When economists — and the Obama White House — talk about middle-class income stagnation, they are often referring to Census Bureau data showing median household income — adjusted for inflation — rose less than 10% from 1984 through 2013, just less than 0.3% per year. That stinks.
But those statistics just don’t pass the smell test. Anyone over the age of 35 or so knows Americans are substantially better off than they were 30 years ago. Economist (and former head of the National Bureau of Economic Research) Martin Feldstein helpfully digs into the data:
The official Census estimate suffers from three important problems. For starters, it fails to recognize the changing composition of the population; the household of today is quite different from the household of 30 years ago. Moreover, the Census Bureau’s estimate of income is too narrow, given that middle-income families have received increasing government transfers while benefiting from lower income-tax rates. Finally, the price index used by the Census Bureau fails to capture the important contributions of new products and product improvements to Americans’ standard of living. … With the traditional definition of money income, the CBO found that real median household income rose by just 15% from 1980 to 2010, similar to the Census Bureau’s estimate. But when they expanded the definition of income to include benefits and subtracted taxes, they found that the median household’s real income rose by 45%. Adjusting for household size boosted this gain to 53%.
So 53% is a lot more than 10%. But even that number may underestimate the rise in American buying power due to how we measure inflation:
The authorities arrive at their estimates by converting dollar incomes into a measure of real income by using a price index that reflects the changes in the prices of existing goods and services. But that price index does not reflect new products or improvements to existing goods and services. Thus, if everyone’s money incomes rose by 2% from one year to the next, while the prices of all goods and services also rose by 2%, the official calculation would show no change in real incomes, even if new products and important quality improvements contributed to our wellbeing. Indeed, the US government does not count the value created by Internet services like Google and Facebook as income at all, because these services are not purchased. No one knows how much such product innovations and improvements have added to our wellbeing. But if the gains have been worth just 1% a year, over the past 30 years that would cumulate to a gain of 35%. And combining that with the CBO estimate of a gain of about 50% would imply that the real income of the median household is up nearly 2.5% a year over the past 30 years.
If I am mathing this out right, real median incomes rising 2.5% a year for 30 years means real median incomes have more than doubled. If you invested $100,000 for 30 years at 2.5% interest, the investment would be worth $210,000 three decades hence. And here is more on how our productivity and inflation measures are having a hard time with America’s IT economy.
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