More info for saving Michigan and Ohio

This is a continuation of my previous post on what to do to help out Michigan and Ohio. (or the rest of the nation for that matter). I suggested that there is plenty of money in this country, we just need to find a way to reduce a trend that has lead to the top 1% gaining a larger percentage. Currently at almost 22%, up from 8.8%. We have been living under the theory that high tax rates (personal or otherwise) have harmed the entrepreneurial spirit and thus harmed growth. We as a nation have prided our self on the free spirit industrialness of our character. We bragged about the small business being the engine of our economy. Jobs, jobs, jobs is the answer we’re told. But consider this by Harold L. Wilensky, U of C , Berkeley, written in July of 1991:

“Not only is job creation unconnected to unemployment but it is
unrelated to economic performance generally. Take real GDP growth per capita
for 18 countries (exclude Israel):
In the pre-shock period, the more job creation, the less growth but the relationship is insignificant (r – -.14).
In 1974-79, the relationship is positive but insignificant (r = .33).
Only in 1980-84 is job creation significantly and positively related to real growth (r = .57); the more job creation the more growth. But in the three years after that the relationship disappears (r = -.07 for job creation 1985-87 and growth 1985-88).
Further evidence of the ambiguous meaning of job creation is the absence of any relationship to inflation (r = -.23 in the pre-shock period; r = .13 for 1975-79;r= .13 for 1980-84; r = .13 for 1985-88).
The statistical picture for 18 countries from 1965 to 1988 is consistent. There are no statistically significant correlations between job creation and the index of economic performance for any period.”

Dr. Wilensky at the end of his paper writes: If employment is expanded by the rapid creation of low-paid service jobs, an increasing number of them part-time or temporary jobs taken by people looking for fulltime work; a steady drop in real wages; and increases in the rate of family breakup (forcing single parents to work with grossly inadequate childcare arrangements), while productivity increases fade and international competitiveness and trade balances deteriorate, we can ask, “Is this progress?”
He then goes on to predict based on the resultant low wages: we incur all the costs of mass insecurity, industrial conflict, ungovernability, and unproductive welfare spending evident in my analysis of economic performance and party decline…
And here we are in 2007!

That’s the job issue. Concern about the types of jobs are always voiced when we discuss the numbers. I believe Cr. Wilensky has qualified that concern. We need to consider what we are creating. But, what about the actual creation that has gone on? Is there more entrepreneurial activity if we free up the money? We have allowed faster depreciation, cut corporate taxes and the top income tax rates along with capital gains tax. All things that effect the upper income earners. Using Piketty and Saez data which looks at the top 10% of income earners and then breaks out the subgroups within, I have graphed three groups: 90 to 95, 95 to 99 and 99 to 100. This posting is looking at each of the three groups make up of income. I will post each type of income in the next posting.

At AB we look at GDP over time and job growth as indicators of how well one time is doing compared to another. I did not think there was a need to post graphs of these, especially considering the above. But, we are trying to determine if all this freedom from taxes has benefited us. Is the money going back into the country in a manor that raises all boats? So, lets also look at capacity utilization (BEA does not go back further than 1967 for this number).
And Net Non-Residential Investment

And Export % Change

What follows are the 3 graphs of subfractions of the top 10%. The income for each group is:
90 to 95% $110,424
95 to 99% $176,925
99 to 100% $812,497
At 90% $96536, at 95% $130,373 at 99% $310,062.
It appears that the lower part of the top 10% is not much out of the range for what would be middle class had wages kept pace with GDP and productivity.
Note that each group is benefiting from rising wages and not so much from the passive incomes of interest, dividends and rents. Interestingly, interest income starts to decline after 1930 and doesn’t see a real bump until the 80’s ending in the mid 90’s. The largest increases in share of income from wages is the 95 to 100% crowd. Rent’s and dividends just seem to be going down. But the real line to look at is entrepreneurial income (self-employment, small businesses, partnerships). Is this what is referred to in the supply side theory/ownership society? Every time this line is going up, income from wages is going down. Only the top 5% are showing any real initiative. Yet, before the big crash, even the lower half of the top 10% had an increasing share of their income from personal initiative. Some say that the Clinton years were do to the luck of the computer age reaching a critical mass. When you look at the entrepreneurial lines, there appears good reason to believe so. The only other time when everyone was rushing to be an entrepreneur was WW2. Funny that we are in a “war footing” now and entrepreneurship is rising?
The first graph is what I would expect considering the income levels. Is not the middle class looked at as being the class who goes to work every day for the business owners?
The second graph suggest that this is the level of income at which people will consider moving toward self sufficiency. What we would expect from our upper middle class?

The third chart is where the big payday is. If the theory is correct would we see a somewhat similar curve in the rise of entrepreneurship as we see in wages? Is this what we would expect from the supply side, tax cutting crowd?

Lets put it all together. We sense that it is about quality of jobs and not quantity and have correlations from 1991 that suggest such. We seen a decline in capacity utilization over time, a peak in net non-residential investment that coincides with the computer age along with similar peaks in entrepreneurship. But, non of it shows the activity of WW2. And, none of it puts a dent in the fact that everyone is basically just going to work and earning a living. With these charts, the better the quality of the job, the better the income. I don’t think these charts support that we need to keep freeing up capital. They certainly do not bode well for the idea that everyone is independent and just needs to apply themselves to get be more financially secure. Instead it is more like that feeling that everyone just wants a “good” job that will allow them to have the American dream. A home, couple cars (used even), college for the kids, vacation and freedom from fear of financial ruin. The charts suggest to me that our economy needs a real, new to the human race event to spur growth via investments. Like say an industrial revolution, or a war or electronics revolution. Something where an existing core technology reaches a critical point in development that then creates a new sector of an economy. Something where there are no established players (think the failure of Tucker, DeLoraine, Bricklin, etc). I would say maybe energy could be the next biggy. Certainly anything related to environment; like getting rid of garbage.