This strikes me as a very sensible and informative explanation of one aspect of the middle class income story. An excerpt:
In year 2000, after-tax income was $45,900. In 2004, it had increased to $48,400 after taking out the effect of inflation. That is an increase of $2500, or 5.5% (contrary to what the Census Bureau figures suggest). Note that actual incomes increased more than that, but this is the increase that occurred over and above the rate of inflation. When the numbers for 2005 come out, there is no doubt that they will be higher still. As such, it is simply wrong to assert that the median family is $1300 poorer in 2005 compared to 2000. The Census figures indicate that families feel poorer, but that might be because we have a media that is largely incapable of reporting anything positive about the economy. Whatever the reason, it happens not to be true. People in the middle in America are getting better off with each passing year. As such, Gene Sperling should have said “The typical American family is making $2,500 in inflation-adjusted dollars more than they were in 2000. They’re $2,500 richer each and every year. If Rudy Giuliani and President Bush want to say that’s success, they can.” And they should.
Update: A reader responds:
Dear Jonah:
You are assuming that the inflation stats are correct. In the past 5
years, house prices have doubled, health care costs soared, gas
prices doubled, food increased, extra. The middle class lives in
reality, not government statistics. That is why the middle class is
not happy about the economy. My take, the Fed has created massive
inflation thanks to low interest rates and too much money in the
system and the middle class is paying for it. What good is low
interest rates if the price of a house doubles?
Update II: My Productivity Guy writes in:
Jonah
I’m in the office working on a deadline, but decided to take a Corner break and noticed your post on Middle Class Income Stats and your reader’s response that the inflation stats over the last five years must be wrong because of rising housing prices, costs of medical care, gasoline etc.
In fact, the growth in inflation-adjusted income is almost certainly biased down because it is well-known that the CPI overstates the actual growth in prices paid by consumers. This is so for a number of reasons, such as the fact that the CPI is only computed with “list” prices and not the discounted prices that consumers often pay, and it is a fixed-weight index which does not reflect changing consumption patterns (i.e. people invariably tend to purchase less of products whose prices are rising more rapidly – therefore if this decline in consumer’s actual purchases was factored into the index calculation, the products with the most rapidly increasing prices would be weighted less and the overall index would grow less rapidly). There was actually a Presidential Commission that looked into this issue in 1996, headed by the very respected economist Michael Boskin. It estimated that the CPI overstated the real increase in prices paid by consumers by 1.1% on average per year. This implies that rather than growing by 5.5% over the 2000-2004 period, a more accurate measure would imply growth in median incomes by as much as 9.9% over 2000-2004 – extremely respectable especially when you consider that it included the 2001 recession.
It may also be worth noting that the after-tax data used in the post you cited came from the Urban Institute and the Brookings Institute, two left of center think tanks that could be expected to shade the reported data to be less favorable to the Bush Administration.
(One caveat: I’m assuming the CPI was used as the inflation measure to develop the after inflation, after-tax income figures – I couldn’t confirm this from what I could see of the study, but the CPI is almost always used to develop these types of calculations).
And then a reader sends this along .