Stagnabit!

Ask anyone on the street these days about middle class incomes and, if they don’t threaten to mace you if you don’t please step away, they might tell you a sad story of stagnation. Adjusting for inflation, the typical household is earning but a pittance more than the 1970s, while all the gains in wealth have gone to feed fancy feasts to the fat cats at the top of the distribution.

But Terry J. Fitzgerald, who may or may not be related to F. Scott Fitzgerald (or even F. Scott Key, for that matter), and who, though failing to write a Great American Novel or national anthem, has nonetheless written many a satisfactory research article for the Minneapolis Fed, recently penned a rejoinder to this dominant narrative that is gloriously free of turgid run-on sentences such as the one I'm writing at this very moment. Par exemple:

The U.S. Census Bureau reports that median household income stagnated from 1976 to 2006, growing by only 18 percent. In contrast, data from the Bureau of Economic Analysis indicate that income per person was up 80 percent.

The fact that an 18 percent gain in purchasing power is considered stagnation may in the eyes of some be rivaled only by the Turducken as a signal of how prosperous our society has become. Ignoring that consideration, however, leaves one to wonder about the apparent contradiction in the two statistics above. How can income per person have grown four times as much as the income for a typical household? Terry tells the story in pictures:

About 15-20 percent of the difference between the per person and household figures is caused by increasing inequality, but most of the discrepancy is explained by other factors such has household composition, definitional differences, and different methods of calculating inflation. Briefly:

  • Household composition – The household in 1976 looked different than the household of today. They are smaller, for example, and less likely to have a married couple, and this accounts for a smaller growth in household income. Comparing apples to apples yields much higher growth rates.
  • Definitional differences – Unlike the Census, the BEA includes “employer contributions to employee pension and insurance funds and in-kind transfer payments such as Medicaid, food stamps and energy assistance” in its measure of income. Including these forms of compensation boosts income growth.
  • Different methods of calculating inflation – There is no standard way of calculating inflation, and income statistics over time are sensitive to which method is used. Using a different method that attempts to capture reality better results in higher growth.

Putting all this together yields a 44-62 percent increase in median household income over the past 30 years. The assumptions and the methodology are yet imperfect, but this is hardly a result at which to cluck, quack, or gobble.