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Tyler Cowen points out [2] that the median household is not doing very well lately, noting that real median household income was 8.3% lower in 2012 than it was in 2007. Pretty depressing. The headline of his post is
The Great Reset: (free Facebook won’t make up for this)
The Facebook claim is a dig at those who argue that there is a lot of stuff we don’t have to pay for (Facebook, Google) that isn’t in the income numbers.
Then he links to this Neil Irwin [3] article in the Washington Post which points out that real median income is now lower than it was in 1989. This is supposed to seal the case that times are awful.
Well times aren’t very good. We know that. We know that a lot of people are unemployed. A lot of people are underemployed working part time. And we know that a lot of people have given up. A lot of people are on disability.
The question is how bad is it? Does Tyler really believe that it’s worse than 1989–that the net growth of the last 23 years is negative?
I have some idea of what Tyler does feel, having just finished his book, Average is Over [4] (fascinating book), and interviewed him for EconTalk (coming out on September 30). I think Tyler would probably say, yes, there are measurement issues when you compare today to 1989 but it’s still pretty bleak when you correct for them as best we can. And I suspect he’d say those measurement issues are small over the last five years and 8.3% is a big drop. Tyler believes (and he has lots of company) that we’re facing the Great Reset—that some of the changes we’re seeing aren’t due to the Great Recession but are due to fundamental restructuring that is not going to be pretty for lots of people.
I’ll start with the 1989 claim and then I’ll look at the past five years. The 1989 claim doesn’t reinforce the point that times are bad–it makes the point that real median income is both difficult to measure and difficult to interpret. It certainly doesn’t capture what Neil Irwin thinks it does. He writes about the well-being of the “typical American family.” Well the American family is very different today than it was in 1989 and that messes up how you measure economic progress. As I’ve pointed out many times here at the Cafe (here [5] and here [6], for example), family structure has changed a lot and that distorts the median when there’s been a huge increase in households headed by single women, for example.
But maybe a better to point to make (as Don often points out) is that many (most?) of us wouldn’t give up our free Facebook and Google and our iPhones and robotic prostate surgery and our GPS-laden cars with bluetooth phone and audio in return for the incomes of 1989 or even the 8.3% higher incomes of five years ago. So take the 1989 comparison with a few tons of salt.
What about the the Great Reset? An 8.3% drop is a big change. But what does it mean? What it doesn’t necessarily mean is that the average family has seen a reduction in its earnings of 8.3% and faces a permanently lower standard of living because of changes in the structure of the economy.
From November of 2007 (right before the Great Recession started) through November 2012, employment in the US fell over 3 million–a statement about the lousiness of the recovery. But there are 5 million or so more households in the Census data in 2012 than there were in 2007. So what does it mean to say that the median income fell? Does that mean that the typical family was working and is now earning less? Working and now on unemployment or disability?
Remember that the Census measures income, not earnings. I’m not sure what’s included but if you go to this earlier Census report [7] you see that are about 5 million fewer people with any earnings in 2012 compared to 2007. I’d like to know what happened to the income or earnings of those two groups—the people who have earnings in both years.
And there was an increase in the foreign-born population [8] of 2.4 million between 2007 and 2011. How does that affect the median? It sure would be nice to see some panel data—data that actually follows the same people around over time so we could see what’s actually happened independently of the immigration issue.
I’m taking a wait-and-see attitude on the Great Reset. It’s a lousy economy for a lot of people. A lot of people aren’t working. But I’d argue that right now it’s hard to figure out whether this is a permanent change or just the result of a lousy recovery.