How’s the US Economy Doing? Incomes Up, Inequality Stable

 

So let’s look at the numbers: US median household income rose for the third straight year in 2017, according to new Census Bureau figures. And that’s where the good news seems to stop, at least according to the top line numbers. The 1.8 percent growth rate in 2017 lagged behind the previous two years, when median household income rose 3.2 percent in 2016 and 5.2 percent in 2015. And while a scan of the numbers shows household income level to be the highest on record, that’s only due to changes in how the Census Bureau calculates the numbers. Essentially incomes are about the same as where they were at previous peaks in 1999 and 2007.

So that sort of seems like stagnation. But less so if you look at the income numbers calculated by the Congressional Budget Office. As economist Jason Furman notes in a tweet today, CBO data show median income surpassed its 2007 peak back in 2014. He also wrote that Census has some data issues, including “no household size adjustment, a biased inflation measure, no benefits, inconsistent treatment of govt programs, etc.” All stuff CBO handles better, according to Furman, although its numbers come out less frequently.

(And by the way, CBO numbers also show incomes up 42 percent from 1979 through 2014 for the broad middle class — measured as the 21st to 80th percentiles. And median household income is up 16 percent since 1999 through 2014. Is that stagnation? I report, you decide. The data  show increasing incomes even though growth during that 15-year period was slower than the previous 15-year span. But to my mind, at least, the numbers undermine the “no better off than decades ago” argument of the populist left and right.)

One more thing from the Census report: No change in income inequality. Good news for those who find that gap worrying. Indeed, there is reason to think inequality has been stable for a decade.

Published in Economics
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  1. DonG Coolidge
    DonG
    @DonG

    Spending power is what matters.  Transfer programs have made “middle class” income the same as “lower class” income or so I’ve heard.  I am sure that the poorest folks in American have better smart phones than any billionaire had 10 years go.

    • #1
  2. Mark Camp Member
    Mark Camp
    @MarkCamp

    James:

    The state of the economy, and whether it’s doing well or not, is determined by the temporal capital structure.  It takes time and many production steps to produce consumption goods.

    Your charts just show instantaneous aggregate values, as if that the capital structure is non-existent and investment is a single quantity which turns instantly into production goods the same year the savings are made.

    In other words, this data doesn’t allow you to make an assessment of how well the economy is doing.

    • #2
  3. RushBabe49 Thatcher
    RushBabe49
    @RushBabe49

    Inequality is NOT a bad thing, it is a good thing.  It should be what motivates those at the lower end of the earnings scale to better themselves and get a better job and EARN MORE.  The assumption is that Equality is the be-all and end-all of the economy, and it is emphatically not.  Economies that strive for equality will stifle innovation and make everyone equally miserable.  It’s a shame that you seem to have forgotten that.

    • #3
  4. Mark Camp Member
    Mark Camp
    @MarkCamp

    DonG (View Comment):
    Spending power is what matters.

    Good point!  One quibble: I would use “consumption” instead of “spending power”.  If I understand your point, then I think this would express it better. As Adam Smith taught, “Consumption is the purpose of production”.

    The problem with the term “spending power” is best seen in an example.  If household spending power increases by 1.5% one year, but real consumption is down 0.5%, then people are worse off, not better off.  In that case, the increased spending power would be purely an illusion created by money.

    • #4
  5. Mim526 Inactive
    Mim526
    @Mim526

    Mark Camp (View Comment):

    DonG (View Comment):
    Spending power is what matters.

    Good point! One quibble: I would use “consumption” instead of “spending power”. If I understand your point, then I think this would express it better. As Adam Smith taught, “Consumption is the purpose of production”.

    The problem with the term “spending power” is best seen in an example. If household spending power increases by 1.5% one year, but real consumption is down 0.5%, then people are worse off, not better off. In that case, the increased spending power would be purely an illusion created by money.

    Mark, I’m following on the concept of increased buying power vs whether a household is actually consuming (buying), and production depends upon consumption up to break even when profit margin comes into play.

    Question:  where/how do you fit saving/capital investing into evaluating the health of an economy?

    • #5
  6. Mim526 Inactive
    Mim526
    @Mim526

     

    RushBabe49 (View Comment):

    Inequality is NOT a bad thing, it is a good thing. It should be what motivates those at the lower end of the earnings scale to better themselves and get a better job and EARN MORE. The assumption is that Equality is the be-all and end-all of the economy, and it is emphatically not. Economies that strive for equality will stifle innovation and make everyone equally miserable. It’s a shame that you seem to have forgotten that.

    Agree, and add that I’m glad to see/hear the emphasis on work, unemployed going back to work, reports of wages rising…many good things.

    A large gap between lower income and higher income households (income inequality) when you have large segments of a country’s population either very wealthy or very poor (little to no middle class) is obviously not good.  Ideally, I like to see a greater number of people having the greater share of a country’s wealth (the upward mobility concept) and expanding middle class more than a shrinking one like what’s happening in places like California right now.

    • #6
  7. Ekosj Member
    Ekosj
    @Ekosj

    RushBabe49 (View Comment):

    Inequality is NOT a bad thing, it is a good thing. It should be what motivates those at the lower end of the earnings scale to better themselves and get a better job and EARN MORE. The assumption is that Equality is the be-all and end-all of the economy, and it is emphatically not. Economies that strive for equality will stifle innovation and make everyone equally miserable. It’s a shame that you seem to have forgotten that.

    Absolutely!     Why is it a bad thing that some people make a lot of money?    Aren’t they supposed to be rewarded for their good performance?     I’m proud to live in a country free enough that, if I invent a better mousetrap, the world ( and their wallets ) will beat a path to my door.   

    • #7
  8. Mark Camp Member
    Mark Camp
    @MarkCamp

    Mim526 (View Comment):
    Question: where/how do you fit saving/capital investing into evaluating the health of an economy?

    1. I think that the more accurately savings and capital investments reflect consumer preferences, the healthier the economy.
    2. People’s preferences between quantities of various current goods can be visualized as “demand curves”, as in the ordinary supply/demand theory.  The more accurately the kind, quantities, and prices of current goods reflects that demand, the healthier the economy.
    3. Their preference for current goods over goods consumed in the future can be visualized as a natural rate of interest.  If it’s 3%, then consumer preferences will most accurately be satisfied if they give up current consumption (that’s the definition of savings, for present purposes) to get about 103% of that amount in one year on investments.
      1. To use different words, the healthiest market price of an investment that is expected to produce a one-time cash flow of 100 dollars in one year will be around 1/103% of the current price, in real terms.  Account must be taken of  risk, maintenance, durability, repeated cash flows, and entrepreneurial profit.
    4. If government intervention artificially suppresses interest rates, there will be forced rather than voluntary savings, which will temporarily create fictitious profits and a boom, followed typically by a bust when the non-market-driven projects are liquidated, firms contract, and companies go bankrupt.

     

     

    • #8
  9. Mim526 Inactive
    Mim526
    @Mim526

    Mark Camp (View Comment):

    Mim526 (View Comment):
    Question: where/how do you fit saving/capital investing into evaluating the health of an economy?

    1. I think that the more accurately savings and capital investments reflect consumer preferences, the healthier the economy.
    2. People’s preferences between quantities of various current goods can be visualized as “demand curves”, as in the ordinary supply/demand theory. The more accurately the kind, quantities, and prices of current goods reflects that demand, the healthier the economy.
    3. Their preference for current goods over goods consumed in the future can be visualized as a natural rate of interest. If it’s 3%, then consumer preferences will most accurately be satisfied if they give up current consumption (that’s the definition of savings, for present purposes) to get about 103% of that amount in one year on investments.
      1. To use different words, the healthiest market price of an investment that is expected to produce a one-time cash flow of 100 dollars in one year will be around 1/103% of the current price, in real terms. Account must be taken of risk, maintenance, durability, repeated cash flows, and entrepreneurial profit.
    4. If government intervention artificially suppresses interest rates, there will be forced rather than voluntary savings, which will temporarily create fictitious profits and a boom, followed typically by a bust when the non-market-driven projects are liquidated, firms contract, and companies go bankrupt.

    Great summation!  I hear very little about #4 even on business news channels.  

    Was also thinking of debt…specifically high debt such as we have in US (private and govt).  High debt/income ratios for companies, paying off debt means less disposable income, etc.  And I really wish Congress would at least freeze the expanding US budget, and use increased revenues to pay down more of our national debt.  Get our credit rating up again whatever borrowing we do will at least cost less.

     

    • #9
  10. Stad Coolidge
    Stad
    @Stad

    James Pethokoukis: One more thing from the Census report: No change in income inequality. Good news for those who find that gap worrying. Indeed, there is reason to think inequality has been stable for a decade.

    I really wish we would get rid of the concept of “income inequality”.  People with certain skill sets earn bigger incomes.  People with little or no skills earn significantly less.  It will always be this way.  Lebron James will earn more in five minutes on the court than I ever did in one year – and it’s perfectly fair!

    However, to reduce this so-called disparity, the only way to do it is to take from those on top and give it to those on bottom.  This is only done by government, and only after government gets its cut . . .

    • #10
  11. Mark Camp Member
    Mark Camp
    @MarkCamp

    Mim526 (View Comment):

    Was also thinking of debt…specifically high debt such as we have in US (private and govt). High debt/income ratios for companies, paying off debt means less disposable income, etc

    The healthier the economy, the more sustainable the current flow of debt payments.  

    People who were taught Keynesian-based economic theory don’t understand that the current economic aggregate data are consistent with an economy that is more healthy and with one that is less healthy.  In a healthy economy, the accounting profits that allow companies to maintain their current levels of spending and debt payments are sustainable because consumer demand is consistent with that future flow of funds (households voluntarily saved the money, so they don’t have as much cash to spend).

    In an artificial boom, those debt payments and the additional flow of bank and other credit will not be forthcoming for long enough to sustain the investments.  Credit will contract, relatively, and there will be layoffs and reductions in output, until the mis-timed capital investments are liquidated.

    • #11
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