Yesterday, President Obama gave a speech at Knox College outlining his vision for the US economy. As EPI President Larry Mishel notes, the speech did a great job diagnosing the failure of our economy (and our economic policies) to strengthen and reward the middle-class, even if it was a bit light on prescriptions to address these failures. We look forward to hearing the president’s more specific proposals in the upcoming speeches he has planned.

EPI has researched and documented much of what the president described in his speech. (For a great overview on how the economy has not been working for most Americans over the past 35 years, and what you can do about it, visit our new website, inequality.is.)

Here’s 10 figures that illustrate many of the president’s points, as well as links to some of EPI’s research on these topics.

Productivity/Wages and Top 1% Income:

Obama: “The link between higher productivity and people’s wages and salaries was severed – the income of the top 1% nearly quadrupled from 1979 to 2007, while the typical family’s barely budged.”

EPI: “The economy’s failure to ensure that typical workers benefit from growth is evident in the widening gap between productivity and median wages. In the first few decades after World War II, productivity and median wages grew in tandem. But between 1979 and 2011, productivity – the ability to produce more goods and services per hour worked – grew 69.2 percent, while median hourly compensation (wages and benefits) grew just 7.0 percent.”

– The State of Working America, 12th edition (page 7)

EPI: “Comprehensive income trends show a striking pattern in average income growth by income group: Income growth is strongly positively correlated with a household’s rank in the income distribution, and the gap in income growth between the highest-income households and the rest is enormous. For example, the top 1 percent of households registered cumulative income growth of 240.5 percent between 1979 and 2007, while households in the bottom and middle fifths of the income distribution posted gains of 10.8 and 19.2 percent, respectively.”

– The State of Working America, 12th edition (page 79)

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Rep. Susan Bonamici of Oregon has a great idea that will simultaneously help young people with limited means pay for college, get them job experience, and stimulate our stumbling economy. She proposes to have the federal government pay for tens of thousands of internships, making them available to low-income, Pell Grant-eligible students who could otherwise not afford to take them. Under Bonamici’s Opportunities for Success Act, H.R. 2659, the federal government would send funds to colleges and universities, which would use them to provide stipends equaling at least the minimum wage, but potentially more in situations where a student was not currently attending school (such as a summer internship) and would have to pay for food, lodging and transportation. The maximum grant would be $5,000.

The need for such a program is clear. Paid internships are increasingly important to the ability of college students to gain skills, make professional connections, and find jobs after graduation. As Rep. Bonamici says in the bill’s “Findings” section:

• Many students struggle to make ends meet; 66 percent of young community college students dedicate more than 20 hours a week to an outside job, and the need of many students to maintain a part-time or full-time job reduces or eliminates the time available for an internship.
• Internships often require significant time commitments or temporary relocation, which many students are unable to afford; these additional living expenses include housing, meals, and travel, and these costs make unpaid internships with employers like non-profit organizations and government even more inaccessible for those with low and middle incomes.

Unless we want to exclude students from low-income and middle-income families from important opportunities to participate in government, to make important connections, and to get their foot in the door for future paid employment opportunities, it is particularly important that we provide a means of supporting them financially while they work in government internships. This is not just a matter of economic justice but a way to ensure full democratic participation and to combat economic elitism.

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In Seattle, San Francisco and Salt Lake City, a child raised in the poorest 20 percent of families has more than a one in ten chance of ending up in the top 20 percent of earners as an adult. In the Atlanta area, by contrast, only one poor child in 25 will make it to that top quintile during adulthood.

Why does geography matter so much to your odds of moving up the economic ladder? One reason may lie in differences in state and local policies. In a new study, which is being presented this week at a conference of the National Bureau of Economic Research, four economists explore the link between intergenerational income mobility, and a particular subset of such policies, tax expenditures. In Monday’s New York Times, David Leonhardt used the authors’ dataset to produce a fantastic interactive piece, painting a picture of economic mobility (and immobility) across America.

The study’s authors—Raj Chetty and Nathaniel Hendren of Harvard, and Patrick Kline and Emmanuel Saez of Berkeley—find that the level and progressivity of tax expenditures are associated with increased economic mobility between generations. Even when controlling for a broad range of local characteristics, the authors find that local and state tax expenditures contribute significantly to the likelihood that a child who grows up poor will experience significant upward mobility as an adult. The economists also identify particular state-level tax expenditures (such as the earned income tax credit) that are associated with greater economic mobility. “Overall,” they conclude, “these results suggest that tax expenditures aimed at low-income taxpayers can have significant impacts on economic opportunity.”

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The president did a great job framing the economic problems we face, providing a narrative on what’s happened to the broad middle class.

“…a growing middle class was the engine of our prosperity.  Whether you owned a company, swept its floors, or worked anywhere in between, this country offered you a basic bargain – a sense that your hard work would be rewarded with fair wages and benefits, the chance to buy a home, to save for retirement, and, above all, to hand down a better life for your kids.”

And then he got to the core issue, “The link between higher productivity and people’s wages and salaries was severed—the income of the top 1% nearly quadrupled from 1979 to 2007, while the typical family’s barely budged.” Couldn’t have said it better, though my colleagues and I have tried many times, (here on the productivity-wage divergence and here on the top one percent).

The question I want to raise is whether the solutions being discussed are of sufficient breadth and scale to overcome the forces driving the dismal outcomes just delineated. Let me identify some issues that stand out for me. The president makes the appropriate case for public investments in infrastructure, in clean energy and in education. In fact, these investments are critical to our future growth. But he shouldn’t pretend that there will be anything but DISINVESTMENT in the future, as  overall spending on domestic programs will be reduced by at least a fifth over the next ten years, even if the sequester is reversed. Looking specifically at public investments, Obama’s FY14 budget had nondefense public investment fall to 1.7% of GDP in 2023—the lowest since 1947—from 2.7% in 2008. And, we’ll never raise the revenues we need for these and other investments if we brag about “locking in tax cuts for 98% of Americans,” as the president did.

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In a speech today outlining his economic agenda for the next two-and-a-half years, President Obama repeated his call for raising the minimum wage.

At the same time, today was a national day of action in support of a higher minimum wage. Americans throughout the country rallied to support legislation that would raise the minimum wage to $10.10 per hour and index it to inflation.

EPI has long supported raising the minimum wage, and it’s great to see the president, lawmakers and activists making the case for a minimum wage increase. Raising the minimum wage would boost the incomes of millions of Americans, provide a modest economic stimulus, and slow the growth of income inequality.

The inflation-adjusted value of the minimum wage is lower today than it was in 1968. If the value of the minimum wage had kept pace with average wages since then, it would be $10.50 today. If it had increased alongside productivity, it would be $18.75 today. And if it had increased at the same rate as the wages of the top 1.0 percent, it would be over $28 per hour.

In support of the national day of action, we made a series of graphics with facts about who would be affected by a minimum wage increase, and why it’s a good idea. They’re quick, to the point and easily shareable. The data points come from this paper. Check them out:

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Tomorrow at Knox College, President Obama will kick off a series of speeches outlining his vision for rebuilding the U.S. economy. He is expected to talk about how the economy works best when it grows from the “middle-out,” not from the top down.

Growing from the middle out is indeed the right approach to economic growth. I hope that President Obama will get to the heart of the matter, which is that, adjusted for inflation, wages and benefits for the vast majority of workers have not grown in ten years. This is true even for college graduates, including those in business occupations or in STEM fields, whose wages have been stagnant since 2002. Low and middle-wage workers, meanwhile, have not seen much wage growth since 1979. Corporate profits, on the other hand, are at historic highs. Income growth in the United States has been captured by those in the top one percent, driven by high profitability and by the tremendous wage growth among executives and in the finance sector.

The real challenge is how to generate broad-based real wage growth, which was only present during the last three decades for a few short years at the end of the 1990s.

To generate wage growth, we will need to rapidly lower unemployment, which can only be accomplished by large scale public investments and the reestablishment of state and local public services that were cut in the Great Recession and its aftermath. The priority has to be jobs now, rather than any deficit reduction (which under current conditions will sap demand for goods and services and slow job growth). This means an aggressive increase in the minimum wage that eventually grows to half of the average workers’ wage. It means reestablishing the right to collective bargaining for higher wages and addressing workplace concerns. It means not allowing guest workers to undercut wages in both high-wage and low-wage occupations, which can be done by giving full rights to any ‘guests’ and by scaling such programs to the limited situations for which they are needed. It means taking executive action to ensure that federal dollars are not spent employing people in poverty-level wage jobs. Overall, it means paying attention to job quality and wage growth as a key priority in and of itself, and as a mechanism for economic growth and economic security for the vast majority.

If we choose not to take this path, we will fail to achieve shared prosperity and return to relying on debt and asset bubbles to fuel growth. I have seen that movie already, and I didn’t enjoy it.

I just finished complaining in an earlier blog that the media wasn’t telling enough manufacturing and supply chain stories when Bill Vlasic proved me wrong with his piece on Chryslers’ Jefferson North Assembly Plant in Detroit: Last Car Plant Brings Detroit Hope and Cash.

Only two days later, the City of Detroit filed for the nation’s largest ever municipal bankruptcy. “Hope and cash” suddenly sounded like too little too late. It’s not. In fact, the story suggests what it takes to make recovery work.

We can all picture a Jeep. But Vlasic’s piece gives the new Jeep Grand Cherokee a powerful backstory:

“There is a section of Detroit’s east side that sums up the city’s decline, a grim landscape of boarded-up stores, abandoned homes and empty lots that stretch all the way to the river.

And in the middle of it stands one of the most modern and successful auto plants in the world.” 

The article paints a picture of today’s high-quality, high-tech manufacturing that can’t be underscored enough: making 300,000 vehicles a year with $2B a year in profit, the unionized Detroit facility is “on par with the most efficient luxury car plants in Germany and the best factories operated by Japanese automakers in the southern United States.” It’s a positive story for the auto industry and for Detroit: jobs at the plant have more than tripled, from 1,300 to 4,600, a third of employees live in the city, and its property taxes send $12 million a year to the city coffers.

Calling it the “last car plant” in Detroit is a bit misleading, however. Not only is GM’s Hamtramck facility arguably within the city limits, as are two engine plants, but from an industrial perspective, Chrysler’s plant is hardly alone. It is part of a huge cluster of automotive parts and assembly facilities in the greater Detroit area that still make up a significant share of US manufacturing output. If we’re going to bridge the gap between the auto industry’s recovery and Detroit’s, it would be more helpful to think of Jefferson North as a leader in a new generation.

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The choice for Ben Bernanke’s replacement as the next Chair of the Federal Reserve seems, in DC’s conventional wisdom, to have come down to Janet Yellen (Bernanke’s current deputy) or Larry Summers (a former official in both the Clinton and Obama administrations, including a stint as Treasury Secretary).

For those who think that the U.S. economy remains too weak and needs as much policy support as it can get, this seems like a pretty good choice. Both Summers and Yellen have consistently argued in the past couple of years that the primary problem facing the U.S. economy currently is slack demand.

I’d argue, however, that Yellen is the clearly correct choice for the job right now.

For one, she has been far ahead of the policymakers’ curve when it comes to diagnosing macroeconomic trouble. Recently released minutes from Federal Reserve Open Market Committee meetings in December 2007 show that Yellen was nearly alone in warning that a recession was imminent—a warning that proved correct.

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On Wednesday, Jim Tankersley reported on a new study from the Heritage Foundation claiming that the apparent broken link between wages and productivity is actually just a statistical artifact.

Most of the report simply notes that compensation, not just wages, matters to American workers, that productivity and wage (compensation) growth are often calculated using different price deflators, and that one should take depreciation into account while calculating productivity.

All these are fair enough as matters of arithmetic (though we may have more to say on our interpretation of these issues, which differs a lot from the Heritage report1), and we have generally taken these factors into account in our work showing the growing gap between wages and productivity (and so have other careful analysts). So what’s the big difference between our work and the Heritage report? It’s something they spend a lot less time on.

At EPI, we don’t look simply at average compensation, but (generally) at median compensation, the compensation of a worker in the middle of the pack who makes more than half the workforce but less than the other half. This really matters;  when, say, LeBron James walks into a bar average compensation rises a lot even though  the compensation of the median person in the bar is likely unaffected.

So, average compensation does indeed track productivity growth much more closely (though not perfectly) than does median compensation. But this is just another way to make what is the entire point of the compensation/productivity gap analysis: rising inequality has kept typical Americans from seeing their compensation  track productivity.

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There’s a heat wave in Washington this week. Here are some cool articles we read:

• Wal-Mart Is Scared of These True Stories From Its Own Employees (Gawker)
  
• Thanks To Obamacare, New Yorkers’ Health Insurance Premiums Will Plunge 50 Percent (ThinkProgress)
• Denny’s restaurants settles foreign workers’suit for $1.4 million (Toronto Star)