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The Glass Is More Than Half Full

Summary:
We didn’t know how good we had it in 2019. Then the pandemic hit in 2020, and we all concluded that it will take many years before life will be as good as it was in 2019. Perhaps we’re too pessimistic. After all, 2019 was better than we realized at the time; perhaps we’ll return to the good life sooner than we realize now. Let’s examine that notion, starting with how good it was in 2019, then considering how we might rebound to the good old days sooner than widely anticipated: (1) Household income rose to record high in 2019. My attitude toward any data series that doesn’t support my story is that either it is flawed or it will be revised to support my story. That’s been my strongly held attitude toward median real household income, the annual series compiled by the Census Bureau and

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We didn’t know how good we had it in 2019. Then the pandemic hit in 2020, and we all concluded that it will take many years before life will be as good as it was in 2019. Perhaps we’re too pessimistic. After all, 2019 was better than we realized at the time; perhaps we’ll return to the good life sooner than we realize now. Let’s examine that notion, starting with how good it was in 2019, then considering how we might rebound to the good old days sooner than widely anticipated:

(1) Household income rose to record high in 2019. My attitude toward any data series that doesn’t support my story is that either it is flawed or it will be revised to support my story. That’s been my strongly held attitude toward median real household income, the annual series compiled by the Census Bureau and used to measure poverty in America. It’s been a big favorite with economic pessimists and political progressives in recent years because it confirmed their view that, for most Americans, the standard of living has stagnated for years.

My view has been that lots of other, more reliable indicators of income confirm that the standard of living has been improving for most Americans for many years. Now even the Census series confirms my story. So it’s back on the right track after misleadingly showing stagnation from 2000 through 2016 (Fig. 1). The median household series, which is adjusted for inflation using the CPI, is up 9.2% from 2016 through 2019 and hit new highs during each of the last three years (2017-19) after remaining flat from 2000 to 2016.

Also up over the past three years to new record highs are the Census series for median family (up 11.0%), mean household (10.7%), and mean family (12.5%) incomes. Almost everyone was doing better than ever before last year.

(2) Personal income data refute stagnation myth. While the Census data make more sense to me now, they still have lots of issues. Most importantly, the Census data are based on surveys asking a sample of respondents for the amount of their money income before taxes. So Medicare, Medicaid, food stamps, and other noncash government benefits—which are included in the personal income series compiled by the Bureau of Economic Analysis (BEA)—are excluded from the Census series. In addition, the BEA data are based on “hard” data like monthly payroll employment statistics and tax returns. BEA also compiles an after-tax personal income series reflecting government tax benefits such as the Earned Income Tax Credit.

The BEA series for personal income, disposable personal income, and personal consumption expenditures—on a per-household basis and adjusted for inflation using the personal consumption expenditures deflator (PCED) rather than the CPI—all strongly refute the stagnation claims of pessimists and progressives (Fig. 2). All three measures have been on solid uptrends for many years, including from 2000 through 2016, rising 25.1%, 27.9%, and 25.9%, respectively, over this period. They often rose to new record highs during this period. There was no stagnation whatsoever according to these data series. Instead, there was lots of growth!

The standard critique of using the BEA data series on a per-household basis is that they are means, not medians. So those at the very top of the income scale, the so-called “1- Percent,” in theory could be skewing both the aggregate and per-household data. That’s possible for personal income but unlikely for average personal consumption per household. The rich can only eat so much more than the rest of us, and there aren’t enough of them to substantially skew aggregate and per-household consumption considering that they literally represent only 1% of taxpayers, but almost 40% of the federal government’s revenue from income taxes, as discussed below.

(3) Real hourly wages belie stagnation myth too. Another data series that refutes the stagnation claim of pessimists and progressives is average hourly earnings (AHE), reported in the monthly employment report and reflected in the BEA income data. Adjusting it for inflation using the PCED shows that it soared during the second half of the 1960s through the early 1970s (Fig. 3). It then stagnated during the rest of the 1970s through mid-1995 as a result of what was then called “de-industrialization.” Since December 1994, it has been rising along a 1.2%-per-year growth path. That’s a significant growth rate in the purchasing power of consumers, as real AHE compounded to an increase of 37.2% from December 1994 through July of this year. That coincides with the High-Tech Revolution, which I’ve been writing about since 1993!

By the way, the hourly wage series I am using here is for production and nonsupervisory workers, which obviously doesn’t include the rich. Furthermore, these workers have accounted for between 80.4% and 83.5% of total payroll employment since 1964 (Fig. 4). So the real AHE series includes lots of working stiffs and isn’t distorted by the 1-Percent, let alone the top 20%-or-so of earners.

(4) The CPI is very misleading. It is well known that the CPI is upwardly biased, especially compared to the PCED (Fig. 5). Since January 1964 through July of this year, the CPI is up 838.5%, while the PCED is up 646.3%. As a result, while the PCED-adjusted AHE has been rising in record high territory since January 1999, the CPI-adjusted version didn’t recover to its previous record high during January 1973 until April 2020, which makes absolutely no sense (Fig. 6)! (An extremely flawed August 2018 study by the Pew Research Center concluded that Americans’ purchasing power based on the CPI-adjusted AHE has barely budged in 40 years!)

The Fed long has based its monetary policy decision-making on the PCED rather than the CPI. A footnote in the FOMC’s February 2000 Monetary Policy Report to Congress explained why the committee had decided to switch to the inflation rate based on the PCED.

(5) Adjusting for household and family sizes makes a difference. The fun of making fun of the funny-looking Census income data series continues when I adjust them for the average size of households and families in the US (Fig. 7 and Fig. 8). Both series have been on downward trends since the 1940s, especially the average size of households. Households have always been smaller than families, and earned less, since the former include single-person households, which have increased significantly in recent years because young adults have been postponing marriage and older folks have been living longer, resulting in more divorced and widowed persons.

Furthermore, data available since 1982 through 2019 show that the percentage of nonfamily households has increased from 25.1% to 35.7% over that period (Fig. 9 and Fig. 10). So there are more of these households that tend to earn less than family households. No wonder that the Census data adjusted for household size and for inflation using the PCED shows less stagnation and steeper uptrends since the start of the data (Fig. 11 and Fig. 12).

(6) The rich aren’t like you and me. What about the 1-Percent, who earn too much money, have too much wealth, and don’t pay their fair share of taxes? The total number of all the tycoons on Wall Street, in Silicon Valley, and in the C-suites of corporate America—including everyone with adjusted gross income (AGI) exceeding $500,000 a year—was 1.5 million taxpayers in 2017, exactly 1% of all taxpayers who filed returns that year, according to the latest available data from the Internal Revenue Service (IRS) (Fig. 13).

Collectively, during 2017 the 1-Percent paid $625 billion in income taxes, or 26.7% of their AGI. That amount represented 38.9% of all federal income tax paid by all taxpayers who paid any taxes at all (Fig. 14, Fig. 15, and Fig. 16). The rest of us working stiffs, the “99-Percent,” shelled out $980 billion, or 61.1% of the total tax bill. What should be the fair share for the 1-Percent? Instead of almost 40% of the federal government’s tax revenue, should they be kicking in 50%? Why not 75%? They would be less rich, but everyone else would be richer—unless the 1-Percent decided to work less hard or to leave the country, having lost their incentive to keep creating new businesses, jobs, and wealth.

(7) Can you Trump this? Love him or hate him, the standard of living did increase significantly during Trump’s first term (until the pandemic hit), as it has done under many previous presidents, especially those who have championed pro-growth and pro-business policies, including tax cuts and deregulation.

(8) Time for progressives to declare “mission accomplished?” Progressives continue to claim that government policies need to be more progressively focused on raising taxes and redistributing income. Until recently, they’ve relied on the Census income series to prove their point, though these measures clearly leave out the positive impact that past progressive policies have already had through Medicare, Medicaid, food stamps, tax credits, and other noncash government social benefits.

Progressives long have promised that their policies will create Heaven on Earth. Arguably, they have succeeded in doing so for many Americans with their New Deal, Great Society, and Obamacare programs. These programs have reduced income inequality by redistributing income, which has been growing faster than progressives concede thanks to America’s entrepreneurial spirit and capitalist system. Progressives, who never seem satisfied with the progress they have made, run the risk of killing the goose that lays the golden eggs to pay for their programs. Incomes can always be made equal by making everyone equally poor.

As confirmed by the latest available IRS data, there is no denying that the rich got richer during 2017 and earned more taxable income than ever before. They undoubtedly continued to do so during 2018 and 2019. But now even the Census data show that real median household income rose to a record high last year. Most Americans were more prosperous last year than ever before, though some more so than others. Why does anyone have a problem with that?

The bottom line is that just before the pandemic, American households enjoyed record standards of living. Income stagnation was a myth. Income inequality isn’t a myth but an inherent characteristic of free-market capitalism, an economic system that awards the biggest prizes to those capitalists who benefit the most consumers with their goods and services. Perversely, inequality tends to be greatest during periods of widespread prosperity. Rather than bemoaning that development, we should celebrate that so many households are prospering, even if a few are doing so more than the rest of us.

(9) Housing-led recovery. So how do we bring back the good times once the pandemic is over so that we can enjoy widespread prosperity again? We may not have to wait that long. The pandemic has triggered a housing boom that could offset many of the ongoing woes in industries still plagued by the pandemic. De-urbanization is certainly weighing on urban economies, but suburban ones are booming because more and more city apartment dwellers are moving to homes in the burbs. There’s increasing anecdotal evidence that Millennials who’ve been renting apartments in urban areas are responding to the pandemic by buying houses in the burbs. Housing-related retail sales of furniture, furnishings, and appliances have rebounded to record highs as both existing and new home sales are surging.

Among the industries that are most likely to face a challenging recovery are the ones covered by the following categories of personal consumption expenditures: air transportation, hotels & motels, food services, amusement parks & related recreation, admission to special spectator amusements, and gambling. Altogether, these categories added up to $996 billion (saar) during July, while housing-related construction and consumption totaled $862 billion. While the recent recovery in the former could stall until a vaccine is available, the latter is likely to boom in coming months (Fig. 17).

Furthermore, Americans have $10.6 trillion in home mortgages. Thanks to the Fed’s ultra-easy monetary policies, many are refinancing their loans at record-low mortgage rates, providing a significant boost to monthly household incomes. Those record-low mortgage rates are also helping to keep home buying affordable even as home prices continue to rise. In addition, Americans have a record $20.2 trillion in home equity. If they need it, they can use it to raise some cash through home equity loans or by selling their homes at record-high prices. The glass is at least half full.

Dr. Ed Yardeni
Dr. Ed Yardeni is the President and Chief Investment Strategist of Yardeni Research, Inc., a provider of independent investment strategy and economics research for institutional investors. In this blog, we highlight some of the more interesting relationships and developments that should be of interest to investors. Our premium research service is designed for institutional investors.

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