Illustration by Ben Mounsey-Wood
About the author: Edward Yardeni is the president of Yardeni Research and author of In Praise of Profits!
Most Americans are better off today than ever before. This is an easily verified fact, but to say so these days is to risk arrest by the cancel-culture police. It flies in the face of a core belief behind progressive policies—that only the wealthy in America have never had it so good. This simple belief, however, is wrong.
In the progressive narrative, the standards of living of all but a tiny percentage of Americans have been stagnating for decades. That’s supposedly because most of the gains in national income have benefitted corporate profits at the expense of labor compensation. The rise in productivity growth since the early 1970s has reputedly gone mostly to profits, meaning that employers have exploited employees.
The solution? Riches must be redistributed by taxing corporations and upper-income households, and the government must provide more support to lower-income households. This isn’t new. Indeed, the contention that most Americans are struggling has given rise to many social safety nets, including unemployment insurance, Social Security, Medicare, Medicaid, SNAP (food stamps), and Obamacare.
Let’s give credit where credit is due: The progressives have made much progress. But it is never enough for them. It should be. Belief in stagnation is based on myths.
Myth No. 1: the productivity/pay gap. Progressives, including at the Economic Policy Institute in Washington, assert that the gap between productivity and inflation-adjusted hourly compensation has been widening since the mid-1970s. However, this calculation deflates hourly compensation with the consumer price index, which long has been recognized as upwardly biased. Doing so weighs misleadingly on real hourly compensation. The gap narrows using the personal consumption expenditures deflator, a more accurate measure of consumer prices.
Myth No. 2: wage stagnation. Adjusted for inflation using the PCE deflator, hourly compensation rose 2.1% per year, on average, from the first quarter of 1995 through the second quarter of 2021. That’s a solid increase in the standard of living consistent with gross-domestic-product growth.
Progressives usually counter that their preferred measure for the purchasing power of Americans is median household money income deflated by the CPI, a data series compiled by the Census Bureau. But this series distorts the picture: It is based on surveys asking respondents to provide their money income before taxes. Medicare, Medicaid, food stamps, and other noncash government benefits are excluded.
These sources of income are included in the personal income series compiled by the Bureau of Economic Analysis, however, which makes it the more accurate measure. Furthermore, the BEA data are based not on survey replies like the Census series, but on “hard” data, like monthly payroll employment statistics and tax returns. The BEA also compiles an after-tax personal income series reflecting government tax benefits such as the Earned Income Tax Credit. The BEA series for personal income, disposable personal income, and personal consumption expenditure—on a per-household basis and adjusted for inflation using the PCE deflator rather than the CPI—refutes the stagnation claims.
The standard critique of using the BEA data series on a per-household basis is that they are means, not medians. So, those at the top of the income scale, the so-called 1%, in theory could skew both the aggregate and per-household data. That’s possible for personal income, but unlikely for average personal consumption per household. The rich can eat only so much more than the rest of us, and there aren’t enough of them to substantially skew aggregate and per-household consumption, considering that they literally represent only 1% of taxpayers.
Myth No. 3: the exploited workers. Since the early 1990s, the share of national income going to labor compensation has trended downward, and the share represented by profits has risen—angering many a progressive.
But these shares are misleading. They don’t reflect the fact that pass-through businesses—including S corporations, sole proprietorships, and partnerships—have grown rapidly in recent years. Collectively, their owners and employees account for more than half of employment. Many are small businesses run by entrepreneurs. S corporations account for about a third of corporate profits, while the income of sole proprietorships tends to be about 80% as large as corporate profits.
The true story about inequality. Progressives are right about income and wealth inequality, I’ll give them that. It has gotten worse. What they miss is the bigger picture: Economic inequality always gets “worse” during periods of prosperity. That’s a small price to pay for widespread prosperity that lifts all boats. Most workers gain on an absolute basis, especially since there is greater upward income mobility during periods of prosperity.
And what drives prosperity? Profits, mostly. It is profitable companies that expand their capacity and payrolls, revving the engines of an economy and creating prosperity. Profits are too critical to all of us in society, up and down the income ladder, to jeopardize the profit motive through the unintended consequences of ill-conceived, though well-meaning, progressive policies.