Vladimir Putin on America's Middle Class and the Election of Donald Trump

In a recent interview with Lionel Barber, editor of the Financial Times, Russian President Vladimir Putin had some very interesting and accurate comments about the current political situation in the United States, particularly as it relates to America's middle class.  Here are some of the key comments:

"Russia has been accused, and, strange as it may seem, it is still being accused, despite the Mueller report [on the investigation into allegations of Russian meddling in the 2016 presidential campaign], of mythical interference in the US election. What happened in reality? Mr Trump looked into his opponents’ attitude to him and saw changes in American society, and he took advantage of this.

You and I are talking ahead of the G20 meeting. It is an economic forum, and it will undoubtedly have discussions on globalisation, global trade and international finance.

The middle class in the US has not benefited from globalisation . . . The Trump team sensed this very keenly and clearly and they used this in the election campaign.  Has anyone ever given a thought to who actually benefited and what benefits were gained from globalisation, the development of which we have been observing and participating in over the past 25 years, since the 1990s?

China has made use of globalisation, in particular, to pull millions of Chinese out of poverty.

What happened in the US, and how did it happen? In the US, the leading US companies — the companies, their managers, shareholders and partners — made use of these benefits. The middle class hardly benefited from globalisation. The take-home pay in the US (we are likely to talk later about real incomes in Russia, which need special attention from the government). The middle class in the US has not benefited from globalisation; it was left out when this pie was divided up.

The Trump team sensed this very keenly and clearly, and they used this in the election campaign. It is where you should look for reasons behind Trump’s victory, rather than in any alleged foreign interference. This is what we should be talking about here, including when it comes to the global economy." (my bolds)

Mr. Putin clearly lays the defeat of Hillary Clinton in 2016 at the feet of disillusioned American middle class voters.  Let's look at some of the reasons for this disillusionment:

1.) Stagnant wages:  Here is a graphic showing what has happened to median real wages for full-time workers aged 16 and over since 1979 (setting 1979 wages at 100):

Over the four decade period since the beginning of 1979, real wages for American full-time workers has only increased by 6.6 percent.  If that isn't wage stagnation, I don't know what is.

Here is a graphic showing what has happened to the median weekly nominal earnings for American full-time workers aged 16 and over since 1979:

Over the four decade period, median nominal wages for the second quartile of American workers have increased by 293 percent.

Here is a graphic showing what has happened to nominal corporate profits since 1979:

Over the four decade period, profits for Corporate America have increased by 696 percent or 2.4 times that of its wage earners over the same period.

2.) CEO to worker wage disparity:  Here is a table from the Institute for Policy Studies showing the most egregious examples of CEO-to-worker pay gaps:

Here is a graphic from the Economic Policy Institute showing how the CEO-to-worker compensation ratio has changed since 1965:

CEO compensation has even grown when measured against the top 0.1 percent of earners as shown on this graphic:

3.) Taxation:  As shown on this graphic, Main Street America is paying a higher and higher share of Washington's total tax revenue:

...when compared to Corporate America as shown on this graphic, keeping in mind that corporate profits have grown at 2.4 times that of median nominal wages:

4.) Trade balance:  Here is a graphic showing how the United States trade balance has changed since 1992:

Despite these comments made in May 2000 by then President Bill Clinton and former Federal Reserve President Alan Greenspan about the advantages of Permanent Normal Trade Relations (PNTR) with China:

...it is clear that admitting China to the World Trade Organization has had a massive negative impact on America's manufacturing industry and its accompanying negative impact on wages and salaries for American workers.

While drawing links from economic class to voting patterns is difficult given that education impacts voting rates, it is pretty clear that Vladimir Putin's observations about American society and the growing sense that middle class America is being left behind is accurate.  It is becoming increasingly clear that globalization benefits the few at the top and leaves behind the vast majority of society who feel that their place in society is under threat.

Exclusive Prosperity - The Disappearing Middle Class

Economic historians have long pointed out the importance of the contributions of the middle class to economic development.  This occurs through three mechanisms:

1.) the middle class is the incubator for entrepreneurship and innovation.

2.) middle class values stress the accumulation of savings and human capital.

3.) the consumption power of the middle class leads to diversification and expansion of markets.

If you think of it in terms of the 0.1 percent and the rest of us, one extremely wealthy individual is unlikely to buy 1000 toasters, computers, automobiles and homes whereas, the 999 who are defined as middle class consumers, are most likely to buy 999 of each item between them.  That's the power of middle class consumption in today's economy.

A recent report from the Center for American Progress examines the key role of the middle class in global prosperity.  The Inclusive Prosperity Commission, which includes former U.S. Secretary of the Treasury Lawrence Summers, begins by noting that in the decades following World War II, rapid economic growth brought hundreds of millions of people around the globe to a position where they had economic security through both benefits paid by employers and those provided by government social programs.  Households in the last half of the 20th century widely believed that hard work would result in economic security for their families.  This model of the economy has come under severe stress in recent years with downward pressure on growth in wages, particularly for the middle and lower classes.

In the report, there are a handful of graphics that go a long way to explaining the issues facing the world's, and particularly America's, middle class.  Here is a graphic showing the average growth rate of incomes for the bottom 90 percent of earners over ten year periods from the 1950s to the 2000s, including 2010 to 2012 in light blue, for six advanced economies:

As you can see, average income growth for the bottom 90 percent in the latest partial decade has been either slower or far slower than growth in earlier decades for all nations except Australia.  In the cases of the United States, Japan and the United Kingdom, income growth for the bottom 90 percent has actually been negative over the period from 2010 to 2012.

Here is an interesting graphic that compares the growth in productivity (in brown) to the growth in average income (in blue) for the bottom 90 percent for the same six advanced economies:

In every case but Canada, productivity growth has outstripped income growth, in some cases by a very wide margin.

Now that we know that the bottom 90 percent of earners have suffered from low rates of income growth and since the middle class has been responsible for the lion's share of economic growth since the Second World War, what impact has exclusive prosperity had on economic growth?  Here is a graphic that sums up the relationship very neatly:

In almost every case, the average annual GDP growth rate in the period between 2010 and 2013 has been significantly lower than what it was in the decades going back to the 1950s.

Let's focus on the United States.  Here is a graphic that shows the changes in wages for full-time male workers in the United States from 1963 to 2008 based on educational attainment:

Over the last four and a half decades, only college graduates and those who attended graduate school saw their wages rise.

This graph shows the impact of stalled wage growth:

Since the middle of the 2000s, the labor share of income has been steadily dropping, particularly after the Great Recession.  In fact, labor's share of income in the third quarter of 2014 was just above its lowest level since 1947.

On the other hand, this is what has happened to the real output per hour of American workers:

This is what has happened to corporate profits:

  

While labor's share of income has plummeted, real output has continued to grow and with it, corporate profits.  This tells us that worker power has declined significantly at the same time as corporate power has grown.  As growth of wages and incomes has slowed and productivity has risen, the beneficiaries of economic growth have been shareholders and top management rather than employees.   This shows us that, as noted in the title of this posting, prosperity has become exclusive.

The report concludes by looking at five key areas that need to be developed to create inclusive prosperity:

1.) returning to a real wage growth environment to raise living standards and provide profit-sharing and share ownership for all employees so that everyone benefits from corporate success.

2.) raise skill levels for workers through education through both on-the-job training and post-secondary trade and non-trade formal education.  While this may reduce profits over the short-term, it  will provide long-term benefits.

3.) support and promote innovation because innovation drives growth in productivity.

4.) align corporate executive incentives with long-term profitability rather than focussing on short-term profits.  The shift to equity-based pay has caused management to maximize profits rather than maximizing the long-term value of the company.  As it stands now, executive stock option plans are designed to enable executives to make considerable personal gains when share prices spike rather than through longer-term corporate growth.

5.) countries must co-ordinate their efforts to  ensure that global economic growth is sustainable.  Part of this should be achieved through restored integrity in corporate taxation.

As the authors of the report note in their preface:

 "History tells us that societies succeed when the fruits of growth are broadly shared.  Indeed, no society has ever succeeded without a large, prosperity middle class that embraced the idea of progress.  Today, the ability of free-market democracies to deliver widely shared increases in prosperity is in question as never before. The primary challenge democracies face is neither military nor philosophical. Rather, for the first time since the Great Depression, many industrial democracies are failing to raise living standards and provide opportunities for social mobility to a large share of their people. Some of those countries that have produced economic growth have done so in a manner that has left most of their citizens no better off. This is an economic problem that threatens to become a problem for the political systems of these nations—and for the idea of democracy itself."


It certainly appears that today's marketplace is not working in favour of either long-term economic prosperity or the interests of the middle class, rather, it is focussing on maximizing very short-term, quarter-by-quarter corporate profits.  Without aligning the interests of middle class employees with the interests of those that dwell in the corner offices on the upper floors of office towers, we can look forward to a future of modest economic growth. 

The Hollowing Out of America's Middle Class

The growing disparity between the rich and poor in America is accompanied by the disappearance of the middle class.  Even with the recovery of the economy since 2008, an ever-shrinking number of Americans classify themselves as "middle class".

According to a recent poll by Pew Research Center, the number of Americans that classify themselves as "middle class" is just above the percentage that classify themselves as "lower class" as shown on this graph:

Note that as recently as 2011, more than half of Americans defined themselves as middle class; by January 2014, this had dropped to 44 percent, a drop of 8 percentage points.  

Data from the Census Bureau helps to explain why there has been this change in perception.  While the prices of necessities including food, fuel, housing and other key needs rises continuously, albeit at levels that are relatively tame when compared to the inflationary pressures of the past, real median household income is stalled as shown on this graph:

In 2012, real median household income was $51,017, basically level with the median of $51,100 in 2011.  This is 8.3 percent lower than in the year before the Great Recession; in 2007, the real median household income was $55,627.  In fact, if we go all the way back to 1999, the real median household income of $56,080 was 9.0 percent higher than it was in 2012.  Looking back even further, in 1989, the real median family income was $51,681, $664 higher than it was in 2012!  Since that time, the consumer price index has risen from 188.6 to 337.2 (where December 1977 equals 100), up by 78.8 percent.  It's no wonder that Americans are less willing to describe themselves as middle class.

Pew defines the middle-income tier as all adults whose annual household income is two-thirds to double the national median which, in 2012, would be incomes between $34,011 and $102,034.  In 2011, the middle-income tier included 51 percent of all American adults, down from 61 percent in 1971.  This has meant that these adults have been pushed into both higher and lower income tiers.  In fact, the upper-income tier rose from 14 percent of all adults in 1971 to 20 percent of all adults in 2011 and the lower-income tier rose from 25 percent in 1971 to 29 percent in 2011.  The middle-income tier now takes in 45 percent of America's total household income, down from 62 percent in 1971.  The upper-income tier now takes in 46 percent of America's total household income, up substantially from 29 percent in 1971.

 A recent study by Raj Chetty et al showed that one of the most important characteristics at play in upward economic mobility is the size of the middle class as shown on this graph:

Where a region has a larger middle class, that region's low-income children are more likely to be upwardly mobile. 

In large part, it was the middle class that built America.  While many Americans who lean to the right politically tend to give all of the credit to America's wealthiest for creating jobs, it is, in fact, the middle class that has created the most jobs over the past decades.  When you compare the purchasing power of tens of millions of middle class consumers to the purchasing power of several thousand of America's wealthiest entrepreneurs, it is quite clear that it is the consumer demand sourced from the rapidly disappearing middle class that has actually kept Americans "at work".  With that in mind, perhaps, in part, we can draw a link between the rather lukewarm economy since the end of the Great Recession to the shrinking of the consuming middle class.

Falling Behind - Stagnant Wages in Middle Class America

Updated September 13, 2013

Many of us have suspected that the middle class has been left out of the economic benefits that have allegedly accrued over the past decade particularly when it comes to wage growth when compared to those that dwell at the top of society's heap.  A study by Lawrence Mishel and Heidi Shierholz of the Economic Policy Institute examines what has happened to wages and benefits over the past decade and how workers' real wage gains have evolved particularly since the "end" of the Great Recession.  In this posting, I will also look at one of the key measures of the perceived health of the economy, the University of Michigan Consumer Sentiment measure and how its current level is likely connected to wage growth.

The authors looked at wages from two perspectives:

1.) Using establishment data supplied by surveys that are employer-based.

2.) Using household data supplied by surveys that are household-based.

Let's open by looking at a graph that compares real average hourly compensation growth and productivity growth between 2000 and 2013:

As you can quickly see, since 2004, real growth in hourly compensation has been stagnant no matter what measure is used.  In the period between 2000 and 2007, productivity grew by 16 percent whereas compensation grew by between 5.5 percent and 7.2 percent depending on the measure used.  Since the Great Recession in the years between 2007 and 2012, productivity grew by 7.7 percent whereas real growth in compensation in the private sector "grew" by between 0 percent and -0.6 percent depending on the measure used.   

Now, let's look at the impact of educational attainment on real wage growth.  For those of us that are baby boomers, the mantra of the necessity of getting a college or university education to succeed in life was drilled into us from the early years.  While a post-secondary education does provide a wage premium, that premium has stalled at between 40 and 50 percent since the late 1990s as shown on this graph:

Both college-educated genders have seen the premium stall at about 45 to 46 percent for women and 48 to 49 percent for men since before the Great Recession.  White collar managers and professionals have seen real wage increases of 4.7 percent between 2001 and 2012.  By comparison, blue collar construction and natural resource workers have seen real wage increases of 5.9 percent and installation and maintenance workers have seen real wage increases of 5.3 percent over the same time frame.  Over the past year, all workers have seen real wage increases of only 0.3 percent with white collar managers and professionals  seeing real wage increases of 0.3 percent and blue collar construction and natural resource workers seeing real wage increases of 0.1 percent.  The minute difference in real wage growth between the two groups is rather stunning even in light of the wage premium.  It certainly makes one question the wisdom of accruing tens or hundreds of thousands in debt for a wage gain that is not growing.

So, in all of this, who is benefitting the most from real wage increases (as though you can't guess).  Here's the answer:

Since the Great Recession, all income groups under the 70th percentile (i.e the lower and middle classes) have seen a decline in real wage growth and, in the case of wage earners in the bottom 20 percent as shown in the lightest blue line, they have seen their wages shrink by 5.5 percent in real terms between 2007 and 2012.  The only wage group that saw increasing real growth in wages was the top five percent (the 95th percentile as shown in the darkest blue line).  This group has seen their real wages rise by 11 percent between 2007 and 2012 as shown on this chart:

Over the past year (2012 to 2013), wage earners in the 50th percentile and greater (excluding those in the 10th percentile) have seen real but very modest wage gains ranging from 0.6 percent to 2.0 percent.  Those on the losing end who fall in the 20th to 40th percentile saw real wage contractions ranging from -0.2 percent to -0.7 percent over the year.   

As you can imagine, a great deal of real wage growth in recent years can be attributed to very low inflation rates rather than significant increases in nominal wages.  With very low inflation, even a modest raise of three or four percent still provides the recipient with a one to two percent real wage increase.  Even modest raises like that do not appear to be prevalent in today's job marketplace.  As one would suspect, in this environment of "you're damn lucky to have a job", employers are less than motivated to actually increase wages by a significant amount.

If we link all of this data to the overall economy and how consumers are viewing things, it may explain this:

Consumer sentiment, while it is up from its 2008 - 2009 lows, is nowhere near the levels generally seen during inter-recessional periods.  In fact, during the last period of economic growth between 2003 and 2008, consumer sentiment ranged from 90 to 100 for the most part.  That compares to a level that has ranged from 70 to 80 over most of the period of time since the end of the Great Recession.

So much for shared prosperity.  It's no wonder that so many Americans are feeling poorer as the years pass.  The fact that productivity keeps growing while wages remain stagnant makes one wonder how much longer corporations will be able to squeeze more and more blood out of a stone without giving something back.  And, until consumers feel that they have sufficient credit or income to spend, the economy is likely to continue to expand at a rather tepid rate as has been typical since the end of the latest recession.