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September 21 2016

Lies, Damned Lies, and Income Statistics

Rachel DiCarlo Currie

“I usually try to be restrained,” White House chief economist Jason Furman wrote last week on Twitter, “but this is unambiguously the best Income, Poverty & Health Insurance report ever.”

While that’s debatable, there’s no denying that this year’s report, compiled by the Census Bureau, offers much to celebrate. Its most notable finding is that, in 2015, America’s median household income grew by 5.2 percent, which represented the largest annual increase in recorded history (i.e., since 1967), as well as the first annual increase since 2007. Meanwhile, the official Census poverty rate dropped from 14.8 percent to 13.5 percent, the biggest year-on-year decline since 1968.

President Obama made sure to pat himself on the back for these gains, and he cited them as evidence of how far the U.S. economy has come since January 2009.

In reality, the news on household incomes is both better and worse than recent headlines suggest.

Let’s start with the good news. Because the Census Bureau measures pre-tax “money income,” it excludes the value of non-cash government transfer programs (such as Medicare and Medicaid), employer-provided fringe benefits (such as health insurance), realized capital gains, and other income sources. Census researchers also adjust for inflation using a version of the Consumer Price Index, which is widely considered to be less accurate than the Personal Consumption Expenditures index.

All of this helps explain why Census estimates of median household income are significantly lower than those produced by the Congressional Budget Office (CBO). According to CBO, median household “market” income — that is, realized income from private sources, before taxes and government transfers — was $64,700 in 2013 (the most recent year for which CBO has data). When CBO includes the value of transfer programs, it finds that total pre-tax median household income for 2013 was $79,200.

By comparison, the Census Bureau says that median household income in 2015 was just $56,516, despite the 5.2 percent increase from 2014.

Here’s another point worth remembering: As America gets older, retirees are becoming a larger share of the population. The CBO data allow us to separate elderly households from households with children. They show that, in 2013, the average market income among households with children in the middle quintile of earners was $81,200.

When measuring income growth over time, it’s also important to account for changes in household size. (American households are smaller, on average, than they were 40 or 50 years ago.) CBO estimates that, between 1979 and 2013, growth in size-adjusted median household market income was 20 percent; growth in size-adjusted post-transfer median household income was 37 percent; and growth in total size-adjusted after-tax median household income was 47 percent. Over that same period, growth in non–size-adjusted median household market income was only 12 percent.

In short, actual income levels among working-age households are significantly higher than the Census Bureau would have us believe. In addition, actual poverty levels are significantly lower, especially when we account for refundable tax credits. (Economists Bruce Meyer of the University of Chicago and James Sullivan of Notre Dame estimate that, in 2010, America’s poverty rate based on consumption was only 4.5 percent. The 2010 Census income-poverty rate, by contrast, was 15.1 percent.)

So that’s all good news. The bad news? Whether we use Census or CBO data, and whether or not we adjust for household size or include all government transfer programs, America’s median household income remains below the pre-recession peak it reached in 2007. For that matter, both median household money income as calculated by the Census Bureau and size-adjusted median household market income as calculated by CBO remain below their respective 1999 levels.

Even if we control for the rising number of elderly, CBO reckons that the average market income among households with children in the middle quintile was lower in 2013 ($81,200) than it was in 2005 ($82,400).

These numbers confirm the severity of the Great Recession, and they demonstrate how difficult it has been for our economy to recover. They also confirm that, as Alex Pollock of the R Street Institute and Neil Irwin of the New York Times recently noted, the 21st century has witnessed a remarkable slowdown in per-capita GDP growth, both in the United States and in other developed countries. Writing last month, Irwin put it bluntly: “Economic growth in advanced nations has been weaker for longer than it has been in the lifetime of most people on earth.”

That remains true today, despite last week’s encouraging Census report.

Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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