August 16, 2008

The Pernicious ‘No Real Economic Progress’ Myth

Filed under: Economy,Taxes & Government — Tom @ 11:30 am

Note: This was originally posted at Pajamas Media on Thursday, with the subheadline, “The Bush years have been better for Americans’ wallets than most critics admit.”

Consider it 2008′s reality-based alternative to David Cay Johnston’s former annual flights of fantasy with incomplete IRS data at the New York Times. Johnston left the Times earlier this year after taking a buyout.

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The Conventional Wisdom (CW) is that under President Bush:

  • The country’s economy has grown very little, and incomes have never gotten back to where they were before the recession.
  • That the rich have been getting richer, especially because of the Bush tax cuts, while, the poor and the middle class have been getting ever fewer crumbs.

While its performance hasn’t been as good as it could have been, the Bush economy has acquitted itself well enough that the CW should be discarded.

Let’s start with the overall economy.

Based on quarterly economic growth data from the government’s Bureau of Economic Analysis (BEA), the economy is almost 19% bigger now than it was at the beginning of the fourth quarter of 2001, the first quarter that the new president’s first budget was in effect (three of the five quarters prior to that had negative growth, first because of the bursting of the Internet bubble, and in the case of the third quarter of 2001, the September 11 terrorist attacks). Real growth during that time has averaged 2.56% — not stellar, and not as good as the best of the Clinton years, but certainly not the awful performance the CW typically assumes.

Why hasn’t it been better? I’m not alone in arguing that the post-Enron wave of burdensome regulation imposed by the Sarbanes Oxley (Sox) law has held the economy back, both by imposing onerous compliance costs on publicly-traded companies, and by largely shutting off the initial public offering market to all but the most stellar candidates. The next president and Congress are going to have to do something to reduce the excesses of Sox if we are ever to return to consistent growth of 4% or more.

Next, let’s look at overall income growth (original data obtained from BEA; this other BEA link has figures for Nominal Per Capita Income that are almost all within $10 of the figures listed below):

RealPerCapitaIncomeChart0808

At the end of 2007, the average American was almost 8% better off than in 2002 ($26,078 divided by $24,176), the trough of the post-bubble, post-9/11 recession. Again, this is nothing to party hearty over. But keep in mind that BEA data excludes capital gains, the benefits of which tend to skew towards those with higher incomes; so the measurements listed above better reflect what “working people” are seeing than other available measurements.

Many of the same people who deride the Bush Economy, especially its tax cuts, won’t face up to three very important points illustrated in the chart above.

First, the Clinton Economy didn’t become anything special for the average person until 1997, the first year of Bill Clinton’s second term. Why is that? It certainly wasn’t because of the tax increases of 1993. It’s clear from the chart that, if anything, they held back an economy that, given the technology improvements that were occurring at the time, should have been roaring after the early-1990s recession.

It was the capital gains tax cut of 1997 that caused the big personal income gains. That cut actually began having its desired effect in the year it was passed because the Clinton administration telegraphed its desire for it shortly after the 1996 election. Investors assumed correctly that passage by the then Republican-controlled Congress was assured. Thanks to that legislation, real per capita personal income skyrocketed over 12.5% during the administration’s final four years.

Second, real income during the Bush era didn’t take off until the 2003 investment-related tax cuts on capital gains and dividends took hold. Their positive impact on real income wasn’t visible until 2004. The 7.5% growth in real per capita income from 2004-2007 is also not as good as the best of the Clinton years, but, as noted earlier, you can lay a lot of the blame for that on Sox.

The third point is best made with a graph containing the chart’s final seven years, this time expressed in 2001 dollars:

RealPerCapIncomeGrowth2001to2007

As you can see, the claim that “incomes have never gotten back to where they were before the recession” hasn’t been true since 2004.

But wait, haven’t all of those income benefits gone to the rich, leaving nothing for the poor and middle class?

Hardly.

This data from the Census Bureau released last year (PDF can be retrieved by going to this web page) shows that the upper income limit and the mean household income of every income group presented went up in real terms from 2003-2006:

CensusIncomeQuintilesEtc2003to2006

As I said when I posted on this last year, “I’m not claiming these results are where I would want them to be, but they are all positive. In fact, the household results show more real improvement at the lower income levels than is found in the middle and upper-middle.”

I should also point out that the Bush rate reduction in the lowest taxable income bracket from 15% to 10% has increased spendable income for those in the lowest income quintiles disproportionately since 2001, while helping all but the very highest earners.

Since we’re about to enter presidential campaign silly season, it’s probably too much to expect politicians to challenge the CW claims noted at the beginning of this column. But one would hope that reality-based observers know better.

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2 Comments

  1. I would question the use of Real Per Capita Personal Income as most representative of true “economic progress.”

    The Census Bureau has a footnote (#22) in this document (http://www.census.gov/prod/2007pubs/p60-233.pdf) that states: “22 Unlike medians, per capita and means are affected by high incomes.”

    So, to the extent that high incomes have gone higher, the per capita data may be skewed.

    I’m sure you’re aware that the Median Household Income number (page 4 of that same publication) tells an entirely different story.

    Comment by Invictus — August 17, 2008 @ 10:55 am

  2. If you’re referring to the second table, I think the cap gains flush-out referred to in the post largely solves that problem.

    If you’re referring to the third, that already does the quintile thing, and I went to it specifically to overcome whatever objections might remain to the second.

    I don’t think the Page 4 story you’re referring to with Median HOUSEHOLD income going up by about 1/3 in 40 years refutes per-capita info. Both have weaknesses. Per-capita flushes away the problems with changes in household size, which is trending downward (how fast, I haven’t looked, but I think it’s pretty well-known that household size is quite a bit lower now than 40 years ago; it also doesn’t take much of a household size reduction to cause a diff between per capita and household results).

    More recently in the Page 4 graph, 2005 and 2006 appear to be higher than 2001; 2005 appears to be higher than 2000. This table I believe DOES have cap gains in it (Census does, the BEA I used doesn’t, IIRC), which, along with the options exercises, bubble-driven cap gains boom, and investment-firm windfalls of 1997-2000, would explain why 1998-2000 are showing as better. I think “the rich” garnered most of that excess, and that the “working people” trendline would be straighter through those years.

    Tom

    PS. Posted your e-mail and this one to the blog. Don’t know why your problems are occurring. The comment spammers aren’t having any problems….

    Comment by TBlumer — August 17, 2008 @ 10:55 am

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