CBO Data on Income Growth

Interesting data from the CBO. Income is up for all quintiles and, after taxes and transfers, the lowest income quintile have done quite well. See this link for information on the data and to switch back and forth between before and after taxes and transfers.

Comments

If the lines for lowest and middle were switched we would not have Trump or the crazy left so strong. Pretty ironic.

The lack of recent progress (all incomes only now reaching pre-recession levels) has definitely shaped our politics.

Consumer confidence took off last year though. That might be a reason why we are moving from economic to social issues politically. Gun control, not Tea Party.

True. My point was that the kind of impact we had shaped the kind of response we got. If the top quintile had been affected more than the others we would probably have had a much milder response. Envy rules politics.

"all incomes only now reaching pre-recession levels)"

Poppycock. The data is only through 2014. IE you're looking 3 years into the past.

Substitute "only recently" then.

Once again, instead of admitting you are wrong, you move the goal posts.

I was gracious, you are not.

It's gracious to admit you are wrong. You didn't do that, and you have a history of not doing it. Instead, you invariably try to change the subject or move the goal posts.

Indeed, in the first reply you attempted to move the goal posts, and in the second you tried to change the subject.

If the lines for the highest and lowest where switched I'd be happier.

And if it were before taxes and transfers.

Right. And you can see the difference between a recession and a depression as well. In a recession, you have a single year of downturn followed by a strong recovery, for example, in 1991 and 2001. In a depression, by contrast, income does not even turn up for seven years, and does not recover its previous high for nine years, in the case of the middle income group.

This prolonged anemia in the economy leads to a questioning of the entire political system and leads to unconventional solutions, ie, Brexit, Macron, Trump, maybe even Xi. Thus, periods of far left and right extremism will be closely linked to depressions, but not recessions.

China had nothing remotely like a depression from 2008 to 2016.

Not sure if I am reading right.

But does this mean the per-capita income of the highest quintile is lower today than in 2005? I find that hard to believe.

The highest quintile (top 20%) level of granularity here could easily be obfuscating some the differences we so often hear about in the media (i.e. the 1% and the .1% and the .01%).

True.

But still to me this is a revelation. What would be the top quintile cutoff in terms of household income - $100K?

This chart suggests it is quite likely we have fewer 6 figure income households than in 2005.

Sorry. I realize this is only till 2014 and not today

I don't know why a 2018 March study has only 2014 data to rely upon. Strange.

I think that the top .o1% do not matter much because the consume so much less than they earn.

I might’ve missed it, but I think literally everyone missed the bigger point.

Unlike common reports all groups have healthy positive real growth.

That the left paints this as horrible as the top grew faster is quite insane.

No.

The top quintile's mean household income is lower than pre-recession levels. Atleast as of 2014.

@shrikanthk. In the US there hasn long been a narrative that incomes for the working classes stopped growing in the 1970s, while there was still healthy income growth for the upper middle class and upper class from the 1970s. So it is news that even the poorest have seen incomes increasing as opposed to the 1970s.

Floccina;
A more Keynesian view would likely agree with your emphasis on consumption spending.

But I think that is a little blinkered: The other side of this coin is that there can be no consumption if there is no production: Not only would there be nothing to consume, but no one would have a job producing it. And no one will be able to afford to open a plant, employ workers, and produce goods (which then can be sold & consumed) unless they have extra money beyond their personal consumption needs. Indeed, when even a small business can cost $500,000 to launch, the folks who do have extra income beyond their consumption needs had better have a LOT of extra.

The value of those 0.01 percenters to the rest of society lies precisely in the fact that they cannot possibly consume all of their income. And necessarily, what doesn't get consumed will have to get saved. And they're not saving it in basement swimming pools ala Scrooge McDuck. Instead, they're investing it in the hope of staying ahead of inflation. (At current inflation rates, a spare million dollars left uninvested will lose another $2000 in purchasing power every month.)

When the buildings & equipment you use at work wear out, you have to hope there's someone willing to invest the money to replace them. If we want jobs growth, we have to hope there's someone willing to invest the money to open new businesses where new entrants can find jobs. If we want technological advancement (self-driving cars, better wi-fi connectivity, maybe a cure for Alzheimers), we have to hope there's someone willing to invest the money to develop those marvels.

Our big problem in the U.S. may well have been our hostility toward these very wealthy investors: Most of the world is more eager to get them to invest there than we are to get them to invest here. And an awful lot of wealth that should have been invested here went overseas instead because it got treated better over there.

(One good side to that; We've lifted a billion Asians out of extreme poverty since 1990.)

As always, a reminder not to make longitudinal claims (or accidentally make longitudinal interpretations) using cross-sectional data. The individuals comprising each group change each sampling period. Sophisticated readers already get that, at least if asked to consider it explicitly, but the most common intuitive interpretation of charts like this is the wrong one.

I get that. Is there a handy fraction for the immobile though? I would think a fair number are in stable careers with stable compensation.

This critique is generally trotted out by conservative economists when discussing graphs that show flat trends rather than increasing trends. I'd say whether or not the individuals comprising each group are not the same year-to-year (especially if you believe the claim that people are relatively immobile in their economic rank), this graph shows that Americans are getting richer.

This is great news! I (should) feel so much better. Everyone I know is hurting, including me.

Where is the disconnect?

Where do you see hurting?

Is this nominal or real dollars? Quite a vague graph.

Real of course.

Poorly labeled. Hurts the credibility of the exercise.

Haha... this graph is not perfect, thus negating the findings. Maybe it's just that people who research income trends realize that it would be so stupid not to correct for inflation that it's just obvious to them that income growth means real income growth.

In general I agree, however it's lazy not to include a (in 2014 dollars) at the end of the graph titles for the first two graphs. If nothing else it addresses the ambiguity of what their reference year was. The later graphs are percentage, so it's less relevant.

JFA;
Steven didn't say it negated the findings; he only said it could have been presented better.

The gap between poor and middle is shrinking, but the highest quintile is still pulling away ahead of the pack?

I guess some of that "widening" is inflation though, right? And of course, it's not so easy to make a claim that there's something fundamentally wrong with the distribution of incomes; when most people do it's just a subjective and emotional claim about 'fairness'.

"When most people do it’s just a subjective and emotional claim about ‘fairness’ "- but this graph would perhaps explain why the middle class is hostile to tax and spend liberalism, as that tends to compress the incomes between the lowest rungs of society and the middle class, which understandably seems unfair to people who work long hours for relatively low pay while watching their neighbors have a comparable standard of living without working nearly as hard.

This is the most ironic part about American left convinced that middle class Americans would really prefer European tax/spend programs if they understood the choice or were not motivated by racism. In reality, the European middle class is taxed much more heavily and the upper class only marginally more so. And housing is not any less expensive in Europe. Only healthcare is, but it's not clear why you need a huge government tax/spend program to solve that problem.

"I guess some of that “widening” is inflation though, right?"

No. The authors adjust for inflation.

It's not the top quintile that captures much of the income growth, it's the top 1%: "The top 1 percent income earners in the United States hit a new high last year (2015), according to the latest data from the U.S. Internal Revenue Service. The bottom 99 percent of income earners registered the best real income growth (after factoring in inflation) in 17 years, but the top one percent did even better. The latest IRS data show that incomes for the bottom 99 percent of families grew by 3.9 percent over 2014 levels, the best annual growth rate since 1998, but incomes for those families in the top 1 percent of earners grew even faster, by 7.7 percent, over the same period." http://equitablegrowth.org/research-analysis/u-s-top-one-percent-of-income-earners-hit-new-high-in-2015-amid-strong-economic-growth/

I would contend that the top 1% do not matter that much because the higher you go the less of their income they consume. The problem, if there is one at all, is the top 20% pulling away. Rich people selling stocks to each other at higher and higher prices seems unimportant.

https://www.clevelandfed.org/newsroom-and-events/publications/economic-commentary/2014-economic-commentaries/ec-201418-income-inequality-and-income-class-consumption-patterns.aspx

I think it is just the opposite—inequality is more a matter of savings and wealth rather than conspicuous consumption. It is not how much you make, but how much you keep. Savings and wealth buy you leisure and security, let you become a creditor of others, and allow you to influence public policy and pass money down to your kids. There is also diminishing marginal utility to consumption; a $100,000 car is not going to be anywhere near ten times better than a $10,000 one, but $100,000 in stocks is ten times better than $10,000. So the top 1% owning all the stocks seems to be a bigger contributor to inequality than the top 20% having nicer cars.

But a $10 million private jet* is a hundred times better than a $100,000 car, especially at flying.

* I have no idea what jets cost.

If you look at the share of national income for the 80-98th percentile, it has not changed much since the early 70s. The top quintile is not pulling away, just the top 1%.

Rate of change error without looking at the starting and ending point.

So, if my income starts at $13k and goes up by $800 I am relatively better off than if I started at $400k and went up $30k.

So, let's take away those food stamps and medicaid and see what the numbers look like.

Paul Ryan would like to know.

Actually, Paul Ryan doesn't care.

He just wants to take them away and give out yet more tax cuts to the top 1%.

Looks like Dino below did it, and, surprise! Good work Dino. +1 to you.

I'm not as concerned about income inequality as I am about wealth inequality. It's wealth inequality that is the driver of public policy. Indeed, some might argue that wealth inequality will likely drive us over the cliff. That might not concern Tabarrok's Austrian friends at Mercatus (at least not those with tenure), but for the rest of us, it should.

So the highest quintile has not just the highest income but the highest growth rate as well. I make it about 2% annual for them vs. 1.5% for the lowest and 1% for the middle group.

Those are big differences.

Shouldn't we look net of private charity as well as net of government transfers?

Someone correct me if I'm wrong here, but...

68.8% higher over 35 years. CAGR = (168.8% / 100%)^(1/35)-1 = 1.5% annual income growth.

Compare to 3.6% inflation over the same time period.

The numbers are inflation adjusted... consider yourself corrected.

Maybe Alex should put an addendum to this post as commenters here don't seem to realize that researchers who study income would find the whole exercise useless if they didn't adjust for inflation.

Thanks. Makes sense.

Methinks 1.0151^35 = 1.688

Wouldn't it be more accurate to show what happened to the individuals in each cohort?

Russ Roberts tackles issues in charts like this here -> https://www.youtube.com/watch?v=VXI_ADnp22c

There's not much longitudinal data to study. What little there is, shows that about 12% of Americans will be in the top 1% for at least one year of their lives; that almost everyone will be in the bottom 20% sometime; basically that individuals experience a lot of variation over time.

Since Tabbarok gestures vaguely at differences between the charts before and after taxes and transfers, I went to the site and used the tool to switch back and forth between the charts with and without taxes. Chart without transfers paints a noticeably different picture, specifically one where there is very little rise in income for the middle and lower quintiles without taxes and transfers. I guess it should not surprise me that only one of these charts was presented given the policy preferences of the poster, but for some reason I continue to expect more than political hackery from a college professor. Like maybe a full discussion of the consequences of government intervention?

"...but for some reason I continue to expect more than political hackery from a college professor."

After tax income is a more accurate picture of what people have available to spend on personal consumption. Pointing out that the before and after tax graphs are substantially different is not political hackery.

Indeed, it seems as if your comment is far more mood affiliated than Tabbarok's post was.

“Pointing out that the before and after tax graphs are substantially different is not political hackery.” Yes, which is why I did it? Rather than leave it up to the reader to investigate on their own and find that any increases in income experienced by the lower quintiles is almost entirely the result of government intervention. A conclusion that is much clearer when the charts are compared. But such comparisons do not comport well with the poster’s ideology.

"any increases in income experienced by the lower quintiles is almost entirely the result of government intervention"

Inaccurate

Inaccurate? A little. But it's gets to the gist of the data. Before taxes and transfers, lowest quintile income growth was 25%. After taxes and transfers it was 68%. Lots of government intervention in those numbers for sure.

I don't blame Alex for not putting both charts on the page. It was enough to get me to click on it and look at the other graphs and check out the report.

Wow, Tabarrok provides the link, tells you to click on it to see what happens when you switch back and forth to show before and after taxes and transfers, and when you do that you accuse him of political hackery?

Yes. Since this after chart leads him to conclude that "the lowest income quintile have done quite well," when in fact if it were not for the government policies he spends all his time railing against the lowest quintile would actually not be doing very well at all.

Look, by presenting half the picture and basically saying "see, they're doing just fine, just like I've been saying" it comes off as an endorsement of his ideological position, when in fact the numbers tell precisely the opposite story.

"Pointing out that the before and after tax graphs are substantially different is not political hackery." Yes, which is why I did it? Rather than leave it up to the reader to investigate on their own and find that any increases in income experienced by the lower quintiles is almost entirely the result of government intervention. A conclusion that is much clearer when the charts are compared. But such comparisons do not comport well with the poster's ideology.

It struck me as odd that those who have been most concerned about the income share of the 0.1% have never seriously advocated a markedly higher income tax rate (say 80% or 90%) starting at $2 or $3 million income. In the Obama era, attention was instead focused on 40% tax rates starting at the $250K level.

If ones primary concerns were inequality, as evidenced by the increasing income share of the very top earners, why not pursue this?

Or the $10 million income level for that matter. Obama and Democrats could have passed a much higher tax bracket in 2009 or 2010. They chose not too. It's a political game. If they did it, a lot of very rich Democratic donors would be much less likely to donate in the future. If they claim they would but the GOP is stopping them, the donations continue to roll in.

Always fun to see the mouth-breathers gawking at the jagged lines and making up stories about them. Thx Tyler.

This graph looks at *means-tested* transfers. It includes social security and Medicare as regular income, before transfers. I wonder what it would look like if we looked at pre-govt. and post-govt. effects. I didn't notice if state taxes were in there---probably they are.

For the middle quintiles a 1% CAGR, has productivity only increased one percent annually for 35 years? (valid interpretation?)

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