Progressives claim that despite the (old) New Deal, the Great Society, and Obamacare — the incomes of the vast majority of Americans have stagnated for three decades and that income distribution remains disturbingly unequal and must be fixed with more progressive taxes.
Who would know better than Joseph Stiglitz? After all, he is a Nobel laureate in economics. In 1972, I took Stiglitz’s course on microeconomics in Yale University’s PhD program. He gave me a good grade, so I like him.
In a New York Times article last month titled “Progressive Capitalism Is Not an Oxymoron,” Stiglitz lamented: “Despite the lowest unemployment rates since the late 1960s, the American economy is failing its citizens. Some 90 percent have seen their incomes stagnate or decline in the past 30 years. This is not surprising, given that the United States has the highest level of inequality among the advanced countries and one of the lowest levels of opportunity — with the fortunes of young Americans more dependent on the income and education of their parents than elsewhere.”
Freshman Rep. Alexandria Ocasio-Cortez (D-NY) must have read Stiglitz’s article. She recently tweeted that “working Americans haven’t gotten a raise in 30 years despite unprecedented growth & living costs have exploded.”
This certainly sounds like a problem that needs to be fixed. But hold on: There would surely be a revolution in America if 90% of our citizens have suffered income stagnation or worse, as Stiglitz claims has happened for the past 30 years — i.e., since 1989. While real GDP is up 110% since then, just 10% of Americans have benefitted, he claims. Is it possible that the great silent majority has enjoyed no improvement in standards of living since 1989? No freaking way, professor!
I have taken deep dives into the data on standards of living and income inequality. Nowhere can I find a credible series that confirms a 30-year drought in standards of living for almost all Americans. Instead, the data show that Americans have never been better off. I’m not making a political statement, just a statement of facts (which, I acknowledge, do have political implications). Consider the following:
1. The worst data series ever: Stiglitz must be relying on annual data compiled by the Census Bureau on real median household income (Fig. 1). I hate this series with a passion because it is an extremely flawed measure of income; yet it is widely used by Progressives to prove their claim of widespread and prolonged income stagnation. It is up only 13% since 1989 through 2017. The flakiness of this measure is confirmed by the modest 27% increase in real mean household income (which gives more weight to the rich) since 1989 despite a 52% increase in real GDP per household over this period.
In my book, Predicting the Markets, I discuss the problems with the Census income measure, calling it the “income stagnation myth.” It is woefully misleading, because it grossly underestimates Americans’ standards of living. It is based only on surveys that focus just on money income. On its website, the Census Bureau warns: “[U]sers should be aware that for many different reasons there is a tendency in household surveys for respondents to underreport their income.”
Furthermore, the Census measure of money income, which is used to calculate official poverty rates, is missing key noncash government-provided benefits that boost living standards for many Americans, including Medicare, Medicaid, the Supplemental Nutrition Assistance Program, and public housing. The Census series is a pre-tax measure of income. So it doesn’t reflect the Earned Income Tax Credit and the Additional Child Tax Credit that many low-income households receive from the government.
That’s insane. The government’s bean-counters are excluding many of the beans provided by government programs designed to reduce income inequality. So the Census series will never show the progress made by Progressives’ pet programs, seemingly calling for more such programs to fix a “problem” that might have been mostly fixed by the existing programs already. (Software programmers call this phenomenon a “Do Loop,” which is to be caught in a series of actions that repeat endlessly.) Enough will never be enough. No wonder the Progressives love this series, while I hate it.
2. Price deflator makes a big difference: The Census series uses the Consumer Price Index (CPI), which is based on an indexing formula that gives it an upward bias over time. That’s simple to fix by dividing the nominal version of the Census measures of median household income by the personal consumption expenditures deflator (PCED). Since 1989 through 2017, it is up only 7.4% using the CPI, but up 21.5% using the PCED (Fig. 2). That blows away the income stagnation myth without much effort.
3. Smaller households distort income stagnation and inequality measures: Another problem with any income series on a per-household basis is that growth of the singles population (aged 16 and older) continues to outpace that of the married population. It’s been doing so since the start of the data in 1976 (Fig. 3).
What’s changed in recent years is that the former cohort exceeds the latter, as singles are getting married later in life and unattached seniors are living longer (Fig. 4). That means more single-person households, which tend to have lower incomes than married-couple households. That trend will weigh down both median and mean per-household incomes, exaggerating income stagnation and inequality.
4. The true story is a happier one: While the political agendas of Joe Stiglitz and other Progressives rest on a flawed measure of income, plenty of other indicators tell a different story. Over the past 30 years, from March 1989 through March 2019, inflation-adjusted average hourly earnings of production and nonsupervisory workers is up 32%, using the PCED and a measure of wages that covers more than 80% of payroll employment (Fig. 5 and Fig. 6). That is not stagnation.
Median measures of income are hard to find. However, the Bureau of Labor Statistics (BLS) has a quarterly series on pre-tax “median usual weekly earnings of full-time wage and salary workers” that starts in 1979 and is based on survey data. Dividing this series by the PCED shows that it is up 25% since the start of 1989 (Fig. 7). Clearly, American workers haven’t been reporting stagnant paychecks over the past 30 years to the BLS survey takers.
I believe that the best measures of standards of living are the disposable income and consumption series compiled monthly by the Bureau of Economic Statistics on a per-household basis. Deflated by the PCED, the former is up 61%, while the latter is up 67% from March 1989 through March 2019 (Fig. 8). (Real GDP per household is up 54% over this 30-year period.)
Admittedly, these alternative measures of standards of living are means rather than medians, but the rich don’t eat much more than the rest of us. There aren’t enough of them to make a significant difference to average measures of income and spending. IRS data for 2016 show that the so-called 1% of taxpayers earning more than $500,000 in adjusted gross income included 1.3 million of the total 150.3 million returns filed that year. Moreover, as noted above, there are fewer mouths to feed per household as the population of adult singles continues to grow faster than married couples.
The bottom line: American households are enjoying record standards of living. Income stagnation is a myth. Income inequality isn’t a myth but an inherent characteristic of free-market capitalism, an economic system that awards the biggest prizes to those entrepreneurs who benefit the most consumers with their goods and services. Perversely, inequality tends to be greatest during periods of widespread prosperity. Rather than bemoaning that development, we should celebrate that so many households are prospering, even if a few are doing so more than the rest of us.
Ed Yardeni is president of Yardeni Research, Inc., a provider of global investment strategy and asset allocation analyses and recommendations. He is the author of “Predicting the Markets: A Professional Autobiography.” Follow him on LinkedIn, Twitter, and his blog. Institutional investors may sign up for a four-week complimentary trial to his research service at https://www.yardeni.com/trial-registration-linkedin/ .
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