According to the Census Bureau’s latest report, median household incomes rose 6.8% between 2018 and 2019. Ignoring the nonresponse concerns and taking this at face value, this represents a significant step towards reclaiming the lost decade of income growth caused by the Great Recession. The economy continued to grow in 2019 and the unemployment rate averaged 3.7% over the year. Increasing earnings as well as slowing inflation between 2018 and 2019 contributed to significant gains in household incomes.

And yet there’s reason to put a big old asterisk on the data for 2019. Although the data release includes information about 2019 only, the data was collected between February and April of this year, right as the pandemic began to spread rapidly and most of the country was locked down. This Census paper discusses some of the impacts the pandemic had on data collection efforts. Overall, nonresponse increased significantly and was more strongly associated with income than in previous years, with nonresponse decreasing as income increases, meaning that income data could be skewed higher than it actually was. Respondents were also less likely to be Black and more likely to be white or Hispanic. Using that information, researchers at the Census provided new estimates for household income over the last four years, provided as a separate working paper and not adjusted in the official Census report. Figure A provides some perspective on those changes along with other data changes in the last several years. Solid lines are reported CPS ASEC data; dashed lines prior to 2013 denote historical values imputed by applying the redesigned income methodology in 2013 to past trends; and the dotted lines since 2016 represent the new imputed values from the Census working paper on nonresponse rates.

Figure A

When correcting for nonresponse bias in 2019, the Census found that real median income was $66,790, 2.8% lower than reported in the official release. This represents a 4.1% increase in median income between 2018 and 2019, significantly lower than the official 6.8% figure. While 4.1% is still welcome growth, it’s not nearly as strong as the reported 6.8% would appear. After accounting for the nonresponse bias (as well as the 2013 redesign), median household income grew 3.6% between 2000 and 2019 versus 6.5% when failing to account for nonresponse bias. Further, nonresponse bias seems to impact those with lower incomes more than higher, leading to larger overestimates of income and income growth at lower incomes versus higher, suggesting greater income inequality than reported in the Census report.

While excitement over what looked like strong growth must be tempered by nonresponse bias, the deep recession that came with the pandemic this spring overshadows any of those differences. By any measure, the data for 2019 is terribly outdated. However, we may look to 2019 as the most recent labor market peak and see how well it performed. While the labor market continued to strengthen, as a metric of full employment, 2019 still fell short.

Healthier income growth in 2019 on top of two years of slower income growth illustrate just how long it has taken for the gains to a growing economy to reach those workers and households. To achieve just 3.6% growth at the median since 2000, less than 0.2% growth annually over the last 19 years, is a low bar for growth in living standards. Further, much more income growth is needed to close persistent racial disparities. Even in an economy as strong as 2019, median Black and Hispanic households had significantly less income than white households, bringing in only 61 and 74 cents on the white dollar, respectively. And, if what we’ve already learned about lower response bias is any indication, these reported income differences might be even larger in actuality.

Persistent racial disparities—deeply rooted in historical and ongoing social and economic injustices—contributed to greater susceptibility to the pandemic and the ensuing recession for Black and Hispanic workers and families. Now, because of the pandemic, we will once again be trying to recover lost ground for years to come. Policymakers should take heed of the policies that worked to help produce positive outcomes in 2019 and help get us back on the road to full employment sooner rather than later.

While these data tell us very little about the 2020 COVID-19 pandemic and recession, the report provides some important lessons about what is now the most recent business cycle peak. Readers should not use these data to get a read on today’s economy, because the pandemic has unquestionably increased the poverty level, reduced incomes, and reduced access to health insurance. Also, there are significant concerns about data quality, given the fall in survey response rates. It appears that nonresponse biased income estimates up and poverty statistics down so the actual reported improvement should be taken with a grain of salt.

By 2019, the labor market had been recovering from the Great Recession for just about 10 years and the unemployment rate averaged 3.7% over the year. As expected because of the low unemployment rate and growing economy, earnings and incomes rose between 2018 and 2019. While the gains were quite healthy, in part due to slowing inflation, incomes had only just now recovered from significant losses in the Great Recession, and income gaps still loomed large.

Median men’s earnings for full-time workers rose 2.1% between 2018 and 2019, while median women’s earnings rose 3.0%. In 2019, typical full-time women workers were paid just 82.3% of typical full-time men workers, an insignificant improvement over 2018. Earnings for all workers, part- and full-time, rose 1.4% between 2018 and 2019. Among all workers, women’s earnings grew faster than men’s (7.8% versus 2.5%).

Because labor market earnings are a significant portion of family income for the vast majority of households and the U.S. economy saw increases in labor force participation in 2019, household incomes rose even faster than earnings. Median household income rose by 6.8% between 2018 and 2019. Similarly, non-elderly household income rose by 6.7% over the year. These are the fruits of a growing economy that was on its way to full employment before the current recession

Between 2018 and 2019, the official poverty rate fell 1.3 percentage points. In 2019, 10.5% of the U.S. population, or 34.0 million people, lived below the poverty line.

While any reduction in poverty or increase in income is a step in the right direction, many families have just barely made up for lost ground from the Great Recession by 2019. After correcting for a discontinuity in the income data to make years before and after 2013 comparable, median household income is now 6.5% above where it was in 2000. With the strong growth between 2018 and 2019, 2019 was the first year that non-elderly household income exceeded its 2000 level. In 2019, non-elderly household income was 4.3% above its 2000 level. This translates into only 0.2% average annual growth over the 19 years from 2000 to 2019.

Household income growth was strong across all racial and ethnic groups reported. Median Asian household income grew the fastest between 2018 and 2019 at 10.6%, followed by Black households at 8.5%, and Hispanic households at 7.1%. White, non-Hispanic household income grew at 5.7% over the year. (This analysis uses Black alone or in combination whereas the Census reports data for Black alone.)

For the first time in the recovery from the Great Recession, Black households exceeded their 2007 income levels in 2019. As strong as many broad measures of the U.S. economy were in 2019, median Black household income was just 1.4% higher than it was in 2000. This is a gain of less than $700 in total between 2000 and 2019. Black household income is just 61% of white household income, lower than it was in 2000, when it was 65%. These persistent racial disparities—deeply rooted in historical and ongoing social and economic injustices—contributed to greater susceptibility to the pandemic and the ensuing recession for Black and Hispanic workers and families.

This report shows that the gains to a growing economy take much longer to reach those workers and households, and much more income growth is needed to close persistent racial disparities and combat decades of rising inequality. Now, because of the pandemic, we will once again be trying to recover lost ground for years to come. Policymakers should take heed of the policies that worked to help produce positive outcomes in 2019 and help get us back on the road to full employment sooner rather than later.

With regard to the fatalists, one cannot dispute on objective grounds that changes in federal tax and transfer policies between 1979 and 2007 have exacerbated post-tax, post-transfer income inequality growth, up 33 percent over this period, versus market-based income inequality growth of 23 percent (both measured by the Gini index). Moreover, the role of tax policy changes in exacerbating post-tax and post-transfer inequality is understated in these measures because of the phenomenon of “bracket creep”—top incomes rise faster than the inflation adjustment for tax brackets, subjecting more income to taxation at top rates—which innately increases the redistributive nature of the tax and transfer system over time. But while tax and transfer policy should have been pushing harder against inequality growth instead of exacerbating it, there are practical limits to how much increased redistribution can mitigate strong market trends.

Klein characterizes my views on income inequality as making the “most optimistic version” of the redistributionist case, because I give weight to research suggesting that tax policy changes, particularly reductions in top income tax rates, have exacerbated market-based income inequality growth. Essentially, a lower top tax rate increases the rate of return to executives’ efforts demanding greater compensation from boards of directors, and successful efforts will come out of workers’ paychecks, not shareholders’ portfolios. Meaningfully curbing income inequality growth necessitates reducing the market income share accumulating to upper-income households, and higher top marginal tax rates may be one of the more concrete policy levers to advance that end, while necessarily further reducing post-tax, post-transfer measures of inequality. (For concise, accessible versions of this argument and surrounding research, see this blog post of mine and Dylan Matthews’ Wonkblog post on my paper. For a more thorough treatment with respect to executives’ income growth, see this new paper by Josh Bivens and Larry Mishel or Josh’s summary blog post.)

But after walking through these empirical arguments about the role of policy, Klein brushes off my case for higher top tax rates on political grounds:

“Ultimately I think Fieldhouse gives the tax code too much credit. Changes he attributed to the tax code are really rooted in political culture. Taxes on the wealthy didn’t lower themselves, after all. Wealthy Americans fought to bring them down. And now that they’ve grown used to those low taxes and high incomes, they will fight to keep them.”

Prima facie, this is irrelevant to the “fatalist” versus “redistributionist” schism for explaining driving forces of income inequality growth explored by Klein. That said, I don’t dispute that reductions in top U.S. tax rates stemmed from a calculated, multi-decade campaign by supply-siders (pdf), or that the plutocrats and conservatives in Congress will fight like hell to prevent any increase in top tax rates. But that’s entirely beside the point of empirically grounded economic research intended to inform better public policy.

From my perspective, Congress ran the plutocrats’ “supply side” experiment, the robust growth promised never materialized, the income growth we saw never trickled to the vast majority (see this State of Working America figure), income gains highly skewed toward the top drove a marked trend of income inequality growth, and the budgetary opportunity cost of this experiment was staggering. But rather than resigning yourself to these monumental policy failures and the current political landscape in which higher tax rates are a huge political lift, one must build an evidence-based case for reversing these policy shifts to eventually make that lift easier.

As it happens, recent economic research strongly refutes supply-siders’ arguments. Best estimates of behavioral responses to top tax rates have trended downward with improved research methods and data availability (pdf). While tax increases decrease upper-income households’ reported taxable income more  than they decrease moderate-income households’ reported income, research suggests this is entirely because upper-income households take advantage of their greater capacity to shift income from one category to another or one time period to another to reduce their taxes, as opposed to working less (pdf). And time series regression analysis suggests that reductions in top tax rates have had no statistically significant impact on overall economic growth (pdf) or its driving factors (pdf). I summarized this research in a recent paper on the economic effects of raising top tax rates, which argues that there is considerable scope to raise top tax rates without unduly slowing productive economic activity or overall growth.

Moreover, this research suggests that broadening the tax base (eliminating or curbing tax expenditures such as deductions, exclusions, credits, exemptions, and preferential treatment of capital income over labor income) in ways that reduce tax avoidance opportunities only strengthens the case for higher top tax rates. Consequently, broadening the tax base and raising top rates should be thought of as complements, not substitutes—exactly the opposite of Washington’s dominant thinking toward a modern tax overhaul, as I explain in this recent paper.

In other words, there is a strong policy case for higher top tax rates that too many policymakers are either unaware of or wrongly ambivalent toward: Rates can be raised significantly without hurting economic growth, and higher top rates would generate substantial revenue, necessarily reduce after-tax income inequality, and could yield big gains in reducing market-based income inequality.

I don’t naively expect higher top tax rates to be enacted in the 113^th Congress. But I hope a much broader swathe of the Democratic Party eventually grows a spine regarding higher tax rates, joining their colleagues in the Congressional Progressive Caucus who better understand realistic revenue needs and the scope of policy changes necessary to meaningfully improve economic opportunity and mobility. Widespread misconceptions about tax policy are currently impeding such a needed change of heart among Democratic members of Congress, hence the importance of economic research debunking those fallacies and distilling said research for policymakers.

The plutocrats peddling supply side snake oil will likely never come around, but when push comes to shove, they’re hugely outnumbered by the economically struggling vast majority—whose living standards the Democratic Party is supposed to be championing.