Americans are worried about the economy. As a recent headline announces, we have a national case of the jitters. But the economy's apparently healthy condition, with unemployment at 5.3 percent and employment and national income at all-time highs and still growing, one may well wonder why so many are so anxious.
Maybe they believe the bad news asserted by President Clinton, Labor Secretary Robert Reich, and others that real wages have been falling since 1973. The good news is that this oft-repeated allegation is not true. The price index used to adjust the wage data for inflation overstates the true rate of inflation by 1-2 percentage points per year. Correcting for the improperly measured inflation turns the alleged real wage decline into a significant real wage increase.
Moreover, employees have been getting more of their total compensation in the form of benefits such as health insurance, retirement contributions, and vacation time. Between 1970 and 1995, such noncash benefits rose from 11 percent to 19 percent of total worker compensation. According to economist Marvin Kosters of the American Enterprise Institute, real total compensation (including benefits) per worker has increased by at least 15 percent since 1973.
Recently the media have bombarded us with stories about corporate downsizing, leading people to think that employment has become more insecure. But the cases that make for dramatic headlinesAT&T? to shed 40,000 workers, for instanceare unrepresentative. In fact, in recent years job losers have composed a smaller group, relative to total employment, than they did between 1975 and 1985. The Labor Departments 1995 Report on the American Workforce found little change in overall job stability in recent decades.
Despite repeated claims to the contrary, todays newly created jobs are not mostly hamburger flipping and the like. According to the 1996 report of the Presidents Council of Economic Advisers, two-thirds of the jobs created recently are in occupations and industries with above-average pay. McDonalds workers are simply more visible than those at Microsoft and Intel. Since 1985, MCI and Sprint together have added 61,000 employees, far more than compensating for the attrition at AT&T?.
But if the economy is actually performing reasonably well, why are people so worried? Perhaps because they realize they must run faster and faster to stay ahead of the tax collector.
For most workers the tax that looms largest is the Social Security tax. Although half of it is designated as paid by the employer, the employee actually bears the entire burden. In 1970, this tax was 9.6 percent of taxable earnings up to $7,800, making the maximum $749. After rising relentlessly, the payroll tax is now 12.4 percent of taxable earnings up to $61,600as much as $7,638plus 2.9 percent (for Medicare) on all labor earnings without limit. For someone earning $35,000, the payroll tax amounts to $5,355; for someone earning $70,000, it is $9,668.
A worker earning $10,000 in 1970 paid $749 in Social Security tax (about $2,622 in todays dollars). If the worker now earns $35,000, having just kept up with inflation, the tax is $5,355. It has more than doubled in inflation-adjusted dollars, even though the worker's earnings in inflation-adjusted dollars are unchanged.
This very raw deal is only the beginning. For their remaining pay, workers must shell out federal (plus, in many cases, state and local) income taxes, real estate and personal property taxes, general sales taxes, excise taxes, estate and gift taxes, customs, and miscellaneous exactions plus fees for auto registrations and licenses, smog inspections, and airport departuresnot to speak of the billions of dollars paid to tax preparers, accountants, lawyers, and investment advisers for helping them cope with the impenetrable complexity of the tax laws.
Altogether, taxes are now at an all-time high. Just between 1990 and 1995, total receipts of American governments rose by $550 billion, or 32 percent, and they are projected to continue rising indefinitely. The Congressional Budget Office forecasts that federal revenues alone will grow by 33 percent between 1996 and 2002. State and local revenues will probably rise by a similar proportion.
According to the Tax Foundation, the median-income two-earner family paid about 20 percent of its income in taxes in 1955, about 38 percent in 1995. This increase in tax liability amounts to more than $9,000 per family.
Yes, Americans are nervous, and with good reason. They get the jitters just thinking about how much of their earnings will be snatched by the state.
Robert Higgs is Senior Fellow in Political Economy at The Independent Institute and Editor at Large of the Institutes quarterly journal The Independent Review. He received his Ph.D. in economics from Johns Hopkins University, and he has taught at the University of Washington, Lafayette College, Seattle University, and the University of Economics, Prague. He has been a visiting scholar at Oxford University and Stanford University, and a fellow for the Hoover Institution and the National Science Foundation. He is the author of many books, including Depression, War, and Cold War.
Full Biography and Recent Publications