More Evidence That We're All Getting Richer

Steve Horwitz

While looking for something else, I stumbled across this Census report on household income from 2006.  What's really interesting is to look at the percentage of households in each income category and how that's changed over time.  If the prophets of doom and decline and rising inequality are right, we would expect to see, I'd think, lots more rich households and lots more poor ones as the supposed gap widens.  Some prophets of doom might expect to see fewer households in the upper brackets as the highest income categories are dominated by a few people getting very, very rich.

The reality, as it turns out, is different.  From 1980 to 2006, the percentage of US households earning $100,000 or more (in constant 2006 dollars) grew from 8.6% to 19.1%.  The percentage between $75k and $100K grew from 10.3 to 11.3 percent.  At the other end, the percentage under $15K fell from 16.6% to 13.4% and the percentage between $15K and $34K fell from 26.2% to 23.3%.  Thus all three categories below $35K fell a total of 6.1 percentage points. 

The middle classes fell too, though by less.   The sum total across the $35K to $75K categories fell by 5.4 percentage points.  In other words:  the net movement of households was an 11.5 percentage point gain in households above $75K and a net reduction of 11.5 percentage points in houses below $75K.  So the percentage above $75K rose from 18.9% to 30.4%.  That is, it increased by over 50%.

Let me repeat that:  over 30% of US households in 2006 earned above $75K compared to under 20% in 1980.  Over the same period, the percentage of US households earning under $35K fell from 42.8% to 36.7%.  Fewer households are poor, fewer are middle class, and a hunk more are above $75K.  (And in case you were wondering, those general trends hold for black and hispanic households too - with the percentage of black households under $35K falling by 10.9 percentage points and the number above $75K increasing by 8.9 percentage points, for example.)

Throw on top of this the fact that most everything people buy costs less in real terms and you have a recipe for increasing wealth across the board.  Not bad for what so many people claim is 30 years of stagnation.

Comments

[Mark]

Two countervailing (countervailing to each other, that is) facts:
First, baby boomers (a big segment of the population) were still in the beginning of their careers in 1980 and in their prime earning years now.

Second, immigrants make up a larger percentage of the population today than in 1980. http://www.census.gov/population/www/socdemo/foreign/ppl-174.html

The first skews the data on income upwards, while the latter skews it downward. http://cafehayek.com/2006/11/friedman_on_gro.html

[Nick]

If you take into account inflation of prices reflected in the official Consumer Price Index. Then $75,000 in 2006 is equivalent to $30,647 in 1980. And $35,000 in 2006 is equivalent to $14,302 in 1980.
http://www.measuringworth.com/uscompare/

Which means that many households are now a lot poorer than before, despite having more money. Because the US dollar has lost more than half of its value from 1980 to 2006.

If you don't take inflation into account. Then you would have to say that Zimbabweans were better off than ever before, when they were getting paid trillions of Zimbabwean dollars for their work. Which is utter nonsense.

[liberty]

Nick: read "in constant 2006 dollars"

[Matt]

I think Nick has a good point, although there are other considerations. How would a $70k income translate into 1980 figures. I know numbers games can be kind of confusing, but I look at it this way; people have more crap than they had in 1980. More people have homes than they did in 1980. The homes and the crap we have has gotten a lot nicer, in my opinion. Of course we have a lot more debt, too.

It's an interesting post, but I'd like to see the idea expanded on.

[Steve Horwitz]

Folks, in "constant 2006 dollars" means Nick's post is irrelevant. It is standard in these comparisons across time to adjust incomes for inflation, so these have *already* accounted for that.

Matt's other point is a good one: we know from all kinds of studies that poor Americans have more in their homes than ever before, mostly because it's so much cheaper in real terms. See this post of mine at Liberty and Power for some data: http://hnn.us/blogs/entries/44568.html .

[Ombibulous]

Does your analysis take into account the size of households? I imagine 2006 households were smaller (less people on average) than they were in 1980.

[Steve Miller]

2006 households are indeed smaller on average, which would mean, if anything, that Prof. Horwitz's claims are *understated*.

[Steve Horwitz]

What Mr. Miller said.

[Rafael Guthmann]

"Not bad for what so many people claim is 30 years of stagnation."

Well, the period from ~1978 to ~2008 consists in a period of relative stagnation compared to any other 30 year period in the US history, like the period of 1940 to 1970 or from 1900 to 1930. Even if the average American is better off today than 30 years ago, the difference in progress has been smaller.

Also, what if these inflation adjusted data use a price index that is not the better one around. Some guy made an alternative inflation index, with a larger multiplier for the period of 1968 to 2004, so real family incomes measured with his index may have fallen in this period:
http://www.gold-eagle.com/editorials_04/paulos090904.html

Also, since relative prices change too, different preferences may have different evaluations of real income across time.

[Steve Horwitz]

Rafael,

I refer you to the consumption data in the post linked in my comment above. Find me another period in US history where the poorest among us gained so much in real terms. Yes, money wages grew slower in the last 30 years than before, but total compensation grew faster than money wages and the real price of consumption basics fell enormously in real terms.

Do you really want to argue that the average American in 2008 has gained less since 1978 than the average American in 1978 had gained since 1948? Hard to convince me of that!

[Bill Woosley]

Steve:

People are much poorer today than 50 years ago. Back then, people didn't need a cellphone, cable TV, personal computer in the house, laptop.. I could go on and on.

[Rafael Guthmann]

"Do you really want to argue that the average American in 2008 has gained less since 1978 than the average American in 1978 had gained since 1948? Hard to convince me of that!"

I always though that the general perception is that between 1948 to 1973 economic progress in the US was significantly more intense than in any period after. In some articles that I read stated that real wages in the period from 1947 to 1973 increased around 50-60% while from the period from 1973 to 1996 they stagnated.

Also, the State expenditures in proportion to GDP were on average 25% in the 50's and increased to 39% in 1980. Between 1980 and 2008 the were on average ~35% of the GDP. I think that smaller State expenditure in proportion to GDP in the 50's compared to the more recent past explain a significant part of the "why economic progress slowed down". And simultaneously constitute in a argument for the "slower economic progress thesis".

Also, economic progress was slower in the second half of the 20th century compared to the first half in the US.

[DG Lesvic]

What good is it to claim that we're richer, now?

If so, the Left will take the credit for it, and, if not, blame the Right.

As Mises stated, "History can neither prove nor disprove any general statement."

You still need economics.

[marmico]

The census household income chart is deflated by the CPI-U-RS.

The cumulative CPI-U-RS is less than the CPI-U for the relevant time period.

Thus, household income gains are lower if deflated by the CPI-U.

What the heck is the CPI-U-RS? http://www.bls.gov/opub/mlr/1999/06/art4full.pdf

Do you Austrians make table wagers? Median household income will be less in 2010 than in 2000 whether deflated by the CPI-U or the CPI-U-RS. Book it.

[Fishsticks]

Bill W.

I hope what you say is toungue-in-cheek. I'll bet in 1950 people said you didn't need an automatic clothes washer or a TV. Go to the 20's or 30's and that electricity and running water made people poorer too.

Fishsticks

[e weick]

Steve,

Does it trouble you in any way that you are using Ministry of Truth data from which you are drawing your conclusions?

And, do you think the data might be a little different now that the economic collapse is visiting the subjects of the census?

ED

[Reality Hammer]

Way back in the day I posted a similar observation about the Reagan years. The middle class was only "disappearing" to the extent that it was moving up, not down.

[Steve Horwitz]

Ed,

Doesn't trouble me a bit. I don't think low level data collectors in the federal government intentionally distort data to serve some hidden agenda. They might be stupid, but their stupidity should cancel out on net.

Marmico - a fall in median income says nothing about the overall change in well-being. After all, suppose between year 1 and year 10 every single household got richer by a little, but thousands of new households entered the distribution thanks to immigration and college graduations etc and they entered below the year 1 median. The result would be that the median would fall in year 10, even though every household in the year 1 distribution is richer and all the new entering households are probably richer as well. Median falls, everyone wins. Simple stats, if you know what a median is and recognize the distribution changes over time.

[Law of the Bad Premise]

Steve,

The way the left would play this chart is as follows. "Look how the income spread has widened between the top 20 percent and the bottom 20 percent. We have increasing income inequality".

While I wish I was being facetious, haven't we heard that one countless times?

Mike Rulle

[Campbell]

@Bill W. - People don't need all of these things. I get along fine driving a used car, using a cheap laptop, and don't have cable TV or even a TV for that matter. If I really wanted to, I wouldn't have to have internet as I could quite easily get it at one of hundreds of free wireless sites around town. I don't need to have an iPhone either, I did just fine without one before. All of this as an engineer none the less.

I challenge you to think about the amount of money people would have paid in 1995 for an internet connection 10% as fast as my *wireless* internet. Likewise, think about the amount of money people would have paid in 1985 for a way to access virtually limitless amounts of information, entertainment, instant and free mail, that people enjoyed in 1995. When these considerations come in to account, I find it very difficult to come to the conclusion that we are "poorer" now than we were thirty years ago.

[Rafe Champion]

Of course Bill is joking, he is saying if you are prepared to live with the same stuff you had 30 years ago and today's income you would have heaps of disposable income to spend on wine, women and song or whatever.

Some Green people are going that way to show how modestly you can live if you go without enough things. Good luck to them, but don't expect them to be emulated in the Third World.

It is good to cite the data on the the contents of poor households because surveys of expenditure regularly show that income data (and also the take-up of programs like food stamps) under-estimate the resources of poor households. You have to remember that there is a whole left-liberal industry dedicated to documenting disadvantage and any opportunity they have to put their thumb on the scales will make things look worse than the reality.

If you want a quick indicator of the way we have come in 60 years, check the space required to store the average middle class child's toys over the period. And the size of their room. Or the number of rooms in the house.

[DG Lesvic]

Statistical disputes are wonderful, endless opportunity to pretend that you're a real economist.

[muirgeo]

The need for families to have both parents working and the constant 2006 dollars are underestimated by the methods used to calculate inflation.

Elizabeth Warren explains what really has happened to the middle class here;

http://www.youtube.com/watch?v=akVL7QY0S8A&feature=channel

[dsylexic]

austrian economists using idiotic aggregate numbers?..you guys are a blot on individualism.

how come a woman working at home cleaning and cooking doesnt contribute to gdp while the same thing done by a hired cook or a drycleaner adds to it?. statistics used by economists is shameful and makes real statistics students cringe

[Steve Horwitz]

Well Dsylexic, if I was talking about GDP, then we'd have a discussion. And your example is certainly correct, and one I use in class all the time. I've also written on the way inflation overstates GDP for similar reasons.

There's nothing un-Austrian or un-individualistic about using aggregate data, at least when done carefully. Don't you talk about "the" money supply or "the" supply of credit when you talk about the Austrian cycle (not to mention "the" interest rate)?

You can't DO economics without some aggregates, used carefully.

[Roger Koppl]

I know we're getting off topic, but I really don't like loose comments about "aggregates." I challenge Dsylexic or anyone else to explain the supposed problem with "aggregates" as such. Careful! I said "as such."

[DG Lesvic]

Prof Horwitz is confusing concrete aggregate data with the abstract conception of them.

The economist, as such, must deal with the abstractions but never with the concrete data itself, except by way of illustration.

[Gary]

I love it when folks talk about how the ubiquity of two heads of household working means households are not as well off as the data suggest. As if in the good old days only one head of household worked, and the other spent days frolicking in open fields. Or maybe they suppose that the same amount of housework has to get done today as in the good old days (because washing machines, vacuum cleaners, dishwashers, clearly have no time-saving properties), PLUS heads of household work more outside the home than ever before.

Either way, I'm impressed that anyone could reach the age they reached without ever running into the evidence that shows total work time (in-home + out of home) declining fairly determinedly over the 20th century.

[doctordrewl]

I guess this new breed of middle class Americans, just doesn't have any interest in pacing the economy like they did a generation ago... by buying new cars, shopping at the malls, going to ballgames, traveling abroad.... I mean all of these industries are doing so well during the recession...

This is the dumbest $hit I've ever read. As someone born and raised in the middle class...I can tell you the "real middle class" as we know it, is shrinking like Obama's approval ratings... go to any small town, and you'll see it... ask anyone at the Wal-Mart...the last store in town.

Just like the at the Federal Reserve...here, the economic reality of interest rate manipulation and dollar devaluation (i.e inflation tax) is ignored...It's like saying Barry Bonds numbers keep getting better and better...all the records are being broken, so why are you complaining?

When it comes to money in the US, if you spend it, they tax it. If you save it, they tax it. If you invest it they tax it. Hell, if you just bury it in a hole in the ground... it may evaporate completely.

[John Singleton]

On an unrelated subject, has anyone seen the thread about "emotive anecdotes" around here?

[Daniel P]

Wow, I can't understand, as others have posted, how you can make this claim without including inflation adjustments and in not factoring in the timing of 2006 as being close to the height of the housing bubble. This as you may remember is when many individuals "money" or net worth was based on loans of various stripes and context. the recession at the beginning of the millenium should have caused an unwinding of loans but nstead a new housing bubble was created that leads directly to the inflate figures that you arrive at using your census data. Try the same "study" on the new data and see if it might dent your dream scenario a little bit.

[Sheldon Richman]

Think how well we'd be doing in a freed market!

[Steve Horwitz]

Daniel: Inflation HAS been adjusted for. And if we also then adjust for the falling real cost of most consumption goods in terms of labor time, things look *even better*.

And yes, this was the peak of the housing bubble, but: this measures household INCOME not "net worth" or other measures of asset value that might have been distorted by the housing bubble. Yes, my guess is that things would look different today, and probably not quite as good. Of course the CAUSE of the housing bubble was government intervention, not markets, so if one wishes to argue that markets produce income inequality and falling well-being, you can't blame markets for whatever the housing bubble may have done to that.

@Sheldon: absolutely!

[marmico]

Steve, quite the contradiction in your assertions. If real incomes increase, of course, there will be migration to higher income brackets. The middle class ($35K-75K income bracket) lost ground (the so-called "stagnation theorem")in the race to riches. A decline of 5.4% as you put it. If your definition of "even better" is goods consumption, then you have missed the secular decline of goods consumption relative to services consumption. Nixon was the president when services consumption first exceeded goods consumption as a percentage of total personal consumption expenditures.

The lower class (0-$35K) gained ground due to government transfers and the upper class ($75K+) gained ground due income distributional effects (primarily the combination of increased female labor force participation and real income gains greater than males).

Did you know that full time male workers real income is flat since 1980?

http://www.census.gov/hhes/www/income/histinc/p36AR.html
Didn't think so! :-)

In any event, aggregate share of income by quintiles or deciles is a counterfactual to your assertions.

http://elsa.berkeley.edu/~saez/saez-UStopincomes-2007.pdf

About 70% of aggregate income gains have accrued to the upper decile in the last 30 years.

[Steve Horwitz]

Ah Marmico, if only the deciles stayed the same year to year, then you'd have something there. Who comprises the deciles change and the data on income mobility is consistent with the upward movement my original post noted.

True enough that the consumption of services has risen in importance, but that is very much an EFFECT of rising wealth across the board. For most of human history, if one wanted chicken for dinner, one had to provide all the labor oneself. Consider even 100 years ago: you had to either raise and butcher them yourself, or at the very least buy a whole chicken and do all the rest yourself. We couldn't afford to pay people to do that work for us.

Now we can. I can have all the labor done other than perhaps warming it up (and I can even buy a fully cooked dinner at most grocery stores). The fact that this option is available to me and to poor Americans at about one hour's worth of minimum wage labor suggests just how rich we've become. Your observation about the importance of services works more in favor of my general point about rising social wealth than it does about any notion of stagnation.

[Cata]

"Not bad for what so many people claim is 30 years of stagnation."

Not *that* many. According to my data, just 30% of adults disagree that the standard of living is higher today than it was 30 years ago.

[dsylexic]

regime change mes amis. the inclusion of 3 billion indians and chinese into the global marketplace for services and goods has provided much of the benefits in the last 15 years.a time series with so much regime change is a dataminers paradise

[fred]

It's because there are more two earner couples.

In 1980, a greater percentage of households was a one earner household. Two people earning 50,000 = 100,000 household

[liberty]

fred,

This is true, but as someone pointed out earlier, it was not as if in the 1950s or even 1970s there was one worker and one person lying on the beach. Usually the non-worker (the wife) was spending all her time cooking, cleaning, taking care of children, and wishing she had the luxury to go out, get an education, and get a job.

Instead she was working but NOT getting paid. Anyway, statistics on individual (not household) earnings (especially when properly adjusted for at least some of the drop in technology prices) will still show a huge rise in incomes. It is simply ridiculous to imagine that we have not become richer -- especially the poorest among us -- over the past 20-30 years. Open your eyes, its everywhere!

[Henry Blankett]

Over the past ten years, what percentage of debt has the average household accumulated as compared to that of any previous time in American history?

The answer to those two very simple questions will help explain the avalanche of horselaughs generated should this article be read by more of the general public.

Thank you for the laugh

[Henry Blankett]

Whoops - the first part of my post got clipped. But I'm sure you're agonizing over how to answer the second part, anyway.

Question #1 (of 2, see above): Over the past ten years, how does the rate of any average household net income compare to the rate of inflation over the same time period?

Yours, in chuckling,

Henry Blankett

[Steve Horwitz]

Once again, all of those data are adjusted for inflation, so can we leave inflation out of this please?

As for the first, yes household debt is up, but we'd expect that if income was up. People can afford more debt if they have higher income. Are you somehow arguing that more debt creates more income? If so, can you explain how?

[Rafe Champion]

Stats in Australia covering a few years of the modest deregulation in the 1980s showed that rich and poor alike were doing better and the middle class were doing better than the others.

Don't know the end of this story, an article by Irwin W Stelzer 'Lies, damned lies and statistics' in "The Weekly Standard" Dec 1996 claimed that some key indicators were being miscalculated. For example the CPI figures for two decades could have been 1.3% lower than the official figure. That converted a decline of 9% in net hourly earnings (from 1975) into a rise of 35%. And the increase in median family income shifted from 2% to 19%.

He also wrote that many families receiving welfare benefits spend a lot more than the annual income they report. Some 75% owned a car and over 40% owned their home.

[Henry Blankett]

"As for the first, yes household debt is up, but we'd expect that if income was up."

We have just now received verified reports that the Horselaugh Plague is spreading and afflicting mortgage and credit card underwriters...

"People can afford more debt if they have higher income."

If by "higher income" you mean "Donald Trump", and by "more debt" you mean "less than 5.0% of assets + income", then the word "afford" makes sense in this context. Otherwise...*facepalm*

"Are you somehow arguing that more debt creates more income?"

No, I am arguing that more debt = not getting richer (and likely getting poorer -- much poorer).

[VL]

Very interesting post. One thing though, in Cuba there's either... poor or rich. That's it, there's not really a middle class. With our economics turning (creepy) similarly to their country, I would hate see if we loose our middle class also. Time will tell I guess.

[Bill Woolsey]

Horwitz wasn't really looking at the distribution of income but rather with changes in the real household incomes in absolute terms for various groups in the income distribution.

The _normal_ situation would be for the distribution of income being little changed (the fraction of the pie each household gets stays about the same,) but the total size of the pie gets bigger, so each household is better off.

The left has traditionally emphasized the shares of the pie, with the goal of decreasing the share of income going to high income households, increasing the share going to low income households, and thereby making the high income households worse off and the low income households better off.

There has been a shift in the distribution in the other direction. It would be possible that the size of the pie got larger, (which it has) but the share going to high income households increased so much, that everyone eles recieved a smaller fraction of that bigger pie, leaving their income absolutely unchanged.

Horwitz's figures show that didn't happen. That is, the real incomes earned by various middle income households increased in size.

Now, these are household incomes, and it is true that two earner households are over represented in the top 20%. I think it is obvious that this involves the sacrifice of household production. It is not all gain.

On the other hand, the increase in the labor force participation rate by 10% (from 60% to 66%) occurred during the seventies and eighties, not during the period of increased income inequality.

All figures are corrected for inflation (imperfectly) and these are not consumption figures (that might be funded by borrowing or dissaving) or net worth figures (that might be impacted by speculative bubbles in stocks or houses.)

[Joe]

"Throw on top of this the fact that most everything people buy costs less in real terms and you have a recipe for increasing wealth across the board."

Wow, what planet are you talking about?

[Steve Horwitz]

This planet Joe: http://myslu.stlawu.edu/~shorwitz/Good/myths.htm (and I have more recent data if you'd like to see it). In terms of the labor time it takes to buy most consumption goods, virtually everything is cheaper than it used to be. That also explains this data, wherein the poor today have more consumption goods than the average American in the early 70s. http://hnn.us/blogs/entries/44568.html