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.
Yeah baby. We in the highest fifth are making a comeback!
Comment by Kevin Irwin — November 12, 2005 @ 8:53 pm
The only cure for poverty is wealth. It is clear that plenty is being created. Uninterfered with, it will redistribute thru commerce.
Comment by triticale — November 13, 2005 @ 9:51 am
#2, very good point, esp in that I didn’t mention in the post that the Census Bureau ignores capital gains (I’m assuming that means they DON’T ignore interest and dividends).
Of course they’re also ignoring two other things (which they should ignore), but which affect a person’s feeling of financial well-being. On the upside, it’s home appreciation. On the downside, it’s the debt and credit buildup.
Comment by TBlumer — November 13, 2005 @ 12:09 pm
Uninterfered with, it will redistribute thru commerce.
Only if interest rates are low.
Comment by Kevin Irwin — November 13, 2005 @ 2:47 pm
4, Kevin, I don’t quite understand. If interest rates are low, as I think you’re assuming, investors will want to pursue returns on stocks or “angel” investments. If rates are high, they might decide to invest less and put more money in the banks. But then the banks have more money to lend (though at higher rates), and business borrowers who think their returns will be a lot greater than even the higher interest rates will still be borrowing.
Though I suppose you have an alternate thought…
Comment by TBlumer — November 13, 2005 @ 2:55 pm
Economic Growth Challenge Answered
I asked Tom Blumer a question recently: the economy is on a record-setting growth trend, but have lower and middle-income earners seen improvements based on that growth?
I personally would be unwilling to either blame or …
Trackback by Dean's World — November 14, 2005 @ 3:04 pm
Click the Table H-3 link to see what’s happening with the top 5%, and the story changes some. I can’t imagine how much it’s changed after Bush tax cuts. I’d love to see a table for top 1% and top 0.1%.
Comment by Brian S. — November 14, 2005 @ 5:34 pm
The top 5% increases/decreases are as follows for the top 5% and top quintile from above (remember that you have to look at the bottom half of the table for the numbers that have inflation removed, which I just bolded in the post to make sure everyone catches):
- 2001-2004 — minus 4.9% vs. minus 2.7% above
- 1989-2004 — plus 30% vs. plus 20% above
- 1974-2004 — plus 82% vs. plus 59% above
Looking at the most recent three years, the top 5% have taken a harder hit than the top 20% as a whole (the 15% not in the top 5% are probably about minus 2.0%). That’s a hard enough hit for the top 5% that the tax cut probably didn’t take most of them into positive territory (unlike all other groups).
Over the long hauls of 15 and 30 years, the top 5% have done better than the other 15% in the top quintile, but the last few years appear to have seen that come to a temporary halt. This seems to contradict the knee-jerk “rich getting richer” claims, but information on capital gains and the like would have to be included to get a total handle on this.
Rush’s free home page at rushlimbaugh.com has links to IRS information about the share of federal income taxes paid by the top 1% and maybe even the top 0.1%, but I don’t know what else might be available there.
Comment by TBlumer — November 14, 2005 @ 5:55 pm
If one looks at statistics dealing with the rich (millionaires for example), the vast majority of them tend to be 1st generation rich - that is to say, self made.
In that context, the rich getting richer makes sense - with a greater ability to leverage technology, those who work harder will be able to accomplish much more than they did in the past - the rich will get richer. The poor, who don’t really accomplish anything anyhow, stay poor - surprise, surprise.
Comment by nordsieck — November 15, 2005 @ 5:51 am