With the disappointing ADP jobs report this morning, and with the big employment report due out on Friday, employment and unemployment are clearly the things foremost on investors’ minds this week. Next week the focus will probably shift to third quarter earnings as they start to flood in.
I came across this today, which looks at who is getting hurt most in the current slow economy. Surprise, surprise, it is the poor. The graph shows the unemployment rate (blue) and underemployment rate (red), for January-August 2010, based on household income in fourth quarter of 2008. The blue dashed line is average unemployment rate for the entire sample; the purple dashed line is average unemployment plus underemployment ratio for entire sample.
In other words, people who were doing well before the worst of the Great Recession set in are still doing OK, on average. It is those that were struggling right at the poverty line when the economy turned south who have had the hardest time of it. I think the study would have been more interesting if it had been based on, say, 2007 income levels, since the recession was already underway in the fourth quarter of 2008).
This helps explain why we saw such a big increase in not just the poverty rate but the extreme poverty rate in 2009. The people who have been hardest hit in the downturn were already living in poverty (income under $21,000 for a family of four). The overall poverty rate rose from 13.2% of the population in 2008 (and 12.4% in 2007) to 14.3% in 2009.
The odds are very high that it has gone up again in 2010. The extreme poverty rate, or people living on less than half the poverty rate, income rose to 6.3% in 2009 from 5.7% in 2008. In other words, there are 19.0 million people in this country that are living on less than $10,500 for a family of four, up from 17.1 million in 2008. While that is not like the extreme poverty in the rest of the world where over a billion people are living on less than $2 per day ($1,460 per year for a family of four) that would be almost impossible for most of the people reading this to imagine living on.
If not for government programs, most notably extended unemployment benefits, the rate of poverty (and presumably extreme poverty as well) would have been much higher. How much higher? In 2009, 3.4 million people were kept above the poverty line by unemployment benefits, up from 900,000 in 2007 and under 500,000 in 2007. Those who rail about excessive government spending usually target programs like unemployment insurance and food stamps first, and are inclined not to touch programs that help the wealthy such as crop subsidies. Cuts to Pentagon spending are almost never on the table for them (Rep. Rand Paul of Texas is an exception to this).
One of the hallmarks of a third world country is an extreme disparity of wealth and income, with a small number of fabulously wealthy people (Carlos Slim of Mexico, for example, is now the richest person in the world) and vast numbers of people who are desperately poor. On standard measures of income inequality, the U.S. is already much closer to the average third world country than it is to, say, most of Western Europe.
The best single measure of income inequality is known as the Gini Index. It ranges from 0.0, meaning perfect equality, to 1.0 meaning that one family has all the income in a given country. Obviously, no country comes close to either extreme. The most equal country in the world is Sweden with a Gini index of 0.23, and the highest is Namibia at 0.707. The EU together has a Gini index of 0.31. In the U.S. the Gini index rose to 0.458 in 2009 from 0.451 in 2008.
The countries that were closest to the U.S. were Cameron (0.446), the Ivory Coast (0.446), Uruguay (0.452), Jamaica (0.455) and Argentina (0.457), according to the CIA. Do we really want to exacerbate that trend? Do we really want to turn this country into a Banana Republic? We are well on that path, and I see no need to continue down it, much less step on the accelerator.
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.
