Friday, December 5, 2014

Why the US Economy Benefits Fewer People Today Than It Used To

What follows is a very simplified version of how the US economy changed from one in the 1950s and 1960s that generated widespread prosperity to one that, since the 1980s, has focused most of its gains on a smaller and smaller segment of the income ladder.

After World War II, the production capacity that had been used to produce war materiel was converted to the production of consumer goods.  A key element of manufacturing back then was that it required lots of people.  For the most part, these workers did not have to possess special skills, only the ability to learn, which they could do on the job.  The US education system cranked out millions of people that fit perfectly into this system.  A virtuous cycle developed where people were hired to manufacture products, and the wages those people earned created demand for more products (and services), which in turn required more people.  Among other things, this also caused tax revenues to increase as more people earned more taxable income, bought homes, paid sales taxes and so forth.  This made more money available for education, which fed the system with more workers.  Fact:  From the late 1940s through the mid 1970s real household incomes for every quintile in the income ladder doubled (i.e increased by around 100%).

That all began to change in the late 1970s when, 1] foreign companies began marketing products in the U.S. of at least the same quality as American-made products, but with cheaper labor and lower prices, and then ultimately 2] computers and robots began to replace people on the assembly lines.  Some of the jobs lost in manufacturing were replaced with jobs in the service sector, but low-skill service jobs jobs did not match the pay of the lost manufacturing jobs.  Also, the surplus of available labor caused by the decline in the number of manufacturing jobs pushed wages down further.  Today we are in a situation where produce many more workers than manufacturing needs (looked inside a factory lately?) and the service sector cannot pick up the slack.  Fact:  Since the late 1970s real incomes for the bottom 80% have barely changed.

In other words, we simply have too many workers competing for low-skill jobs.  That keeps wages down and slows down recoveries.

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