Commentary | Wages, Incomes, and Wealth

The Catch-Up Economy

Opinion pieces and speeches by EPI staff and associates.


The Catch-Up Economy

By  Jared Bernstein 

As summer draws to a close, the mind inevitably turns to … benchmarks.

A benchmark is a number you use to help put another number in context. It answers the economist’s pesky question: Compared to what? Now is the time to be thinking about benchmarks because on August 29 the government will release findings on household income and poverty for 2005.

In a world where most of our economic information is about broad averages, like gross domestic product, industrial production and so on, these statistics offer important insights into how families of different income classes fared last year. Every five minutes, we’re updated on the latest squiggle in the stock market, but only once a year the Census Bureau tells us how many children are poor in America.

The challenge is in the interpretation. While it’s tempting to start and stop with the simplistic view of “poverty up, bad; poverty down, good,” that level of analysis will not serve us well. Instead, we should evaluate where we are now compared to the past, and what we would expect at this stage of our economic expansion.

Most of us who follow such things expect positive results: median household income—the income of the typical household, smack dab in the middle of the income scale—should rise a bit in real (inflation-adjusted) terms, and poverty should fall.

What underlies our optimism? First, 2005 is the fourth full year of an economic recovery that began in late 2001. As we would expect, poverty rose and household income fell in that recessionary year. But the negative trend has persisted in each recovery year since, and that has taken us by surprise.

The poverty rate, for example, rose each year from 2002 through 2004, a historically unprecedented trend. Since 2000, when poverty bottomed out at 11.3 percent, it has climbed to 12.7 percent in 2004, adding 5.4 million persons, including 1.4 million children to the ranks of the poor.

That’s not supposed to happen in an economic recovery, and it is a telling reminder of just how unbalanced this economy has been. If you’re wondering where the growth has been going, we recently learned that corporate profits as a share of the economy are at their highest level on record.

It’s also a sharp reversal of the poverty trend of the 1990s, when an all-too-unique period of broadly shared prosperity pushed poverty rates into a seven-year slide, with the biggest benefits accruing to the least advantaged. Child poverty among African Americans, for example, fell by 14.9 percentage points over these years, more than twice the overall decline for all children.

Likewise in the latter 1990s, median income grew at a rate close to that of productivity, implying a pause in the inequalities that have become such a problematic wedge between growth and well-being.

Since then, prosperity has eluded most in the middle class on down. The longest jobless recovery on record helped generate the negative results the Census Bureau has reported through 2004, but with most labor market indicators trending up since then, we expect enough of the growth to reach the bottom half to begin to reverse the slide.

But there is almost no way the 2005 results will repair the damage done thus far. The income of the median household is down $1,700 (in 2005 dollars) since 2000, and it would take an unusually large gain to make that up in one year. Poverty is likely to decline by only a few tenths of a point, and will remain well above its 2001 level of 11.7 percent.

By the fourth year of each of the last five recoveries for which we have data, the poverty level had fallen below what it was at the end of the recession. For example, the early 1990s recession ended in 1991, when poverty stood at 14.2 percent. Four years later, in 1995, it was 13.8 percent. Based on the 1991-1995 pattern, the 2005 poverty rate should be 11.3 percent, which would be analogous to the 1990s benchmark. No one thinks our 2005 poverty rate will come in at that level.

Note that getting back to the previous income peak and poverty trough is not that demanding a benchmark. Productivity over this recovery has been quite stellar—up 14 percent just since late 2001. Most economists assume this automatically translates into higher living standards, but don’t tell that to the median family.

If the August 29 release reveals that incomes rose for middle and low-income families, we will applaud even meager gains. Our applause should be tempered, however, by the knowledge that we are behind where we ought to be.

Armed with appropriate benchmarks and reference points, we must place the upcoming Census results in the context of an economic recovery that has produced an alarmingly large gap between growth and the living standards of most families. Hopefully, the gap is closing—but it’s been a long time coming, and we’ve got a long way to go.

Jared Bernstein is senior economist at the Economic Policy Institute in Washington, D.C.


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