A Rising Tide Lifts All Yachts

Luxury YachtsI am certain this play on the saying “a rising tide lifts all boats” has been used before, but it is too apt in this case to pass over. When practicing bankruptcy law, you get to place your finger on a certain pulse in the economy. Despite the belief by many that bankruptcy is used mostly by irresponsible poor people or the very rich working the system, at least for our firm, it’s mostly the honest and hard working middle class. Here’s a client sample which is fairly indicative of our total client pool. I am detecting a heightened sense of struggle and resentment among my clients that appeared to be explained in part by a recent podcast.

There was an episode of The Weeds, a podcast hosted by Ezra Klein and Matt Yglesias, about metrics used to measure our economy that make it appear that things are robust: a booming stock market, low unemployment, and host of other popular data reported in the media to evaluate the economy. And things are booming. But as is evident with what I see with my bankruptcy clients, the data markers we look to masks an underlying and problematic reality.

In a white paper by Emmanuel Saez and a couple of colleagues, they published a comprehensive study about income and wealth gains in the United States, measuring the mid 20th century through 2014. From 1946 through 1980, all income brackets shared a relatively equal gain in pretax income and wealth. In fact, the gains in pretax income by the lower 90% were slightly greater than the wealthy. But around 1980, things change rather drastically. Some of the punch lines:

  • From 1980-2014, the pretax income gains for all Americans was 60%.
  • From 1980-2014, the pretax income gains for the bottom 50% of income earners was 1%.
  • From 1980-2014, the pretax income gains for the middle 50-90% of income earners was 42%.
  • From 1980-2014, the pretax income gains for the top 10% of income earners was 121%.
  • From 1980-2014, the pretax income gains for the top 1% of income earners was 204%.
  • From 1980-2014, the pretax income gains for the top .001% of income earners was 636%.
  • In 1980, the bottom 50% income earners took home 20% of all income earned; in 2014, 12%.
  • In 1980, the top 1% income earners took home 11% of all income earned; in 2014, 20%

As the data suggests, from 1980 to the present, the very wealthy just take over, and the poor go nowhere, and actually lose half their earning power for every dollar earned since 1980. Telling as well, was the bottom 90% of all earners (including the bottom 50% as a separate category) all increased their pretax income by over 100% from 1946 through 1980. Then they hit a wall.

Another notable statistic for me, pointed out by Ezra Klein, was that the bottom 50% of income earners in France has now surpassed the bottom 50% of Americans in pretax income. As of 2014, the bottom 50% of American workers earned an average of about $16,000 per year, whereas the bottom 50% of French Workers earned over $18,000 per year.  The poverty level for a household of one in 2017 is considered $12,060.

Not only do the bottom 50% of the French now enjoy a higher standard of living than the bottom 50% of Americans, the French take two months off as a matter of cultural policy. The hard working American continues to work longer for less. The United States has a more robust and higher growth economy than France, which actually makes it an even grimmer picture because even with robust growth, none of the gains make it to the bottom 50%. This makes the American dream feel like it’s been usurped by the French dream, with a lot more vacation days to boot.

They then discussed a second paper by Loaker and Eekhout about markups charged by businesses from 1950-2014 as one possible explanation for this growing disparity.

For measuring “markups,” as host Matt Yglesias said, imagine what it costs a restaurant to make a hamburger, and then the costs of a second and third hamburger thereafter. Or the cost to an oil company to produce its second and third barrel of oil. It measures simply how much more a company can charge than it costs to make a product or charge for a service. From 1950-1980, the markup meanders but averages approximately 16%. From 1980 to 2014, that spikes to 67%. That is, businesses are making over four times more on marginal costs today; they make more off the same products and services.

This markup was present in all industries, so it’s not just tech or other industry specific outliers. Taken together with the first paper, this market power concentration indicates that workers earning the bottom 50% in wages are not sharing in the growing profits enjoyed by the powerful businesses.

Ezra Klein noted in the podcast that the normal set of indicators we use to measure the economy no longer tells us enough about the economic well being of the United States. In fact, our oft cited indicators appear to mask a huge disparity and overlook most American workers. Unemployment is low, the stock market is breaking records. But there appears to be something fundamentally wrong in our economy where the bottom half of wage earners have seen a 1% pretax increase in pretax wage growth since 1980. No wonder there is a tremendous sense of economic anxiety out there.

Enter the political and think tank food fights. I don’t know the causes that I’m sure some will bandy about: taxation, unions and collective bargaining, anti-trust policies, a globalizing economy, automation, regulations, tariffs, international trade deals, immigration; pick your poison(s).

I do know that this continued concentration of wealth in the very few, with the majority of American workers’ wages stagnating, often at poverty levels, is alarming. There’s a heightened barrier to entry into the middle class. I’ve conducted thousands of consultations with potential bankruptcy clients. Universally, they all just want to earn a decent living, make ends meet and maintain their autonomy and dignity. If the tremendous wealth generated right now gets funneled disproportionately to only a select few, we’re in for some rough social and political changes.

What I am not hearing yet, is a coherent policy and strategy to address this. My clients cannot continue to struggle as hard as they do to pay health care premiums, absurd rents and mortgages, childcare and other basic expenses. But the data shows my lowest earners’ wages are not increasing commensurate to the economic growth of the country as a whole or to the profits enjoyed by their employers. The data tells us they have in fact lost a half of their earning share in the last 40 years. I see a deep pessimism among those working very hard to survive.

When the guy on the yacht throws you a life jacket, with annoyed reluctance at that, the resentment is going to boil over and reveal itself. My clients come to see me for financial relief, and it rarely translates into a consultation about economic and social policies. But if you listen to their stories, their concerns, their fears, I hear a growing implied narrative of decent people that are ready to burn down the village to save it.