The New Economy's Dark Side (Mark Zandi) : LUSENET : TB2K spinoff uncensored : One Thread

Dark Side

Note: Mark Zandi is an outstanding economist who also happened to call Y2K correctly.

The New Economy's Dark Side By Mark Zandi 3/31/00 4:40 PM ET

Perhaps the most salient hallmark of current economic times is that not only the wealthiest are benefiting, but so are the most economically disadvantaged.

Since the mid-1990s, the earnings of those in the bottom 25% of wage and salary workers have grown at approximately the same rate as the earnings of much higher paid workers. And joblessness for those with low levels of education has also fallen dramatically. For example, the unemployment rate for those without a high school diploma has been cut almost in half since the early 1990s. With earnings up and unemployment down, the confidence of lower income households has never been higher.

While the economy seems friendly to those at the lower end of the income scale, reality is much more complicated. Indeed, the same forces that brought a New Economy have brought an ongoing skewing of the distribution of income and wealth. This skewing has recently been obscured by the economy's unprecedented performance and by favorable but fleeting demographic trends and government policies. While living standards for most of us will continue to rise strongly in the New Economy, it is important to recognize that the relative living standards for a significant number will fall further and further behind.

It is undeniable that the distributions of income and wealth are highly skewed and have become more so in the past generation. Households in the top 20% of the income distribution garner almost one-half of the nation's income (see Chart). Even more astounding is that the top 5% of households take home more than one-fourth of the nation's income. Households in the bottom 60% of the income distribution, in contrast, manage to bring in only just over one-fourth of the nation's income.

Wealth is even more skewed than incomes. Families in the top 20% of the wealth distribution own well over 80% of the nation's wealth, while the top 5% of families own 60% of the wealth. Not surprisingly, wealthy households are generally high-income households. The median net worth of families with more than $100,000 in annual income was well over $500,000 in 1998, which is more than seven-times the median net worth of all families. In contrast, nearly the entire bottom one-fifth of families in the wealth distribution has zero or negative net worth. These families also generally have low incomes and very high debt burdens.

The skewing of the income and wealth distributions has been long in the making. In the twenty years between 1973 and 1993, only the top 20% of households experienced an increase in their share of income, and much of that accrued to households in the highest 5% of the income distribution (see Chart). The wealthy have also gotten wealthier, as the average net worth of families in the top 20% of the wealth distribution recently topped $1 million, up from $800,000 twenty years ago. Net worth for families in the bottom 40% of the distribution, in contrast, has remained essentially unchanged.

Households do move up and down the income scale and focusing on the income distribution in any given year overstates the true degree of inequality. It is important to recognize, however, that the significance of the rising inequality evident in the increasing skewing of the income distribution would be mitigated only if individual income mobility is also increasing. What evidence is available on this score suggests that income mobility is actually declining.

Concern regarding the inequitable distribution of income and wealth has also faded as the evident skewing in the income distribution between the early 1970s and 1980s has abated somewhat in more recent years. Income shares across the quintiles of the income distribution have remained largely unchanged since 1993. Moreover, due to the acceleration in national income growth in recent years, mean real household incomes are rising across the income distribution.

This recent development does not signal any long-lasting improvement in the distribution of income and wealth, however. More likely it is a testimonial to the robustness and length of the current expansion and various other factors that will prove to be fleeting. Most notably are a number of fiscal policies implemented during the Clinton Administration that have benefited lower income households. These include the substantial expansion of the earned income tax credit, several hikes in the minimum wage and numerous housing initiatives that have successfully promoted homeownership.

Also contributing to the apparent moderation in the skewing of the income distribution in recent years is the changing ways in which high-income households are being compensated. Compensation for such workers is increasingly nonpecuniary, such as more flexible work arrangements like working at home or working nontraditional hours. Compensation is also increasingly in the form of stock options. This would suggest that while the distribution of income has not become more skewed in recent years, the distribution of compensation has.

The factors driving the skewing of the income and wealth distribution during the past generation thus remain firmly in place today. These factors are the same ones driving the New Economy, namely an accelerated pace of technological change and the ongoing globalization of the economy.

Technological change has affected the distributions of income and wealth as it has heightened the value placed on highly skilled and educated labor vis-`-vis less skilled and educated labor. The enormous and increasingly rapid investments made by businesses in high-tech equipment have raised the demand for skilled labor that has the ability to effectively use the new technologies relative to unskilled labor that does not have this ability. As a result of this shift in the demand for labor, the returns to education are soaring. The earnings of college educated labor have risen from approximately 155% of the earnings of high school educated labor in the mid-1970s to over 175% currently. The earnings differential between a college graduate and high school dropout has risen even more significantly.

Increased globalization leads to the skewing of the income distribution since the value of the goods and services in which the U.S. has a comparative advantage and the labor that produces them, namely high-technology products, is enhanced. Moreover, the value of the goods and services in which the U.S. has a comparative disadvantage, namely products that utilize low-skilled labor, is depressed.

The factors that have led to the skewing of the distribution of income and wealth are likely to remain in place well into the current century. Continued rapid technological change, a low cost of capital and ample financial resources are expected to further foment strong investment in sophisticated capital. This will enhance the value of labor that can employ that capital effectively relative to those that cannot. While colleges and universities are responding to the increased demand for their graduates, they will very likely be unable to keep up.

The income and wealth of labor with special talents is also significantly enhanced as technology dramatically broadens the markets for those talents. The ability to show movies, sporting events and other entertainment in every corner of this nation and much of the rest of the world, for example, allows entertainers and athletes and the owners of movie studios and sport teams to garner increasingly enormous paychecks and profits.

Technological change and further political advances, the recent debate over the WTO notwithstanding, will also support the ongoing globalization of the U.S. economy. Lower skilled U.S. labor will be at an increasing disadvantage, while highly skilled U.S. labor will benefit as the demand for the goods and services they produce expands. Foreign immigration laws may ultimately be changed, but they currently are not designed to bring more educated and skilled workers to the U.S.

While confidence in the New Economy is at a fever pitch, it is important to recognize that the changes have a dark side. The same forces that are supporting the economy's unprecedented performance are the same forces that are resulting in a long-running skewing of the distribution of income and wealth. Seemingly more rapid advances in technology and the ongoing globalization of the economy will let the nation's real income expand more strongly and for longer than in the past. These forces also ensure that the benefits of those gains will increasingly accrue to the wealthiest and at some expense of the economically disadvantaged. Debate over how our economic largess is distributed--which will cut across economic, social and political lines--is destined to be the most significant public issue of the next generation.

-- Ken Decker (, April 14, 2000


There is 9 million or a little over a million making 100,000 dollars a year or over, we have 270,000,000 people, so what do the rest make? An people say everything is fine. You haven't talked to people on the down side, or have you?

-- ET (, April 14, 2000.


I guess that explains all of those high fences and private guards in Medina.

Best wishes,,,,,


-- Z1X4Y7 (, April 14, 2000.

Ken Decker knows everything there is to know about economics, and


-- laughing (at@anything.youwritedecker), April 14, 2000.

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