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Critiquing Misleading White House Statements About the Economy, Part 1: Income Growth and Median Earnings

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This Snapshot is part of a series; see also part 2, part 3 and part 4 of the series, or print the entire series.Adobe Acrobat (PDF) 

Snapshot for May 3, 2006.

Critiquing misleading White House statements about the economy, part 1

Income growth and median earnings

A recent White House news release contains this claim regarding income growth:

Real disposable income has risen 2.2 % over the past 12 months. Since January 2001, real after-tax income per person has risen 8.3%.

Since income growth is the primary determinant of living standards, the validity of this claim is central to the White House’s argument that their policies are lifting the living standards of most families. The problem here is that the measures cited are of limited use in judging the extent to which the recovery is truly reaching most families. 

First, these measures represent the aggregate of trillions of dollars in income generated by the economy.  Real disposable income (inflation-adjusted income after taxes) always tends to expand in recoveries because more persons are working.  Disposable personal income (DPI) also includes income from business ownership, interest, and dividends, but is also lifted significantly by the high levels of executive compensation, as reflected in recent news reports (see The New York Times, “A cozy arrangement.” April 13, 2006).  

To measure the effectiveness of the administration’s policies, the question is not whether real DPI is growing, but how fast are the growth rates relative to past recoveries.  By both measures cited by the White House, the growth over this business cycle is considerably weaker than the average for past cycles.

As shown in Figure A, DPI per capita has gained 8.4% since March 2001, but the average for comparable periods is 11.1%.1 In addition, the 2.3% gain in real DPI over the past year—2005q1-2006q1—falls short of the average growth of 3.6% over comparable periods in past recoveries.

Figure A. Growth in real disposable personal income per capita, this cycle vs. past averages

The second problem with the White House’s claim is that the increase in inequality in recent years has meant that average income growth is less descriptive of how the typical family is faring.  As growth has flowed up the wealth scale, middle and lower income households have not enjoyed even the modest growth shown in the average income figure above.  Median family income declined not only in the recession year of 2001, but has consistently fallen in real terms through 2004 (down 2.9 %, or $1,500). Though median income results for 2005 will not be available until late this summer, the trend in median earnings, shown next, suggests things are unlikely to have improved much since 2004. 

Figure B shows the trend in real median earnings of full-time workers since 2001. Median earnings, representing the paychecks of the typical working person, have stagnated or declined since 2002, and by the end of the period are little changed from where they began, despite four years of recovery and strong productivity growth.

Figure B. Real median earnings, full-time workers, 2001q1-2006q1

The gap between the per capita income growth and median earnings is a stark reminder of the unbalanced nature of the current recovery, one that contradicts the White House’s rhetoric regarding the success of their policy agenda.

Coming next: Setting the record straight on the White House’s claims regarding job growth: U.S. vs. Europe.  

1. Notice that our comparison starts in March 2001 instead of January 2001. In order to make sound comparisons with past cycles, we examine the first five years of business cycles that have lasted at least as long as the current one.

This week’s Snapshot was written by EPI Economist  Jared Bernstein.  

This Snapshot is part of a series; see also part 2, part 3 and part 4 of the series, or print the entire series.Adobe Acrobat (PDF) 

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