36 Comments

1. Paul:

So where did all the government money come from if median income was stagnant? Did the population grow that much?

Nov 6, 2008 - 5:04 pm 2. Ledger:

Increase in debt.

Nov 6, 2008 - 5:11 pm 3. Joe:

Federal spending in the first chart would be more interesting, compared to GDP. And in the second chart, to be meaningful it should be per person, federal expenditures.

Not that I doubt that the results are heading in a bad direction. Just not as bad as the chart might suggest now.

Nov 6, 2008 - 5:18 pm 4. Worth Reading » The Ethereal Voice:

[...] And a couple of charts from the Belmont Club. [...]

Nov 6, 2008 - 5:24 pm 5. slade:

Also that “median income” needs to be defined. I expect it is wages/salary and not capital growth.

Which of course is another point.

Nov 6, 2008 - 5:30 pm 6. OldManRick:

So where did all the government money come from if median income was stagnant? Did the population grow that much?

Three things:

First, Median does not mean average. Median is the half way point in distribution (half the samples are above and half below). Since this is a Poisson distribution, the bottom is always limited to zero but the top can be spread wider. Look at this http://www.smalldeadanimals.com/archives/009889.html chart. 24% of households make less than $15K a year, another 47% make less than $61K. The lack of a market for low skill labor will keep a large portion of this population in place at the bottom. The median is buried in this large group and will never move very far from it. You could take the top 7% (who pay 54% of the taxes) and put them in the $123K bracket and the median would not change but tax income would drop by 45%. Moving the median up only helps when individuals make the larger leap between classes.

Second, is increase is households does help, but only the increase in the number of household above the $63K threshold.

Then there is deficit.

Nov 6, 2008 - 5:44 pm 7. slade:

I used to assume that the time scale charts were adjusted for inflation – until I discovered one that wasn’t. But the point remains.

And those “per capita” normalized metrics get dicey with the large numbers of illegals. But the point remains.

On the brink of bailing out the broken auto industry.

Nov 6, 2008 - 5:46 pm 8. Tony:

I am guessing Prof W is referring to Greg Mankiw’s analysis of the value of working. Here’s some interesting commentary expanding that:

Now for the calculations. I start with Mankiw’s results and then adjust for the value of inflation over 35 years to give you the real dollar value.

Obama’s $1.85 becomes:
With 2% inflation -> $0.91
With 3% inflation -> $0.64
With 4% inflation -> $0.44
With 5% inflation -> $0.31

McCain’s $4.81 becomes:
With 2% inflation -> $2.37
With 3% inflation -> $1.66
With 4% inflation -> $1.15
With 5% inflation -> $0.80

. . .

Obama’s plan ends up penalizing savings unless the inflation rate averages below 1.75% for the next 35 years, a very unlikely event. McCain’s plan encourages working and saving unless inflation rates averages above 4.40% for the next 35 years, also an unlikely event. McCain’s tax plan provides more incentive both to work and save then Obama’s does.

http://www.bermanpost.com/2008/10/adding-inflation-to-greg-mankiws-work.html

Alternatively, in the immortal words of the B-52’s:
“What ? / Get a Job / What for / I’m tryin’ to think!”
- Dead Beat Club
http://www.youtube.com/watch?v=-deVRLs03jw

Nov 6, 2008 - 5:47 pm 9. slade:

SS and Medicare/Medicaid should be broken out as well as military expenditures to make three categories in addition to “other”.

Nov 6, 2008 - 5:56 pm 10. Greg Marquez:

I’m wondering about the median income number. I believe I recall Prof. Sowell mentioning this number in his book, Black Rednecks and White LIberals and indicating that the small increase in median income reflected in this number is a result of decreasing family size, thus the per person income has actually increased significantly. This kind of seems like the case to those of us who lived through this period. I was born in 1959 and am absolutely certain that people are a lot more prosperous now than they were in the 60s.

Greg Marquez
goyomarquez@earthlink.net

Nov 6, 2008 - 6:08 pm 11. elby:

I fear this is a runaway train that can’t be stopped. In addition to breaking out SS and Medicare, how about interest payments on the national debt. The US is like the person who got in waaaay over his head in credit card debt. He can just barely make the minimum payments and that only pays interest and try as he might he can’t touch the principal.

I don’t think we can grow our way out of this. We can tell ourselves that, after all, we got over the stagflation of the 70’s, however that isn’t going to happen this time. In the 80’s and 90’s the baby boom generation were in their 30’s and 40’s, their most economically productive years. Now the baby boomers are in their 50’s and soon will be retiring. As the bolus of baby boomers/A makes its way through our system, I think we will choke on it. Here’s a link that shows an animation: http://geography.about.com/gi/dynamic/offsite.htm?site=http://www.wwu.edu/%7Estephan/Animation/pyramid.html

This goes beyond just a strain on Social Security. A very large portion of the population will not be as economically productive as before. Not starting businesses, buying homes, paying taxes as much as before.

Could someone with a better grasp of economics explain to me how we get through this economic reality? As Wretchard mentioned in a previous post, we are entering this not healthy, but sick and bloated. Runaway spending, government bailouts of all sorts, wars, ever more entitlements added to the existing ones… I fear for our future.

Nov 6, 2008 - 6:19 pm 12. Harry:

Roll the presses!

Nov 6, 2008 - 6:31 pm 13. elby:

Harry, that’s just what I fear.

Nov 6, 2008 - 7:49 pm 14. Unsk:

Greg Marquez-

From my perspective, Greg, families in the 60’s were on average much more prosperous than today. Since you were born in 59 the economics of the 60’s may be a little of blurry.

In my home town in Los Angeles, let’s do a comparison.

Household income

Nov 6, 2008 - 8:06 pm 15. Charles:

Minyanville has a good take on the destruction of credit and its impact on inflation/deflation in the world economy.
http://www.minyanville.com/articles/index/a/15975

A stunt pilot loses his right wing and lands successfully. (looks like he falls like a leaf and then puts his nose up at the last moment)
http://www.evtv1.com/player.aspx?itemnum=13634

Nov 6, 2008 - 8:24 pm 16. sanchmo:

There are a couple of other interesting charts. In the first one here: http://www.heritage.org/Research/Taxes/images/Chart4l.gif we see that from teh end of WW2 to today, when top marginal tax rates renged from 90% to 70% to the mid-30%, federal income tax revenue never once exceeded 10% of GDP and nver once was lower than 8.5% of GDP. A similar chart (I’ll need to track it down when I have time) tracks the total state & federal tax revenue (state, federal, income tax, corporate income tax, capital gains tax, FICA tax, state income taxes, state sales taxes, etc) for the same period. Corporate tax rates also range wildly, from 50% to Reagan-era lows, and FICA taxes rose from almost invisible to today’s 12%+. Again, total tax revenue for all types of federal and state taxes never once dips below 19% and never once rises above 22%.

Lesson? You can not tax your way to a balanced budget. The best thing you can do is control spending and structure policy (including tax policy) to encourage growth.

Nov 6, 2008 - 8:31 pm 17. Leo Linbeck III:

Median income is not a good reference point for this comparison.

There are two better options:

1. Per-capita personal consumption expenditures. In 1965, this number was $10,331 (in constant 2000 dollars). In 2006, this number was $26,828. This is a 260% real increase. Not as much, mind you, as the growth in government expenditures (334%), but not as out of whack as appears in the median income numbers.

2. Per-capita personal income. In 1965, per-capita disposable income was $11,594, and the average tax rate was 10.38%. This gives a per-capital personal income number of $12,937. In 2006, these numbers were $28,005, 12.33%, and $31,943. So, the increase in PCPI was 247%.

A few points worth noting:

- Consumption grew faster than personal income (260% vs. 247%). Thus, the need for more personal debt.
- Average tax rate grew by 18.9%, so that’s where the money came from.
- Federal spending grew fastest of all.

FWIW.

L3

Nov 6, 2008 - 8:45 pm 18. sanchmo:

Greg: You’re right about the median income phallacy. It’s kind of meaningless to talk about median household income if average household size is changing. Better to talk about median per capita income… and also throw in mean per capita income (the diff between median & mean will tell you more about income distribution that studying quintiles).

Elby meet Harry, Harry meet Elby:elby asked how to sole SS & Medicare? The simple aproach is to reduce benefit payout, for example by raising the retirement age (when SS was created in the 30’s, very few people would expected to live to retirement age, thus it was called “retirement insurance” at the time, not “retirement savings”) and by means-testing (that is, by changing SS from “mandatory old age insurance” to a progressive, age-based wealth redistribution program). the other way to reduce benefits is through the “invisible tax” of inflation which over time erodes the value of cash, of defined-benefit annuities (like SS), of fixed-income streams (like retirement annuities and… oh yeah, all that money the US will need to pay back to the Chinese once all those Treasuries mature)

Nov 6, 2008 - 8:46 pm 19. Unsk:

( Sorry about the discontinuity- my computer is freaking out)
The comparison:
Household Income:
1970- $9275
Today – Depending of sources $39,900 or $51,315

Average Home price
1970- $22,000
Today- $420,000

College Tuition:
USC 1970 $1,800 Today $60,000 +/-
UCLA 1970 $300 +/- Today $14,000

Private School Tuition- A necessity today: $15,000 – $30,000
1970 Totally unnecessary

Other basic necessities such as insurance, health care, gas, electricity, and automobiles were all relatively cheaper in 1970 than they are today. Comparisons are difficult because in the 60’s the middle class was much broader and there were far fewer people of wealth. There were also fewer luxury items to indulge oneself, and today many of the gadgets like computers, the internet, IPOD’s etc didn’t exist.

However, from the point of view of necessities, more people were far more prosperous in the 60’s than today.

Nov 6, 2008 - 8:51 pm 20. Ivan:

GWB may have the last laugh after all. He’s cleaned out the larder and the Asians are not going to lend anymore money. So any project to feed the polar bears will have to wait. Glitz and schmaltz will not put food on the table. No wonder Mr McCain was so happy to concede.

Nov 6, 2008 - 9:12 pm 21. mika2k1:

November 7, 2008
Georgia Claims on Russia War Called Into Question
By C. J. CHIVERS and ELLEN BARRY

TBILISI, Georgia — Newly available accounts by independent military observers of the beginning of the war between Georgia and Russia this summer call into question the longstanding Georgian assertion that it was acting defensively against separatist and Russian aggression.

Instead, the accounts suggest that Georgia’s inexperienced military attacked the isolated separatist capital of Tskhinvali on Aug. 7 with indiscriminate artillery and rocket fire, exposing civilians, Russian peacekeepers and unarmed monitors to harm.

.
.

http://www.nytimes.com/2008/11/07/world/europe/07georgia.html

Nov 6, 2008 - 9:28 pm 22. Ledger:

The stock market rendered its collective verdict on Obama executive skills and his party’s fiscal skills in the two post election days:

969 point drop since Tuesday’s close. Nearly a 10 per cent drop.

The sell off started immediately after Obama’s election. Getting out while the getting is good?

At this rate it should not take long to make it to the Big O

Zero

See: Largest Post Election Stock Market Sell Off in History

http://www.floppingaces.net/2008/11/06/largest-post-election-stock-market-sell-off-in-history/

Nov 6, 2008 - 9:52 pm 23. Charles:

I think that the way to imagine the forces at work is to reckon there are two forces at work currently: one is hugely inflationary and the other is hugely deflationary.

Over the last 10 years or more western banks pushed their loans to assets ratio from traditional 12-1 to over 32-1. This represented an enormous expansion of capital. Now those ratios will return to historical levels of 12-1. That’s hugely deflationary. At the same time the government now is borrowing huge amounts of money and pumping that into the system and the fed is pumping enormous amounts of capital into the system. That’s hugely inflationary.

Current thinking is that if there is a deflationary spiral –that means that the central banks around the world have lost control of the world economies.

The bright boyz at minyanville believe the central bankers around the world have been very proactive about leaning against the prevailing financial tides. Yet the financial tidal forces are currently so powerful and the undefined that the financial territory we’re heading into is uncharted.

Curiously they also think the result of the current creative destruction will be a much stronger financial base from which to advance investment.

There will be a time for example in the next 10 years where the technology will gel to make it cheap to desalinate sea water and pipe it inland a thousand miles and dirt cheap to get electricity from the sun with solar cells. The two technologies together will make it technologically feasible to turn the world’s deserts green and double the size of the habitable planet.

The projects to make this happen –on the far side of the current recession–will require a lot of capital. But if people can get 7% on billions of capital the money will be available for big capital projects.

These projects will be much bigger than the public works projects in the 100’s of billion that the US federal government is currently considering as a way to stimulate the economy.

Nov 6, 2008 - 10:35 pm 24. elby:

Sanchmo, I agree there exist solutions to SS and Medicare in theory. But the time to implement them was 10 or 20 years ago. We may be facing a case of too little, too late. The inflationary route may be invevitable. But that hurts everyone.

My point is: its all going to go bust. We have kicked the can down the road, and now the end of the road is in sight. Nowhere left to kick the can. Government spending grows through a positive feedback cycle of politians promising ease and comfort and getting away with it because the payment is due at some distant, ill defined time in the future. Well the future has arrived.

But then again, maybe the One can give a great speech and hypnotize/A> us into willingly giving up our wallets.

Nov 6, 2008 - 10:54 pm 25. elby:

Sorry, the link to the video got dropped. Here it is: http://www.youtube.com/watch?v=8ZohpDS2aMc&feature=related

Scary, isn’t it?

Nov 6, 2008 - 10:56 pm 26. Derek:

My question is at what point does the source of money for the US federal gov’t dry up?

Earlier this year the dollar dropped in value, presumably due to the lack of desire to invest in the US. From my understanding the current rise of the dollar has more to do with the unwinding of positions into cash than any real confidence in the US.

Right now the US is borrowing money to pay the interest charges.

I suppose some comfort can be gained in thinking that everyone else is in worse shape than the US. Not much however.

A number of years ago Canada was in the strange situation where politicians would raise taxes and get less revenue.

Derek

Nov 6, 2008 - 10:59 pm 27. sanchmo:

unsk: your comparisons are not very meaningful. comparing ave household income to just about anything is pretty meaningless because ave houshold size has been decreasing at a rapid rate recently, mostly due to individuals choosing to live alone earlier and longer. Comparing ave home price from 1970 (the end of a generation-long flat-line in the inflation-adjusted price in house prices) to any time in the near past (the end of one of the biggest housing bubbles in our history) is a little dicey, esp since such a large number of people may actually wind up not paying the full home price, due to defaults and bailouts on easy credit.

And private school not a requirement in 1970? Puh-leeze. US public school curricula in 1973 was 1-2 years behind both US private (in my case, Catholic) school curricula and European (in my case, Spain) curricula. Why else would a family of Cuban refugees decide to take on 3rd and 4th and 5th jobs, moving into crushingly higher marginal income tax brackets, and paying local taxes for pitiful public schools that lost 10-20 school days every year due to teachers strkes and janitors strikes and bus drivers strikes, only to spend those increasingly-harder to earn dollars on private school tuition?
Speaking of which, you didn’t compare the task burden in 1970 to today. Hint: marginal tax rates were 2-3 times higher in the 60’s & 70’s than in the period of 1980-today.

Nov 7, 2008 - 12:52 am 28. nilsonian:

There is a solution to our economic problems–it has a pedigree that goes back to Pericles: We have spent over 50 years providing security to the Western world, and subsidizing other western countries by doing the military heavy lifting. The solution is a tax upon the rest of the world, through a rationalized oil trade.
In short–turn the Persian Gulf into the American gulf. Turn the tribal states over to the Bureau of Indian Affairs–use the many indentured laborers from India and the Phillipines, China, and so on as employees of a new international regime with a very innocuous name– ‘The International Oil Assistance and Security Authority’, perhaps. Oh, yes–take the $75 a barrel oil, sell it, and keep most of the proceeds for the new American National Oil authority. No more deficit spending or trade deficit for the next 50 years. The actual native populations might be more easily controlled than Iraq, which had a functional military and secret police to provide insurgent recruits. This may be the outcome if Iran attacks Israel or the United States with mass casualty results.

Nov 7, 2008 - 3:47 am 29. Mike Sylwester:

Damn, nilsonian, why did you wait until after November 4 to make your proposal ??!!

Nov 7, 2008 - 6:31 am 30. Pseudo-Polymath » Blog Archive » Friday Highlights:

[...] Will Obama slow that growth? [...]

Nov 7, 2008 - 7:07 am 31. Stones Cry Out - If they keep silent… » Things Heard: e39v5:

[...] Will Obama slow that growth? [...]

Nov 7, 2008 - 7:08 am 32. Greg Marquez:

UNSK:
Hey I hear you about the UCLA tuition. Both my wife and I attended UCLA, ‘79 and ‘84 when our son applied last year I was in shock at how much tuition had gone up. Fortunately for us he was accepted to the Naval Academy. In any even the point I was trying to make was that Prof. Sowell, one of my prof’s at UCLA had said that the median income number is office because it is family income and family size has gotten smaller therefore the per person income has increase. Significantly as Leo Linbeck III pointed out in post “17″ above.

We all wish it had gone up more but bending the number to try and prove our argument is, I believe, unhelpful.

The best argument for reduced government is that government subsidy of bad cultural traits keeps people from making necessary changes in their behavior and as a result they stay poor. You get more of what you subsidize and less of what you tax. Most conservatives seem to have a very hard time making this argument without sounding racist.

Greg Marquez
goyomarquez@earthlink.net

Nov 7, 2008 - 8:59 am 33. Unsk:

Sanchmo-

I beg to differ. The fact that family size was slightly smaller 30-40 years ago doesn’t make that much of a difference.

I admit my post was thoroughly screwed by its discontinuity. So I did not elaborate earlier

The inference of Wretchards post was that not only has government grown significantly faster than household income, government control and intrusion has grown significantly as well. Household income growth used to restrain the growth of government. No longer. The Democrats have found many creative ways of circumventing funding restrictions. Debt and imposing regulations on the production side to fund or provide services previously thought to be government responsibility are just two of the many schemes that have been hatched.

Back to household prosperity. That analysis has to broken down into at least three areas based upon where someone lives. Those areas being Large Democrat and Union controlled older cities, newer emerging suburban Cities and rural areas. The costs of living for family households have skyrocketed in the more intrusive Democrat controlled older cities because of the costs of enabling the victim class which has grown enormously over the years. That same bureaucracy needed to service the victim class has also driven away jobs from the old line industrial cities to the newer emerging cities and rural areas. Piling on those trends is another trend to where the victim class and illegals seek out those Democrat controlled cities that are more hospitable to their rent seeking.

So as a consequence, several shifts in household prosperity are happening all at once, and the prosperity situation can vary significantly as a consequence. Not only is the Federal and State governments increasing generally their cost, regulatory and control burden, but on the State and Local level depending on how it is governed, the situation can vary markedly depending on locale.

As a result, average statistics may not give a clear picture as to what is happening nationally. However it needs to be noted that while in some areas, particularly the newer emerging areas, family prosperity may be rising, in many areas of the country, family standard’s of living have fallen drastically. LA City is a good example of the prototypical emerging city becoming a constipated static Democrat Socialist playground and the consequences speak for themselves.The ratio of home prices to income went from roughtly 2 to 1 to 10 to 1 in thirty years. It is so bad and unruly that household income is difficult to quantify. No one knows exactly how many illegals are there and how much they make so the income numbers are suspect and there are differing stats depending on who you ask.

Generally greater government has meant falling standards of living. It is not for nothing that two incomes are now required in many areas to support a family where one average income used to suffice nicely.

The trend to greater government spending vis a vis household income, is not a
good one. Your argument seems to support the idea that household prosperity can survive greater government spending, control and intrusion. Household prosperity for most of the country, still concentrated in the older cities, has declined as this huge increase in government spending and control has occurred.

This time of potentially unprecedented growth in government power from the Obama administration is not the time to argue that this era is more prosperous. It is not. For the upper 10% and in some areas perhaps. Elsewhere not.

I think one of the major reasons the Republicans lost so badly is that they are not addressing the causes for the high cost of urban living and prosperity squeeze happening there. The Republicans in many ways have grown out of touch.

Nov 7, 2008 - 10:28 am 34. Jay:

Who is going to advance our technology? Our college students are mostly under educated crybabys. I know, I am a professor at a large state university with a decent reputation.

Nov 7, 2008 - 11:10 am 35. Michael Hoskins:

and the answer is…
724 pounds per day. That is the amount of wood a woodchuck could chuck if…

Let’s not get lost in the tullies, all of the above discussions are on the margin. Simple fact is…at some point the well runs dry. The new administration is just trying to find the bottom of the well.

Nov 7, 2008 - 11:24 am 36. Ms. Know:

More guns, did anyone see that the left-wing illuminati are in, so there won’t be more guns. Better get them now.

Nov 15, 2008 - 9:22 am

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