From 1950 to 1980, productivity growth and real worker compensation essentially grew in lockstep. After tax reforms, that’s no longer the case.Kylie Cooper/Reuters
It is sad the issues currently dominating the headlines are the reshaping of global trade, the White House’s battles with elite universities and immigration. There’s not a peep from the U.S. government, academia or Wall Street about something that is vital to our social stability now and in the future.
That crucial issue is massive income and wealth inequality, which has gone unaddressed by policymakers for years, regardless of whether Democrats or Republicans are in power.
It is not foreign producers and exporters who stole jobs away from America and hollowed out the middle class. It is the entire tax system, especially how it directs government subsidies and support. The government never made adequate efforts to retool and retrain workers most affected by globalization. That amounts to years of neglect at the highest levels of the public sector.
We need to constantly remind ourselves that capitalism needs democracy, and democracy needs social stability. Nothing I see policy-wise right now tells me we are heading in a very good direction. This is the problem with the tariff war and the “big beautiful” budget bill. None of these really help the “little guy.”
From 1950 to 1980, productivity growth averaged just over 2 per cent annually, and real worker compensation per hour matched that pace. Something happened in 1980. I have often said that Ronald Reagan was the greatest president of our time, but I’m not so sure any more. While the Gipper had exceptional leadership and communication skills, it was his policies that got the ball on income inequality rolling here, especially on tax reform. Top marginal corporate tax rates were 46 per cent then and are 21 per cent today.
Everyone embraced the reforms at the time, notably on Wall Street. But productivity has increased at a 2-per-cent average annual rate since 1980, while real work-based incomes have averaged half that pace at just over 1 per cent per annum. Compound that divergence over a 45-year period and it amounts to a whole lot of money.
You see how dangerous this is, right? In a balanced economy, workers should be reaping the fruits of their labour. Their real compensation growth should match the labour component of productivity growth that they bring to their employers.
So, who benefited from the continued expansion in labour productivity if it wasn’t the workers? It was the owners of these businesses. From 1950 to 1980, unit profits in the non-financial corporate sector rose at an annual average rate of 2 per cent or more. Businesses and workers shared equally in the productivity gains. But since 1980, unit profit growth has doubled to more than a 4-per-cent average annual rate.
Washington found a very clever way to keep lower-income individuals feeling they could afford the American Dream. The government deregulated the financial sector and allowed them to plug the proletariat with debt. The outstanding level of debt in the household sector has surged by more than 10 times since 1980 to $20-trillion. (All figures in this piece are in U.S. dollars.)
The number of households has only expanded by 70 per cent over this period. In 1970, personal debt (loans and mortgages) was $7,000 per household. In 1980, it went up to $17,000. A decade later, after a proliferation of financial innovation and ever-increasing access to credit, that number rose to $38,000 by 1990. Then to $70,000 in 2000, $120,000 in 2010 (after a debt-laden mortgage boom), $130,000 in 2020, and now $150,000.
In 1970, credit cards were a $5-billion business. Only high-income earners with a credit score could access a card, and they had one American Express card. It was a status symbol. Even in 1980, it was just a $60-billion business. Today? Try $1.3-trillion! This, along with government-insured mortgages, encouraged people – and particularly those in the low and middle classes – to replace the incomes they should have received from their productivity with easy access to credit.
How can this possibly end well? Now that the Fed has raised rates more than four percentage points from the cycle lows and is leaving monetary policy deliberately tight, we are seeing the strains beginning to surface. Delinquency rates have surged on credit cards and auto loans; now that has spread to student debt, and even mortgage late-payment rates are edging higher. Consumer confidence for the lowest-income cohort has plummeted to all-time lows.
Because young adults are saddled with so much debt, with few job or income prospects, their confidence levels have also plumbed the depths as they confront an additional problem, which is that the dream of owning a home is now just that – a dream. A median starter home price today averages out to $342,000 – with median incomes for this group at $68,000 and qualifying income for a mortgage loan at $100,000, how on earth can they ever move out of their parents’ basements? There are 24 million Americans between 18 and 34 still living at home!
It’s time to stop this obsession with blaming foreign trading partners for our problems at home and start focusing on the real problems that are homegrown. The tax system has not only failed to cover the insane level of government spending, which has somehow been allowed to surge more than 50 per cent above the level immediately preceding the pandemic in 2019, but has failed to prevent income inequalities from rising further to unprecedented levels.
Means-testing Social Security or widening the bands of the income tax rate schedules have somehow become taboo; not to mention tightening the bands between net effective corporate rates and personal tax rates. And that, my friends, will carry with it the laws of unintended consequences. Not now, perhaps, but in the future.
David Rosenberg is founder of Rosenberg Research.
Editor’s note: A previous version of this article incorrectly stated 45 million Americans between 25 and 34 still live at home. The correct statistic is that 24 million Americans between 18 and 34 still live at home.