November 12, 2005

The Saturday Challenge: The Economy Is Doing Well. How About Income Growth? (and a Bonus Look at the Long-Term)

In this well-received post a couple of weeks ago, I noted that the current economy has achieved 10 quarters in a row of annualized 3%-plus Gross Domestic Product (GDP) growth for only the second time in the 57 years quarterly GDP stats have been kept (the other occurrence was 13 quarters in a row from 1Q 1983 to 2Q 1986), and how the business press was downplaying this performance.

Dean Esmay wonders how various income groups are faring in this overall prosperity.

Good question. Let’s look, and while we’re in the neighborhood, let’s look at a longer piece of the historical record.

The source material is from the US Census Bureau. I looked at income data for households through 2004; I wanted to look at families, too, but the families data only went through 2003 (households will do for the longer-term look).

Note that the Census Bureau’s definition of income is essentially what most of us would think of as gross income (before taxes, etc.) but does NOT include noncash benefits such as food stamps, health benefits, and subsidized housing.

So here is the table:
Table H-3–Mean Household Income Received by Each Fifth (quintile) of Households, All Races (top 5% column at Census table omitted due to width)
(listed data is from the bottom half of the table that removes inflation for the years 1974 through 2004; this table tells you the average earnings, from left to right, for each income quintile of households)


Now, let’s look at the past few years:

  • From 2001 to 2004, the period you could argue Mr. Bush is responsible for (because it uses 2001 as the base, and the real impact of any administration policies would not begin to be felt until 2002), real household income has fallen in the income quintiles as follows:
    Lowest — minus 5.1%
    Second — minus 3.4%
    Third — minus 2.3%
    Fourth — minus 1.7%
    Highest — minus 2.7%
  • BUT…… This doesn’t take into account the impact of the Bush tax cuts on everyone, and the expansion of the Earned Income Tax Credit on the Lowest and Second quintiles (remember the Census Bureau’s definition above). It is very likely that if these were factored in, every quintile’s after-tax income would show an increase (probably not by much, but positive nonetheless). Remember that the tax cuts took the lowest federal tax bracket on the first $15,000 of taxable income from 15% to 10%, and that the Earned Income Tax Credit is even available to low-income singles now.
  • I would say that we will have to see 2005 Household numbers, and both 2004 and 2005 Family numbers, to get a definitive answer to Dean’s question as to whether the economy’s consistent 3%-plus growth spurt (which after all did not begin until the second quarter of 2003) will end up positively impacting real incomes.

As to the long run:

  • From 1974 to 2004 and 1989 to 2004, real household income has risen in the quintiles as follows:
    Lowest — plus 10% and 0%
    Second — plus 13% and plus 3%
    Third — plus 19% and plus 4%
    Fourth — plus 30% and plus 9%
    Highest — plus 59% and plus 20%
  • Of course, both sets of figures support the “rich get richer” position, but to me it forces forces a better question: What is holding certain members of the lowest two or three quintiles back? The argument gets back to the decades-old “not enough goverment help” vs. “not enough personal responsibility” vs. “the system is rigged” vs. “crime and lousy schools” vs. “many other valid points” debate, which there is not space to engage in here, except to point out that the data in this post show why the debate is so important.
  • As I mentioned in my comment at Dean’s World, it’s always important to note that there is a great deal of mobility between income groups in this country, meaning that someone who is poor today, or who is in a family that is poor today, is fairly likely not to be poor 20 or 30 years from now. See “Income Inequality + Economic Mobility = Long-Term Prosperity” for more on that.

Positivity: Archaeologial Evidence Found Supporting Biblical Goliath

Filed under: Positivity — Tom @ 12:29 pm

It’s not proof that “David vs. Goliath” happened, but the latest finding shows that the historical context is accurate, which is a pretty big step:


This Weekend’s Unanswered Questions (111205)

Another installment in a nearly-regular series of mysteries and pseudo-mysteries (usually 3-4) this inquiring mind would like to have answers for (some links included may require free registration):

QUESTION 1: How overdue is this?

Finally, not everyone going through airport lines will be equally suspect as a terrorist:

Starting in June, some fliers can skip long security lines

A program that speeds pre-screened travelers through security will begin June 20, launching what airports hope will be a new era of checkpoint screening.

Transportation Security Administration chief Kip Hawley announced the start date Thursday at a congressional hearing. The Registered Traveler program will allow people who have passed a background check to go through checkpoints quicker. Participants must pay a fee, go through a records check for criminal warrants, and provide a fingerprint and eye scan. They’ll be checked against databases of known terrorists.

Airports will decide how much they’ll charge. In Orlando International Airport’s test program, Registered Travelers pay $80 a year.

Once in the program, travelers are entitled to use potentially much shorter lines at participating airports. More than 50 airports — including almost every major one in the USA — are interested in using Registered Traveler.

The wonder is that this got past Transportation Secretary Norm (no profiling) Mineta. And what an outrageous waste of resources that all passengers not in the Registered Traveler program will be just as vulnerable to full-body search as a young Arab “student” who bought a one-way ticket.

QUESTION 2: How do people who are so wrong in their predictions keep their jobs?

The Free Market Project notes previously warnings that the weak dollar was going to sink the economy:

The media weren’t just wrong about the future direction of the dollar and the end to foreign purchases of U.S. Treasury paper. They also missed the mark on their forecasts of an economic downturn. In fact, not only did the dollar’s value fail to “[put] the brakes on the country’s economic recovery,” but, instead, the gross domestic product grew by 3.8 percent in the first quarter, 3.3 percent in the second quarter, and 3.8 percent in the third quarter.

Curiously, even after the dollar had clearly bottomed, the media continued to focus on its “weakness,” as well as espouse new reasons why its value had ominous portent for the nation. Mellody Hobson of ABC News said this on “Good Morning America” on February 23 of this year:

“Well, it affects them in a couple of ways. One, we saw oil go up yesterday. It’s now over $51 a barrel, almost $2 at the pump around the country. More in certain areas. So, that’s a very specific effect that comes right out of your pocket because oil trades in dollars. So, when the dollar gets weak, the oil producers raise the price to make up for the difference.”

It was fairly common of the media earlier in the year to blame rising oil prices on a declining dollar. However, as the dollar has increased by roughly 15 percent this year, while oil has increased by about 40 percent, it was obviously specious to suggest such an inverse relationship existed between the two.

Americans could learn a key lesson from the media’s poor prediction skills that many professional investors have known for decades: When the mainstream press begin to recognize a trend in anything and focus a tremendous amount of attention on it, that trend is probably very close to being over.

I would only add the belief that, because of who is in The White House, it was an exercise in wishful, hopeful thinking for many members of the business press.

QUESTION 3: Does anyone remember McDonald’s doing this?

Maybe they have, but I don’t recall them ever announcing it:

Wendy’s to close up to 60 hamburger outlets; mulling Tim Hortons closings

Wendy’s International Inc. plans to close 40 to 60 Wendy’s outlets and could close some of its Tim Hortons locations in the U.S., including some of the former Bess Eaton restaurants acquired in 2004.

“These (Tim Hortons) units have produced lower-than-anticipated sales in their first year of operation, which has negatively affected profitability in the U.S.,” the company stated in a filing with Securities and Exchange Commission.

….. The company said it will close between 40 and 60 underperforming Wendy’s stores that are negatively impacting its bottom line.

The problems with the other brands are understandable, and typical. McDonald’s has had the same difficulties. But the flagship-brand store closings strike me as a bit more ominous than the company is letting on.

QUESTION 4: How many people know this?

From the Ottawa Sun (HT Outside the Beltway): “103 of the names on the Vietnam Memorial are Canadian.” Even so:

There’ll be words spoken in the cold November air about our brave soldiers who fought and died in World War I and World War II and the Korean War, but there’ll be no words spoken about the long and terrible and bloody conflict known as the Vietnam War.

How sad.