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When Numbers Aren't What They Appear

© Frank Monaldo

If you point your trusty web browser to the Census Bureau Web Site you will find that the median household income rose only 7% in inflation-adjusted dollars from 1970 to 1996 — a pathetically low rate of increase. If you listen to the Right, this statistic is clear evidence of the need for higher economic growth. Increase those tax cuts. If you listen to the Left, this statistic is proof of the poor languishing at the bottom the income distribution, while the rich get richer. Punish the rich. The only problem is, as Robert Samuelson pointed out this week, the statistic is really a measure of what has happened to households, not to income. The nature of the American household is changing.

When families break up, the total income of that family is divided among two households, reducing the median income. Natural demographics also affect median household income. As the population ages more people are retired. Typically, retired people have lower incomes than they did during their working years. The growth in the number of elderly depresses median household income.

Normalizing for the size of household radically changes the picture. For households of one person, the median income peaked in 1989, but from 1970 to 1996 increased by 52 per cent. For four-person households, the real increase was 26 per cent.

Other factors further depress the apparent increase in household income. Immigrants typically have lower incomes. Increased immigration may reduce median household income in a way that does not necessarily reflect on the state of the economy.

The Consumer Price Index used to normalize income is generally considered to have technical problems. In some cases, it does not appropriately consider the improvement in products. If a car increases in both price and reliability, not all of the increase is really inflation. The consumer in some sense is getting more car. There is considerable debate as to the size of the effect of this overstatement of the annual inflation rate. Estimates range from 0.5 per cent to over one per cent. In either case, real income growth of any household is underestimated.

Samuelson concludes, "The real message from the numbers is that our major problems are not economic, but social (an aging society, family breakdown, immigration, a culture of poverty). And these are problems for which we have no quick fixes.'' Samuelson's dissection of the problems associated with median household income should serve as a caution in drawing broad generalizations from what appear to be straightforward statistics.

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