The Self-Exploitation of Intellectual Capital: How Returns to Labor Have Eclipsed Returns to Capital

Social security only began keeping track of salaries over $50 million in 1997. (In 1990, the highest group it broke out were folks making more than $5 million.) In 1997, 13 people made more than $50 million in salary. By 2018, that had increased to 211.

In the last 50 years, arguably only the returns to entrepreneurship have grown more than the returns to elite labor. This huge gain in wages is easiest to see with CEOs and professional athletes. 

In 1969, Willie Mays was the highest paid major league baseball player at $135,000. In 2019, Mike Trout was the highest paid player at $37.7 million. (Willie made about two-thirds what we paid Nixon to be president; Trout makes 94X as much as we pay Trump.)

In 1969, the ratio of CEO to average worker pay in the S&P 500 was 32. In 2019, it was 264. (Which means that S&P 500 CEOs make per day what their employees do per year.) 

Median wages between 1990 and 2018 grew about $4,700. Meanwhile, wages for those in the top 1% grew about $114,000. (Both numbers are adjusted for inflation.) Folks making median wage had about $90 more per week; folks in the top 1% had an extra $2,200 per week.

The old models still suggest that capital is the source of income inequity. The new data suggests that it is increasingly returns to labor - unique skills and intellectual capital - that drive big differences in income. 

As Daniel Markovits points out in The Meritocracy Trap, one of the fascinating things about this is that to be rich once meant you owned land and capital and could afford to be idle. Those assets worked for you. Increasingly, being rich means working more than the poor, not less. Bankers used to work 10 to 3; now investment bankers report working 17 hours a day. In 1962, elite lawyers were expected to bill about 1,300 hours a year; now they are asked to bill 2,400 hours a year, which means working long hours six days a week. To be rich now means having to put in the hours to get a return on the skills or intellectual capital you have created. The old, financial capitalist exploited the worker; the new, intellectual capitalist has to exploit him or herself.

Information on social security here.

Information on CEO to worker pay ratios here.

Overeducated Workers in a Post-Information Economy

The simplest statement of effective economic policy is to create, get, or get more from whatever limits progress. As a community shifts from one economy to another (from, say, an agricultural to industrial economy), the limit shifts and so does effective policy.

All that as prelude to summarizing a report recently released by the UK's Office for National Statistics (ONS). 

Here are some excerpts of note:

Overeducation is a form of mismatch where a person can be overeducated if they possess more education than required for the job.

Levels of overeducation: completed  

before 1992: 21.7%; 

1992-1999: 23.4%;  

2000-2006: 24.8%;  

2007 or after: 34.2%

The wage of an overeducated worker is between 3.3% and 8.1% lower compared to the wage of a worker with a similar level of education who is matched to the right occupation. 

We find that overeducated graduates experience negative returns to overeducation.

Overeducation is becoming more prevalent and overeducated graduates actually get negative returns on their education.

I have not seen a similar report on American workers but have little doubt that it would tell a similar story.

We still imagine we're living in a world in which capital and knowledge workers limit progress and we put trillions into capital gains tax cuts and education funding .... even as those no longer limit. 

What a Shrinking Labor Force Means for the Job Market & the Economy

Since December, the labor force has shrunk by 770,000. This is one reason that the unemployment rate hit its lowest in this century in March. (It's been half a century since unemployment was at 3.6%.) This fall in labor force could be random variation but it may be a sign of a trend.

As you can see in this graph, the rate of growth in the labor force has been steadily falling in the last 5 decades.

Baby boomers and immigrants drove a big rise in the labor force. LBJ's Immigration and Nationality Act in 1965 ended the fairly racist quotas for immigration and increased the number of immigrants about the same time that baby boomers entered the job market. The birthrate for a stable population is about 2.1 births per woman. In 1960, the US had a birthrate of 3.65 and in 1973 it fell below 2, where it has stayed since.

The number of kids coming of age and the number of immigrants coming to our country have both steadily dropped since the 1970s. It is conceivable that in the 2020s, the labor force will actually stop growing.

This is good news for workers. Sort of.  It should be mean strong wage growth for the millennials whose careers started out in the midst of the Great Recession. Workers will have more power in negotiations with companies who are competing for a shrinking pool of workers. They deserve it and it could be good for their pocketbooks. This also suggests that house prices will increase at a slower rate as demand for housing eases.

The news is not as good for the economy for at least two reasons.

The most obvious is that the ratio of retired to those working will go up. That suggests more poverty among the retired than we'd otherwise have. (Baby boomers might care about this.) Elder care will be more expensive as wages rise.

Less obvious is what fewer workers mean for an economy.

Just today the New York Times published a story on how Hungary's economy is now limited by workers. Prime Minister Viktor Orban is, like Trump, an anti-immigrant nationalist.  Hungary is not the only European country experiencing lower birthrates, though. Demand for workers is up throughout much of Europe. Because of this, Hungarian workers are leaving for better paying jobs in big European cities. So Hungary's labor shortage is driven by two things: its own people emigrating to other countries and other people not immigrating into Hungary. As a result, businesses are turning away orders because they cannot fill them.

How are we i the US doing with immigration as birthrates fall?

Foreign student enrollment in American universities has fallen two years in a row - essentially since Trump has taken office. The immigrants we should most want - those able to get into our universities - are choosing to go elsewhere, raising the probability they will go work elsewhere.

There is something else going on here that rarely gets mentioned. As population increases, so does per capita GDP. More people stimulate more ideas, more creativity, more products, more technologies, and more businesses. This is a big reason why productivity and wages are so much higher in cities than in rural areas. Our creativity is stimulated by interactions with people; and the more diverse that group, the more creative our response.

The good news about diminishing growth in the labor force is that it will mean that workers will likely get more of the pie, be able to negotiate higher wages this year. The bad news is that there will be less pie, less creativity, innovation and entrepreneurship than we'd have with a larger, more diverse population and wages - while taking a higher percentage of corporate revenue - could actually be lower than they otherwise would be. (And that, of course, suggests company earnings would be smaller for two reasons: smaller portion of revenues going to profit and smaller revenues.)

As birthrates fall across the West, smart countries will compete for immigrants, not shun them. Us? Well, apparently we're cashing in our lead in immigration and choosing to become more like Hungary.

Wage Growth After the Great Recession

In numerous posts I've argued that the first half of the teens (the years from 2010 to 2019) would repair the unemployment rate and the second half would repair wage growth. Stats on wage growth 2009 to 2017 help to illustrate that. First we have to get unemployment down and then wages start to grow.

From the end of 2009 and 2015, unemployment fell by half, from 9.9% to 5.0%. Since then it has continued to drop but 5.0% gets unemployment within fairly normal boundaries. (This century, unemployment has been over 5.5% about as often as it is below 5.5%, so 5.0% is pretty good.) At that point the labor market has tightened enough that employers have to offer higher wages and can't simply hire folks from among the unemployed.

You can see the sharp rise in the rate at which incomes began to rise since 2015 here.

Last week with a client in Orange County, I was with an executive team. The head of HR told me that two big changes in the last year are passive recruitment and a new California law that bars employers from asking what you made in your last job.

Demand is high enough for employees that companies increasingly recruit people who are not looking, a process they call "passive recruitment." A lot of this recruitment happens within LinkedIn.

Also, last year California made it illegal for employers about to offer you a job to ask what you made in your last job.

The consequence of these two phenomenon are that there are a chunk of people who are getting very cool raises by changing jobs. Across the country, household incomes are rising at their fastest rate since the Great Recession.

More broadly, though, low unemployment rate simply means more upward pressure on wages. And wages are now rising at a healthy rate and will continue to rise as long as the economy continues to create new jobs at this rate.

That's very cool.

Take note, though, that politicians trying to make the case for change will point to older data and argue that wage growth is not keeping pace with inflation. Senator Kamala Harris argued this week that wages are not keeping up with the cost of living. That was true early in the decade when the unemployment rate was higher than average but is no longer true.

We're going to hear a lot of nonsense about what policy changes we need but we need to be clear about why wage growth was so sluggish. We had a Great Recession. What are the implications? Regulate financial institutions so that they do not blow up the economy. The problem is not the economy the problem is its vulnerability to financial mischief. Just like sports competition is enhanced by good officiating, so is business and finance competition. The American economy is still a great game; it's just that we can't expect good results when we've put blindfolds on all the refs. 

Your Blogger's Forecast Record for the Last 2 Years - 2016 and 2017

Some years I make forecasts for the coming year. This is a blog so there is nothing standard about what metrics I forecast but here is a recap for the last two years.

2016

I forecast that median household income would finally enjoy a strong rise and forecast it would hit $55, maybe $57k. It hit $57.7k.

I thought residential construction would rise between 10 to 15%; the monthly year over year rise varied from 8 to 13%.

I forecast a rise in personal consumption of 5%. It hit 5%.

I was bullish on job creation, predicting another 12 straight months of uninterrupted job gains that would total between 2 to 3 million. We got 12 moths of uninterrupted job gains and 2.2 million new jobs.

I forecast a rise in the rate at which wages would go up; they did rise more rapidly in 2016 than they did in 2015. 

Finally, I forecast an S&P 500 rise of 10% to 20%. The market rose 9.8%.

2017

Last year, I forecast a smaller number of statistics but predicted a very strong economy. (Prediction is here, A Stimulus, a Boom and White Men Dancing: an economic forecast to the end of the decade )

The forecast starts with:
"First of all, the economy is primed for take-off."

And then,

"The next four years will be great and it's perfectly plausible that unemployment will drop below 4% within two to three years. We might even see the uninterrupted run of positive job creation run out another four years, as absurd as that sounds."

Then, it adjusts for the just elected Trump.

"Short term, Trump changes this for the positive ... bump GDP growth .... driving stock prices up."

I tweeted out just two statistics:

Job creation of 2 million and unemployment just over 4%.

The actual numbers? With a month left we're 84,000 jobs short of 2 million and the unemployment rate is 4.1%. Also, the stock market is up 18.8% for the year with weeks to go.

Next post will be my forecast for 2018.

What Your Fellow Americans Are Making - And What That Suggests About Minimum Wage Law

13 October, our Social Security Administration released data on last year's wage earners.

An income of $95,000 put you in the top 10%, made you 1 out of 10.

An income of $250,000 put you in the top 1%, 1 out of 100. 

$500,000 put you in the top 0.1%, or 1 out of 1,000.

$50,000,000 - fifty million - put you in the top 0.001%. It made you one in a million. 143 people reported incomes of over $50 million and those 143 people had average incomes of $100 million.

Here's another remarkable stat. Merely having an income put you in the top 50%. When I write, "top 10%," above, I'm writing about the top 10% of wage earners. Social security has data on 163 million wage earners. There are about 325 million Americans, so only about half of Americans reported incomes. Some were too young. (My wife's second grade class is full of slackers who haven't earned a dime in their life.) Some were too old. Some are too rich to work or make their living from investments rather than wages, property or stock owners. Some are too handicapped. Some are working jobs without wages, jobs like caring for their kids or parents. Some depend on family or friends for food and housing, some are in school, some recovering from injury, some permanently disabled, etc.

Now let's get into the normal people, the wage earners who don't make six figure salaries but still work. The 90%.

If you make $15,000, you make more than 30% of all wage earners. $15,000 a year works out to $1,250 a month. Median rent for a one-bedroom apartment in the country's most expensive 22 cities is higher than $1,250 a month. Assuming that you have to eat, buy clothes, get transportation, etc., what nearly a third of Americans make is not enough. 

If you made $30,557.71 last year, you made more than half of all wage earners. You have as many people who would trade wages with you as you would trade wages with. In some sense, you are the representative American, someone fellow Americans are as likely to pity as envy.

$30,000 a year works out to $15 an hour. Half of wage earners make less than this. Half.

Seattle is a wonderful city. It's both home to two of the richest men in the world and to many liberals who folks in the Midwest would consider more liberal than Scandinavians. They've recently passed a $15 an hour minimum wage. 

I have a problem with that.

I don't have a problem with places like San Francisco and Seattle - places where median wages are $90,000 to $100,000+ a year - saying to employers, "If you want to hire our people you have to pay more than you would elsewhere." That makes perfect sense to me. 

What doesn't make perfect sense to me? Choosing to make that minimum wage $15 an hour - an amount MORE than what half the people in this country make. 

Average wages in Belarus and Armenia are about one-tenth the average wage in the US. You can't just pass legislation requiring all businesses to pay Armenian employees the same as American employees. It's a noble and proper aspiration to lift wages but the way you get there is complicated. Better education. Easier access to foreign markets where they can sell their goods and services. More capital investment that makes their people more productive. 

Minimum wage seems to work as a prod to businesses or industries that aren't keeping up. It can force the folks in the bottom of 10% or 25% of labor productivity to either go out of business, go overseas or to up their game and make their employees more profitable even at a higher wage. What it can't do is force wages up for half the workforce. You need more complicated policies than that.

Policies that make it easier to live when you make only $15,000 a year or less - something that 30% of the workforce is doing - are good, humane and necessary. Minimum wage laws that ignore what the market says about the value of half your workforce seem, by contrast, bad, silly and doomed to backfire. 

Americans Were Making About $500 a Month More in 2016 than in 2014 (And How Income Growth Changes Voting)

Yesterday the Census Bureau released new data on household income from 2016. There are a variety of interesting things to come out of that and one really interesting thing about how changes in income change how Americans vote. First some data.

Incomes grew at an impressive rate. Earlier in the recovery, while unemployment remained high, income growth was slow. It has been a spectacular recovery. For 83 uninterrupted months now, the economy has created a jobs. A total of 16.4 million. But the economy started from a 10% unemployment rate. As the economy continued to create jobs, detractors continued to say, "Yeah, but wage growth ..." Well when you have 8 million people still standing out in the hallway hoping for a job, there is not much pressure to raise wages. Later in the recovery, as unemployment dropped below 5%, companies had to start offering higher wages. And they have.

Across all households, median income rose 3.2% to $59,039 and average income was up 3.6% to $83,143. Since 2014, average income is up $6,360. Think about that. That work out to $530 a month in extra income. (Median income is up nearly $400 a month.) This strikes me as a big deal. Car payments, an annual vacation, eating out, paying down debt .... $400 to $500 a month extra income makes a very real difference. This is simply great news and actually unsurprising. For years I've been predicting that the first half of the 2010s would be about lowering unemployment and the second half would be about raising wages.

One other bit of great news is that we're narrowing the gap between white men and women and minorities. Everyone's income grew but the incomes of women and minorities grew at an even faster pace. Median income for all households grew 3.2% but for Hispanics it rose 4.3%, for blacks it rose 5.7% and most impressive of all, for households headed by single women, it rose 7.2%. (For those of you alarmed at an erosion of white male privilege, rest assured that while incomes of white households rose at a lower rate - 2% - it is still higher than other groups.)

In all, this income report is great news. It also suggests the possibility that income growth can predict who Americans vote for.

The data reported goes back to 1967 and I used it to analyze how changes in income change how Americans vote. Since 1967, four Republican and three Democratic presidents have taken over from the previous party. (In 1968, 1980, 2000, and 2016 Nixon, Reagan, Bush and Trump took over from Democrats and in 1976, 1992, and 2008 Carter, Clinton, and Obama took over from Republicans.)

On average, Democrats inherit a worse economy than Republicans. The three Democrats were elected in years when median income was falling an average of nearly 1%. The four Republicans were elected in years when median income was rising by 1%. A difference of 2% is a pretty big deal.

What I make that mean is that whether households are more or less inclined to vote for someone who promises a safety net depends on whether they are feeling good about their income or threatened. When incomes are shrinking, Americans are seemingly more aware of the need for government help; when incomes are growing they are less aware. Good times are bad news for politicians who promise to help you through bad times and good news for politicians who tell you that people don't need much help. If that's right, it might not have been economic woes that caused people to pull the trigger on Trump but instead people who were feeling more secure because of higher incomes.

Polarized or Zero-Sum Politics?

Our politics has become more divisive. Republicans and Democrats seem to look at each as aliens and look back at the past as a kinder, gentler time.

Stagnating wages have contributed to this. Call it take-home pay economics. You could argue that since 1980 politicians have been giving tax cuts because employers aren't giving pay raises. (You could argue this. It doesn't really match the facts but it does seem to match popular perceptions.)

Assume Pradeep and Martina each make $50,000 a year. It turns out that Martina is very conservative and just doesn't understand why the government needs more of her money. Well, she understands it sort of but isn't a big fan. Pradeep thinks we should have better roads and schools and help for the homeless. He's a fan of government.

Now they each get a raise of 10%. An extra $5,000. Pradeep argues that 50% of this raise should go to government, a full $2,500. Martina thinks that is ridiculous. She thinks that 15% is more than enough. It's reasonable to think that in spite of their different values and passions, they might reach a compromise to, say, split the difference and pay about a third in taxes, less than Pradeep's $2,500 but more than Martina's $750. $1,500 say.

This goes on for years, heated debates culminating in some sort of compromise that neither one sees as particularly awful. In that world, politics are not so bad.

Now imagine a parallel economy where our heroes also make $50,000 a year. Again, Martina is very conservative and Pradeep is very liberal. That has not changed. What is different, though, is that in this world, wages are stagnant. Instead of a raise of 10%, they get a raise of only 2%. In the prosperous economy, their gross pay bumped up $5,000; in this stagnant economy their pay bumped up only $1,000. Pradeep sees how hard it is on people to live in this economy; he'd still like to give $2,500 but his raise is only a portion of that, so he thinks that maybe $500 of his $1,000 raise?  Martina? She thinks that $1,000 is already too little and isn't about to give any of it to the government. She doesn't want to give any of her tiny raise away. Well, maybe $100, $150 tops. The more she listens to Pradeep's inane proposals to take most of her raise, the more she feels inclined to just keep it all. She thinks he's nuts.

Maybe it is because they are fighting over such small amounts, but this question of how much they'll support the larger community vs. be allowed to keep to themselves is contentious. Already Pradeep knows that there won't be enough money to build the new school that he thinks the neighborhood deserves. He's appalled that not only will his neighborhood not get a new school but they might actually have to layoff some teachers and go from 22 kids per classroom to 32. Martina is appalled that not only will she not be able to afford her new car but it looks like she might not even have enough extra to get the repair she's been putting off. The debate about building a new school or buying a new car is heated but it is not viscous; the debate about teacher layoffs or car repair is.

It's probable that fragmentation of news sources has reinforced and magnified the differences in our politics. It's probable that politicians playing to primaries, making the effort to win their party's voters rather than the voters in a general election has made us more polarized. It's probable that the big divide into different communities, liberals who shop at Whole Foods and conservatives who dine at Cracker Barrel each self-segregating into their own neighborhoods has made us more polarized. Too rarely mentioned, though, is the effect of stagnating wages over the last 17 years.

There are numerous approaches to diminishing polarization and there is likely no one solution to this. That said, as policies create more prosperity, politics could become less viscous.

Is This Record Streak of Job Creation Finally Raising Wages?

Today's job reports makes for some great facts.

In November, the American economy created 321,000 new jobs. 365,000 jobs were announced today, though, because the job creation numbers for September and October were revised upwards.

Since 2000, there have been only 2 months with job gains of more than 365,000.

It has been nearly 20 years since we've had 10 consecutive months in which the economy has created at least 200,000 jobs.

This month's positive number means the current uninterrupted streak of positive job numbers is now 50 months, breaking last month's record for longest streak since the US began keeping records in 1939.

Even if the economy creates zero jobs this month, 2014 will be the best year for job creation since 1999. That is, this is already the best year of the new century.

While the unemployment rate held steady at 5.8%, it is down 1.2% from last year and this sustained rate of job creation might finally be putting upwards pressure on wages.

There is also really promising news about wages. In the October report, wages were up only 0.1% from the previous month. This month, they were up 0.7%. Now 0.7% is almost surely unsustainable. (That would translate into a 8.2% raise in wages for the next year, a delightful prospect that's more fantasy than possibility in light of the last couple of decades but a rate that we actually hit in the 1970s and 1980s.) But such a sharp upwards trend in the context of lower unemployment rate and strong job growth suggests that we might finally be moving beyond the prolonged period of wage stagnation that has characterized this new century. If so, that could be the best news yet.

The Economy May Have Hit a Tipping Point for Wage Growth

It won't be until employees have choices about where to work that we will see wage growth, a key to progress. Ben Casselman reports at fivethirtyeight.com on a statistic that could signal a turn in labor market conditions.

Some people are unemployed because they lost their job. Others left their job or decided to rejoin the labor force and are looking for one. For the first time since the Great Recession began, the number in each group is roughly the same.

People don't leave a job unless they believe can do better. (Even if doing better means living closer to someone they love, working at a lower income.) Generally speaking, as more people leave jobs of their own choice, they head into better jobs. By contrast, when they are laid off, they often have to take lower-paying jobs. This difference in how they leave - of their own volition or because they are forced - could be the first strong signal that wages are about to start rising faster than inflation.

So many problems that people (rightfully) fret about, problems like stagnating wages and income inequality, might simply be the product of woefully inadequate job growth. It make take a decade of normal job growth to ameliorate these. The good news is that we're on track for creating about 20.5 million jobs this decade. The bad news is that we're coming off a decade in which we lost a million jobs and so far, we've gained only 9.7 million this decade. We're still coming out of a crater.

But with unemployment finally below 6% and still heading down, the labor market is healthy enough that it can start putting upwards pressure on wages.

Today's Jobs Report Sets a New Record for Consecutive Months of Job Creation

Last month the economy gained 248,000 jobs but today's announcement is for 317,000 new jobs since July and August numbers were revised upwards by 69,000.

The total for the year is already over 2 million with one quarter to go. Better yet, the fourth quarter has been one of the strongest during the recovery.

We're on track for the best year since 1999. 

This is now the longest uninterrupted streak of positive monthly jobs reports. For exactly four years BLS has reported net gains in job creation, matching the streak in the late 1980s. And this streak is almost certain to go longer. This in the midst of the Tea Party's near-government shut-down last year, Ebola panic this year, repeated Eurozone crises, Arab Spring, Russia's invasion of the Ukraine, and the fact that during no other recovery has the federal government been shedding jobs. There have been, in the parlance of the field, some strong headwinds. And during this volatile period, the American economy has created 9.1 million jobs, more than Japan, Western Europe, Canada, and Australia combined.

At 5.9%, the unemployment rate is below 6% for the first time since before the Lehman Brothers bankruptcy in September of 2008 that - for many - marks the beginning of the Great Recession. (In the 14 months after Lehman Brothers, the economy lost 7.2 million jobs, a staggering number.) Better yet, the rate at which the unemployment rate is dropping is accelerating. Accelerating at the point at which the longest previous recovery on record stalled. 

Perhaps the best news about this has yet to play out. For more than a decade, the jobs market has been weak. Imagine a rope that pulls up wages. If that rope is slack - if the unemployment rate is 6% or higher rather than 5% or lower, say - wages stagnate. We are entering a period in which the job market is finally strong enough to not just create jobs but to bid up wages. 

It might just get better. 

The Deficit's Root Cause

The deficit is pretty simple. The federal government spends more than it collects in taxes.

It's worth asking why Americans feel entitled to both low taxes and high levels of government spending. Maybe the root problem is simply one of growth in incomes. Or rather, a lack of growth.

Between 1900 and 1999, wages grew from $4,200 to $33,700. That's a lot. Faster growth than at any time in history. Ever. This allowed for two things: households got a steady growth in take home pay even while paying more in taxes and getting more government programs like public education and social security.

Yet the phenomenal wage growth slowed late in the century. From 1900 to 1980, wages grew 2.2% a year.

In the 1980s, when Reagan's policies supposedly had such a positive impact on the economy, wage growth slowed to 1.8%.

In the 1990s, when Clinton's policies supposedly had such a positive impact on the economy, wage growth slowed further to just 1.6%.

In the first decade of the 21st century, it got worse. Wage growth dropped into negative range, to -.3%.

These might sound like small differences, but percentages have a way of quickly compounding. By 2009 wages were about $44,000. They would have been $62,000 had wages grown at the same rate in the 30 years after 1980 as they had in the 80 years before 1980. 

Slower growth means that wages are about $18,000 a year less. That's a difference of 40%.

What does this have to do with deficits? 

You could make the case that politicians have been giving tax cuts because the work place is no longer giving raises. American workers expect their take home to raise every year. For that to happen when wages don't go up, taxes must go down. 

One big reason for the polarization in politics is the sharp division on how to deal with lower incomes. The left wants to mitigate the pain of lower incomes with government spending; the right wants to do it by lowering taxes. 

As long as wages continue to stagnant or drop, this polarization - and the painful choices - will only get worse. 

It might be worth thinking about how to jump start income growth again. Any other solution will leave Americans feeling poorer for the simple reason that they are. 

---

For more on wages in the 20th century, look at Donald M. Fisk, American Labor in the 20^th Century, http://www.bls.gov/opub/cwc/cm20030124ar02p1.htm

Bush vs. Clinton - Income Growth by Percentile

The amount of joy you get from a scoop of ice cream depends on lots of things. One big determinant of how much joy you get from it is how much you already have. If you already have 1,000 gallons of ice cream, your enjoyment isn't going to go up much if you get another. If you have only one scoop of ice cream, your joy will go up more. As you get more, your marginal utility (fancy economist speak for your additional joy from the next unit) falls. It is as true of money as it is for ice cream and clothes. A person with only $100 will get far more excited about another $10,000 than a person with $1 million. To be a Bush supporter is to deny this very simple and hard to refute claim.

CSPAN posted some charts today in conjunction with Bernanke's hearing, one of which I've recreated here. For me, this graph seems to capture what is indefensible about Bush's policies. (And note that even the median income in 2006 was probably much lower than what most people think - about $35,000.)

Income growth was higher for everyone during the 1990s. For those in the top ten percent, incomes grew twice as much. More important, though, is what happened to those at or below the median. The difference for those in the bottom 10 percent could hardly be more dramatic - during the 1990s, their income went up 11% and so far this decade, their incomes have dropped 3%.It is not just that the incomes are growing more slowly. The increase in marginal utility under Bush's tenure has been negligible. Is it any wonder his approval ratings have been abysmal?

Why Send Jobs Abroad When We Can Find One Here?

Outsourcing seems to provoke both liberals and conservatives. There is something about losing jobs that unites people, whether they use their discretionary income to pay for subscriptions for The Nation or The National Review. The purpose of outsourcing is to find lower cost labor. There are many problems with outsourcing, ranging from phone conferences at 9:30 PM after the children are in bed to the impact of confusion on quality, rework, and productivity.

So, why not get the benefits of outsourcing without actually leaving the country? This graph from Swivel suggests that its possible. Women still make considerably less than men, on average. About 40% less. Under the category of management, for instance, men's median wage was about $79,000 and women's merely $44,000 (a discount of 44%). Professional or scientific and technical jobs: men, $70,000 and women $43,000 (discount of 38%). It seems to me that it's silly to go abroad when we can merely find one here.

[Red = men's median income, Blue = women's median income]

Best Investment for 2007

The business and personal finance magazines are offering their usual advice about the best places to invest for 2007. I’d like to suggest that you look no further than you.

Imagine two 25 year-old people making $30,000 a year. One person invests $1,000 a year into seminars, books, tapes, classes, and activities that improves her productivity by 15% a year, half of which goes into her paycheck. Another spends his on season tickets, and his productivity grows by only 10% a year (more experience means greater productivity, whether or not the person gets further education), half of which goes into his paycheck. In other words, one is getting raises of about 7.5% a year and the other is getting raises of about 5% a year.

10 years into the career, she is making just over $60,000 a year and he is making just under $50,000. A significant, if not huge, difference. By the time they are 45, she is making about $125,000 a year and he is making nearly $80,000. By 55, she makes about a quarter of a million a year and he makes about half that. By 65, she is making about $500,000 a year and he is making about $200,000 a year – a really big deal.

But here is the most amazing thing. During this 40 year career, she makes $3.5 million more than he does. This little difference of 2.5% on an initial salary of $30,000 a year can make that big of a difference. What mutual fund or real estate investment offers that kind of investment return?

So, where best to invest in 2007? Perhaps you should look no further than you.