A reality-based economy

The neo-populist story line that executives are seeing their incomes skyrocket while the middle class gets squeezed and the tides of globalisation work against average Americans is not entirely wrong, but is incredibly simple-minded, says New York Times columnist David Brooks.

To believe this line of thought, you have to suppress a whole string of complicating facts, says Brooks. For example:

Average wages are rising sharply; real average wages rose by 2 per cent in 2006, the second fastest rise in 30 years.

Earnings for the poorest fifth of Americans are also on the increase; from 1991 to 2005, the bottom fifth increased its earnings by 80 per cent, compared with around 50 per cent for the highest-income group, according to Ron Haskins of the Brookings Institution.

Moreover:

Companies are getting more efficient at singling out and rewarding productive workers; a recent study suggests that as much as 24 per cent of the increase in male wage inequality is due to performance pay.

Inequality is also rising in part because people up the income scale work longer hours; many highly educated people work like dogs while those down the income scale have seen their leisure time increase by a phenomenal 14 hours a week.

Perhaps most importantly, we're in the middle of one of the greatest economic eras ever, says Brooks:

Global poverty has declined at astounding rates while globalisation boosts each American household's income by about $10,000 a year.

Thanks to all the growth, tax revenues are at 18.8 per cent of Gross Domestic Product (GDP), higher than the historical average.

In addition, the deficit is down to about 1.5 per cent of GDP, below the historical average.

Source: David Brooks, A Reality-Based Economy, New York Times, July 24, 2007.

For text (subscription required): http://select.nytimes.com/2007/07/24/opinion/24brooks.html

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

FMF Policy Bulletin/ 31 July 2007