The U.S. Economy: Just How Strong Is It?

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by: Elliott R. Morss
Summary

The American President regularly reminds us how well the US economy is doing.

But there is far more to the story than the aggregate numbers suggest.

It is time the US government started collecting data on what is really happening.

Elliott R. Morss, Ph.D. ©All Rights Reserved

Introduction

We hear that the US economic numbers are great: low unemployment, stock markets strong and manufacturing activity moving ahead at a good clip. But a recent piece by David Leonhardt in the New York Times with supporting data from Piketty, Zucman and Saez (PZS) indicates that the “usual” economic data do not tell the whole story. And far from it. PZS break income growth numbers down by income bracket. I have asked around if any agency in the Federal government does this. And with the exception of the Internal Revenue Service, the answer is no.

In the following, I highlight their findings.

1. A Static View - The Current Situation

Table 1 provides data for 2014, the most recent year in the PZS database. Note the income differentials: the post-tax average income for all was $46,500 while the top 1 percent earned $790,000. It is also clear from the table that government expenditure and tax policies reduced the income differentials substantially.

Table 1. - Income by Income Bracket, 2014

Source: Distributional National Accounts | Gabriel Zucman

2. How Things Have Changed

Table 2 indicates how incomes have changed over three time periods. Several things worth noting:

  • In the 1962-80 period, the income growth mainly occurred in the lower income brackets, with the largest rise (53%) happening in the bottom 50% of income earners.
  • But from 1980 on, growth was highest in the top income brackets.
  • The income of the lowest 50% of income earners has not recovered to the level it was before the 2008 – 09 banking collapse/global recession.

Table 2. – Post Tax Growth in Income, by Income Bracket

Source: Distributional National Accounts | Gabriel Zucman

I quote from Leonhardt:

The financial crisis remains the most influential event of the 21st century. It left millions of people — many of whom were already anxious about the economy — feeling much more anxious, if not downright angry. Their frustration has helped create a threat to Western liberal democracy that would have been hard to imagine a decade ago. Far-right political parties are on the rise across Europe, and Britain is leaving the European Union. The United States elected a racist reality-television star who has thrown the presidency into chaos.

As the following figure from PZS suggests, US government taxes and transfers have moderated income differentials somewhat.

But the following graph from PZS indicates what is really happening. Note that the constant dollar income of the bottom 50% is about what it was in 1980!

Looking Ahead

To understand what is happening, it is important to understand what is “driving” US growth. I have written extensively about the information revolution and labor-saving automation in particular. I conclude that income distribution is likely to get worse as entrepreneurs continue to replace workers with labor saving technologies. This has little to do with “conspiracies at the top.” This is all about entrepreneurs choosing to invest in technologies instead of hiring more workers. And one sees these technologies being applied in almost all goods producing and service industries.

These lead to a larger question that I cannot answer: what will the world do with the large populations for whom there is no work?

So to answer the question proposed in the title: the US economy is not doing at all well for a large segment of its population. And it is time the US government started collecting data on this issue. More specifically, the US Bureau of Economic Analysis and/or the US Bureau of Labor Statistics should start collecting income growth data by income bracket.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.