GDP growth vs. the median wage: Sometimes a chart is worth 1,000 words

@cicerone imposter,

as the wealth vanishes so will the immigrants, a process that started a few years ago. http://pewhispanic.org/reports/report.php?ReportID=94

If they can be poor at home and be poor here they will stay home.

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@hawkeye10,

I believe that's true for laborers, but not for high tech workers. I also believe different areas of the country will hurt more than others; some are already experiencing depression in their cities and communities.

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@nimh,

nimh wrote:

Reflect on this for a sec... the average American's income (median income) doubled between 1948 and 1973 - so within one generation. Then between 1973 and now, it went up by 1.25 times.

How many times do you see graphs for median income? When people want to illustrate how a country is doing economically, the first reach is for GDP numbers. And a graph of GDP growth shows America doing steadily better ever since WW2, at a consistently pace. But from 1978 or so onwards, the regular middle-class American all but stopped benefiting. While GDP kept growing, he was excluded from its fruits.

In fact, looking at this graph, you see that the median income did not increase at all between around 1978 and around 1993. Much like it's stagnated between 2000 and now. That increase by 1.25 times that did occur almost entirely took place in the mid- and late nineties.

Coincidence that it was the Reagan, Bush Sr and Bush Jr administrations that was middle-class income stagnate even as GDP kept growing? Or the consequence of Reaganomics and its offspring?

Great post.
Reminded me of economist's Edmar Bacha's definition of GDP growth, as the "happy-o-meter of the rich", median income being the true parameter of social economic welfare.
Of course GDP growth, and not median income, is the important parameter to look at when analyzing the dynamics of an economy.
It's interesting to notice that the dynamics of the economy as sold, by the media, as the well-being of the people. A huge confusion between means and ends.

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@Blickers,

Blickers wrote:

With all these charts, everybody is missing something HUGE.

The US is growing. There are more people every year, more people working every year, more people of working age every year, more people buying goods and services every year. So to stand still is not normal. Growth is normal.

While it's true that America's population is growing, that's irrelevant to the figures compared in the graph. Population growth cancels out when you calculate per capita income, because it increases the national income proportionally the number of capita (= "heads") it divides into.

Similarly, population growth as such has no effect on median income. "Median" means that you rank the population by income and pick the middle rank. In practice, this means you rank 200 million American workers and look what income the 100 millionth American worker has. In a counterfactual world where America experienced no population growth over the last generation, you might pick the 75 millionth out of 150 million Americans. Again, the total population cancels out in the calculation.

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@nimh,

nimh wrote:

In fact, looking at this graph, you see that the median income did not increase at all between around 1978 and around 1993. Much like it's stagnated between 2000 and now. That increase by 1.25 times that did occur almost entirely took place in the mid- and late nineties.

Coincidence that it was the Reagan, Bush Sr and Bush Jr administrations that was middle-class income stagnate even as GDP kept growing? Or the consequence of Reaganomics and its offspring?

Two different paragraphs to be commented.

The median income DID increase during the period 1978-1993, unless you want to look only at both ends of the 1978-93 graph. It certainly increased less than productivity and less than GDP, but during most of the years in that span, income was higher than at the beginning.

Of course it's a consequence of Reaganomics. But we must understand that Reaganomics didn't come out of nothing.
During most of the early post-war, American wages grew according to productivity. This also meant that profits could increase only by increasing productivity. As classical industries (typically, steel) struggled to increase productivity, and as other industries (typically textiles and electronics) fragmented their production and "exported" its labor-intensive segments to countries with cheaper labor, the whole system stagnated, with bad returns for both investors and workers (the Carter years).
What Reaganomics (and Thatcherism) did, in first place, was to break the back of the workers' unions. This easied the transfer of labor-intensive segments both within the US borders (from unionized states in the North to non-unionized stated in the South) and outside the borders. And easied a dynamic transformation of the American economy, away from the classical industries and much more into services and new types of industries (think Silicon Valley).
In this sense, the limited view of unions helped Reaganomics and Reaganpolitics. Instead of proposing a new social deal (a definition of class wealth distribution, that would have meant some sacrifices, but not the complete loss of power) they just fought for the rights (and privileges) of their members. And lost handily.

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@Thomas,

Quote:

While it's true that America's population is growing, that's irrelevant to the figures compared in the graph. Population growth cancels out when you calculate per capita income, because it increases the national income proportionally the number of capita (= "heads") it divides into

All very true.

However, I mentioned the fact that America has a growing population, growing number of people of workforce age, growing number of workers and growing number of people purchasing goods and services every year to make those who are unfamiliar with economics realize that merely preventing a decline in GDP year to year is not a good thing. Standing still is not good enough, you must move forward.

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@Blickers,

I agree.

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The trick was the Republicans divided the enemy i.e. the average joe was the enemy, with divisive issues such as abortion, gun control, gay rights, environment, etc. so that many were voting against their own economic interests and got into red herring political battles all the while the average joe was being robbed.

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@talk72000,

After they were robbed (blind), they still want to vote for McCain. Go figure.

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@cicerone imposter,

While you people are talking economics explain to me how bailing out the big lending institutions with the 700 billion dollars is helping me as an average joe. And that helpful party of the people the democrates were the ones who passed it in order to help the rich keep their wealth. It is what I have been telling you all. The politicians rep or dem go with the big money and screw the middle class. We need a third party who have the common peoples welfare in mind.

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@rabel22,

Well I'm probably the least qualified to answer here, but from what I understand, the collapse of the whole system of bad loans and all has resulted in the banks just not having the cash anymore to provide new loans. Not for big business but also not for small businesses, mortgages, consumer credit etc. So small businesses will find it ever harder to get new loans and people will find it ever harder to get new mortgages, or will see the banks clamping down harder on existing loans and mortgages, etc.

So in that sense it's important for the government to bail out the banks, not to reward them but to make sure the whole credit system doesnt freeze up. I guess it's back to Keynes in general - the last thing you want to do in a crisis like this is freeze spending like McCain proposes and aim for balanced budgets; the economy is just lacking the cash that's the oil the wheels can't turn without. But I gather that injecting cash into the economy by giving working- and middle-class consumers tax cuts and refunds and the like will also help, and since you're right that it's ridiculous to reward the same bank bosses who helped get us all in this **** in the first time with all their speculation and trade in bad debts, I think that the solution in terms of government policy should include both. Bailout of the banks and an economic stimulus program focused on returning cash into the hands of middle class people through tax cuts, refunds etc.

Liberal Democrats tried to couple the bailout bill with such a stimulus program, but they were defeated by conservative Dems and Republicans. Maybe they'll stand a better chance after the elections with increased Democratic majorities in Congress. (So vote for that Democratic Senate candidate ;-).

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@fbaezer,

fbaezer wrote:

It's interesting to notice that the dynamics of the economy is sold, by the media, as the well-being of the people. A huge confusion between means and ends.

Thanks, that's a great way of summarising it!

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Methinks a class war is long overdue in America.

As Joe Biden says "GET UP?"

BBB

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@BumbleBeeBoogie,

AGREE!!!!!!!!!!!!!!!!!!!!

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@rabel22,

rabel, You are living with misinformation like many conservatives. You need to look at the "big" picture of what happened when democrats controlled our government vs republicans.

As for the "bailout/rescue" plan, I agree that the government is misusing that money by bailing out failed banks and finance companies. That money should be used to create jobs for Americans. Our country needs to repair and maintain our infrastructure; without it, our economy cannot exist. Having said that, it was necessary to infuse cash to make credit available to people who have good credit ratings to keep our economy moving. Without cash, our economy will freeze up hurting everybody.

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@cicerone imposter,

So the democrates giving a crooked republican government total controll over 700 billion dollars is going to help me how? And I have never been nor shall ever be a conservative. I have a heart and feel for all the people that so called business has screwed over in the name of profit.

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@rabel22,

Why ask me? CLUE: I have no control over that $700 billion.

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@rabel22,

The banking system works like this: The banks have our cash which comprises the assets and can lend that money to businesses at higher interest rates. However, to make more money it could lend more cash than it has. The bank has to put capital in the central bank which allows it to lend 10 times the money it has in the central bank. It is this credit that makes the system work. However, they changed the normal 10:1 capital to credit ratio to 35:1 which is dangerous. On top of that banks got into more speculative activities such as stocks and bonds and mortgage-based certificates. They were not acting like banks any more thus the failure.

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GDP growth vs. the median wage: Sometimes a chart is worth 1,000 words

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