Two Economies

I was discussing the US economy with my client “Eric” yesterday. He noted that many of the Democratic presidential candidates are talking about “two economies,” but that he does not see evidence of that fact. Given that Eric is a corporate attorney who earns approximately $400,000 per year, this does not surprise me. But I talk to all kinds of people on the radio every weekend and I have heard and experienced the voices of the two different economies. Without turning this into a political column, let’s discuss some of the facts.

According to IRS data released last month, the wealthiest 1% of Americans earned 21.2% of all income in 2005, which is up sharply from 19% in 2004, and surpasses the previous high of 20.8% set in 2000, at the peak of the previous bull market in stocks. The bottom 50% earned 12.8% of all income, down from 13.4% in 2004 and a bit less than their 13% share in 2000. These numbers are based on a large sample of tax returns and reflect "adjusted gross income," which is income after some deductions, such as for alimony and contributions to individual retirement accounts.

How did this happen? Economists and scholars attribute rising inequality to several factors, including technological change that favors those with more skills, but I think that it also speaks to globalization, which has forced down wages in some sectors of the US economy. Indeed, there has been a divergence between who is benefiting from globalization in the developed world. In these early stages, it appears that those who already own capital are making great strides, while only meager rewards are going to labor. In other words, the rich may be getting richer and living better, while the middle is somewhat stuck.

That’s why despite strong growth in the US economy last quarter (estimated at 3.9%), many Americans think the economy is in a recession. Remember, a recession is defined as two consecutive quarters of negative growth and we are clearly far from that level. But some people feel worse than the data indicate, despite news that the US economy is doing well and we are all living better as a result of the forces of globalization. It is obvious that the economic strength of certain sectors or the stock market does not negate the fact that if you work in the auto industry, the economy probably seems miserable. Or if you have had to pay more for your health insurance or have given up a piece of your pension because of changes in the economy, you probably had to make significant adjustments to your lifestyle and Democratic candidates are attempting to exploit those feelings every day on the campaign trail.

People like Eric may not encounter the other tier of the economy on a day-to-day basis, but I believe that it really does exist. The proof may be as simple as these numbers: the IRS data show that the median tax filer's income -- half earn less than the median, half earn more -- fell 2% between 2000 and 2005 when adjusted for inflation, to $30,881. At the same time, the income level for the tax filer just inside the top 1% grew 3%, to $364,657. That sounds like two-tiers to me.