In his recent book, Aftershock, Robert Reich builds a strong case for the disparity between the top income earners and the rest of us as the basis for our current economic turmoil. He argues that there will be chronic, structural economic problems if those who produce goods are not able to purchase them. Reich defines the concept of producers also being consumers as the “basic bargain”. This is an elegantly simple concept and one that distills many ostensibly complex economic discussions to their elemental components.
Reich also contends that there are two American economies. One economy is made up of the wealthy who have disposable income with multiple investment options including the Dow Jones Industrial Average (DJIA). The second economy is everyone else.
To better understand the relationship between the basic bargain and the two economy concept I considered looking at the relationship between the median wage and the Consumer Price Index (CPI) but didn’t feel that would give a clear differentiation between the wealthy and the non-wealthy. Instead, I used the DJIA to represent what the wealthy would buy. After all, almost everyone has to buy the CPI market basket but not everyone invests in the The Market.
The question asked is “How long would a worker making the median wage need to work to buy one share of every stock on the DJIA?”
In 1982 the DJIA was 890 and the median wage was $7.82 meaning that the median wage earner would need to work 113 hours to “buy the DJIA”. In 2007 the same worker would need to work seven times as long, 757 hours, to accomplish the same task.
When the DJIA and the hours needed to buy it are plotted clear trends can be seen. From 1962 to 1982 the two values are converging, e.g. the worker could buy the same number of shares of the DJIA with fewer hours of work. Coincidentally, this time span is contained within the era of what Reich has termed the “Great Prosperity”.
From 1982 to the present the trend was reversed with the median wage earner needing to work more and more hours to accomplish the task of buying the DJIA. The basic bargain seems to have been lost.
The concept buying the DJIA may be dismissed as irrelevant by trained economists but it helps understand how the current economy is qualitatively different from the one in the “good old days”.
Until we get the income shares and buying power back in line with where they were prior to 1982 I suspect that Reich is correct when he suggests that we should expect only “phantom” economic recoveries.