Slave Labor Wages and the Proposal for $21.25

         Raising the Incomes of the Lower Earning 50 Percent    

There is a campaign in the state of New York to raise the minimum wage to $21.25 per hour. The EPI.org published two articles (here and here), both claim that passage of this high minimum wage will increase the incomes of 32% of workers in New York state. The Federal minimum wage is $7.25 per hour in stark contrast.

The Social Security Administration every year releases a detailed report on annual wage income. In 2021 it showed that 30.188% of workers earned less than $20,000. With a much higher minimum wage nationally, not just New York, all 50 million workers (30.18%) would have higher annual earnings. 

Wage income growth has been anemic over 50 years now, and it’s nearly slave-level in the U.S. Don’t gasp at “slave-level”. The lower earning 52% of U.S. workers in 2021 earned together just $1.45 trillion, as the SSA report shows, and that is less than 7% of the total national income (using the Fed’s Flow of Funds’ figure on total national income, $22 trillion). We might assume that 93% of income went to the other half of workers, but that is incorrect, but mostly true. Wage income in 2021 totaled $9.77 trillion which is 44% of all income ($22 trillion). 

Couple this $21.25 per hour proposal with the PRO Act and the Reward Work Act and the new sectoral bargaining proposal for unions, and the nation would see a revitalized union sector with much higher wages for all. Wage levels would return to their 1970s high. The scourge of low-income work-life would be over. In addition, the lop-sided, unjust and dangerous distribution of income would improve. The cause of the Great Depression was immiserating, one-sided distribution of income, as J.M. Keynes and then Federal Reserve chief Marriner Eccles sought to explain. The U.S. is losing its middle class and sliding into the unenviable condition of Mexico where inequality has created a poverty rate approaching 50%.  

The RealTimeInequality.org web page, a product of U.C. Berkeley economists, shows that from 1976 to 2022 (current figures) the shift of income from the lower-earning 90% of all adults has resulted in a decline of 13% of total income share for the lower 90%, which comes to nearly $12,737 for all 225 million adults in the lower 90%. I should emphasize the importance of the $12,737 figure. In 2022 the median household income was $70,784, and with two earners together making $25,474 in addition to their current income, it is plausible that the median would be about $96,000. If the wage gains were equally distributed across the pay range, then lower-income workers would see the biggest income improvements and poverty rates would improve in a major way.  

The report "Real Wage Trends, 1979 to 2019" from the Congressional Research Service shows wage growth was 8.8% for the 50th percentile worker in this span of time, while the "Real gross domestic product" grew by 91%, see here. This 8.8% increase at the median equals a yearly income increase of $3,868 (or a yearly income increase from $43,971 to $47,840). This begs the question "Why so slow? Why not an increase of 91%?".   

The wage report for 2020 to 2022 from the Economic Policy Institute shows

"Data from the Social Security Administration show that the chasm between top wages and the wages of the majority has only grown wider over the last four decades. Between 1979 and 2020, the top 1% of earners saw a 179% increase in their wages, while the wages of those in the bottom 90% grew just 28% (Mishel and Kandra 2021)."  

They conclude a gain of 28% for the lower 90%, much different than the 8.8% at the median reported by the CRS. Most of the growth must have happened above the 50th percentile. Linking to the Mishel and Kandra report, they claim 

• The bottom 90% received just 60.2% of all wages in 2020, the lowest share since data began in 1937 and far lower than the 69.8% share in 1979.

This shows again, the lower earners are getting a smaller share of the pie. 

The Supplemental Poverty Measure shows that about 19% of households earn less than 150% of the Official Poverty Line (OPL), which many esteem as the actual poverty level; and 34% of households earn below 200% of OPL (see page 70), which indicates not-poor-but-struggling. And the recently released ALICE report from the United Way charity shows 41%, about 137 million Americans, living with hardship in 2021. And the U.S. Census Pulse Survey of April 19, 2023, shows that 38% of American adults  found it "somewhat difficult or very difficult meeting household expenses" (Spending Table 1) and 50% responded to "Frequency of not being able to stop or control worrying: Several days [in the last two weeks], more than half the days, nearly every day" (Health Table #1). And 46% report feeling "down, depressed or hopeless" (Health Table #2).  These Pulse Surveys themselves make me depressed. Put all this dismal science data together and one realizes ---This nation is not wealthy, not worry free, not particularly well, and not happy for many Americans. The Pulse Surveys have been like this since they began in 2020.    

It is not entirely ridiculous to project a median household income of $96,000, the “average household income” is $165,000 using Flow of Funds figures. Lifting the incomes of lower-earning households  higher would improve life substantially. 

And using the Joint Committee on Taxation figure, which is $2 trillion less than the Flow of Funds total income figure, the “average” household income is $144,000. 

This RealTime figure is pre-tax and pre-transfer, or "factor", income, sometimes called market income.

In 1976 for every $1 earned in the lower 90%, the top 10% earned $5.44

In 2022 for every $1 earned in the lower 90% the top 10% earned $9.72.

The entire point of these paragraphs is: income distribution is crucial. Correction of the income distribution is paramount to correcting the economy.  __________________________________________________________________________

           Income Ratios   

The income ratios between three or four income groups  -- lower 50%, middle 40%, top 10% (and top 1%) -- can be calculated using RealTime Inequality data. First I look at the 50% -- 40% --10%, and afterwards I look at 50% -- 40% -- 9% -- 1%.  

Taking the average income of the lower 50% of adults as “1”, the following income ratios are revealed:

For 1976, looking at pre-tax income, we see that:   

with three groups it is    1 – 3.7 – 10.2.     

When we separate out the top 1% we see (four groups) these ratios:     1 – 3.7 –   8.0 – 31.     

It would take in 1976 about 31 years for an average lower 50% worker to earn the income of a One Percenter.

The ratios change drastically by 2022.

For every $1 earned by a lower-50% worker the ratios are:    1 – 5 – 23.     

(Lower 50% to next 40% to top 10%.)

Separating out the 1% in of the top 10% we see:                  1  -- 5 – 14.6 -- 103.   

To visually grasp the difference:

             1976   --   1 –  3.7   –  10.2        or   1 –  3.7   --    8.0  --   31.

            2022   --   1 –   5.0   –  23.0       or    1 –  5.0   --  14.6  –  103.

It would take 103 years working at the low income to earn what is earned at the top 1% of incomes.

This is “factor” income (pre-tax and pre-transfer) for adults 20 years and over. The graph shows the staggering income gains of the one percent of adults: 

Income growth of 1%, 10%, 50-to-90%, and lower 50% of adults' income. RealTime Inequality

This makes me sick. 

Fortunately, the post-tax income ratios are better or fairer.   

               The 2022 pre-tax income share for the lower 50% is 8.9%.   --   $20,300 per household.

               The 2022 post-tax income share for the lower 50% is 16.6%   --  $39,300 per household. 

I'll repeat the pre-tax ratios: 

            1976   --   1 –  3.7   –  10.2        or   1 –  3.7   --    8.0  --   31.

            2022   --   1 –   5.0   –  23.0       or    1 –  5.0   --  14.6  –  103.

These are the post-tax, post-transfer ratios for household income groups, same as above:

     The lower 50%, the next 40%, then the top 10% (and secondly, the top 9% with the topmost 1%)

            For 1976  ---      1  --  3.1 – 8.2          and             1  --  3.1  --  8.2 --  22  

            For 2022  ---      1  --  3.1 – 13           and             1  --  3.1  --  9  --  48.

But the post-tax, post-transfer graph looks identical to the pre-tax, the one above: 

Social benefit programs (like Social Security, Medicare, Medicaid and EITax Credits, etc.), or transfers, make a big difference for the lower half. The lower 50% nearly doubles its income, but one must ask is this the result of Social Security, Medicare, and Medicaid? Do these benefits affect the lives of the lower 50% or just seniors and sick people? I suspect the benefits exclusive of the ones I mention, do not affect the lower 50% much, except the Earned Income Tax Credit. But, as we regularly witness, these benefit programs are subject to criticism and cuts, they are regarded as gifts to the poor, or as parasitic injuries to the working contributors who provide for our national economic health.

I often repeat the following fact, and you should remember it, "average weekly earnings for production and nonsupervisory workers”, shows the Bureau of Labor Statistics, were higher in 1969 than in 2022.

Here's the BLS web page showing the details. And the graph I would like to see in every home: 

Therefore, yearly wage income, adjusting for inflation, for 80% of workers (both full-time and part-time) were higher in 1969 than in 2022. In the same 53 year period the GDP (Real gross domestic product) per capita increased by 148%. Now, the graph in real inflation corrected dollars: 

Place, mentally, this graph over the "average weekly earnings" graph. 

The economy grew by 2.5 times since 1969, but the 80% of mostly lower-earning workers saw no gain in yearly income!

The GDP/capita, or per person, in 2023 dollars today stands at $79,087 in 2022 dollars (from the Fed's FRED graphs). A four-person family generates an average GDP/capita of $316,238 -- sounds reasonable? That amount creates a total GDP amount of $26.4 trillion. The Flow of Funds figure is slightly less, $26.145 trillion. Remember, the Flow of Funds "national income" amount is $22.046 trillion (page 10). And we see at the BEA.gov, Table 2.1, the after-federal-tax national "disposable" income is $19.7 trillion, which implies a per capita post-federal-tax income of $58,891, which also implies for a four-person family a post-federal-tax income over $235,000. But the pre-tax median income for a four-person family is $111,104 as the Census shows. If we reduce the $111,104 pre-tax income by federal taxes it comes to $94,284, and with New Hampshire state taxes it is reduced further to $80,242, showing an "overall  effective" tax rate of 28%. This overall effective rate is congruent with the analysis of the ITEP.org rate for this income, see here (the last table). Half of U.S. families of four earn less than pre-tax 111,104, which becomes $94,284 post-federal-taxes. The average post-federal-tax income is $235,000 for the four-person family. The average ($235,000) and the median ($94,284) are far apart. 

It may be difficult to remember all these numbers, but one more to think about:  

The average income per household, for all 131 million households, is $168,000, but the median household (the mid-point family) has an income of $70,784, not even half the “average”. 

Confused? I'm showing that the "median" income is not a good indicator, and is not remotely close to  the average -- because the high income few have skewed the average much higher. Ergo: high inequality. 

I study this issue. I'm concerned that the general public, even readers of the American Prospect, do not grasp some fairly basic realities, the level of inequality and economic incompetence.

That $21.25 per hour goal is not pie-in-the-sky, it's somewhat realistic, it likely would need adjusting for special cases of low-income communities and businesses with less than 100 employees. The PRO Act, the Reward Work Act, and sectoral bargaining also would play a decisive roll in restoring prosperity to all in these highly unequal times.

Corporate Price Hikes Cause Inflation

 Corporate Profits Were 57% Higher Than Pre-Pandemic Years -- $857 Billion Higher 

(I added in mid April, 2023, a brief summary to the July, 2022, essay. My grievous complaints about the U.S. economy are summarized in the introduction -- just a note for any reader who would like to capture the essence of the mess our economy is in. Click the link at the right, July 2022) 

To continue: Corporate Profits Increased by at least 57% since pre-pandemic -- 

An added $857 billion in added costs to all households is $6,592 per household. My calculation derives from the Federal Reserve's Flow of Funds report, Table F.103, page 80, line one, "Profits before tax". Also one can look at  page 10, line 10, multiple years from 2015 to the present, March 2023, "Profits before tax, Domestic nonfinancial". Simply looking at page 10 at just 2 years 2020 through 2022, on the March 2023 report shows a huge 72% profit gain from $1.455 trillion in 2020 to a total profit of $2.507 trillion in Q2 of 2022. That's a 72% increase in 2 years, and an increase of profits of $1.052 trillion, which comes to an additional $8,092 per household of added expenses. But when I took the profits dating back to 2015 the increase is 57%. I adjusted for inflation and averaged the profits from 2015 to 2020 and compared them with profits from 2021 and 2022. 

This is the BEA graph for Domestic corporations, nonfinancial, from 2013 to 2022: 

Looks something like a hockey stick. Profits increased by $975 billion or 79%  -- which amounts to $7,500 more expensive goods and services for all households, on average. This is exorbitant, it is price-gouging and profiteering, it's immoral in a sense of taking advantage from a crippling situation. The Covid-19 pandemic caused a lockdown and 21.9 million workers were laid off work, lost their jobs, in the first two months from February to April, 2020. Other millions were placed on furlough without income, but still on the company employee roster. Gradually the workers, mostly low-income workers, regained their employment. The savings rate increased to an all-time high of 19% over a 12 month period, and when the vaccines came on the market, pent-up savings and demand created a surge of buying in a condition of broken supply chains. But the price mark-ups were not needed to the extent they created 78% higher profits. 

Added information, October 2023:  After reading a very informative article in the New Yorker magazine about Isabella Weber, professor at UMass/Amherst, I followed the link to a Federal Reserve study that claims that corporate profits amounted to 58% of inflation over the past 2 years. To quote: "markup growth was a major contributor to inflation in 2021. Specifically, markups grew by 3.4 percent over the year, whereas inflation, as measured by the price index for Personal Consumption Expenditures, was 5.8 percent, suggesting that markups could account for more than half of 2021 inflation." Divide 3.4 by 5.8, it = 58%.   

Wage growth or "average weekly earnings for production and nonsupervisory workers" has increased by 1.5% in 3 years, pre-pandemic (from February 2020 to February 2023). This is very slow wage growth but at least it is positive. The non-supervisory workers are 80% of the full-time workers and 83% (or 134 million) of all workers (160 million). Their very modest gains in weekly income are not driving inflation; mostly price-gouging corporations are causing inflation. 

Here's the Fed's Fred graph for pre-tax nonfinancial corporate profits, 2013 to 2022. 

You are looking at a 106% profit change from Q2 2019 to Q2 2022. 

How do you account for it? 

         ***************                 ******************                 ******************

I try to show how much higher the total profits were in 2021 and 2022 in comparison with the six years previous, 2015 to 2020. The (1) Flow of Funds report tightly corresponds with the (2) Bureau of Economic Analysis report, BEA.gov, Interactive Table 6.16D, "Corporate Profits by Industry", line 13. Both sources correspond with the (3) Fed's FRED graph "Nonfinancial corporate business: profits before tax". Corporate profits definitely have jumped significantly higher.   

The incomplete and short story is that American corporations raised their prices in response to the pandemic supply-chain shortages, and coupled with the pent-up savings accumulated in the Covid lockdown period, and, moreover, workers' wages income surged --- not noting that wages then fell back to their pre-pandemic trajectory, and finally the enormous "economic impact payments" from the Federal government all led to very high inflation. 

But that story fails to report that corporations then tacked on an extra charge just to maximize their profits. See the graph below. We needed an excess profits tax to curtail this Profiteering. But we did not even get a clear explanation of the causes of the inflation; instead the excess profits story has been hidden from the public. In the essay below here I show numerous graphs of the profit excesses. I'll repeat the one for "nonfinancial corporations" and the next for "wholesale trade". The seventh graph below, for "retail trade" resembles a hockey stick.

Wholesale trade increased their profits by 75% in two years. Retail trade as well had enormous excess profits, increasing profits by 115% in two years, from $160 billion to $342 billion (see the graph below). 

Did households earn on average an additional $6,592 since 2020? No. The median household income in real inflation adjusted terms dropped by $2,000, from $72,808 to $70,784 between 2020 and 2021. Meaning that household income increases could not possibly be driving inflation.  

The Fed's graph shows declining real median household income in the last two years, and it shows a real gain at the median of just $4,536 since 2000, 7% increase over a 22 year period. In contrast the "Disposable Income per capita" shows a gain of 35%, from $33,645 to $45,411.  

Now the "real disposable income per capita": 

And lastly, in chained dollars, the median weekly income for wage and salary workers (encompassing 80% of all workers) rose by 9% in the last 22 years (note the spike during the pandemic, and it quickly returned to the normal growth level as low income workers returned to employment): 

Average profits of the 6 previous years, from 2015 to 2020, for nonfinancial corporations were $1.493 trillion (inflation adjusted), and for the two year period, 2021 and 2022, they averaged $2.350 trillion -- an increase of 57%. But "real median household income" dropped by 3% from 2019 to 2021.  

The data comes from the Federal Reserve's Flow of Funds report, multiple years, Table F.103, "Nonfinancial Corporate Business", line one "profits before tax". 

 I also looked at after-tax profits (Table F.3, Distribution of National Income, page 10), multiple years, line 10, Domestic nonfinancial. In this case the yearly profits for both 2021 and 2022, the combined average, was 45% higher than the six previous years. 

Households, families and consumers had to pay the pre-tax profit in the cost of their expenses, the $857 billion extra profits. Each household of the 130 million households paid an average of $6,592 more than the average they paid in the six previous years. The main question is "How could they afford it?".

 The answer is "Many could not." The ALICE report from the United Way details how many had trouble paying normal expenses, it comes to between 32% and 50% depending on the question asked. Their 2022 report cites a Federal Reserve study that asks, "Question: Suppose that you have an emergency expense that costs $400. Based on your current financial situation, how would you pay for this expense?" Only 55% of American adults said they could pay it off immediately, the other 45% would have to put it on the credit card, borrow, sell something, or "not able to pay". Additionally, some 20% say they have difficulty paying for food, 30% have difficulty with housing costs, and 46% do not have a "rainy day" savings equivalent to 3 months of income. This is a nation with a per household average income of close to $170,000/year. The Fed's Flow of Funds report states the "National Income" is $22.046 trillion, Q4 2022, which divided among 130 million households yields an average of $169,584. Yet, 45% can't pay a $400 expense within 30 days, they have to put it on a credit card, etc., etc.. 

The next post is my major effort to explain the inflationary pressures in the economy, mostly the role of corporations raising prices for added profit, as documented in other studies and more graphs from the Federal Reserve. 

_________________________________________________________________

Added note on inflation, September 2, 2023

This graph comes from the Fed's FRED graphs, an article by Christian Zimmerman who explores the idea that the price of Shelter has been the driver of inflation from June 2022 to June 2023, 12 months. It's conclusive that the price of shelter rose by 8.0% and the price for all else rose by 0.5%. Here's the graph: 

The graph Zimmerman uses goes from May 2021 to January 2023, so I pulled out the tab to the July 2023. It's clear that the red line is flat, and that shows inflation without shelter. The blue line shows shelter inflation. What has been driving inflation between June 2022 and June 2023? Shelter. 

The BLS also has database showing inflation increases, see here. It shows total inflation increased by 3.0%, June to June, and shelter increased by 7.7%. But as I said inflation without shelter increased by 0.5%. 

This BLS Economic News Release states for July 2023, "The index for shelter was by far the largest contributor to the monthly all items increase, accounting for over 90 percent of the increase, with the index for motor vehicle insurance contributing." 

Housing expenditures were 33.8% of all household expenses, states this BLS document. Shelter costs are the largest component in the list of expenses.  

Inflation, the story not told

Summary about inflation --- corporate profits more than doubled in 3 years, they increased by 115% in 3 years between 2019 and 2022. Generally supply bottlenecks and pandemic related government emergency payments are cited as causing inflation, and nonfinanical corporate profits are not mentioned. But creating profits that double the past years' profits means the corporations have added a price increase above and beyond the inflationary costs of production. Pre-tax profits increased from $1.102 trillion to $2.379 trillion, by $1.277 trillion, which comes to $9,823 per household in added expenses. Incomes did not match this extraordinary growth in profits. The data page I cite for this claim is from two sources, 1) the Fed's FRED graph page on pre-tax profits, and 2) the BEA.gov Table 6.16D, "Corporate Profits by Industry", line 13, "nonfinancial corporations". The FRED graph below, note the right hand side, profits jump from $1.336 trillion in Q4 2019 to $2.507 trillion in Q2 2022, a gain of $1.171 trillion, not doubling but increasing by 87%. Later in the essay I cite the studies of William Lazonick that show that over 90% of corporate profits go to dividends and share buybacks, benefitting a minority of already wealthy citizens. This makes for the incredible inequality we know, and for the dangerous economic insecurity that many feel, leading to lives and deaths of despair. 

Complicating this extremely high inflation rate is the fact that the "real" median household income decreased by 2.8% from 2019 to 2021. ("real" means inflation adjusted) It's up only 6.8% in 21 years, though the "Real GDP per Capita" is up 27.8%. The median crawls while the average races, showing that economic growth has departed from the lower-earning portion of society. 

The Federal Reserve shows pre-tax nonfinancial corporate profits" increased by115% in 3 years, 2019 to 2022. The post-tax profits increased by 92%. (see Flow of Funds, page 10, lines 10 and 18). As I have said before in the last essay, corporations are the primary cause of inflation. At the bottom of that essay, as well as in this one, I detail some of the studies that make this claim. 

Professor Hal Singer makes this case against corporate price hikes in an interview at INET Economics;  "How Corporations “Get Away With Murder” to Inflate Prices on Rent, Food, and Electricity". 

Singer "teaches advanced pricing at Georgetown’s McDonough School of Business and frequently serves as an economic expert in antitrust litigation (often concerning how firms set prices), says that those who hold workers’ wages responsible for inflation are not only wrong but making the problem worse with policies that fail to hit the real mark."

This interview with Singer is a very strong and persuasive argument supporting my argument that corporations are gratuitously raising prices far above costs of production. 

The most succinct case for this argument comes from Mike Konczal's paper "Prices, Profits and Power" where he states, on page 4, "In 2021, markups suddenly increased to 1.72—that is, the average markup charged in 2021 was 72 percent above marginal cost. In other words, in 2021, we see a sharp increase in the 30-year trend of firms in the aggregate decoupling their prices from their underlying costs." Here's a graph of retail trade profits from 2014 to 2021:

Retail trade had two good years. The graph is found at Table 6.17D (BEA.gov), the profit spike in 2020 and 2021, is a leap of over 115%, from $159.175 billion in 2019 to $342.994 billion in 2021. How did this happen? The stores claim they had to raise prices because of higher labor and supply costs, and the goods for sale were more expensive, but obviously they more than matched the additional costs and hiked prices super-high to achieve this profit outcome. Is there another reasonable justification? I'd like to know. Everyone would like to know.   

The Effect on Low Income Households 

An interesting background to the problem is a 34 minute video created by a Congressional committee, "Grit and Grace: The Fight for the American Dream". The committee focuses on "Economic Disparity and Fairness in Growth". Also, the United Way charity report, the ALICE report, must be a corrolary to this video. See their National Report for 2022. About 40% of Americans report they are ALICE, "asset limited, income constrained, employed". The graph below shows the subjective assessment by adults about their living situation:

A close reading of page 6 of the report shows that about 50% of adults report "difficulty in meeting one basic need", and about 32% report to be struggling to pay for "usual household expenses". (see page 6) 

The U.S. Census report on poverty, including the Supplemental Poverty Measure, for 2021 (issued in 2022) reports that 34% of U.S. citizens live with incomes below 150% of the poverty line. (see page 70). And many experts claim that the poverty line is actually around 140% of the poverty line; Kathleen Short, who developed the SPM, said that below 140% individuals are unable to "achieve a safe and decent standard of living." 

This is to say that inflation has had very negative impact on those living with low incomes and virtually no savings, somewhere between 32% and 50% of Americans.  

Are Corporations Getting Away with Murder? 

I'm making this up-date on March 5, 2023, originally posted on Jan 8, 2023. The graph below, from the Fed FRED page, shows corporate profits; note the great increase from 2020 at the right. This data is repeated more or less at the BEA.gov, Interactive Tables, Section 6, Income and Employment by Industry, nonfinancial corporate profits, Table 6.16.D and Table 6.19.D (pre- and post-tax). 

The lower graph shows nonfinancial corporate profits after tax, note the jump, an 87% increase in profits between Q4 2019 and Q2 2022, a period of 2 years and 9 months. Did wages keep up with higher prices? Did this affect low income Americans who were struggling before Covid-19 caused a lockdown? Did the American Rescue Plan's distribution of $1,400 per household in February of 2021 make a difference in 2022?       

The graph above the 2010 to 2020 graph, Profit per unit of gross value added, nonfinancial corporations, shows that from Q1 2020 to Q3 2022, the "profit per unit" has increased by 45%, from 116 to 169. When inflation strikes it increases costs and lowers profits. Such a simple fact is universally denied or ignored by most economists. The interview with Hal Singer, above, is such a breath of fresh air. 

In the graph below corporate profits are found to be responsible for almost 54% of the inflation;  Josh Bivens completes his essay saying, "First, while most policy levers to restrict corporate profiteering wouldn’t work quickly enough to change profit margins or influence inflation, a one-time excess profits tax might." 

Bivens writes at the Economic Policy Institute and published the following graph in April, 2022. 

Recently labor has contributed about 8% to inflation, while profits contributed about 54%, about 7 times more powerful than labor's effect. A Huge Reversal: in the past 40 years labor was 6 times more influential than profits.  

The Covid pandemic locked-down families, definitely reduced employment and GDP output, but as the vaccinations were released and applied in early 2021, the pent-up savings sprang into action, and the surge created shortages, but the corporations maintained high prices, because total profits were even higher in 2022 than in 2021 when conditions were normalizing. 

The real "average weekly earnings of production and nonsupervisory workers", the BLS shows, increased by 2.3% in 3 years, and by 5.6% over 6 years -- that entails 80% of all workers.If weekly and therefore yearly wage income is no greater in 2023 than in 2019, how could workers' income be driving inflation. The top-earning 20% of American families earn 49.6% of all income after taxes and transfers (states the BEA study), all have incomes above $149,000. The top-earning 10% earn 42.5% of all income, after taxes and transfers (states the RealTime study). The percentiles 90 through 9 have an average after-taxes-and-transfers income of $160,000, the top 1% have an average income of $1.3 million (RealTime Inequality). Corporations price their products for these high spending families. 

The graph below shows that the median weekly earnings for 80% of all workers spiked and then fell back to  levels virtually identical to Q4 2019. (Not to be confused with the "average weekly earnings" I mention above.) Since January, 2021, the Consumer Price Index increased by 15.0%. 

    Summary:   Wages are back to 2019 levels, prices are 15% higher, and profits are 40% to 80% higher. Who gains and who loses? Why did the Democrats lose the House of Representatives, and why does President Biden have such a low popularity rating? Why did the Democrats fail to attack corporations for price gouging? 

The Consumer Price Index, also a BLS graph, shows inflation increased by 15.0% in 3 years (Jan. 2020 to Dec. 2022), and by 22.2% over 6 years (Jan. 2016 to Dec. 2022). Furthermore, I show below that the average residential rental cost increased by 27.1% in the same three years, while the median sales price of a home increased by 49%. And, furthermore, 

The U.S. Census Pulse Survey of February 22, 2023 asks respondents "Frequency of feeling nervous, anxious or on edge" -- 59% report this feeling in the past two weeks. And answering "Frequency of not being to stop or control worrying" -- 52%. The first question had 210 million respondents, the second had 209 million. See Health Table 1. As for "Feeling down, depressed or hopeless", some 47% responded affirmatively; and "Frequency of having little interest or pleasure in doing things", 48% responded affirmatively, again over 200 million total responding, Health Table 2.  

It's a dismal science, they say. Just wait, we can liven things up a little.   

Now, back to my original message about inflation -------------- 

________________________________________________________________________

I dealt minimally with the inflation problem in the last essay. I'll add to the story today, but to those really interested I direct them to a 69 page essay at PERI, the economic platform for scholars at University of Massachusetts, Amherst, authored by Thomas Ferguson and Servaas Storm, "Myth and Reality in the Great Inflation Debate: Supply Shocks and Wealth Effects in a Multipolar World Economy". My essay is at least shorter. The PERI site offers seven (!) other papers on the topic by scholars of high reputation. To my eyes I see a sort of bonanza of approaches worth looking at, especially the essay "Federal Reserve Anti-Inflation Policy: Wealth Protection for the 1%?

The Ferguson and Storm essay was published at the INET site, Institute for New Economic Thinking. 

Here's my version, it amplifies a much shorter comment I left at the INET site.

                            Inflation: A Closer, More Accurate Story                  

We badly need a new "inflation story". The Federal Reserve’s policy of increasing interest rates arguably has harmed the economy and is logically flawed; it is based on a false story that wage income is pushing up prices. Instead, I argue, corporate price gouging has been ignored and the Fed's free money policy of  "quantitative easing" has also been ignored. The nation deserves an explanation as to why corporate profits in 2022 are 70% higher than profits 3 years earlier. And we need to know how the Fed’s infusion of over $4 trillion into the economy has affected prices.  

Corporate profits of non-financial firms have risen by 70% in almost 3 years. In Q4 2019 “Nonfinancial corporations” recorded $1.324 trillion in profits, about the same as the seven preceding years back to 2012. In Q3 2022 their profits were $2.2752 trillion, an increase of $961 billion, a 70% increase in less than 3 years. This comes from BEA.gov, Table 6.16D. Interactive Tables. The added cost of $961 billion comes to more than $7,300 per household distributed across the nation.

From BEA.gov, Table 6.16D, Corporate Profits, only "Nonfinancial" shown 

How do you make a profit during an inflationary season with costs of materials and labor rising? You pass along the added costs and pass along a stiff price increase if the market will accept it. The paper "Prices, Profits and Power" by Mike Konczal deals with mark-ups above the cost of production. He states on page 4, "In 2021, markups suddenly increased to 1.72—that is, the average markup charged in 2021 was 72 percent above marginal cost. In other words, in 2021, we see a sharp increase in the 30-year trend of firms in the aggregate decoupling their prices from their underlying costs."  

Here's a look at the profit increase of "Retail Trade" from Table 6.17, 

Their combined profits increased by 115% over two years, 2020 and 2021, a jump from $159.175 billion to $342.994 billion. How does that work? Their costs increased and they had to raise prices. Or so many locked-down consumers hit the stores and bought like mad. Or they jacked up prices enormously. Tell me what happened. 

Inflation began its upward drift in January, 2021, as the vaccines were being distributed and the lockdown was eased; household savings rate was very high, averaging 19% for over 12 months. As the lockdown was lifted, prices and inflation began rising. The Consumer Price Index has risen 13.8% between January 2021 and November 2022, a 22 month period. In the same 22 months, the average weekly earnings, adjusting for inflation, for all workers decreased by 4.4%, by the U.S. Census account, and have returned to exactly at the same pre-Covid level by another account.              

The Consumer Price Index chart at the BLS, all items U.S. Cities'

And Dean Baker provides a graph of non-health-care consumption; the above norm consumption coincides with the jump in inflation.

The median worker weekly earnings, wage and salary workers (Fed's FRED graph)   

The onset of the pandemic in March 2020, it will be remembered, caused massive job loss, some 25.491 million workers (15.5% of the February 2020 labor force) lost work in two months between February and April 2020. Many dropped out of the labor force; if none had dropped out the unemployment rate would have been 19.0%. The Employment to Population ratio captures the sharp decline:

The next slides comes from the Center for Budget and Policy Priorities, the essay "Chart Book: Tracking the Recovery from the Pandemic Recession", December 22, 2022. It shows unemployment hitting 24%. Workers in low-wage industries fared much worse than higher paid workers. 

The average income increased as lower-earning workers experienced most of the layoffs. Recovery from unemployment gradually restored jobs, and the price of labor resumed its normal picture. Now, after nearly 3 years of Covid, the real (inflation adjusted) price of nonsupervisory labor is almost exactly the same as pre-Covid labor costs. Both the average and the median earnings, were either the same or slightly lower after the 33 month period, 2019 Q4 to 2022 Q3. The real "average weekly earnings of production and nonsupervisory workers" has risen by 1.1% since March 2020, almost 3 years. It did spike, but it came down. Wages for 80% of all workers are not pushing up inflation. 

The median sales price for single family housing is 41% higher than in March of 2020. 

And here's the path of fixed-rate 30 year mortgage interest rates:

My hunch is that the influx of $4 trillion from the Fed's Quantitative Easing program added more capital into financial equity markets (or stocks), which spilled over into the housing market. Interest rates also of course were cut in half from 5 to 2.7%. Also home "Owners' equity in real estate" (line 51, Flow of Funds, Table B.101) increased from 64.97% in Q4 2019 to 70.52 in Q3 2022, or up from $18.169 tr. to $29.555 tr. in 2022, an increase of $11.386 trillion, most of the increase during the pandemic years. Where did this $11 trillion come from? From the stock market. 

Total household net worth increased in 2 years, 2020 and 2021, by $31.828 trillion. Incredible! In Q4 2019 total weatlh (private household net worth) was $118 trillion, and Q4 2021 it stood at $150.122 trillion, a gain of $32 trillion, and an all time high. As a comparison, the Federal budget expenditure in 2019, a normal year, pre-pandemic, was $4.4 trillion. The national income for 2020 and 2021 was about $15.8 trillion and $16.679 trillion, respectively. (see Joint Committee on Taxation, 2020, not found, and 2021, page 40) A look at the BEA table 2.1, Personal Income shows about $38 trillion total income for 2020 and 2021 combined. How does wealth increase by $31.8 trillion when income over the two years was only $38 trillion? Was only $6 trillion spent and $32 trillion saved? The stock market was on a tear, and values went through the roof, the magic of a bubble asset market. Fictious wealth? No, part of it was cashed out to feed the housing market. Stocks and corporate profits did very well during the pandemic. The S&P 500 rose by 32% in 2 years, then dropped 17%, for a total 3 year gain of 19%. Since 84% of stock value is owned by the 10% at the top, most stock and wealth gains went to a small minority. Total household net worth stands at $143 trillion in Q3, 2022.    

And rental prices for primary residence rentals, inflation adjusted, are up by 27.0% since December of 2019 until August, 2020 (from $1,560 to $1,981). That's an additional $421 per month, or $5,052 per year needed to stay in the same apartment. Where will that $421 come from? Wages being exactly equal or even lower to pre-Covid while rents are up 27.0% means a season of hardship for low-income Americans. Why would supply bottlenecks, labor market shortages, or higher prices of petroleum products and food raise rental prices? 

Another fact often missing from the discussion is that in the past six months, June, 2022, to December, 2022, the Bureau of Labor Statistics’ Consumer Price Index has risen by 0.16% which is an annualized increase of 0.32%. This is verging on deflation. So, inflation may be tamed already! If wages were pushing up inflation, and they weren’t, it’s been over for six months. Why then does the Fed insist on hiking the interest rate, and slowing the economy, especially new home building?

                                           

           Consumer Price Index, with 6 months of very flat inflation after an 18 month 13.8% surge  

The poorer families and citizens whose precarious living conditions were made worse by Covid (by illness, deaths, lockdowns and job layoffs) and then by inflation (beginning in January 2021) increased their consumption with the assistance of the federal Economic Impact Payments (stimulus checks), enhanced unemployment checks, the increased Child Tax Credit and other benefits. The Supplemental Poverty Measure for 2021 (page 58) shows that child poverty was reduced by 59% (almost 2/3rds, from 12.6 to 5.2 from 2019 to 2021) in 2 years. But the EIPs were an income replacement action, not a serious factor in causing inflation. 

The web page RealTime Inequality shows that the post-tax and post-transfer incomes of the lower-earning 50% of U.S. households grew by 6.9% (or $2,600), rising from $36,700 to $39,300 from January 2020 to September 2022. The lower 50% earns 16.6% of all income after taxes and transfers, according to RealTime Inequality, a web page created by University of California economists. (The average U.S. household income is between $144,000 and $161,000, to put that $39,300 into perspective.) This web page shows the pre-tax, pre-transfer share of total national income of the lower 50% is 8.6% of all income – only 8.6% --, and the post-government-transfer share is 16.6% -- still not enough to drive inflation. Raising the incomes of half of all households who earn a sixth of all income by less than 7% -- it's laughable to claim that this is driving inflation. 

This RealTime Inequality graph shows Income Share of three groups, the lower 50% (orange at bottom), the upper-middle 40% (blue), the top 10% (red). The beginning date is 1/2020, end date is 9/2022. Which group has the power to drive up prices? 

As I’ve mentioned at my blog often, “average weekly earnings for production and nonsupervisory workers” (80% of all full-time workers) were higher in 1967 than in 2022, 55 years ago. The Real (inflation adjusted) GDP (economic output) per capita (human being) increased by a multiple of 2.6 or by 161% during those 55 years, between 1967 and 2022. But weekly wages for 80% of workers did not rise at all! And the real annual wage income for men in 1973 has increased by 4.4% (U.S. Census, Table P-2), while the GDP/capita increased by 123%. This indicates a complete break-down of economic efficiency and fairness, and it goes ignored by the general public and our political representatives. The general effect of permanent low wages for most workers is social upheaval.

The Causes of Inflation Were primarily opportunistic price hikes:

Several economists point out that inflation was mostly caused by out-sized corporate profits. Josh Bivens at the Economic Policy Institute claims that 54% of inflation was caused by corporate price hikes; and  Matt Stoller, the anti-trust expert, claims 60%, and Mike Konczal at Roosevelt Institute explains that corporate price mark-ups and profits increased at a rate faster than any time since the 1950s. American families saved their incomes during 2020 pandemic, as a result of the lockdown, and then began shopping and buying when the lockdown was eased in early 2021. The BEA.gov shows, Table 2.1, that the savings rate during the 12 months from March 2020 to March 2021 was 19%, the highest rate ever recorded, it normally ranges from 5% to 8%. 

This is called by economists “pent-up demand”. Corporations saw it as a golden opportunity to increase their prices. But the status of private wealth had also changed.

Total wealth now is at its highest level in relation to annual national income. The Fed's Flow of Funds report shows a ratio of disposable national income to household net worth (otherwise known as private wealth) (See Household Net Worth, Table B.101.). The ratio was at an all-time high in Q1 2022; savings were 8.25 times higher than income. The historical normal is around 5.2 times higher. In December 2021 private savings peaked at $150 trillion, and since have retreated to $143 trillion.

A graph at the Fed’s FRED site shows the same ratio, “net worth as a percentage of disposable income”, and between 1946 and 1996, the range stays close to 520%, then from 1996 to 2016 it resembles a roller coaster ride, ranging from 560% to 650%, and then it grows to 825% in January of 2022, before falling to 769% in September 2022. 

From July 1973 to September 2022, wealth to annual income ratio. 

Apparently, savings has become hoarding, the nation never has “saved” as much as it does now. The question has to be asked, is this a wise use of resources, or is it a manifestation of a bad and imbalanced distribution of income?

The next graph from the Fed's FRED series, 

 Households; Corporate Equities and Mutual Fund Shares; Asset, Market Value Levels (BOGZ1LM193064005Q)

Twenty trillion dollars ($21 tr.) was gained in the 21 month period, Q1 2020 and Q4 2021. This is an 87% gain in value! 

At the trough of the Great Recession, Q3 2009, the value of stocks was $7.039 trillion, and by Q4 2021, 12 years plus 3 months the value stood at $42.489 trillion, and adjusting for inflation, this is an increase by a multiple of 4.4 times or 440% over a 12 year period. In the same period the real GDP per capita increased by 16% and the average weekly earnings for nonsupervisory workers by 13%.  

RealTime Inequality shows the growth of wealth by percentiles from 1976 to 2022. Note that the lower 50% of households has no recordable wealth.

Between March 2020 and September 2022, 30 months, the “median sales price of houses” increased by 41%, from $322,600 to $454,900. This is the sharpest increase on record. The maintenance of low interest rates had an effect, but the cooling stock market and the lure of investing in real estate also pushed up prices.   

The American economy is a very sad picture of extreme inequality, and this is demonstrated on the web page RealTime Inequality. The page was created by University of California, Berkeley, economists. 

Some reputable economist should put all these details into an orderly package. One last detail has to do with the allocation of corporate profits. Corporations create the majority of products in the U.S., employ most people, and create the most surplus (profits which become excess savings). The findings of professor William Lazonick show that over 90% of corporate profits for the past 15 years have gone to shareholders in the form of dividends or stock buybacks. Where did nonfinancial corporate profits go between 2010 and 2019? "Shareholder payments––stock buybacks plus dividends––have on average totaled 100 percent of nonfinancial corporations’ corporate profits over the last decade", he states in the intro to this study. In this article he states that 93% of profits went to either stock buybacks or dividends ($5.3 trillion or 54% of profits to buybacks, and 3.8% trillion to dividends, another 39% of profits), that's $9.1 trillion out of $9.8 trillion going to shareholders.  

This graph shows the course of dividends and stock buybacks over 40 years or so.

Lazonick makes the point that corporations cannot maintain their advanced productive status and competitive edge without investment of retained earnings, nor can they improve performance without investment in employee skills. Both assets are lost with excessive rewards to stock shareholders. The graph originates from the first link above. Not only do we lose the middle class with wage suppression, we lose the nation's competitive edge in the world economy! Note that in 2017 a total of 111.8% of Net Income is spent on the combined total of buybacks and dividends! He offers examples of General Motors going bankrupt and being rescued by the government after indulging in massive buybacks, and airlines buying $50 billion in buybacks, and then begging for government support during the Covid emergency. And the examples continue. 

William Lazonick with Marie Carpenter, in a recent article, February 28, 2023, details the decline of Cisco Systems because of wasteful buybacks and excessive dividends. (I contributed a comment in the space below the article.)

Employees have not shared in the growth of the economy, only shareholders have. The capitalist system has an Achilles heel; businesses seek higher profits by suppressing wages, and then offering lower priced goods. This creates pressure to keep employee incomes low; it also destroys the customer base. And low wages create high inequality which creates high economic fragility. Furthermore, gratuitous  price gouging by corporations during an emergency proves in a sense that the “invisible hand” no longer works to maintain actual value of products. Gratuitous price hikes and high mark-ups over the cost of production is a phenomenon of exploitation and greed as well as a noncompetitive environment (read the highlights of Konczal's study). Prices were pushed as high as possible after a year-long emergency period of lockdown and depressed demand. The story of workers’ rising incomes pushing up costs masks the real story. And the general public seems to understand, as everyone knows, rising input costs (due to inflation) do not raise profits (by 70%), they tend to lower profits. The essay by Thomas Ferguson and Servaas Storm explaining inflation is worthy of consideration. And it might not be a bad idea to review the logic of Dan Alpert who predicts a period of deflation. He says, 

"The conclusion reached is that the four decades of relative fiscal austerity in the United States, coupled with accelerating globalization and technological development, have produced a disinflationary-to-deflationary tendency – extending from prices to labor incomes – that only substantial amounts of targeted federal spending can restore to equilibrium. With sustained levels of accelerating inflation being very unlikely."

today is January 8, 2023                                

 On January 28, 2023 I recommend this article about inflation: "How Corporations Get Away with Murder to Inflate the Prices on Rent, Food, and Electricity".

The article is by Hal Singer, a professor at University of Utah; a quote:  "I’m in a hotel in New York City right now. You think they’re charging rates based on the wages of the cleaning crews that come in? Not likely. They’re revenue maximizers. They’re just looking at the demand curve. The only thing that enters the calculus is what economists call demand-side elasticity considerations. In other words, how much you can get away with on the demand side in setting prices. The costs are no longer entering the equation."  

A sample from Mike Konczal's paper published in June, 2022, "Prices, Profits, and Power", on page 4 he writes,

"While markups averaged 1.26 between 1960 and 1980, they have been on a slow and consistent rise since then, averaging 1.56 during the 2010s. In 2021, markups suddenly increased to 1.72—that is, the average markup charged in 2021 was 72 percent above marginal cost. In other words, in 2021, we see a sharp increase in the 30-year trend of firms in the aggregate decoupling their prices from their underlying costs."