To Hike Income, U.S. Must Invest in Young

Are you better off this Fourth of July than on past Independence Days?

That question or something like it is at the heart of today’s most important political debate: Whether American living standards are declining and what to do about it.

By one measure, average personal income, the answer is easy--at $4.6 trillion, or $19,308 for each American, personal income is higher than ever. But such national averages only say the pie got bigger--not how the pieces were distributed.

And the Labor Department’s figures on average weekly earnings for American workers paint a different picture--showing that U.S. workers’ average weekly earnings are 2% less today than they were 10 years ago and 11% less than 20 years ago, after adjusting for inflation. Work weeks are shorter these days, but hourly wages tell the same tale.

What’s going on? Some say the pie is too small. “Real incomes are declining because the country has not had the economic growth it needs,” says Sen. Daniel P. Moynihan (D-N.Y.). He advocates cutting Social Security payroll taxes to put money in working people’s pockets and spur the economy.

Others say some people are grabbing an unequal share. The rich are getting richer and the poor poorer, writes author Kevin Phillips in “The Politics of Rich and Poor,” a new book that is captivating Washington. Phillips, who says Reagan Administration policies in the 1980s favored the rich, advocates redistributing the gains of the ‘80s by taxing the wealthy and regulating industry.

It’s a hot issue, and the debate’s outcome could influence tax policy and change the direction of the economy.

So it’s important to understand that what’s really happening in the economy is more complex than simple divisions between rich and poor. The wage figures, for example, say America has changed--but not necessarily declined. Average wages are lower because more women came into the work force the last 20 years, as well as more young people, doing more part-time work. That’s why wages look better in the distant past. “The further back you go, the more you are dealing with a work force of adult male full-time (and often unionized) workers,” says Paul Flaim, analyst at the Bureau of Labor Statistics.

Similarly, income gaps reflect changes in family patterns--more single-person families and families headed by single women. More than half the poverty-level families in America are headed by single women--double the number of such households in 1959, says a report by the Congressional Budget Office.

Rich and poor? The difference is often between old and young. The elderly benefitted in the last dozen years, as deregulated banks paid higher interest to savings depositors--but charged the young more for mortgages.

The inflation-adjusted median income of all families has risen 20% from 1970, but the incomes of elderly families--near the poverty level 20 years ago--have risen more than twice as much.

But, of course, achieving a more secure retirement for America’s elderly is a victory for the economy, not a problem. In fact, retirement income was the focus of the really big winners of the 1980s--the pension funds.

In a decade known for Wall Street deal makers, and inside traders, the big pension funds earned average returns of 14% a year--which means they doubled their assets every five years. It was a needed change from the 1970s, when investment returns were inadequate. So, who was behind the merger mania, leveraged buyouts and short-term corporate focus of the 1980s? Clearly the pension funds, demanding a higher return on retirement-savings investments.

Meanwhile, wage gains of ordinary workers failed to keep up with inflation as America learned that its work force is subject to the world market.

The time is past when high school graduates, or even dropouts, could get plenty of high-paying jobs in Detroit auto plants. Americans long ago accepted cars imported from Japan, or Japanese cars made in Ohio, Tennessee and Kentucky, where wages are lower than Detroit. Americans also bought clothing from Taiwan and Hong Kong in Sears and K Mart.

So where do we go from here? Clearly, to prepare U.S. workers for fields where the highest wages are available. And that is in high technology, industries spending heavily on research and development, according to a new Monthly Labor Review study by W. Norton Grubb of UC Berkeley and Robert H. Wilson of the University of Texas in Austin. Such industries pay the best wages not simply to scientists and engineers but to all workers.

But advanced industries demand investment of capital and skilled employees, which means that the United States needs educated workers and capital at low interest rates, rather than workers at low wages. Indeed, even in the overall wage decline of the 1980s there was a divergence between rising pay for skilled workers and sharply falling income for the unskilled. Education earned a larger slice of pie.

So the direction of U.S. policy is obvious: It needs to make some new investments in the young. And that argues for policies to spur economic growth and make the pie larger, rather than redistribute gains of the past.