Reality-Based Economy, Myths vs. Realities

Myths: The rich are getting richer, especially CEOs, while the average American suffers, the middle class is disappearing, globalization only benefits the top 1% and not the average American, etc. etc.

Realities (from today's column by David Brooks in the NY Times):

1. Real average wages rose in 2006 at the second fastest rate in 30 years.

2. The poor are getting richer. Between 1991 and 2005, the bottom fifth increased its earnings by 80%, compared with 50% for the highest-income group and around 20% for each of the other three groups.

3. Recent rises in inequality have less to do with the grinding unfairness of globalization than with the reality that the market increasingly rewards education and hard work. The education premium is rising.

4. Companies are getting more efficient at singling out and rewarding productive workers. A recent study suggests that 24% of the increase in male wage inequality is due to performance pay.

5. Inequality is rising because people up the income scale work longer hours. In 1965, less educated Americans and more educated Americans worked the same number of hours a week. But today, many highly educated people work like dogs while those down the income scale have seen their leisure time increase by a phenomenal 14 hours a week.

6. The big winners in this economy are not self-dealing corporate greedheads who are bilking shareholders. The top 25 hedge fund managers combined earned more than all 500 S&P 500 C.E.O.s combined. The hedge fund guys are profiting not because there’s been a shift in social norms favoring the megarich. It’s just that a few superstars are now handling so much capital.

7. To the extent that C.E.O. pay packets have thickened (and they have), there may be good economic reasons. The bigger a company gets, the more a talented C.E.O. can do to increase earnings. Over the past two and a half decades, the value of top U.S. companies has increased 500%, and the compensation for the C.E.O.s of those companies has also increased 500%.

8. We’re in the middle of one of the greatest economic eras ever. Global poverty has declined at astounding rates. Globalization boosts each American household’s income by about $10,000 a year. The U.S. economy, despite all the bad-mouthing, is chugging along. Thanks to all the growth, tax revenues are at 18.8% of G.D.P., higher than the historical average. The deficit is down to about 1.5% of G.D.P., below the historical average.

MP: I'll add a few more, to make it 10.

9. The chance of a U.S. recession in 2007 is now only 7%, based on Intrade futures trading.

10. More household wealth has been created in the U.S. economy over the last 10 years than was created in the previous 200 years.