Economic Decline Brings Rising Poverty Rates and Growing Income Inequality

The latest numbers from the Census Bureau show growing poverty and third-world-style income inequality as the middle class disintegrates under the economic pressures of globalization and technological change.

The nation’s poverty rate rose in 2010 to 15.1 percent, up from 14.3 percent in 2009. “There were 46.2 million people in poverty in 2010, up from 43.6 million in 2009, the fourth consecutive annual increase and the largest number in the 52 years for which poverty estimates have been published.” The Census Bureau reported. Median household income has declined by $3,800 (in 2010 dollars) since 1999, a drop of 7.1 percent. Among households headed by someone under 65, the decline in median income was even more dramatic, having plummeted to the 1980s levels, a drop of $6,300.

The census report also shows that federal programs for the poor have played a key role in preventing many more Americans from slipping into poverty. According to the Center on Budget and Policy Priorities,

The Census figures show, for example, that unemployment benefits — including federal benefits scheduled to expire at the end of this year and state unemployment benefits that a number of states have recently chosen to pare back — kept 3.2 million people above the poverty line in 2010. In addition, while the official poverty measure does not count SNAP (food stamps) or EITC benefits as income, the Census Bureau reported that if they were counted, SNAP benefits would lift 3.9 million people out of poverty while the EITC would lift 5.4 million people out of poverty.  

Poverty may climb even higher if such programs are cut in order to reduce the deficit and balance the budget while the economy remains weak.

Structural Changes Behind Job Losses

These numbers reveal a more serious problem with the economy: jobs have not been there since well before 2007, the beginning of the great recession, a sign that the labor needs of the economy have shrunk.

Scott Winship, a fellow at the Brookings Institution, wrote: “We have had a slack labor market for a decade.” (In the graph below, the blue line starting at point A approximates the job openings and new jobs created; it has been comparatively low and flat in the last ten years). The 2007 recession “just dumped a lot more people into an already weak labor market.” The result was levels of unemployment unprecedented in the lifetime of anyone alive today. “Competition for jobs among the unemployed remains greater than any time before the financial crisis, stretching back to the Great Depression.”

(Image from Scott Winship.)

At the same time, corporate profits and economic growth in terms of GDP have been rising. So has productivity. These signs in the face of a stagnant labor market show that the economy no longer needs as many workers to generate the same output as it did a decade ago .

The root causes of these phenomena of falling labor demand with rising corporate profits and productivity are two-fold: globalization and technological change, both of which act to shrink the demand for workers in the U.S. economy. In a sense, the economy’s labor needs are shrinking as offshoring, technological change and the automation of routine work reduce labor needs, according to MIT economist David Autor.

These processes suggest that the job losses are structural and that job creation programs will not work because they can’t change the fundamental economic incentives that are driving employers to invest abroad and to invest in better technology which allows fewer workers to be more productive. Job training programs are also bound to fail because such initiatives do not address the fundamental problem: the lack of demand for more labor. And labor demand will fall even further in the coming years as neither globalization nor technological change can be legislated away.

Income Inequality Now Rivals That of Third World Nations

In The Wall Street Journal, Ellen Byron writes on the phenomenon of U.S. companies splitting their product lines to accommodate this growing income divide, “We now have a Gini index similar to the Philippines and Mexico — you’d never have imagined that,” says Phyllis Jackson, P&G’s vice president of consumer market knowledge for North America. “I don’t think we’ve typically thought about America as a country with big income gaps to this extent.”