By historical standards, the economic recovery in the United States has been unfair. It has devoted too big a share of income growth to corporate profits, too little to workers.
Indeed, in 2004, wages and salaries received the lowest share of total national income ever recorded, with the data going back to 1929, the year the Great Depression began, note Isaac Shapiro and David Kamin, economists at the Center on Budget and Policy Priorities in Washington, in a new study. By contrast, corporate profits' share of national income last year, at 11.4 percent, was "exceptionally high," the study found. The trend has both political and economic implications. For example:
Wage earners suffer: Democrats will surely blame Republicans for the weak job and wage scene. "The distribution of earnings is becoming more unequal," complained Sen. Jack Reed (D) of Rhode Island earlier this month. Since last May, when the economy began creating jobs again, average hourly earnings of nonfarm production workers have actually fallen - by 0.7 percent - after adjusting for inflation.
Investors benefit: High corporate profits are always good news for investors. Last month, the Dow Industrial Average notched its biggest one-day gain since 2003. "There are many factors that affect stock market prices," notes Mr. Shapiro. "But robust corporate profits always help."
Social Security weakened: If wages were growing more robustly - and not so inequitably - the financing gap in the Social Security system would not be so big. In fact, economics, more than demographics, are causing a large part of the Social Security gap, says Jack Bivens, an economist at the pro-labor Economic Policy Institute in Washington.
In 1983, the year of the last major reform of the system, payroll taxes were imposed on 90 percent of all earnings. But over the past four years, the cap has covered only an average of 85 percent of earnings. That's because the cap - $90,000 this year - has not been increased sufficiently to make up for the more rapid growth in income of prosperous Americans.
"This erosion of the taxable base of Social Security, driven by rising earnings inequality, has greatly exacerbated the long-run outlook of the system," Mr. Bivens notes in a new study. Raising the cap so it again covers 90 percent of earnings would cover 40 percent of the gap in financing over the 75-year planning period used by the Social Security Administration, says Bivens.
If Social Security actuaries used "more realistic" assumptions on productivity and economic growth for coming years, another 20 percent of the gap would disappear, he adds.
Of course, wage and salary growth doesn't tell the whole story - at least not for employers. Largely because of rising health insurance costs and increased contributions to company pension plans, labor costs have risen decidedly in the current recovery that began in November 2001. Since then, 20 percent of real income growth has gone toward these benefits, compared with an average of 8 percent in the nine previous post-World War II recoveries.
For workers, however, that extra cost of benefits doesn't necessarily mean any improvement in healthcare or any change in pensions. Only wages and salaries fatten their wallets and purses. Wages and salaries got only 23 percent of real income growth in this recovery, compared with 49 percent for the same years and months in previous recoveries. For corporate profits, the comparable numbers are 44 percent this time and 18 percent in the past.
Even if all employee compensation, including benefits, is included, workers still received an exceptionally small share of the growth in income in the current recovery, according to Shapiro. The trend is just not as marked as when wages and incomes alone are considered, however.
Aware of an economic slump, President Bush tried to counter it with tax cuts. Economists generally don't dispute that the 2001 cuts helped lift the economy out of that year's brief recession. A new study for the National Bureau of Economic Research in Cambridge, Mass., for instance, finds that the average household spent roughly two-thirds of the typically $300 to $600 income-tax rebates mailed to about two-thirds of US households in 2001 within a few months of receiving the check. By the fourth quarter of 2001, the economy was back on a growth path.
But both Shapiro and Bivens say that if tax cuts had been targeted more at the middle class and poor, rather than the rich, the economy would have made for a more vigorous recovery.
Moreover, says Bivens, a better economic rebound would have boosted Social Security payroll taxes. As it is, the projected shortfall in Social Security revenues amounts to 1.92 percent of current taxable payroll. The prime problem is not a falling worker-to-retiree ratio, says Bivens. It's the economy. He doesn't add the word, "stupid," as Clinton campaigners did in 1992.