[lbo-talk] Goldman on income & poverty

[Doug Henwood]

DAILY FINANCIAL MARKET COMMENT 8/31/04
Goldman Sachs Economics

* Last week, the Census Bureau released its annual report on income, 
poverty, and health insurance coverage in 2003. It found real median 
income stayed about the same while both the number and percentage of 
Americans living in poverty and without health insurance increased 
between 2002 and 2003.

* While a major reason for the weak 2003 numbers was the slow 
economic recovery, especially in the labor market, these indicators 
of well-being also reflect a longer term trend of little progress in 
all three areas.

* This report provides insight into the economy in several ways. 
First, the skew in income growth across socioeconomic classes has 
implications for the composition of consumption. Second, for the 
labor market, rising health insurance costs are increasingly seen as 
not only reducing health care coverage but also slowing employment 
growth.

Income, Poverty, and Health Insurance: Many Left Behind

Last week, the Census Bureau released its annual report on income, 
poverty, and health insurance coverage. This report provides a 
snapshot of the well-being of American families in 2003.

Real median household income was virtually unchanged, declining by 
$63 to $43,318 in 2003 from 2002. This is the fourth consecutive 
decline for median income (the peak in 1999 was $44,922). The poverty 
rate increased to 12.5% in 2003, the third consecutive increase, 
resulting in 1.3 million more Americans living in poverty. The health 
insurance coverage statistics were just as weak, as the number of 
Americans without health insurance increased by 1.6 million, to 45.0 
million. The percentage of Americans without health insurance 
increased to 15.6% from 15.2%, the third consecutive increase.

Because these indicators are generally correlated with the strength 
of the economy, it is likely that the welfare of American families 
improved between 2003 and 2004 as the economy improved (although 
there are still doubts on the labor market recovery). While it is 
easy to blame the weak 2003 income, poverty, and health insurance 
numbers on the economy, it is important to note that there are longer 
term trends reflected in the data.

First, real median household income has grown very slowly over the 
past quarter-century, averaging less than 0.5% a year (declining 
household size only accounts for a small part of this weakness). Real 
mean income growth was double that, averaging more than 1% a year. 
Most of the gains from economic growth over the last several decades 
have been going to affluent families. Indeed, an argument could be 
made that low-income households have made almost no gains. For 
example, household income at the 10th percentile in 2003 was $10,536, 
only slightly higher than the $9,589 figure in 1979. The change in 
the 90th percentile over the last quarter-century, on the other hand, 
was significant, rising from $88,588 to $118,200. While low- and 
median income data have fallen over the past few years, it is 
important to note that they are part of a longer term trend of nearly 
zero growth, partially due to rising income inequality.

One of the reasons for increasing income inequality is globalization. 
Globalization, which often provides low priced imports and lower 
production costs abroad, has, most likely, held back wage and job 
growth for less-educated workers. However, this does not fully 
account for some aspects of the growing income inequality, such as 
the rapid rise in the CEO/average worker pay ratio, which increased 
to over 400 from 40 between 1980 and 2000. Emmanuel Saez and Thomas 
Piketty, in a 2001 paper entitled "Income Inequality in the United 
States, 1913-1998" attribute much of this growing income inequality 
to changing social norms. Another possible reason for this rising 
income inequality is technology, as Robert Frank discusses in his 
book The Winner-Take-All Society. For example, with the spread of 
television and compact discs, the profile (and pay) of national 
celebrity athletes or musicians increased rapidly while that of local 
athletes or musicians fell, as people now had access to the national 
scene.

Second, there has not been much progress in reducing poverty. For 
example, the poverty rate in 1979 was 11.7%, with 26.1 million 
Americans living in poverty. During the early 1980s and 1990s, during 
times of economic downturns, the poverty rate increased, followed by 
declines the rest of the decade as the economy expanded. While the 
poverty data are cyclical, there has been no real progress in 
reducing poverty since the 1960s (poverty rate declined from 22.2% in 
1960 to 12.1% in 1969). One possible explanation is the decline in 
the real minimum wage. The current inflation-adjusted minimum wage is 
about 30% lower today than in 1979.

Finally, the percentage of people without health insurance has 
increased almost every single year since 1987 (the first year Census 
released such data), from 12.9% in 1987 to 15.6% in 2003.

This report provides two major insights into the economy. First, 
rising income inequality has implications for the composition of 
consumer spending. Sales data from retailers show that high end 
retailers have done better recently than medium or low-end retailers.

Second, all three of these indicators are tied closely to the labor 
market. Much has been made of the length of this jobless recovery. 
While an improving labor market is generally seen to increase health 
care coverage, one of the reasons why the labor market has recovered 
so slowly is the double-digit percent increases in health care 
insurance costs. Soaring health care costs may make employers more 
reluctant to hire employees or provide health care benefits.

This report reveals much progress has to be made in reducing poverty 
and raising incomes and health insurance coverage, especially for 
low-income individuals, before the vision of a broad "ownership 
society" can occur. In a global economy, education is key. Thus, 
improving the quality of US primary and secondary education would be 
very helpful in reversing the recent trends in income inequality and 
poverty.

Avinash Kaza