- The Washington Times - Saturday, August 27, 2005

Compared to July 2000, inflation-adjusted [i.e., real] wages have remained relatively stagnant for the 80 percent of America’s workforce classified as production and nonsupervisory workers. With average weekly hours having declined for members of this large labor cohort compared to five years ago, their average real weekly earnings are actually less today than they were in July 2000, according to the Bureau of Labor Statistics.

Over a longer period of time — the past 25 years, for example — incomes earned by households in the lower half of the income-distribution spectrum have been growing at much slower rates than higher incomes have. From 1978 through 2003 (the latest year available), according to the Census Bureau, real household incomes at the 10th percentile, 20th percentile and 50th percentile (the median level) have increased by 8.1 percent, 9.7 percent and 12 percent, respectively. For the 80th, 90th and 95th percentiles, real household incomes have increased since 1978 by 28 percent, 35.7 percent and 40.1 percent. Thus, real household income (measured in constant 2003 dollars) at the 20th percentile has increased from $16,398 in 1978 to $17,984 in 2003 (or by less than 10 percent). Meanwhile, real household income at the 95th percentile has increased from $109,348 in 1978 to $154,120 in 2003 (or by more than 40 percent).

On July 21, Federal Reserve Chairman Alan Greenspan appeared before the Senate Banking Committee. Liberal Democratic Sen. Paul Sarbanes of Maryland prefaced a question with this assertion: “Every statistical study shows a growing — a marked growing — inequality in the distribution of income and wealth in the country. The disparities are actually the largest of any of the advanced industrial countries,” Mr. Sarbanes declared, before asking: “What’s your view of that development?”

“I think it’s a very disturbing trend,” replied Mr. Greenspan, whose formative years as an economist, it is worth recalling, were spent as an ardent disciple of Ayn Rand and whose conservative credentials today remain impeccable. Mr. Greenspan added that a “free-market democratic society is ill-served by an economy in which the rewards of that economy are perceived to be inappropriately or unfairly … distributed in a way which too many of our population do not feel is appropriate. More importantly,” Mr. Greenspan continued, “they don’t feel the advantages and benefits coming from the system that a smaller, but still significant, group [has] experienced. So,” the Fed chairman concluded, “I’m concerned about this. I think it’s a major issue in this country.”

Mr. Greenspan’s reply was not atypical for him. In fact, at numerous forums in recent years, he has commented on this issue with increasing urgency. As his remarks clearly demonstrate, Mr. Greenspan has deeply pondered this dilemma. He is no left-wing class warrior, and his insight and concern should command attention. We should listen to what he has to say.

As incomes for lesser-skilled workers grow far more slowly than incomes of the highly skilled, “[t]he consequence, of course,” is “an increased concentration of income,” he told the Joint Economic Committee in June. “As I’ve often said, this is not the type of thing which a democratic society — a capitalist democratic society — can really accept without addressing.” In contrast to what has been happening to the real average hourly earnings of production/nonsupervisory workers, Mr. Greenspan told a House hearing last month that the incomes of supervisory and professional workers, who comprise 20 percent of the labor force, are “going up very much more rapidly.” The result has been a “bi-variate income distribution. And as I have said many times in the past, for a democratic society, this is not helpful, to say the least.”

In his prepared remarks for congressional testimony in February, Mr. Greenspan warned: “In a democratic society, such a stark bifurcation of wealth and income trends among large segments of the population can fuel resentment and political polarization. These social developments can lead to political clashes and misguided economic policies” — such as protectionism — “that work to the detriment of the economy and society as a whole.”

To Mr. Greenspan, the cause and effect are straightforward. “The failure of our society to enhance the skills of a significant segment of our workforce has left a disproportionate share with lesser skills. The effect, of course, is to widen the wage gap between the skilled and the lesser skilled,” he matter-of-factly concluded in congressional testimony early this year. “Many of our students languish at too low a level of skill, and the result is an apparent excess of supply [of low-skilled workers] relative to a declining demand,” he told the House Committee on Education and the Workforce in March 2004. “These changing balances are most evident in the failure of real wages at the lower end of our income distribution to rise during the past quarter century,” he explained.

Mr. Greenspan has relentlessly argued that the solution can only be achieved by markedly improving the nation’s educational system. He frequently refers to a 1995 study — the Third International Math and Science Study, or TIMSS — that compared the performance of American fourth-, eighth- and 12th-grade students with their peers around the world. U.S. fourth-grade students performed above average in science and math; U.S. eighth-grade students were average in science and below average in math; and U.S. 12th-grade students had fallen well below average in math and science literacy, finishing 18th among 21 nations and scoring higher than only Lithuania, Cyprus and South Africa.

Clearly, American students were losing ground in math and science after their early elementary-school years. There have been subsequent TIMSS studies, but none of them have included results for the 12th grade, by which time it is clear that American students have fallen far behind their peers. It is essential for policy-makers to gather the crucial information gauging how American students have progressed as they approach high school graduation, when their math and science skills will largely determine how skillful they will prove to be in the workplace. At a minimum, the federal government should fund comparable studies based on the 1995 TIMSS model to measure the success of education-reform efforts.

It is no longer enough for California students to perform better than Texans or vice versa. Now, and in the future, students from both states must perform as well as or better than their peers around the world. If not, the income-distribution problems currently afflicting America’s free-market democratic society, which rightly concern Mr. Greenspan today, will have become insurmountable. As Mr. Greenspan approaches his scheduled retirement at the end of January, this is probably his most important message. We ignore him at our peril.

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