Way back in 1912, Italian statistician Corrado Gini published a research paper called “Variability and Mutability.” From it came a method of measuring inequality in income or wealth that is today known as the Gini Coefficient.
The math behind the Coefficient is not for the faint of heart but I will admit that I worked my way through it. Very simply put, it is a ratio that has ranges between 0 and 1. So, a Gini Coefficient of 0 means everyone has the same income and a score of 1 means that one individual has all the income and everyone else has none.
The United Nations Habitat and Monitoring Division calls a Gini Coefficient of .40 or higher an “international alert line.” Historically, they claim that a prolonged score over .40 could eventually lead to protests and riots.
Well, I am not the biggest fan of the United Nations. But, honest statistics, and these appear to be, are a wake up call to me as I plan my future.
A separate study from the Organization for Economic Co-operation and Development (OECD) told a similar tale using the Gini Coefficient. The OECD analysis showed that with the exception of Mexico and Turkey, the U.S. had the highest Gini score in the developed world. If you looked at per capita Gross Domestic Product we were close to Switzerland and Sweden but on the Gini scale we played tag with Sri Lanka, Mali, and Russia.
Here is a quick snapshot of the U.S. Gini Coefficient since they have tracked it:
2006—47.6 The European Union was 31.0 at this time
What does all this mean? Very simply, it tells us that the middle class in the U.S. is shrinking. Why did it happen? Some blame George W. Bush. Look at the data. The Gini Coefficient grew more under Bill Clinton (1993-2001) than it did under Bush 43. No, there are likely several reasons—unions got weaker since the late 1960’s, U.S. manufacturers were inept and a lot of jobs gravitated overseas where cheap labor helped them a lot. Also, consumerism really took hold and excessive borrowing masked the impact of the eroding middle class and the rising Gini Coefficient. Even when times got a bit tough, people just borrowed more and more to sustain their lifestyle even as housing, healthcare, and education costs skyrocketed. From several sources, I have found that a stunning 78% of U.S. households are ill prepared to muddle through our current woes. Even if these households cut spending by 25%, they would not be able to be jobless for more than three months. As unemployment remains stubbornly high, Americans continue to live paycheck to paycheck. Yes, savings have gone from zero to about 5% and many people are paying down debt some. But, defaults on credit cards are at record highs and a quarter of homeowners with mortgages are underwater (mortgage greater than home value).
To those of you who know me well this does not mean that libertarian leaning, passionate free trader and free market lover Don Cole has become a collectivist. No way! Nor do I see a European style provider society as a solution to our ills.
But, clearly things are out of whack. When bankers at institutions deemed “too big to fail” get huge seven figure bonuses when their speculations succeed and are bailed out by taxpayers when they fail, there will be growing resentment by the struggling and dwindling middle class.
The great financier J.P. Morgan had a rule when he ran his investment bank in the 1880-1914 period. He never took out of the bank in a given year more than 25 times what his lowest mailroom employee made (certainly, he had other wealth and income from passive investments not affiliated with the bank). Today, CEO’s make hundreds of times what their lower level employees do and stooges on corporate boards (often doing the same thing at their own companies) approve even greater compensation sometimes in poor years. Morgan was an autocrat and aristocrat but he had a sense of proportion that people lack today.
Income gains continue to go to the Americans who are the highest earners. Many of them deserve to be rewarded but some do not and not by so much. In the past 30 years, median income has only increased 13 percent in the U.S. while the top 1 percent has seen a 90 % increase in median income. Get set for more middle class anger and we may see it as early as the fall 2010 elections.
For the media business, this has several implications. If you sell to McDonald’s, Wal-Mart, Target, or Dollar Stores things may be good. The shrinking middle class will still use these stores or maybe even increase frequency of purchase as they trade down from other options. Tiffany may still advertise aggressively in your glossy magazine and appeal to the top 5%. But people will be buying fewer cars (except used), taking fewer trips, even going to the movies less often. It took us a long time to get in to this mess and there will be no slow route out of it.
I offer no solutions today. But, democracies need a vibrant middle class to succeed and sustain themselves. Those of us who have done well in recent decades need to remember that point. I grew up in rural Rhode Island in the 1950’s. Over the years, I had a few breaks, worked very hard, had no huge bad habits, was disciplined about saving, and most importantly, I married the right woman. Today, I know that I am living the American Dream. Will the next generation be as lucky or have the opportunity?
When he called for tax cuts in 1962, Jack Kennedy said it would stimulate the economy and that “a rising tide lifts all boats.” Since then, if you are honest, you realize that what has happened is that a rising tide has lifted all yachts.
If you would like to contact Don Cole directly, you may reach him at email@example.com