The chart below shows that the American economy, based on the latest GDP data, has been growing consistently higher for the last three years. Coupled with the stock market reaching new highs one may argue that America has found its groove again and that we are back on the yellow brick road to prosperity. Sadly, this is not the case for most of us with only the top percentile of Americans really benefiting from the latest economic recovery. Here are 3 reasons why
1. Corporations and the wealthy are getting richer as income inequality grows. The average Fortune 500 CEO’s pay is around 350 times the average workers. Level’s not seen since the internet bubble era at the turn of the century. This has resulted in the top five percent of Americans, who benefit the most from rising executive pay and business income, becoming significantly richer today than they were 5 years ago. This despite facing higher taxes with the expiry of the bush era tax cuts. The income and wealth disparity is not new and many economic pundits have lamented the longer term impacts of this disparity on American society. It has also been noted by the President who despite five years in office focused on the middle class has been unable to close the gap.
In 1982, the average CEO earned 42 times that of the average worker. By 2012, the gap had reached 354 times. Put in current dollar terms, the CEO of a Standard & Poor’s 500 index company earned $12.3 million in total compensation last year, while the average rank-and-file worker earned $36,654.
“Even though our businesses are creating new jobs and have broken record profits, nearly all the income gains of the past 10 years have continued to flow to the top 1 percent,” President Obama pointed out in a recent speech. “The average CEO has gotten a raise of nearly 40 percent since 2009. The average American earns less than he or she did in 1999. … This growing inequality not just of result, inequality of opportunity – this growing inequality is not just morally wrong, it’s bad economics.
America is among the richest countries in the world trailing only a handful of minor nations. Yet despite its vast riches and ample resources the nation looks surprisingly, depressingly backward when it comes to income equality.
2. Economic growth and its benefits are only being driven from and seen in certain sectors. There is little doubt that the American economy is growing on a GDP basis. But digging into the numbers it is clear that the growth is not even across all sectors. So unless you work in a booming sector and/or have invested correctly you would not have seen much upside from the latest recovery. Those working in the services, healthcare or technology sectors have seen decent pay rises. While those working in manufacturing, government and retail have seen much smaller increases. And with many Americans still recovering from the housing market crash or facing higher rents, net wealth for the low and middle class has barely budged over the last few years.
3. Inflationary headwinds can wreak havoc on salaried workers. This is especially the case for lower income workers who are living paycheck to paycheck and would most feel the impacts of rising prices in everyday goods. So as the broader economy starts improving at a more rapid pace and the federal reserve scales back on its supportive liquidity programs, inflation (i.e. rising prices) will rear its ugly head again. The people who benefit from inflation the most are off course the rich and higher income earners who see their assets and earning power rise.
The rich get richer. The cycle repeats itself.