Building an Economy that Works for Everyone

The “second yacht” problem: Why America’s economy is stuck in the doldrums

There are two main reasons why America can’t get out of the economic doldrums.

The first is, wages are stagnant:

The U.S. economic recovery – slow as it is – is leaving workers’ wages in the dust. Average hourly wages, which took a big hit in the Great Recession, are growing slower than they did before the recession, and their real value compared to inflation has fallen over the past year.

The National Employment Law Project said in a study published Thursday that weak wage growth is permeating all industries. But, equally worrisome for the consumer-fueled economy, most of the post-recession jobs being created are lower-paying. [McClatchy]

This isn’t a new trend – in fact, wages have been more or less flat – despite big gains in productivity – since the mid-1970’s:

Wages, adjusted for inflation, would be twice what they are now, if workers had continued to share improvements in productivity.

Which brings us to the second reason we’re stuck in the mud, economically speaking: Income isn’t stagnant at all for the top 1%. That small group has not only seen huge wage gains, but also big increases in investment income, year-end bonuses, golden parachutes, and the like:

Click to get a year-by-year picture – to the dollar – showing just how wide the gap has grown between the top 1% and the bottom 99%.

Why is this a problem? The middle class simply doesn’t have the purchasing power to get the economy rolling again, because too much of the wealth they’ve helped create is being held by too few people. Robert Reich explains:

Photo: WaterpoloSam, Flickr Creative Commons

As long as almost all the gains from economic growth continue to go to the top, the vast middle class doesn’t have the purchasing power to boost the economy on its own. And rich Americans spend a much smaller portion of their incomes than does the vast middle class. Their marginal satisfaction from additional spending falls off. The second yacht isn’t nearly as much fun as the first.


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