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Occupy Wall Street has put a spotlight on the vast and growing economic inequality in the United States. It now takes its place as a top progressive priority -- perhaps the highest priority it has experienced since the Great Depression.

Underlying this greater and greater inequality is a shift of wealth from manufacturing to the top 1 percent and the financial sector. Over the past 40 years, the sectors of the economy that grew in output share grew very little in employment share; making more money but paying it to a small group of people. The sectors of the economy that grew in employment share did not grow in output share, meaning that a growing number of workers had to share in a smaller pot of profits. From 1969 to 2007, the richest 1 percent has grabbed 15 percent more of the income of the United States, to a total of about 24 percent. Meanwhile, the manufacturing sector has lost a similar 15 percent of gross domestic product (GDP). This has led to a downward shift in income for the bottom 99 percent.

Let’s look at the shift among sectors of the economy in a bit more detail, because as finance has risen, so have other lower pay sectors. A good way of looking at the health of an economy is to see if there is a difference in how much income a particular sector, such as manufacturing or finance, pulls in; that is, how much of the economy (GDP) it constitutes versus how much employment it accounts for. You might think of this as what percentage of the economy each working person receives, viewing each sector as a whole. I will call this the “the ratio”: that is, the ratio of the GDP (value-added) share of the economy to the percentage of the employment share of the economy for a particular sector; I will always compare 1968 to 2009 (all data sourced from the Bureau of Economic Analysis).

Manufacturing has historically been the quintessential middle class sector because its share of GDP declined slightly, from 28 percent to 25 percent, between 1948 and 1968 in tandem with its share of employment (its ratio was 104 percent in 1968). Thus someone working in the manufacturing sector made an average income for the economy as a whole -- that is, he or she was right smack in the middle of the middle class. Since 1968, the employment share of manufacturing has been heading down by .38 percent per year, so that it is now 8.7 percent, while its share of the economy is 11.2 percent. The average employee is making about 30 percent more than the average for the economy, most likely because so many of the low-skill jobs were outsourced (along with most high-skilled ones).

At the same time, the finance, insurance, and real estate, or FIRE, sector increased its share of the economy from 14.2 percent to 21.5 percent, while the employment share only rose from 4.4 percent in 1968 to 5.7 percent in 2009. So this sector went from a ratio of 322 percent to 376 percent; for finance alone, the ratio almost doubled from a fairly middle class 116 percent in 1968 to 197 percent in 2009. Real estate always had a ratio of about 1000 percent, which is one more reason, perhaps, that society should not encourage real estate bubbles. Overall, the pot of money has exploded without an increase in payrolls.

So FIRE took about half of the share of GDP that manufacturing lost while barely increasing employment. The rich got richer.

On the other hand, in what is called “accommodation and food services,” or basically hotels and restaurants, the share of the economy moved from 2.2 percent to 2.7 percent in the 41 years between 1968 and 2009, but its share of employment rose from 4.5 percent to 7.2 percent; the ratio fell from 49 percent to 33 percent. The “health care and social assistance” sector, dominated by the health care industry, saw its ratio decline from 73 percent to 63 percent; its share of GDP rose from 2.8 percent to 7.5 percent, but its employment soared from 3.8 percent to 11.9 percent. The other sector that saw a major decline was retail, which actually saw a decline in economic share from 7.9 percent to 5.8 percent at the same time that its employment share increased slightly from 9.9 percent to 10.8 percent. Call this the “Walmart” effect: driving out mom-and-pop stores, leading to a greater efficiency, but lowering the average wage from 79 percent to 54 percent of the economy-wide average.

If we combine these employment “growth” sectors, GDP share moves from 12.9 percent to 16 percent between 1968 and 2009 but the employment share grows from 18.2 percent to 29.9 percent. The ratio fell from about two-thirds of the average to less than half. More and more Americans are employed by sectors that aren’t bringing in a large share of the economy.

So where did the employment and economic output of the manufacturing sector go? When it declined, most of the income went into FIRE and the top 1 percent, and most of the employment -- such as it is -- went into lower paying service jobs or has ceased to exist.

Counter to conservative ideology, the economic role of the government has actually gone down -- at least when measured, as I have been doing here, by value-added data, which eliminates the effect of transfer payments. From 1968 to 2009, the share of employment for the federal government decreased from 9.7 percent to 3.8 percent, and its GDP share went from 6.9 percent to 4.3 percent, while for the state and local governments the employment share rose from 11.7 percent  to 14.4 percent and GDP share went from 7.6 percent to 9.3 percent. So much for “big government” -- FIRE’s share of GDP is at 21.5 percent, while government at all levels is at 13.6 percent. Sounds like “big finance” to me!

All of these statistics point to the need to understand the “natural history” of the economy. The health of a particular sector of the economy is a relevant political issue, as is how we might change the relative importance of each. I have argued previously that manufacturing is at the center of the economy. If we were to move from a manufacturing sector with 9 percent of employment to 20 percent, the economy would add over 14 million jobs. To achieve a change like that, we need to redirect our resources from the “economic royalists” and top 1 percent to the bottom 99.

Originally posted at NewDeal20.org

Jon Rynn is the author of the book Manufacturing Green Prosperity: The power to rebuild the American middle class, available from Praeger Press. He holds a Ph.D. in political science and is a Visiting Scholar at the CUNY Institute for Urban Systems.

Originally posted to JonRynn on Tue Oct 11, 2011 at 10:12 AM PDT.

Also republished by Occupy Wall Street.

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Comment Preferences

  •  There Is A Happy And Sad Story I Tell (2+ / 0-)
    Recommended by:
    cama2008, No one gets out alive

    after WWII my grandfather arrived back in the states. Only a high school education. He took an entry level union job at a Snap-on plant. Worked there for 45 years. Moved up to mangement. Maybe making the best tools known to man.

    He bought a house. Raised three children and paid for their college. Had a country club membership. He was a little frugal, but when he passed away this year at 93 we were stunned.

    He was almost a millionaire. Snap-on offered him stock options and he appears to have bought a lot of them. And he saved. Saved. Saved.

    He worked hard, but just a high school education. That was America not that long ago. Where you could live a good life. Make an honest wage.

    Alas, not so much anymore. I fear people younger than myself don't know this America once existed. Cause that Sanp-on plant has closed. In fact a few months ago they literally sold the land to recycle the concrete. Sad.

    When opportunity calls pick up the phone and give it directions to your house.

    by webranding on Tue Oct 11, 2011 at 10:20:58 AM PDT

  •  Throw the money changers out of the temple (1+ / 0-)
    Recommended by:
    WattleBreakfast

    Always a good idea.

    Who keeps letting them back in?

    Vampires, indeed.

    The Fail will continue until actual torches and pitchforks are set in motion. - Pangolin@kunstler.com

    by No one gets out alive on Tue Oct 11, 2011 at 10:31:42 AM PDT

  •  Exactly how do you propose to bring (0+ / 0-)

    private-sector manufacturing jobs back?  

  •  Very nice analysis (1+ / 0-)
    Recommended by:
    Gooserock

    The obvious question then is why does an economy expand in the FIRE group and not manufacturing? The simple answer would be that manufacturing is difficult, involves a long time frame and contains risk, in many cases a new manufacturing enterprise fails. Finance is easy, insurance is easy, so that's where the capital goes. We could have competed with offshore manufacturing by using technology to increase efficiency. It was never a given that we would lose consumer goods to Japan, China, Korea, Taiwan, Vietnam, etc. Manufacturing got more expensive, in part, because the FIRE group's success raised the cost of manufacturing in the US. Individual sectors worked to increase their profitability, and that in turn caused the manufacturing sector to be less competitive. Consider the cost of industrial/commercial real estate and the cost of health care as two examples. We pay twice the average of developed countries on heath care and we place much of that burden on manufacturers.

    This all raises the obvious question of whether unfettered Capitalism works for the good of the people. If some endeavor makes a profit it is declared good by the disciples of the Free Market. This interplay of various sectors that results in a declining quality of life for most people is clear evidence that it's time to rethink the relationship between government and the economy. Perhaps we really do want economic goals that improve the standard of living for most of the people and a government that can effect the attainment of those goals. A guided Free Market should be only one mechanism of many to achieve those goals.

    •  Capitalism works in specific industries... (2+ / 0-)
      Recommended by:
      WattleBreakfast, The Wizard

      ...but doesn't work in the long-term or system-wide, which is where the government needs to step in -- assuming, of course, that you have a competent government that hasn't been taken over by malefactors of great wealth, as Teddy Roosevelt put it.  

      The way I see it, manufacturing brings great wealth to a society, and then finance and the military sector tend to try to grab as much of that newly acquired wealth as possible.  They then kill the goose that lays the golden eggs, as it were.  A similar process took place in Britain, and you can argue the same thing happened in the USSR (without the finance).  So unless a society can reign in the institutions that grab the wealth and starve the wealth makers (not just the job creators), then the society starts to decline, e.g., the US

    •  Because We Eliminated Protective Individual Taxes (1+ / 0-)
      Recommended by:
      The Wizard

      The steep upper marginal rates and others that prevented the top end from keeping most of a gain, beyond about the level of the upper middle class.

      When you have to pay 9 million to the gov in response to a 10 million dollar increase, you don't ask for the increase, and business doesn't offer it.

      So the incomes in the mid century were highly compressed. That made all kinds of sectors competitive for talent and competitive for investment, because the best anybody could do anywhere, was to be merely profitable.

      Once we took the lid off the rich, it became worth it to them to seek vast compensation, and it was worth it to business to offer it to attract talent.

      Immediately the economy begins collapsing because only a few sectors like 3rd world import, finance especially, and spectacular tech innovations & startup industries can create the high end returns.

      Simple as a box of rocks. Drop the top rates much below 90%, and the money gushes to the top immediately in our kind of economy, and the rich buy off government to do the rest.

      We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

      by Gooserock on Tue Oct 11, 2011 at 11:31:01 AM PDT

      [ Parent ]

  •  There is an emerging argument (0+ / 0-)

    that taxing the 1%-ers more will not achieve much. It cannot get rid of the deficit, for example. But it strikes me that this is akin to arguing that, if a business is in severe financial trouble, it's OK to steal from it because not stealing isn't going to have an appreciable effect on the Company's prospects. Somehow, I can't imagine the Wall Street folks buying that argument. Forget the economic arguments, how about the moral argument?

    •  hmmm...if the top 1% are worth 4 trillion (0+ / 0-)

      then taxing them 10% more per year would yield 400 billion, and even more from, oh, say, 25% per year for a round trillion dollars, and now we're talking real money, to paraphrase Everett Dirksen (perhaps I have just dated myself).  Although I understand if people think those kind of hikes won't happen...in which case, the problem is not so much to attack finance, as to rebuild manufacturing, because that will decrease the power of finance.  In other words, the problem is to build up the alternative to finance.  A positive agenda has a better moral attraction, I think.

  •  Result Not Cause. The Cause was Eliminating the (1+ / 0-)
    Recommended by:
    The Wizard

    protective >> 50% top income and other steep tax rates on the rich.

    That's what drove the change of economic sectors, because with the rich able to take most of an increase home no matter how large, they began to demand compensation they had not been demanding for 50 years. And they began running their enterprises to get them.

    Only a few sectors can produce big fast returns and those are what grew. Every kind of industry that's been flagging, from manufacture to journalism, is declining at least in part because of the inability to compete in offering jackpots with finance and 3rd world imports.

    We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

    by Gooserock on Tue Oct 11, 2011 at 11:33:52 AM PDT

    •  Part of the explanation, yes (0+ / 0-)

      but there was always an incentive to make greater profits, and there was never -- maybe in WWII, but not after, I don't think -- really a 90% marginal rate, I believe when JFK brought it down to "only" 70%, revenues went up because so many tax loopholes were closed. I seem to remember that there was still an effective 50% tax rate.  So certainly you didn't get the Keynesian problem of too large savings -- which he said would lead to Depression, basically --- and you didn't get the positive-feedback effect of great wealth leading to greater wealth.

      However, manufacturing was attacked for many reasons, one of the big ones being that they were unionized, which power-hungry CEOs didn't like.  Also, containerized cargo and communications helped lead to the whole globalization process, particularly to China when that opened up.  So I think you can point to both tax rate changes, and to forces pushing for deindustrialization, as a reason for the evisceration of the middle class.  That points to both tax raises for the 1%, obviously, and not so obviously, a very robust industrial policy.

  •  I remember reading in 2009 or about (0+ / 0-)

    that the States paid Billions in Fines and Fees to Wallstreet banks to get out of things like Credit Default schemes

    This was real money, not fake money like TARP, extracted from State Budgets at the same time States have been forced to slash Public services.

    Today I can't find any reference to this on the internet, not that I really know how to look.

    THIS is the best example of Wall Street greed, and how it directly impacts the lives of everyday Americans  

  •  "Ignorance is Strength" ask Orwell. . . (0+ / 0-)

    Fighting against one's own interests is a proud human tradition.  For thousands of years, the majority were deprived of rights, starved, beaten, enslaved, etc.--and the victims were the enforcers!  My students used to marvel at this, but the answer is simple:  without education (critical thinking), most of us are followers, aware of our vulnerability, and afraid that changing it will lead to our demise.  

    In the eighteenth century, when the middle class grew and education was spread to the masses, revolutions changed the power structure.  Revolutions, we must remember, are ALWAYS the product of the middle class and NEVER the result of unorganized riots.  Therefore, in order to change, we need improved education.  THIS IS WHAT THE KOCH BROTHERS UNDERSTAND!  . . .and this is why they want to disenfranchise the middle class--education, health care, etc.  They understand that they cannot gain power through force, and persuasion requires ignorance to succeed.  As Orwell pointed out, "Orthodoxy is unconsciousness."

    Old Hippies Never Give Up!

    by ravenrdr on Mon Oct 17, 2011 at 02:16:25 AM PDT

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