Conflicting Government Data Shows the Importance of Sound Economic Theory
On Tuesday, I looked at some recent research suggesting that both wealth and incomes are declining — all while the Fed's monetary policy has become ever more interventionist and regulatory.
The conclusions involved were premised on some assertions about Fed policy.
- Fed regulatory changes now favor large Wall-Street-centered borrowers over smaller Main-Street-centered borrowers. This has led to greater wealth gains for financial-sector firms, but does not help growth for most ordinary-sized firms and employers.
- Fed policies encouraging ultra-low interest rates have led to yield-chasing by investors which brings greater gains in higher-risk more sophisticated investments. More ordinary, safer investment instruments used by ordinary people see fewer gains.
- Fed policy has led to a financial system with large amounts of asset-price inflation in stocks, but not in housing. This means greater income gains for higher-income, higher-wealth households, because higher-income households tend to be more invested in stocks than in housing (proportionally).
Nevertheless, whether or not this can be quantified in the empirical data available does not "prove" the effects of Fed policy one way or the other. After all, even if we can observe amazing amounts of economic progress in the face of rising government intervention, in a relatively free economy, this can always be attributed to the resilience of the market system. Nevertheless, since the Fed and the federal government collect data for the purposes of observing income and wealth gains — and using the data in its own policymaking — it's always interested to see how it stacks up.
Moreover, if a highly interventionist Fed policy coincides with stagnating incomes or lackluster economic growth, that should raise questions about the severity of the effects of Fed policy which sound economics already tells us comes with numerous downsides in the form of wealth destruction and malinvestment.
Households vs. Individuals
Some readers complained that the household income data is no good because there are now fewer households with more than one income earners, so this is a poor measure of economic growth.
It's certainly worth noting that household compositions are changing. Although its unclear this can explain away everything related to slowing growth in incomes.
For example, median personal income, shows more or less the same pattern as median household income.
By this measure, as late as 2014, median personal income was below the median income in the year 2000. By 2016, median personal income was up 3.6 percent from 2000. But, since the 2008 peak, 2016 median personal income was up only 0.9 percent as of 2016.
Historically, these gains don't compare very favorably to previous expansions. For example, in the peak-to-peak period from 1977 to 1989, the median personal income increased 11.6 percent. From 1989 to 2000, the gain was 15.8 percent. In contrast, this gain was only 2.7 percent from the 2000 peak to the 2007 peak. The current expansion (with an increase so far of 0.9 percent) has not concluded, but even with sizable gains in 2017 and 2018, we're unlikely to see anything approaching what we saw in earlier expansions.
Some might claim that this slowdown in income gains can be attributed to increasing numbers of retirees. While that a reasonable claim, it's important to note that this may not be as large as some think. After all, the "income" measure in Census Bureau data isn't just a calculation of wages. It includes wages, unemployment compensation, social security, SSI, veterans' payments, survivor benefits, interest, dividends, rents, royalties, trust income, child support, alimony, and other forms of income.
So, it's not as if retirees' incomes disappear. Indeed, given that older persons and households tend to have much higher wealth levels, we can expect more income from investments. (Overall, though, with a loss of wage income, overall incomes are likely to fall for retirees.)
Considering this, it may be helpful to look more specifically at wages.
As far as average hourly wages, go, we don't see strong gains. In August, Pew reported " For most U.S. workers, real wages have barely budged in decades." This was based on data for "Average Hourly Earnings of Production and Nonsupervisory Employees: Total Private." I've more or less recreated the Pew graph below, adjusting for inflation using the CPI:
The top line is inflation-adjusted hourly earnings, and the bottom line is nominal values.As Pew concludes:
After adjusting for inflation, however, today’s average hourly wage has just about the same purchasing power it did in 1978, following a long slide in the 1980s and early 1990s and bumpy, inconsistent growth since then. In fact, in real terms average hourly earnings peaked more than 45 years ago: The $4.03-an-hour rate recorded in January 1973 had the same purchasing power that $23.68 would today.
The Pew report continues:
A similar measure – the “usual weekly earnings” of employed, full-time wage and salary workers – tells much the same story, albeit over a shorter time period. In seasonally adjusted current dollars, median usual weekly earnings rose from $232 in the first quarter of 1979 (when the data series began) to $879 in the second quarter of this year, which might sound like a lot. But in real, inflation-adjusted terms, the median has barely budged over that period: That $232 in 1979 had the same purchasing power as $840 in today’s dollars.
As with the income and wealth data we examined on Tuesday, we can also see in the weekly earnings data that the largest gains have been experienced by the upper income levels — and increasingly so in recent years:
This follows with what we know about the effects of central-bank inflationary policies that tend to favor politically-connected upper-income groups at the expense of ordinary people. That is, thanks to what we know about Cantillon effects and the monopoly effects of additional banking regulations, we shouldn't be surprised to see many workers at lower wage levels lose out.
It remains entirely possible that new gains in technology, worker productivity, or changes in the natural rate of interest could impact incomes and wealth. However, all the positive government income data in the world won't prove that increased intervention in the money supply or the financial system will somehow magically create wealth.
Moreover, some government data might conflict with other government data, depending on what information can be collected, and how it is impacted by outside factors. Without the insights of sound economic theory, we can never make good sense of the empirical data.