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Home Publications Op-Eds & Columns Waiting for the Hangover

Waiting for the Hangover

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John Schmitt
Chicago Tribune, September 6, 1999 
Baltimore Sun

Philadelphia Inquirer

For the last few years, the American economy has been on a real bender. Consumer spending, fueled by mounting personal debt and a gravity-defying rise in the stock market, has set off an economic boom that has boosted job prospects and incomes across the board. Like any night out on the town, however, all good things must eventually come to an end. This time, the negative personal savings rate, the spiraling trade deficit, and the threat of a sudden drop in the stock market are the leading candidates to spoil the party.

The big question facing middle-class Americans is: when we wake up to smell the coffee, what will we have to show for the 1990s? The short answer is: not much, even if Congress passes an ill-advised tax cut sometime this year.

Economists like to measure economic performance over a complete business cycle. This avoids exaggerating the bad news in downturns or the good news in upturns. The last business cycle reached its peak in 1989, when the unemployment rate hit a low of 5.8%. Using 1989 as a benchmark, the economy has grown substantially more productive in the 1990s, but working families have seen little of the gains.

The average American worker now produces about 12% more in an hour's work than he or she did back in 1989, but, after adjusting for inflation, the typical worker's wages have increased only 1.9%. The typical woman (up 3.4%) did better than the typical man (down 1.8%), but she still earns only 77 cents for every dollar earned by her male counterpart. Given that wages and salaries are the main source of income for middle-class Americans, it's not surprising that the inflation-adjusted income of middle-income families grew just $285 between 1989 and 1997 (the most recent available data).

Meanwhile, the share of middle-income workers with some form of employer-provided health insurance (on their own or through their spouse) actually fell between 1989 and 1997, leaving almost 30% of those in the middle without coverage.

The one silver lining in the 1990s is that middle-class Americans probably won't lose much in a stock market crash -mostly because they don't have that much in the market to begin with. According to projections based on Federal Reserve Board data, in 1997, the middle 20% of American households held less than $7,800 in all forms of stocks, including mutual funds and defined-contribution pension plans such as 401(k)s. By comparison, in the same year, the wealthiest 1% of households owned about $2.5 million in stocks, while the holdings of the next 9% were about $275,000.

The recent good times have provided only temporary relief from long-standing economic woes facing the middle class. Over the last two decades, the playing field has shifted decidedly against working Americans, to the advantage of their employers. The decimation of American manufacturing, encouraged by our international trade policies, has cut into a key source of middle class jobs, especially for the three-quarters of the work force without a four-year college degree. The decline in union representation -- from over 20% at the end of the 1970s to only 14% today -- has also undermined the bargaining power of Americans in the middle. The erosion of the buying power of the minimum wage -- now about 20% below what it was in the 1970s -- has taken the bottom out of the labor market and put pressure on wages well above the federal minimum.

Congress believes that the answer to this long-term deterioration is a cut in the federal income tax. The problem with this approach is that the economic difficulties facing middle-class families don't have anything to do with taxes. As wages and incomes have stagnated and declined over the past two decades, federal income taxes have actually fallen from about 6.9% to 5.4% of the typical family's income, according to the Congressional Budget Office.

As these numbers suggest, federal income taxes account for only a small share of the typical taxpayer's income. Even the steep cuts being discussed in Congress would give middle-income taxpayers (those earning around $30,000 a year) only an extra $278 per year -- while requiring spending cuts in important areas such as education and the environment.

What Congress should be doing is getting back to basics: working to reconnect American's wages and incomes to national productivity. In the current context of negative savings, a massive trade deficit, an overvalued stock market, and binge consumption, a tax cut is the equivalent of offering the economy "one for the road" after a wild night on the town.

 

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