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Millennials Will Never Have The Wealth of Their Parents And It’s Making America Vulnerable

September 15, 2016

Millennials don’t have a shot at financial security, not even to make what their parents have, never mind their grandparents. As profit sharing amongst employees has declined since the 1970’s with most profits being given to shareholders or executives, Americans are making proportionately  less than any generation since our grandparents. Ever wondered how your grandparents were able to afford a home plus a vacation cabin? Ever wonder why your grandparents seemed to have more money than you? It’s not just age, it’s adjusted wages.

The usual weekly wages of the median full-time worker (half of workers earn more, half earn less) increased by $4 between December 2012 and December 2013 to $782, according to the Bureau of Labor Statistics. That’s up 1.3% in the past year. The only problem is that prices increased 1.5%.

In real terms, the typical worker slipped further behind.

After adjusting for inflation, median earnings at the end of 2013 were equivalent to $334 in 1982 dollars, no higher than they were in 1999, and just slightly below the $335 that the median worker earned in the summer of 1979.

The median household income has increased slightly — 5% since 1979 — but only because more families are relying on Mom’s wages.

What this means for the US economy? Instability. Our economy is a consumer economy, oversimplifying meaning that the US economy is largely driven by people purchasing product to support the businesses who make them. When consumers don’t have enough money to purchase product, the economy suffers.

While productivity has gone up since 1979 consistently, worker salaries have stayed the same, meaning American workers work more for less money than our parents and grandparents.

Profits from domestic operations have more than doubled in inflation-adjusted terms since the late 1970s even as median wages are flat. Profit margins in nonfinancial companies have risen to nearly 15% of gross valued added, about 4 percentage points higher than average.

Unfortunately, those profits aren’t being reinvested in the economy; they are sitting idle.

The top managers are also getting a much larger share of the pie. According to an analysis by Josh Bivens and Larry Mishel of data from the Congressional Budget Office and from Thomas Piketty and Emmanuel Saez, the income of the top 0.01% of earners (the top 1 in 10,000) has increased at a 6% annual rate since 1979 (compared with a 1% increase for the bottom 90%.) 

The top 0.01% of earners are overwhelmingly corporate managers, top executives in finance, corporate lawyers and investors. This group makes an average of about $16 million a year, or about $300,000 per week.

American workers really are earning less while the 1% keep earning more. For every year the executive gets a raise, pay for workers has decreased. In other words, worker pay is docked each time executives get a raise.

Since June 2009, real average weekly earnings have increased 0.3% per year, even as productivity has increased 1.5% per year. Most of the income gains have gone to the highest paid workers, including the bosses. Real median weekly wages have actually declined 0.8% per year since 2009.

Slow income growth means consumer spending has also grown slowly. Most households are still trying to avoid taking on too much debt (like they did in the 2000s), so they don’t have the purchasing power to buy the additional goods and services that the economy could be producing.

If those additional goods and services can’t be sold, then businesses won’t hire the workers who would produce them, nor will they invest in the buildings or equipment that would be needed.

The U.S. economy relies on consumer spending to drive growth, but consumption is stuck in second gear. With consumer spending growing at less than 2%, it is no surprise that gross domestic product is also stuck in the 2% range. 

Stagnant wage growth isn’t a new trend — it began in the late 1970s — but the Great Recession and its slow aftermath have amplified it. While corporate profits are near a record high as a share of national income, the workers’ share has dropped to the lowest level in nearly 60 years.

After adjusting for inflation, median wages are no higher than they were in 1979.

Short term, executives are pounding each other on the back. They make money from the workers every time, and to them, it makes sense: keep making more money. The reality for the American economy is that this is a dangerous business.

Going beyond the concept of fairness, because it just doesn’t make for a compelling argument for wage increases–the old parental adage of “life is not fair”– the lack of investment in American workers makes for a very unstable economy, as was noticed in the 2009 Recession and most recently, another impending recession after the restaurant industry ( a marker of disposable income) showed declining profits. When people don’t make a living wage at work, the government picks up the tab  in the form of benefits for poor children, increased spending in schools, as opposed to local taxable income supporting schools, increased spending on healthcare, and so on.

But, here is the real crux of the issue–giving money to executives is not helping the economy. Executives aren’t investing in American businesses, infrastructure or building American jobs. One could argue that the executives are the least effective means of disbursing money in America to create a stable economy, right up there with throwing good money away. ‘

Stagnant wages are economically inefficient because they hold back both consumption and investment.

While most of us are spending almost everything we earn, it appears the rich may simply have more money than they know what to do with. They aren’t spending it, and their investments are doing little to increase the economy’s productive capacity.

If our nation invests its wealth stupidly, as in investing in executive and corporate profits, as opposed to consumers who stabilize the economy, then there is only one answer that arises from a stupid investment–lost money.

Corporations are also sitting on a pile of cash. They’ve increased dividend payments modestly, but are still retaining about half the profits they earn. They aren’t plowing the cash back into the business; net investment has fallen to the lowest levels since the Great Depression of the 1930s. Even Apple AAPL, +1.91%  can’t seem to think of anything better to do with its billions than hand them over to Carl Icahn.

The economy is stuck in a kind of Catch 22: It can’t grow at its potential unless consumers spend more, but stronger consumption is impossible without the higher wages that faster growth would bring. 

The only way to make the economic pie bigger is to give workers a larger and fairer share, in line with what they earned in the golden days of the American economy of the ‘50s, ‘60s and ‘70s.

Take a look at the info graphs below. The blue info graph shows the rate of pay for American workers, adjusted for inflation, and you can see a downward spiral. The info graph in yellow and orange/red, shows a comparison of Millennial monies vs their grandparents, and you can see who is losing the financial spending game.

screen-shot-2016-09-15-at-9-30-23-am

screen-shot-2016-09-15-at-9-02-35-am

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