Wednesday, January 13, 2010

How Media Misuse Income Data

From Thomas Sowell in yesterday's Investor's Business Daily:

"Only by focusing on the income brackets, instead of the actual people moving between those brackets, have the intelligentsia been able to verbally create a "problem" for which a "solution" is necessary. They have created a powerful vision of "classes" with "disparities" and "inequities" in income, caused by "barriers" created by "society." But the routine rise of millions of people out of the lowest quintile over time makes a mockery of the "barriers" assumed by many, if not most, of the intelligentsia.

Far from using their intellectual skills to clarify the distinction between statistical categories and flesh-and-blood human beings, the intelligentsia have instead used their verbal virtuosity to equate the changing numerical relationship between statistical categories over time with a changing relationship between flesh-and-blood human beings ("the rich" and "the poor") over time, even though data that follow individual income-earners over time tell a diametrically opposite story from that of data which follow the statistical categories which people are moving into and out of over time.

The confusion between statistical categories and human beings has led to many claims in the media and in academia that Americans' incomes have stagnated or grown only very slowly over the years.

For example, over the entire period from 1967 to 2005, median real household income — that is, money income adjusted for inflation — rose by 31%. For selected periods within that long span, real household incomes rose even less, and those selected periods have often been cited by the intelligentsia to claim that income and living standards have "stagnated." Meanwhile, real per capita income rose by 122% over that same span, from 1967 to 2005. When a more than doubling of income is called "stagnation," that is one of the many feats of verbal virtuosity.

The reason for the large discrepancy between growth rate trends in household income and growth rate trends in individual income is very straightforward: The number of persons per household has been declining over the years (see charts above).

Despite such obvious and mundane facts, household or family income statistics continue to be widely cited in the media and in academia — and per capita income statistics widely ignored, despite the fact that households are variable in size, while per capita income always refers to the income of one person. However, the statistics that the intelligentsia keep citing are much more consistent with their vision of America than the statistics they keep ignoring."

MP: The charts above illustrate Dr. Sowell's argument, and show that once adjusted for the fact that average housesold size has been decreasing over time, real median income per household member (per capita) reached an all-time high in 2007.


At 1/13/2010 9:59 AM, Anonymous morganovich said...

the truly disturbing aspect of this disingenuous classism is that it will create the very problems it purports to address.

higher tax rates limit social mobility. they prevent the accumulation of capital and hamstring small business. this is why there is so much less social mobility in europe than the US.

high minimum wages and benefits requirements entrenches unemployment and causes a substitution of capital for labor.

try getting out of the middle class in the EU. you can't do it. the incremental taxes are just too high. the lower classes stay pinned down, the middle is immobile, and the rich have it much easier than in the US because they can invest offshore and pay no taxes on much of it.

At 1/13/2010 10:12 AM, Anonymous geoih said...

More economic aggregates that mean nothing. If Yao Ming walks into the room, the average height of the people in the room just went up, but nobody is taller.

At 1/13/2010 10:46 AM, Blogger PeakTrader said...

Some people need to ask is a relative increase in living standards at the expense of an absolute increase better than an absolute increase in living standards at the expense of a relative increase.

At 1/13/2010 10:57 AM, Blogger Jet Beagle said...

geoih: " If Yao Ming walks into the room, the average height of the people in the room just went up, but nobody is taller."

Which is why most economists use medians rather than means when analyzing household income.

I agree that using median HH income and mean household size, as Dr. Sowell has done, could create slight distortions. But I think his point is valid and meaningful.

At 1/13/2010 11:05 AM, Anonymous niknaknoo said...

Are you missing the fact that families own lower incomes spend a higher proportion of their income on food and energy, two things that have risen in price above and beyond the government inflation rate?

And let's not forget there's two sets of data, one adjusted for inflation using the government rate, and another using the true inflation rate. The government inflation figures only include the things they want to include at the time so they should be taken with a pinch of salt.

At 1/13/2010 11:05 AM, Blogger juandos said...

"Some people need to ask is a relative increase in living standards at the expense of an absolute increase better than an absolute increase in living standards at the expense of a relative increase"...


First of all, are there really any absolutes in the dynamic arena of wages/salaries?

At 1/13/2010 11:27 AM, Blogger PeakTrader said...

Niknaknoo, yes, there are different inflation rates for each individual. For example, lower income and older Americans generally had higher inflation rates.

However, the GDP Price Deflator is an aggregate measure of inflation:

From AmosWEB Webpedia on GDP Price Deflator:

"There are three important points to note about the GDP price deflator, two pro and one con. These points are especially important when comparing the GDP price deflator to the CPI.

First, the GDP price deflator is based on ALL production in the aggregate economy. This is a definite pro. It includes not just urban consumption, as does the CPI, but also investment expenditures for capital goods, purchases by the government sector, and even exports to the foreign sector. It has it all. So for anyone truly interested in a price index for the aggregate economy, this is it.

Second, the GDP price deflator measures the prices of "current production", the prices of goods actually produced during the current year. This also a definite pro. The CPI, in contrast is based on a market basket of goods identified 5 or 10 years earlier. Again, from a macroeconomic perspective, this is a much better way to go.

Third, the GDP price deflator is reported quarterly, every three months, along with other measures in the National Income and Product Accounts. The GDP price deflator for the first three months of the year (January, February, and March) is not available until late April or May. And then, it is only a 3-month average rather than a month-by-month, blow-by-blow price index. From a timeliness perspective, the GDP price deflator comes up short on providing decision makers with the information needed."

I suspect, inflation has been overstated, because quality improvements have been grossly under measured.

At 1/13/2010 11:40 AM, Blogger Jet Beagle said...

niknaknoo: "The government inflation figures only include the things they want to include at the time"

Are you suggesting that the professional staff at the Bureau of Labor Statistics regularly changes the calculation of CPI in order to report more politically expedient figures? Do you have any evidence to support such a claim?

At 1/13/2010 11:50 AM, Blogger Bret said...

Income per capita may have increased nicely due to falling family size.

However, it does look like income to the median worker has been somewhat stagnant if we're talking aggregates. The point is that there's pretty good mobility of individuals over time (for example, from starving student to fairly well off business manager or something like that).

At 1/13/2010 11:58 AM, Blogger PeakTrader said...

Jet, I doubt economists at the Bureau of Labor Statistics are being paid-off or are politically motivated. A minimum 3.5 GPA is required for economists at the BLS. They're serious technocrats and they'd know if there was systematic bias, which would defeat the purpose of their work. Of course, measuring the largest and most dynamic economy isn't an easy task.

At 1/13/2010 12:10 PM, Blogger PeakTrader said...

Here's some data from the U.S. Census and Current Population Survey:

TUESDAY, AUG. 26, 2008
Household Income Rises, Poverty Rate Unchanged,
Number of Uninsured Down

Real median household income (from wages & salaries) in the United States climbed 1.3 percent between 2006 and 2007, reaching $50,233, according to a report released today by the U.S. Census Bureau. This is the third annual increase in real median household income.

Real median income (adjusted for inflation) for black and non-Hispanic white households rose between 2006 and 2007, representing the first measured real increase in annual household income for each group since 1999.

Real median household income remained statistically unchanged for Asians and Hispanics.

Among the race groups and Hispanics, black households had the lowest median income in 2007 ($33,916). This compares to the median of $54,920 for non-Hispanic white households. Asian households had the highest median income ($66,103). The median income for Hispanic households was $38,679.

At 1/13/2010 12:22 PM, Blogger PeakTrader said...

Of course, Dr Perry's chart shows Real Median Household Income Per Family Member reached an all-time high in 2007.

At 1/13/2010 12:23 PM, Blogger Bloggin' Brewskie said...

Another completely off the topic link, but this one's bigger: guess who overtook Russia as the world's largest gas producer? (BTW - I don't need the credit.)

At 1/13/2010 12:46 PM, Blogger Jet Beagle said...

Peak trader: "I doubt economists at the Bureau of Labor Statistics are being paid-off or are politically motivated. ... They're serious technocrats and they'd know if there was systematic bias, which would defeat the purpose of their work."

I agree completely. I have great respect for their work and for the complexity of their task. I just wanted to find out what niknaknoo used as the basis for his implied criticism.

At 1/13/2010 1:14 PM, Anonymous Benny The Man said...

I guess this means that heavy government intrusion into marketplace really works. Our lixing stndards are going up.

Look at the US ag secor--totally regulated and subsidized. Our financial sector too. The defense sector nothing but a creature of the federal government. The housing market-a fed subsidy program.

Baby, socialism works! Let's keep it up.

BTW-houshold incomes explosed in the 1950s and 1960s, when the top US income tax rate was more than 90 percent. GDP growth was very strong too.

At 1/13/2010 1:16 PM, Blogger PeakTrader said...

Average Household Size by Asian Ethnic Group in Massachusetts:

A few groups:

Chinese 2.86
Japanese 2.07
Filipino 2.76
Pakistani 3.36
Vietnamese 3.91
Cambodian 4.73
Korean 2.40

At 1/13/2010 1:52 PM, Anonymous morganovich said...

peak -

GDP price inflator is not a real number.

it's a calculation based on a whole set of assumptions and estimations.

i really think you over-estimate its usefulness.

At 1/13/2010 2:45 PM, Blogger Jet Beagle said...

Benny the man: "I guess this means that heavy government intrusion into marketplace really works."

I don't think so. Over the period reported - 1967-2007 - these industrsies were deregulated: airline, trucking, railroads, telecommunications, banking, energy (prices).

Over the same period, half of the 50 state governments passed right to work laws. Right to work laws nullified previous laws by which those governments had interfered with the right of workers to be free from union control.

From the 1970's through the 2000's, the U.S. has progressively torn down free trade restrictions.

No, Benny, I think it is just the opposite of what you posted. Reduction in government intervention over the past 60 years has coincided with the increase in real per capita income.

At 1/13/2010 2:49 PM, Blogger Walt G. said...

Shouldn't an adjustment be made for the increase in two-income households vs. one-income households from 1967 to 2007?

I believe as the number of children in the household was decreasing, the number of income earners was increasing. I don't see how we can compare 1967 to 2007 without accounting for that factor.

At 1/13/2010 2:50 PM, Blogger Jet Beagle said...

Benny the man: "houshold incomes explosed in the 1950s and 1960s, when the top US income tax rate was more than 90 percent. GDP growth was very strong too."

Although the statutory income tax rate was 90 percent for a tiny few, the effective tax rate was much, much lower. High income earners took advantage of numerous tax shields in avoiding those silly rates. The high rates had meaning only to the uninformed masses who believed the wealthy were actually paying them.

At 1/13/2010 4:06 PM, Anonymous Benny The Man said...

Jet Beagle-

Actually, I prefer dereg.

But huge sectors of the economy--ag, finance, defense industries, housing--are heavily regged, or creatures of the federal government.

Our rural economy is nothing but a federal subsidy, with everything--highways, water systems, power systems, postal delivery, airports, train stops, phone service, crop revenues--subsidized, or cross-subsidized by urban users or the federal government.

The most mollycoddled, enfeebled, subsidized, economically knock-kneed people on the planet are rural Americans. Rural subsidies have been growing for decades, starting with LBJ's grab of federal water and electricification funds for rural Texas in the 1930s. LBJ was a Congressman then.

Also, environmental regs have increased a lot in the last 50 years.

Cause and effect?

Environmental regs improve living standards? A weakling class in the hinterlands is good?

I read recently GDP per capita in Denmark is up 70 percent from the 1980s.

You tell me. I think any intellectual can make any case he or she wants to.

At 1/13/2010 6:01 PM, Anonymous Anonymous said...

I don't have a link to the stats handy, but my previous investigations have shown that there hasn't been much of a change in number of workers per household over the last 30 years.

No doubt a lot of Two Parent/One Worker households have been replaced by One Parent/One Worker households.

At 1/13/2010 6:55 PM, Anonymous morganovich said...


you've obviously never been to rural france...

At 1/13/2010 7:18 PM, Anonymous Benny The Man said...

I bet it is pretty. I wonder if it as heavily subsidized as rural America.
W/o subsidies, rural America would just about blow away.
I sense (w/o proof) that the rural European economy has had a longer evolution, weening out weaklings before subsidies became the norm.

At 1/13/2010 8:19 PM, Anonymous Anonymous said...

Benny, you've obviously never been to rural france...

Benny rarely gets out of his own special room. If you read his posts, you'll discover that he suffers from a kind of Turrets syndrome. He keeps repeating "military", "rural" and "subsidies" over and over again, punctuated with terms like "mollycoddled", "enfeebled", "knock-kneed". I suppose he believes that if he repeats these things often enough no one will notice that he has no idea what he's talking about. Poor, confused, little leftist.

At 1/13/2010 9:27 PM, Blogger Walt G. said...

anonymous 6:01,

You might be right. A shift to one parent households could negate the shift to two-income households over time.

A valid analysis would have to study the same people over time from low income (and low wealth) to high income in their working years and back to low income in their retirement years (and high wealth).

At 1/13/2010 9:35 PM, Blogger PeakTrader said...

Walt G, the U.S. Census Historical Income Tables-People Table P-13 Marital Status--All Races 18 Years Old and Over by Median Income and Sex: 1974 to 2007 show Median Real Income of Male Workers has been flat since 1974, between $30,000 and $35,000, while Median Real Income of Female Workers increased from $12,500 in 1974 to $21,500 in 2007.

At 1/14/2010 3:22 AM, Blogger PeakTrader said...

Morganovich is correct about the implication that some data don't reflect reality. Comparing the quantity and quality of assets and goods per person in the 1970s to today shows Americans didn't have much in the 1970s.

At 1/14/2010 7:47 AM, Blogger Walt G. said...


I think what is needed is a longitudinal study of the same random sample of people over time. I'm not an expert on this, but I believe those data are hard to come by.

Male income flat while female income rising over time? Isn't that expected with females entering the workforce, increasing the labor supply, and decreasing the labor demand?

At 1/14/2010 6:09 PM, Anonymous Benny "Tell It LIke It Is Man" Cole said...

Hmm. A guy says he wants to free up the ag-rural sector, and reduce a federal bureaucracy, and you say he is a leftie.

Okay, I am a leftie.

Eisenhower was a leftie.


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