- by New Deal democrat
Several times this year I have ruminated about the US turning into a “banana republic,” in both political and economic terms. As I wrote several months ago,
“About a decade ago economists Daron Acemoglu and James A. Robinson wrote “Why Nations Fail,” positing that countries with a strong rule of law and a widespread distribution of benefits, succeeded, while “extractive economies” typified by a ruler at the top who is above the law who along with his cronies siphons off as much created wealth as possible, fail.”
Not only does that fit the T—-p Administration to a “T,” but once again in the past week the GOP majority on the Supreme Court has opined that a(-t least a Republican) President can simply ignore laws passed by Congress and proceed however he chooses.
On this Labor Day, let’s see how far the US has slid towards banana republic status in economic terms in the past 40 years since the Reagan Administration.
Let’s start with a statistic you may have seen graphed several times in the past few weeks: the labor share of GDP (blue in the graph below), which cliff-dived to an all time low in Q2 of this year, down about -16% compared with 1986. The mirror image is just as salient: in the past 40 years, corporate profits (red) have soared over 20x:
They doubled from 1986 to 1993, doubled again by 2002, doubled *again* by 2005, and doubled *yet again* by 2021. In the five years since, so far they are up *another* 50%.
As a result, the Gini coefficient, an international measure of economic equality (where “0” means perfect equality, and “100” means maximum concentration) rose rapidly during the Reagan Administration, and has continued to rise since:
Keep in mind that the above graph does not include this year, when it likely is rising more.
Similarly, in the past 40 years average hourly earnings for nonsupervisory workers (gold) have risen 2.67x, while corporate profits (blue) have risen almost 20x. But even that pales in comparison to stock prices. During the same time, the S&P (not shown) has increased more than 30*, and the Nasdaq composite index (red) has risen 70x!:
Just in the past 12 months, for example, while nominally nonsupervisory wages are up 3.3%, both the Nasdaq and the S&P 500 are up about 20%:
And that’s just the past year. Over the past 40 years, on average, the Nasdaq composite has increased 10% more per year than wages. In the past 10 years, the S&P 500 gains have exceeded nominal wage gains by about 8% on average every year:
In other words, those who primarily rely on stock price appreciation for gain have seen their wealth explode away from those who earn income from labor.
Let’s consider two hypothetical people: Ralph Kramden and Reginald K. Failson III. Ralph entered the workforce in 1986 and in each year has earned the average wage for nonsupervisory workers. Reginald was gifted the same amount Ralph earned in 1986 as a stock trust fund, and hasn’t worked a day in his life, prefering to sip martinis at the yacht or country club. For simple comparison, I have normed each to $10,000 in 1986.
By 2026, Ralph’s cumulative earnings over 40 years total $770,273. Reginald’s stock portfolio, if invested in the S&P, is worth $318,227, or about 40% of Ralph’s total lifetime earnings from work. If it were invested in the Nasdaq, it would be $558,676, or almost 75% of Ralph’s total lifetime earnings. Put another way, if Reginald were gifted 2.5x Ralph’s yearly salary in 1986, Reginald would have as much wealth accumulated passively as Ralph earned from his labor during his whole lifetime!
This by no means is a perfect analogy. For example, after paying all his expenses, Ralph might put a little aside in a stock market mutual fund (but bear in mind that the average savings rate over the past 40 years has only been about 5%). To have the same lifestyle as Ralph, the 1986 trust fund set up for Reginald would have to be about $200,000. For a luxury lifestyle, it would have had to be about $1,000,000.
And by the way, if during this past 40 years Reginald Failson III had passed away, his son Reginald Failson IV, courtesy of the pass-through exemption, could inherit the entirety of III’s stock portfolio without paying a dime in Estate Tax.
In short, for 40 years, the US has inexorably drifted - and then galloped - towards banana republic status in economic terms. Happy Labor Day.
