About the Author: Edouard Yardeni is the president of Yardeni Research and author of Praise the profits!
Most Americans are better today than ever. It’s an easy fact to verify, but to say it these days is to risk being arrested by the crop cancellation police. It flies in the face of a fundamental belief behind progressive policies – that only the rich in America have never been so good. This simple belief, however, is wrong.
In the progressive narrative, the standard of living of almost all Americans, except for a tiny percentage, has been stagnant for decades. This is supposedly because most of the national income gains have gone to corporate profits at the expense of labor compensation. The increase in productivity growth since the early 1970s is believed to be primarily driven by profits, meaning employers have exploited employees.
The solution? Wealth must be redistributed by taxing high-income businesses and households, and the government must provide more support to low-income households. This is nothing new. Indeed, the claim that most Americans are struggling has given rise to many social safety nets, including Unemployment Insurance, Social Security, Medicare, Medicaid, SNAP (food stamps), and Obamacare.
Let us give credit to the credit: the progressives have made a lot of progress. But that is never enough for them. It should be. The belief in stagnation is based on myths.
Myth # 1: the productivity / wage gap. Progressives, notably at the Economic Policy Institute in Washington, say that the gap between productivity and inflation-adjusted hourly compensation has widened since the mid-1970s. However, this calculation deflates compensation. hourly with the consumer price index, long recognized as skewed upward. This deceptively weighs on actual hourly compensation. The gap is narrowed using the personal consumption expenditure deflator, a more precise measure of consumer prices.
Myth # 2: Stagnant wages. Adjusted for inflation using the PCE deflator, hourly compensation increased by 2.1% per year, on average, from the first quarter of 1995 to the second quarter of 2021. This is a solid increase in the level of life consistent with the growth of gross domestic product.
Progressives typically retort that their favorite measure of Americans’ purchasing power is median household cash income deflated by the CPI, a data series compiled by the Census Bureau. But this series distorts the picture: it is based on surveys asking respondents to provide their pre-tax cash income. Medicare, Medicaid, food stamps and other non-cash government benefits are excluded.
These sources of income are, however, included in the personal income series compiled by the Bureau of Economic Analysis, making it the most accurate measure. In addition, BEA data is not based on survey responses like the census series, but on “hard” data, like monthly paid employment statistics and income tax returns. The BEA also compiles a series of after-tax personal income reflecting government tax benefits such as the earned income tax credit. The BEA series for personal income, personal disposable income, and personal consumption expenditure – on a per household basis and adjusted for inflation using the PCE deflator rather than the CPI – refutes claims of stagnation.
The standard criticism of using BEA per household datasets is that they are means, not medians. So those at the top of the income scale, the so-called 1%, could in theory skew both aggregate and household data. This is possible for personal income, but unlikely for average personal consumption per household. The rich can only eat a lot more than the rest of us, and there aren’t enough of them to dramatically skew overall and household consumption, considering they literally make up only 1% of taxpayers.
Myth # 3: exploited workers. Since the early 1990s, the share of national income spent on labor compensation has trended downward and the share represented by profits has increased, angering many progressives.
But these actions are deceptive. They do not reflect the fact that intermediary businesses, including S corporations, sole proprietorships and partnerships, have grown rapidly in recent years. Collectively, their owners and employees represent more than half of the employment. Many are small businesses run by entrepreneurs. S corporations make up about one-third of corporate profits, while unincorporated business income tends to account for around 80% of corporate profits.
The real story of inequality. Progressives are right about income and wealth inequality, I’ll give them that. It got worse. What they lack is the big picture: Economic inequalities always worsen during good times. It is a small price to pay for widespread prosperity that lifts all boats. Most workers gain in absolute terms, especially since there is greater upward mobility of income during good times.
And what drives prosperity? Profits, above all. It is profitable businesses that increase capacity and payroll, powering the engines of an economy and creating prosperity. Profits are too critical for all of us in society, up and down the income ladder, to jeopardize the profit motive through the unintended consequences of ill-conceived, albeit well-intentioned, progressive policies.
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