% in October to 7.2% for November. Obama and the Dems will take credit for that one as well. But as always, it will depend on whether more new jobs were created last month, or whether it went down largely because more Americans stopped looking for work in November, and therefore weren’t counted as unemployed. 

Household Income Continues to Decline

Between 1999 and 2012, the typical household lost over 9% in income. According to the Census Bureau, the median household income was $51,017 a year in 2012, compared to $55,080 at the peak in 1999. In short, most Americans are working harder but earning less. The Labor Department reported recently that real compensation has only increased 0.3% in 2013.

Median Household Income

This means that, as output has been increasing (albeit slowly), it hasn't translated to an equal increase in workers’ standard of living. Where has the increased output gone? Largely to owners of capital – corporate profits reached an all-time high in 2013. Profits now make up 12.5% of GDP, up from around 7% in 2000. That means corporations have been getting a bigger slice of output in terms of profits, while workers have gotten a smaller slice.

One reason wages haven’t risen is because higher productivity no longer leads to more jobs, as it did until 2000 as I will discuss why below. As a result, job growth has remained fairly stagnant since then, and many workers are forced to take jobs that pay less.

One of the main reasons for this is the increased automation at factories and even in service industries. For example, in many businesses secretaries have been replaced by computers, bank tellers by ATMs and bookkeepers by software. The fastest growing jobs are now in software engineering and computer support.

Increasingly, manufacturers have replaced workers with robots. According to MIT Technology Review, at least 320,000 robots have been purchased just since 2011. Undoubtedly, this trend toward robots will accelerate in the future.

Outsourcing – moving US jobs overseas – also forces American workers to accept lower wages, or watch those jobs go to foreign workers. This has led to a lower standard of living in the US in the long-term as wages equalize. In addition, the US labor force has lost its competitive edge, adding to pressures to accept lower wages.

China, India and many other emerging market countries are able to produce things more cheaply by paying lower wages. That’s because China has a lower standard of living, meaning things cost less, so companies can pay less. As a result, US companies often offer lower wages to US employees if they are to compete against these foreign competitors.

Worker Productivity Remains Below Trend

US workers increased their productivity in the 3Q at roughly the same modest pace as the previous three months. The Labor Department reported earlier this month that productivity increased at a 1.9% annual rate in the July to September quarter, about the same as the 1.8% rate in the previous quarter. Productivity measures the amount of output per hour worked.

While the latest report from the Bureau of Labor Statistics (BLS) is encouraging, it is important to keep in mind that the average annual increase in worker productivity since the Great Recession is significantly lower than that seen in the previous two decades, as we see in the chart below. The question is, why is productivity growth lower today than it was in the period between 1990 and 2007, before the financial crisis?

And more specifically, why has the increase in productivity dropped significantly in the last couple of years, as compared to 2009 and 2010? Productivity rose 3.2% in 2009 and 3.3% in 2010. Then in 2011, it plunged to only 0.5%, followed by 1.5% in 2012. And now we’re up to only 1.9% as of the 3Q.

Productivity change

A combination of forces may be at work. Chastened by the deep economic slump, corporate executives have reduced spending plans for factories, equipment, research and development. Startup businesses have been held back as would-be entrepreneurs find it harder to get financing from still-cautious lenders. And out-of-work Americans have seen their skills atrophy the longer they’re without jobs.

The Fed seems to think the current slow growth in productivity may be a long-lasting trend. The minutes from the Fed’s latest policy meeting on October 29-30 include the following statement: “Slower growth in productivity might have become the norm.” That’s a switch from past comments by Bernanke that the deceleration probably was temporary and would end as the expansion continued.

Over 27 Million Americans Under-Employed

While the official unemployment rate last year was 8.1%, a far greater percentage of working-age Americans were “under-employed.”  Under-employed Americans include those who are officially considered unemployed, plus part-time workers that want to work full-time and “marginally-attached” workers – those who have not looked for work within the last four weeks but have sought a job within the last year and are available for employment.

According to the Bureau of Labor Statistics, the under-employment rate in 2012 was 14.7%, amounting to 23.1 million people.  As troubling as that may be, the actual figures are likely much worse. For instance, Gallup estimated that the nation’s under-employment rate stood at 17.4% in August, meaning that there are more than 27 million under-employed Americans.

Also, economists at the Center for College Affordability and Productivity have estimated that 48% of college graduates who are employed hold jobs that do not require a college degree. These are not included in the under-employment figures. If they were, the under-employment rate would soar.

Nevada had the highest under-employment rate during the year ending on June 30 at 19%, followed by California with 18.3%. The lowest rates were in North Dakota at 6.2% and South Dakota at 7.8%.

Finally, with the implementation of Obamacare, employers have an incentive to shift workers to part-time status and/or to hire part-time workers to avoid the mandate to provide health insurance to full-time workers. So this problem will almost certainly continue to worsen.

The Latest (illegal) IRS Attack on Non-Profits

The Obama Administration doesn’t lack for nerve or, more to the point, disdain for the law. Even as investigations continue into the IRS targeting of conservative non-profit groups leading up to the 2012 presidential election, Treasury and the IRS are introducing new regulations to further restrict the ability of these groups to participate in political activities.

The Treasury’s draft of the proposed new rule would redefine as “political activity” a wide range of actions currently undertaken by hundreds of 501(c)(4)s, which are allowed to engage in politics as long as it is not their “primary purpose.” The rule amounts to a crackdown on the Administration’s opponents, limiting their ability to talk about their core issues during an election cycle.

Under the new rule, the IRS would change the standard on non-profit  advertising so that any broadcast ad that mentions a candidate within 30 days of a primary or 60 days of a general election would count as “political activity.” That’s the standard currently used by the Federal Election Commission to define an “electioneering communication,” but using it as a standard for tax-exempt status imposes artificial limits on groups’ ability to work on their core missions during election cycles.

The rule would also expand the definition of political activity to include any communication that mentions the name of a candidate and reaches more than 500 people in the run-up to an election. That definition would include newsletters, candidate appearances at a group function, common materials like voter guides and articles or blog posts on a group's website.

The latter would even include material that remains on the website during the 30-day and 60-day election periods. To avoid getting tagged for engaging in too much politics, a group would have to scrub its website of anything written about a candidate, presumably even if the article was written before the candidate had announced.

IRS

Imagine if the Sierra Club criticized a manufacturing CEO for supposed sins against the Club’s core mission of protecting the environment. If the CEO later ran for Congress, would the Sierra Club have to delete those posts or have that material counted against its allotted share of political activity? Outside the IRS, that’s called censorship!

The rule would also use state and local definitions of what counts as a contribution to a candidate, a policy that would reach into other aspects of 501(c)(4) operations. For example, pro bono legal work done by a non-profit for a candidate would be counted as an “in-kind” contribution.

A “candidate” is defined to include executive and judicial nominees who are appointed, and whose confirmation battles happen outside of traditional election cycles. The American Bar Association rates judicial candidates when they are nominated, so would this put the ABA’s tax status in jeopardy? Apparently so.

The Administration claims the rule’s purpose is to clarify tax-exempt standards to prevent future mistakes like the one that sidelined the applications of hundreds of conservative and Tea Party groups in 2011-2012. Yet the new rule offers zero clarity on what percentage of a 501(c)(4)'s activities may be political, without falling afoul of the nebulous “primary purpose” test. Enforcement could be as arbitrary as it is now.

The new proposal is designed to cover only 501(c)(4)s, the social welfare groups that liberals despise, while leaving the door open to cover other tax-exempt groups in the future. 501(c)(4)s are the immediate target because the real goal here is donor disclosure, which has become a liberal hobbyhorse. If 501(c)(4)s can’t run issue ads in the weeks before an election, that activity would likely shift to 527 groups that are required to report donors under IRS rules.

This unprecedented rule is yet the latest effort by the Obama Administration to rewrite campaign law on its own, since Congress refuses to do it for them. Even congressional Democrats refused to pass the “Disclose Act,” which would have forced non-profits to disclose donor names. So the Obama Administration is now using the IRS to compel donor disclosure. President Obama seems to think Congress can simply be ignored if it doesn’t do what he wants.

Just imagine the outcry if a Republican president were to do something like this!

Best regards,                                                

Gary D. Halbert

SPECIAL ARTICLES

The latest IRS non-profit scandal you haven’t heard of

Voters Do Not Like Being Misled (excellent piece)

Majority Of Americans Think Obama Is Not Honest Or Trustworthy

 


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