Why Many Americans Feel Like They’re Getting Poorer

Since the recession ended, the economy has never grown fast enough to make up for lost ground – and that's helping to keep household income depressed for as much as half the population.

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A homeless man looks from the window of a condemned house in Warren, Ohio, Oct. 28, 2012.

Data released by the Commerce Department last week showed that personal income fell 3.6% in January, the biggest decline in 20 years. The drop was even bigger when taxes and inflation are taken into account. Real personal disposable income fell by 4%, the biggest monthly drop in half a century.

In part, this is a statistical blip. Companies accelerated certain payments – giving year-end bonuses in December rather than January, for example – so that employees could avoid higher taxes going into effect for 2013. But even if that blip is smoothed out, real aftertax income is lower than it was six months ago.

What this means is that the U.S. economy is not merely recovering from the recession more slowly than one might like, but is actually getting worse for many Americans. Despite three-and-a-half years of uninterrupted growth in real GDP and a decline of more than two percentage points in the unemployment rate since 2009, the standard of living is falling for as much as half the population, particularly if you look beyond monthly numbers to longer-term trends.

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Commentators assessing a recovery in progress naturally tend to focus on changes from one month or quarter to another. But what really matters is not how the economy compares with where it was in earlier time periods, but how it compares with where it would now be if it were fully utilizing all of its resources. Economists call this level “full capacity,” and it rises over time as the population grows, technology improves and facilities are upgraded.

When a recession occurs, the economy’s actual output drops significantly below the full capacity level, creating what’s known as an “output gap.” Once the recession ends and a recovery begins, there’s normally a period of well-above average growth so that actual output regains the ground lost during the recession and comes back close to full capacity. But since the most recent recession ended, growth has never been fast enough to close the output gap – indeed, the gap has hardly narrowed at all.

One unfortunate consequence is that worker productivity has stalled. Productivity typically soars after a recession because many businesses have unused capacity and can handle somewhat higher sales before they have to start hiring or investing in new facilities. A travel agency, for example, could book a few more vacations before they have to hire another travel agent or move to larger offices. Following the most recent recession, productivity growth did soar, briefly reaching an annual rate of 8%. But because the output gap hasn’t closed since then, productivity has barely improved since 2011.

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The lack of robust productivity gains has allowed wages to remain stagnant. There is enough growth for companies to enjoy rising profits, but not enough to make it worthwhile for them to hire more and pay more. In a normal recovery, sales gains are normally split between profits and labor compensation. But in the current recovery, profit growth has outpaced sales, while labor compensation has actually lost ground.

Taxes also affect the amount that people take home. With GDP in the past quarter barely keeping up with inflation and productivity gains averaging around 1% a year, you’d expect middle-class incomes to show less than 2% real annual growth. So the expiration of the payroll tax cut – which effectively raised taxes by two percentage points on incomes up to $113,700 a year – is by itself enough to depress real disposable incomes for many American households. And other taxes and social charges have risen as well.

What’s clear in all this is that a true recovery requires closing the output gap and restoring income growth for middle-class households. That can’t be done with short-term budget cuts that cause layoffs and reduce GDP growth further. And it can’t be done with tax increases, which also discourage growth and can hit less-affluent households hard even if they are aimed at the rich.

It’s true that the U.S. is accumulating a disturbingly large amount of debt. But the cause is mostly the soaring cost of Social Security, Medicare, and other entitlements. And it will be some years before that debt load becomes truly dangerous. The conventional wisdom is that the economy will suffer seriously when publicly held U.S. debt (not including the Social Security Trust Fund) reaches 90% of annual GDP. The Congressional Budget Office projects that debt will not reach that level for more than a decade.

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Government policy seems backwards, in fact, whichever party’s views end up prevailing. What’s needed instead is a pro-growth agenda that will close the output gap. It’s certainly reasonable to trim discretionary spending where it is wasteful and to make tax law fairer. But what’s far more important over the long term is to slow entitlement growth without reducing current benefits. In addition, broad tax reform that closes loopholes so that marginal tax rates can be reduced would be helpful. And regulation needs to be streamlined where it creates unnecessary burdens for investment and job creation.

There’s little point in policies that will keep the U.S. economy mired in its current stagnation. And it would be nice to address the long-term problems before a crisis forces drastic action.

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16 comments
jack.foobar.42
jack.foobar.42

This happens when your full time job becomes a part time 29/hr a week job.  Shocking, isn't it.  Math + ObamaCare = Hard

SuzannaLytle
SuzannaLytle

Minimum wage is a hoax it no longer convers the minimum cost of living is too high. and as obamacare comes out more and more buisneses are going to part time. so many people will have to work 2 jobs just to live at the lowest wich means twice as many jobs will be held by half the workers. and minimum wage was sopposed to be a starting point and increase as you worked somewere NOT ANYMORE you will be making that same amount 10 years from now. without dispsable income the economy will not recover because no one will be able to stimulate it. greed will end up destroying this country.


21stcentury
21stcentury

Somebody's gettin' rich off the skyrocketing stock market. The big issue is an ever widening disparity in wealth. Rich get richer and the middle class gets poorer.



RugeirnDrienborough
RugeirnDrienborough

We think it perfectly normal that a household hold a mortgage for 2 to 3 times annual income. So why can't a sovereign nation hold debt that is only 90% of it's annual income? Not that I think debt is a good thing; I don't. But I don't see the rationale here. If the household can service the mortgage, we figure they're fine. Why not so for the nation?

realist512
realist512

Good piece. We must deal with entitlements!

In addition, we need smart, future-centered, cost-effective, short term spending. Invest in innovation (research) and early education. Tax rate breaks are not the answer. Remove silly tax loop holes. Bloat must be eliminated. Homeland security, farm subsidies, and defense come to mind. 

In short, we need a comprehensive, balanced approach. Congress is fooling us. This is actually not that complicated. We just need smart people with political will! I am sure that a few engineers could sit around a table and come up with a good solution. We need problem solvers in Congress!



Read more: http://business.time.com/2013/03/05/why-many-americans-feel-like-theyre-getting-poorer/#ixzz2N2g5VT00

ttaerum
ttaerum

Perhaps the most disturbing point which Sivy makes is that it will take ten years before the debt becomes a serious problem.  As is so frequently the case, these assumptions are based on the notion that if the street you live on points north, it must reach all the way to the North Pole.  It assumes that interest rates will, forever and ever, remain at its present low rate, that we will never face another financial crisis, that little fairies keep the economic world from turning topsy turvy.  Ten years will come and go in the blink of an eye and there is zero behavioral evidence that this President actually gives a damn about the future of America's children including his own.  Words mean nothing.  All of the plans that presently exist talk about bringing down the debt in 10 years.  Hasn't anyone noticed? - ten years is too late,. 

dellbabe68
dellbabe68

My payroll taxes went up by two hundred a month. I am not saying I don't make a fair living, but here is how I recovered that money in my budget: no more manicures or pedicures (I will do them myelf from now on), and no more cleaning woman. All of these services I formerly paid for were performed by new immigrants or first generations Americans. How they recoup the loss in their incomes is anyone's guess. But the point I make is that loss in income has consequences and those become a ripple effect.

manapp99
manapp99

In short what is needed is for the government to allow for the business community to save us. The more government intrudes on business interests and tries to tax our way to prosperity the more they slow the recovery. 

TonyVBlue
TonyVBlue

"Despite three-and-a-half years of uninterrupted growth in real GDP and a decline of more than two percentage points in the unemployment rate since 2009"

LIPSTICK on a pig from a government cheer leading reporter. THE REAL STORY about this fact is that growth is weak, anemic and sickly... And was NEGATIVE 0.5% this last quarter (oops), and unemployment "drop" in 2 points is due to an accounting trick, 8.5 million leaving the work force, than by job creation.

NICE TRY, OBAMANOMICS IS FAILED. After 5 years... When does it start becoming Obamas fault?

antonmarq
antonmarq

Hahahahahaha, another one of those aimless and famous headlines, four simple answer 1) foreign outsourcing 2) technological replacements , 3) continued population growth and 4) a government that doesn't give a sh*t about Americans. If we handle number 4 first, replace every single member in Congress with people who really understand and are ready to throw corporate business control out of our Capital, we may have some hope in reclaiming our wealth. 

Corporate America is the viper that is enacting overlord laws to keep Americans poor, and drive them into slavery. 

vstillwell
vstillwell

I was also thinking that the latest budget deal the Dems offered the Republicans included no tax increases, just closing some tax loopholes. Of course, the Republicans screamed and hollered and left the building. I don't know how we're going to get out of this mess when one party just flat refuses to negotiate beyond its own terms. Also, they're the minority party in overall votes, but yet they have a stranglehold on our governing process, which means they're rewarded for crashing everything down. 

vstillwell
vstillwell

Thank you for that great article. I wish more than a few thousand people would actually read it. 

moderateGuy
moderateGuy

@dellbabe68 Don't worry; apparently Obama's trickle down government will take care of them.

manapp99
manapp99

@vstillwell The GOP has repeatedly said they are good with closing loopholes as long as it is part of an overhaul of the tax code. To just ax a few loopholes without lowering rates to broaden the base you lose the power of utilizing the tax code to incentivise growth. Remember when President Carter imposed the luxury tax and it cost many regular people who make luxury items like yachts and private jets their jobs? Unintended consequences are always ready to bite you if you don't watch out.  

Rockerbabe
Rockerbabe

Well trickle down prosparity via the private sector has worked either, no matter how much one works.   I will say, however, that engaging in TWO unnecessary and immoral wars based on lies, refusing to pay for those wars, taking 10+ years to wage war coupled with tax cuts for the wealthy have done nothing to improve the US economy. 

We have "trickle down government" as you say, because the private sector has taken a beating courtsey of Wall Street and real estate moguls and there is no one else to help keep the wolves at bay.   It isn't that people aren't willing to work, there is just no work to be had and everyone's saving is gone.   Your comments are indicative of the problems we face when the social contract between the people and its government and the private sector is tattered and in disaray and NO one in Congress is willing to step up and fix the problems for fear of being primaried.