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Giving thanks for the invisible hand, the kaleidoscopic energy and productivity of the free market, and no turkey czar
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This post has been an annual tradition at CD now for several years:
Like in previous years, most of you probably didn’t call your local supermarket ahead of time and order a Thanksgiving turkey this year. Why not? Because you automatically assumed that a turkey would be there when you showed up, and it probably was there when you showed up “unannounced” at your local grocery store and selected your Thanksgiving bird.
The reason your Thanksgiving turkey was waiting for you without an advance order? Because of the economic concepts of “spontaneous order,” “self-interest,” and the “invisible hand” of the free market. Turkeys appeared in your local grocery stores primarily because of the “selfishness” and “self-interest” (maybe even greed in some cases) of thousands of turkey farmers, truckers, and supermarket owners who are complete strangers to you and your family. But all of those strangers throughout the turkey supply chain co-operated on your behalf and were led by an “invisible hand” to make sure your family had a turkey on the table to celebrate Thanksgiving this year. The “invisible hand” that was responsible for your holiday turkey is just one of millions of everyday examples of the “miracle of the marketplace” where “individually selfish decisions must lead to a collectively efficient outcome,” as economist Steven E. Landsburg observed.
In a 2003 Boston Globe article titled “Giving Thanks for the Invisible Hand,” syndicated columnist Jeff Jacoby offered a wonderful tribute to the miracle of the invisible hand that makes affordable turkeys available so efficiently every year at Thanksgiving through the power of “spontaneous order” and without the need for any central planning or a “turkey czar”:
Isn’t there something wondrous — something almost inexplicable — in the way your Thanksgiving weekend is made possible by the skill and labor of vast numbers of total strangers?
To bring that turkey to the dining room table required the efforts of thousands of people — the poultry farmers who raised the birds, of course, but also the feed distributors who supplied their nourishment and the truckers who brought it to the farm, not to mention the architect who designed the hatchery, the workmen who built it, and the technicians who keep it running. The bird had to be slaughtered and defeathered and inspected and transported and unloaded and wrapped and priced and displayed. The people who accomplished those tasks were supported in turn by armies of other people accomplishing other tasks — from refining the gasoline that fueled the trucks to manufacturing the plastic in which the meat was packaged.
The activities of countless far-flung men and women over the course of many months had to be intricately choreographed and precisely timed, so that when you showed up to buy a fresh Thanksgiving turkey, there would be one — or more likely, a few dozen — waiting. The level of coordination that was required to pull it off is mind-boggling. But what is even more mind-boggling is this: No one coordinated it.
No turkey czar sat in a command post somewhere, consulting a master plan and issuing orders. No one forced people to cooperate for your benefit. And yet they did cooperate. When you arrived at the supermarket, your turkey was there. You didn’t have to do anything but show up to buy it. If that isn’t a miracle, what should we call it?
Adam Smith called it “the invisible hand” — the mysterious power that leads innumerable people, each working for his own gain, to promote ends that benefit many. Out of the seeming chaos of millions of uncoordinated private transactions emerges the spontaneous order of the market. Free human beings freely interact, and the result is an array of goods and services more immense than the human mind can comprehend. No dictator, no bureaucracy, no supercomputer plans it in advance. Indeed, the more an economy is planned, the more it is plagued by shortages, dislocation, and failure.
It is commonplace to speak of seeing God’s signature in the intricacy of a spider’s web or the animation of a beehive. But they pale in comparison to the kaleidoscopic energy and productivity of the free market. If it is a blessing from Heaven when seeds are transformed into grain, how much more of a blessing is it when our private, voluntary exchanges are transformed – without our ever intending it – into prosperity, innovation, and growth?”
Bottom Line: As you celebrate Thanksgiving tomorrow with your family, make sure to express some thanks and gratitude to the thousands of “invisible” strangers who won’t be there in person, but who were led by the “invisible hand” of the market over the last several months to make sure your holiday feast was possible.
Why the global gloom? World trade and world output are at record highs, and global equities are near record levels
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The CPB Netherlands Bureau for Economic Policy Analysis released its monthly report today on world trade and world industrial production for the month of September. Here are some of the highlights of that report:
1. World merchandise trade volume (adjusted for price changes) increased by 2.0% in September on a monthly basis and by 4.6% from a year earlier to reach a new all-time record high in September (see blue line in chart above).
2. On a year-over-year basis through September, the volume of trade grew more than two times faster in the world’s emerging economies than in the advanced economies for both exports (7.1% for emerging vs. 2.0% for advanced) and imports (6.25% vs. 2.9%). The growth in trade volume for the emerging economies was led by especially strong double-digit gains for the Asian countries, where exports grew year-over-year by 10.2% and imports by 10.3%.
3. At a new record high of 138.7 for the CPB world trade index in September, the volume of global trade is now almost 14% above its previous cyclical peak of 122.1 in early 2008, and 42% above the recessionary cyclical low of 97.6 in May 2009.
4. World industrial production (adjusted for price changes) increased in September on a monthly basis by 1.20% to a new record high, led by monthly growth of 1.4% in the emerging economies and followed by a slightly lower monthly growth of 1.1% in the advanced economies (see red line in chart).
5. On an annual basis, world industrial output increased 3.3% in September, with year-over-year output growth in the emerging economies of 4.7%, led by growth in the Emerging Asian economies of 6.6%. Factory output in the advanced economies grew by 2.2% year-over-year, led by the strong growth in the United States of 4.2%.
5. At an all-time high index level of 127.1 in September, world industrial production is now nearly 12% above its previous recession-era peak in February 2008 of 113.6, and 28.6% above the recessionary low of 98.8 in February 2009.
Bottom Line: World industrial output and world merchandise trade both reached new record monthly highs again in September. The volumes of world output and trade are now both well above their previous peaks during the early months of the global slowdown in 2008 (by 13.6% and 11.9% respectively), confirming that the global economy has made a complete recovery from the 2008-2009 economic slowdown and is now in a new cycle of solid and sustained growth. At the forefront of the global economic expansion in 2014 have been the emerging economies, which experienced especially strong growth over the last year through September in both trade volumes (7.1% export growth and 6.25% import growth) and industrial output (4.7%), led by double-digit growth in exports (10.1%) and imports (10.3%) in the Asian economies and 6.6% output growth.
Reflecting the strong growth in world trade and output over the last several years, the world stock market capitalization rallied to a new record high in August of $64.7 trillion (T) before retreating slightly in September and October (see chart above). Global equity values at $63.3T in October were above their 2007 pre-recession $58.5T peak by $4.8T (and by 8.2%), and above their recessionary low of $27T in 2008 by $36.3T (and by 134%). The complete recovery in recent years for the global economy with more new record highs this year for global trade, global industrial output, and world stock market capitalization demonstrates the incredible resiliency of economies around the world to recover and prosper, even following the worst financial crisis and global economic slowdown in generations. So why so much global gloom?
That’s a question Scott Grannis asked last week in a post about the global recovery (“Why the Global Gloom?“), where he had this to say about the rebound in global equities:
So consider the implications of the chart above. It shows that the market capitalization of the world’s equity markets has increased almost $40 trillion dollars since March 2009, and in the past two years the value of global equities is up about 30%. That’s a huge, and welcome increase. Does it mean that consumers are going to be spending double and triple as much because stock prices have almost tripled? No. It means that the expected future cash flows of corporations all over the globe have increased significantly. Consumers likely will be spending more in the future, but only because corporations will be making more and better stuff, hiring more workers, building new plant and equipment, and booking rising profits. The stock market is often able to look across the valley of despair and see a better future on the other side. It’s likely that that’s the case today.
It’s hard to get pessimistic about the future when the world’s stock markets are becoming more and more optimistic. For now, the world’s stock markets are seeing better times ahead, and investors seem to be getting the message.
IRS data show that the vast majority of taxpayers in the ‘Fortunate 400′ are only there for one year
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Frequency of Appearing in the Top 400 Tax Returns by Adjusted Gross Income, Tax Years 1992–2010
|Number of Years in the Top 400||Number of Taxpayers in Group||Percent of Taxpayers Represented by Each Group|
|10 or more||95||2.40%|
The IRS just released a new report on the 400 taxpayers reporting the highest adjusted gross incomes (AGI) from 1992 to 2010, and the table above shows the frequency of individual taxpayers appearing in the “Fortunate 400″ (Table 4 in the IRS report). Of the 7,600 tax returns filed from 1992 to 2010 (400 highest earners in each year x 19 years), there were 4,024 unique, individual taxpayers, since obviously some taxpayers made it into the top 400 earner group in more than one year. The data show that:
1. Of the group of 4,024 top earners from 1992-2010, there were 2,909 individual taxpayers who made it into the “Fortunate 400″ only one time during the 19-year period. Those 2,909 one-timers represent 72.3% of the total 4,024 taxpayers, and therefore only 1,115 taxpayers that make up the rest of the group (27.7% of the total, or about one in four) were able to make it into the top 400 more than once between 1992 and 2010.
2. Moreover, since 2,909 earners made it into the top 400 once (72.3%), and another 504 (12.5%) made it into the top group twice between 1992 and 2010, that means that approximately 85% of the top earners made it into the “Fortunate 400″ group only once or twice (3,413 out of 4,024), and only about 15% of the remainder (611 taxpayers out of 4,024) were able to make it into the top group in more than 2 years out of 19.
3. There were only 95 taxpayers out of the 4,024 total taxpayers in the top earner group (2.4%) who were in the top 400 in 10 or more years out of 19.
4. Of the 7,600 total returns filed for this elite group over the 19-year period, 2,909 returns represented one-timers. So on average, in any given year between 1992 and 2010, about 38% of the returns filed by the top 400 taxpayer were one-timers who were not in the “Fortunate 400″ in any of the other 18 years.
According to the IRS from its last report (now updated here with 2010 data), “The data reveal a mostly changing group of taxpayers over time. In fact, there were 4,024 different taxpayers represented in total for the 19-year period. Of these, a little more than 27 percent appear more than once and slightly more than 2 percent were represented in 10 or more years.”
MP: Whenever we hear commentary about the top or bottom income quintiles, or the top or bottom X% by income, or the top 400 taxpayers, a common assumption is that those are static, closed, private clubs with very little turnover – once you get into a top or bottom quintile, or a certain income percentile, or the top 400, you stay there for decades or life.
But reality is very different – people move up and down the income quintiles and percentile groups throughout their careers and lives. The top or bottom 1/5/10%, just like the top or bottom quintiles, are never the same people from year to year, because there is constant, dynamic turnover as we move up and down the income categories. As the new IRS data show, almost three out of every four members of the ever-changing, dynamic “Fortunate 400″ over the last 19 years were only “members” of that group for a single year.
US Commission on Civil Rights member says the racial quota system of Minneapolis Public Schools is ‘constitutionally suspect’
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In a CD post a few weeks ago, I discussed how the Minneapolis Public Schools (MPS) announced that it will address racial disparities in student suspensions by imposing racial quotas for future suspensions. Several legal experts have pointed out that those explicit racial quotas might be unconstitutional because they violate the Equal Protection Clause (also known as “equal justice under the law,” a phrase engraved on the US Supreme Court building) of the Fourteenth Amendment to the United States Constitution.
One of those legal experts is Peter N. Kirsanow, an attorney and one of the eight commissioners of the U.S. Commission on Civil Rights. Here’s an excerpt of a letter he sent today (as a commissioner and not on behalf of the entire Commission) to Minneapolis Public Schools superintendent Bernadeia H. Johnson, in response to the November 7 announcement of her intent to eliminate the MPS’s racial suspension gap by 2018 through the use of racial quotas (emphasis added):
The new discipline policy is legally and constitutionally suspect.
I would have to be profoundly naïve to believe that this policy is not introducing a racial quota system for school discipline. According to the statement announcing the new discipline policy,“MPS must aggressively reduce the disproportionality between black and brown students and their white peers every year for the next four years. This will begin with a 25 percent reduction in disproportionality by the end of this school year; 50 percent by 2016; 75 percent by 2017; and 100 percent by 2018.” This is a racial quota system for school discipline, because it has nothing to do with whether any particular individual deserved to be punished for his misbehavior.
Minneapolis’s new quotas for racial discipline exposes students who belong to non-preferred races to a stricter discipline policy than students who belong to preferred races. It teaches them that justice is not colorblind and that we do not stand or fall on our individual merit. This profound inequity is the potential constitutional problem with this discipline policy.
Achieving a state of affairs where there is no racial disparity in discipline by 2018 means that there will have to be differential treatment of misbehaving students based on their race. There is, to our knowledge, no substantive allegation that black or brown students are being treated more harshly in Minneapolis schools on the basis of their race.
If there were such an allegation, this new policy would refer to concrete examples of racially disparate treatment rather than racial disparities in discipline. Racial disparities in school discipline have been common knowledge for years. If it were possible for such disparities to be solved through racially neutral policies, it would have happened by now. The idea that MPS will be able to eliminate the racial disparity in discipline by 2018 without either treating black and brown students more leniently or white students more harshly is unrealistic and absurd.
This is the dark side of disparate impact. In trying to avoid disparate impacts caused by racially neutral policies, entities begin to deliberately discriminate by treating people differently based on race.
In short, by trying to remedy the disparate impact of facially neutral disciplinary policies that do not violate Title VI, you are exposing MPS to liability for racially disparate treatment that is banned by Title VI, as well as violating the Equal Protection Clause.
If the differences in discipline rates reflect actual misbehavior on the part of students, and this behavior is of long duration and seemingly intractable, what is to be done? Is the solution simply not to punish the misbehaving students because we do not want ten black kids to be punished and only five white kids to be punished? Do we let the five “extra” black kids go unpunished? And if we do, what is the effect on the students in the class who are well-behaved, are trying to learn, and who often are “black or brown” themselves?
HT: Hans Bader, senior attorney at the Competitive Enterprise Institute; see his related article “Minneapolis Adopts Unconstitutional Racial Quotas in School Discipline.”
An amazing chart of an amazing job-creating state; we owe a debt of gratitude to ‘Saudi Texas’ and the shale boom
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The chart above shows a most amazing economic phenomenon: Since December 2007 when the Great Recession started, Texas civilian employment has increased by 12.4% and by more than 1.36 million jobs, from just over 11 million jobs in December 2007 to 12.37 million in October of this year (see blue line in chart). In contrast, civilian employment in the other 49 states without Texas is still 0.26% and more than 350,000 jobs below the December 2007 level (see red line in chart) — there were 134.9 million non-Texas jobs in October vs. 135.26 million in December 2007.
It’s also important to note that while job growth in Texas slowed considerably in 2008 and 2009 due to the recession, the level of civilian employment in Texas never fell below its pre-recessionary, December 2007 level. Also, while Texas was able to actually increase jobs slightly even during the depths of the recession in 2008 and 2009, the US labor market minus Texas experienced a stunning loss of 8.374 million jobs (a percentage drop of 6.2%) in the two year period between December 2007 and December 2009.
In another job-related milestone for Texas, the BLS reported today that annual payroll employment in Texas increased in October by more than 400,000 jobs from a year ago for the third straight month, and established a new all-time state record for job growth over a 12-month period with a 421,900 gain from October 2013. Over the last year, Texas has added more than 1,600 new jobs every business day – a hiring rate of more than 200 jobs every hour! Also, Texas’s annual job gain of 421,900 through October represented 16% of the country’s 2.643 million increase in nonfarm payroll employment over that period, even though Texas’s population is only 8.4% of the US total. In percentage terms, Texas payrolls increased by 3.74% over the last 12 months, almost double the 1.93% growth in US payroll employment.
The chart and data tell a powerful and remarkable story of job creation in the Lone Star State of more than 1.36 million new jobs added since the start of the Great Recession, compared to a net deficit of 354,000 jobs for the other 49 states combined. Much of the economic success of Texas in recent years that has fueled job creation in the state is a direct result of the shale oil and gas boom taking place in areas like the Permian Basin in west Texas (1.8 million barrels of oil per day) and the Eagle Ford in south central Texas (1.6 million barrels per day). Texas is now producing almost 37% of America’s total crude oil production, and as a separate country would be the world’s 8th largest oil-producer. Further, Texas has done a great job of attracting businesses like Toyota because of the state’s “employer-friendly combination of low taxes, fair courts, smart regulations and world-class workforce.”
Bottom Line: The country, the president, and all of us individually owe a huge debt of gratitude to the state of Texas and to the oil and gas industry for helping support the US economy during and after the Great Recession. Without the energy-driven economic stimulus from the fracking revolution, and without the gusher of jobs in the state of Texas, there’s no question that the Great Recession would have been much worse and lasted much longer, and the jobs picture today would be much bleaker. The chart above helps to illustrate how important the state of “Saudi Texas” is to the US labor market and economy. Thanks largely to the Lone Star State, the US has finally gained back all of the jobs lost during the Great Recession – September and October this year have been the only two months since 2007 that civilian employment in the US surpassed the pre-recession jobs peak. God Bless Texas.
Something to be thankful for: the real cost of a Thanksgiving dinner is 1.2% cheaper than last year, 21% cheaper than 1986
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From the American Farm Bureau Federation (AFBF):
The American Farm Bureau Federation’s (AFBF) 29th annual informal price survey of classic items found on the Thanksgiving Day dinner table indicates the average cost of this year’s feast for 10 is $49.41, a 37-cent increase from last year’s average of $49.04. The big ticket item – a 16-pound turkey – came in at $21.65 this year. That’s roughly $1.35 per pound, a decrease of less than 1 cent per pound, or a total of 11 cents per whole turkey, compared to 2013. The average cost of the dinner has remained around $49 since 2011.
The AFBF survey shopping list includes turkey, bread stuffing, sweet potatoes, rolls with butter, peas, cranberries, a relish tray of carrots and celery, pumpkin pie with whipped cream, and beverages of coffee and milk, all in quantities sufficient to serve a family of 10. There is also plenty for leftovers.
Foods showing the largest increases this year were sweet potatoes, dairy products and pumpkin pie mix. Sweet potatoes came in at $3.56 for three pounds. A half pint of whipping cream was $2.00; one gallon of whole milk, $3.76; and a 30-ounce can of pumpkin pie mix, $3.12. A one-pound relish tray of carrots and celery ($.82) and one pound of green peas ($1.55) also increased in price. A combined group of miscellaneous items, including coffee and ingredients necessary to prepare the meal (butter, evaporated milk, onions, eggs, sugar and flour) rose to $3.48.
In addition to the turkey, other items that declined modestly in price included a 14-ounce package of cubed bread stuffing, $2.54; 12 ounces of fresh cranberries, $2.34; two nine-inch pie shells, $2.42; and a dozen brown-n-serve rolls, $2.17.
“America’s farmers and ranchers remain committed to continuously improving the way they grow food for our tables, both for everyday meals and special occasions like Thanksgiving dinner that many of us look forward to all year,” said AFBF Deputy Chief Economist John Anderson said. “We are blessed to be able to provide a special holiday meal for 10 people for about $5.00 per serving – less than the cost of most fast food meals.”
A total of 179 volunteer shoppers checked prices at grocery stores in 35 states. Farm Bureau volunteer shoppers are asked to look for the best possible prices, without taking advantage of special promotional coupons or purchase deals. The AFBF survey was first conducted in 1986. While Farm Bureau does not make any scientific claims about the data, it is an informal gauge of price trends around the nation. Farm Bureau’s survey menu has remained unchanged since 1986 to allow for consistent price comparisons.
1. Compared to last year’s cost of $49.04 for a complete classic Thanksgiving dinner for ten people, this year’s cost of $49.41 for the dinner is only 0.75% (and 37 cents) higher (see blue line in chart). That compares to increases in overall consumer prices over the last year of 1.7% and average wages of 2.2%.
In addition to the 0.5% decrease in turkey prices compared to last year, the other items that decreased in price over the last year were: rolls (-0.5%), stuffing (-4.9%), cranberries (-3.3%), peas (-7.2%), and pie shells (-2.8%). The items that were more expensive this year compared to a year ago were sweet potatoes (+6.0%), pumpkin pie mix (+0.6%), milk (+2.7%), relish tray (+1.2%) and whipping cream (+8.1%).
2. Adjusted for inflation, the cost of a classic Thanksgiving dinner for ten this year is 1.24% cheaper than last year, 3.54% cheaper than two years ago and 5% cheaper than 2011 (see blue line in chart).
3. Compared to the cost of a Thanksgiving dinner of $62.28 in 1986 (in 2014 dollars), today’s classic turkey dinner for ten is almost 21% cheaper at $49.41 this year.
4. Measured in time worked at the average hourly wage for all private production workers of $20.70 in October 2014, the “time cost” of this year’s classic turkey dinner for ten is only 2.40 hours, down by 1.2% from 2.43 hours last year and down by 4.4% from 2.51 hours in 2012 (see bottom chart). Compared to 1986 when the average American would have worked 3.22 hours to earn the income necessary to purchase the turkey dinner for ten, the “time cost” for a worker today (2.40 hours) is almost 26% lower.
5. Cost conscious shoppers can buy the same classic Thanksgiving meal at Walmart for only $32.64 (see top chart above), a savings of 34% compared to the AFBF national average, according to this press release from Walmart. In hours of time worked at the average hourly wage for private production workers, that would be a “time cost “of only 1.58 hours for one worker to purchase a holiday feast for ten people at Walmart, a truly amazing bargain.
Bottom Line: The fact that a family in American can celebrate Thanksgiving with a classic turkey feast for less than $50 and at a “time cost” of only 2.40 hours of work for one person (and only $32.64 or 1.58 hours of work for Walmart shoppers) means that we really have a lot to be thankful for on Thanksgiving: an abundance of cheap, affordable food. Compared to 1986, the inflation-adjusted cost of a turkey dinner today is 21% cheaper, and 26% cheaper measured in the “time cost” for the average worker. Relative to our income and relative to the cost of food in the past, food in America has never been more affordable than it is today.
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One of the most frequently reported economic trends is the gradual decline in US real median household income from its 1999 peak of about $57,000 to below $52,000 in each of the last three years (see blue line in top chart above). We hear a number of reasons from politicians and pundits for the decline in median household income over the last decade, mostly reasons that involve a narrative about economic stagnation and growing inequality caused by the progressives’ usual suspects: gains in worker productivity, income and wealth going to corporations and “the rich” instead of being shared by average workers; failure to increase the minimum wage or pass “living wage” laws; the combined effects of globalization, free trade and outsourcing putting downward pressure on middle-class incomes in America, and other variations of economic pessimism. Former President Bill Clinton recently offered his three reasons for stagnant median household income that include not raising the minimum wage and excessive corporate greed.
But there are some other very obvious, but mostly overlooked, factors that could easily explain why median household income has declined over the last decade that have nothing to do with economic stagnation: demographic changes in the composition of US households. AEI’s Alex Pollock addressed this issue recently in his essay “If income is going up, can median household income go down? It’s possible.” Here’s how Alex frames the issue:
One of the most commonly cited numbers in discussions of inequality is the trend in median household income, often used as if it settled the issue. Using median household income poses a fundamental problem, however. It conflates two measurements — changes in the composition of households and changes in income — and thus can easily mislead us.
Has the composition of households in America been changing? Obviously, it has. The percent of married couple households has fallen from more than 60 percent in 1980 to less than 50 percent in 2010. One-person households have risen from 23 percent to 27 percent of households in this period. Shifting from two-earner households to one-earner households lowers the median household income, even if everybody’s income is the same as before [or rising].
Alex provides a series of hypothetical examples showing how simple household demographic changes can result in rising individual incomes while at the same time the median household income is falling. For example, if there is a shift from two-earner, married households to one-earner single households as a result of divorce, the overall median household income could fall even when income is increasing for all individuals in the new mix of households with a greater share of single households.
Alex’s key point is that when demographics and household composition are dynamically changing, individual income and median household income can naturally move in opposite directions. The most frequent mistake, according to Alex, is to look at median household income over time assuming that household demographics are static. And that is precisely the mistake made in almost all of the discussions about median household income, and that leads to a distorted and inaccurate conclusion about why median income is falling.
One example of a major dynamic change in household composition is the significant increase in the share of US households with no earners, from fewer than 20% of all US households in 1980 to 23.7% of households in 2013 (see blue line in bottom chart above, Census data here from Table H-12). Likewise, the share of single-earner households has also increased from 33.2% in the early 1990s to above 37% for the last five years (see red line). In contrast, there’s been a decrease in the share of US households with 2 or more earners from above 46% of all households in 1989 to fewer than 40% of US households in every year since 2010 (see brown line in bottom chart above).
In summary, over the last several decades, there’s been an increasing share of no-earner, single-parent and single-earner households and a decreasing share of married and two-or-more-earner households. That major demographic shift has likely depressed median household income significantly in the last decade, even though it’s possible, as Pollock shows, that the income of individual working Americans could be rising.
Another key demographic shift is the increasing number of retired Americans as a share of the adult population based on Social Security data. As the red line in the top chart above shows, US retirees represented a pretty stable 15% share of the US population from 1990 to 2008. Starting around 2008 when the early “baby-boomers” – those born in 1946 — reached early retirement age of 62, the share of retirees started increasing from less than 15% of the adult population in 2007 to more than 16.6% in 2013.
In the five year period between 2008 and 2013, the number of retired Americans increased by 5.6 million, which was the largest five-year increase in US history, and more than double the 2.5 million increase in the previous five-year period. Given that wave of recent retirements, there have been millions of older, experienced, highly-paid workers going from their peak earning levels to a much lower retirement income that would typically include Social Security payments, pensions, and distributions from retirement accounts. As those millions of retirees are replaced in the workforce by younger, less experienced, lower paid workers, median household income could be falling even though the average income of working Americans could be rising.
It’s probably no coincidence that the recent increase in retirees, both in absolute numbers and as a share of the adult population, along with the other demographic changes described above, has naturally coincided with a decline in median household income. It would be hard to imagine that an aging population with a significant increase in the number and share of retirees, wouldn’t depress median household income, for purely demographic reasons.
Bottom Line: Most explanations of the recent decline in US median household income are based on some variation of a narrative of economic stagnation, rising inequality and pessimism. But what is almost always overlooked are the very significant demographic changes that have taken place in the composition of US households over time that would significantly impact the income of the median US household. Taken together, a) the increase in the share of no-earner, single-earner, and single-parent households, b) the increase in the number and share of retirees, along with c) the decline in the share of two-earner and married households, would logically and necessarily depress the income level of the median US household.
In summary, the composition of US households is not static, fixed and permanent; rather it’s dynamic, evolving and ever-changing. Discussions on changes in median household income over time that ignore the changes in household composition over time will always be incomplete, distorted and misleading. Perhaps the decline in median household income this century is not a narrative of economic pessimism and stagnation after all, but a more upbeat story of a greater number of Americans living longer lives, and enjoying periods of time in retirement that were never possible until this century.