The 2016 Elections Will Be All about Incomes

The 2016 Elections Will Be All about Incomes

March 23, 2015

The key issue in next year’s elections is already clear: Recent Census Bureau data show that after two decades of strong, steady and reliable income growth by American households of virtually every type – the 1980s and 1990s — as many as two-thirds of households suffered steadily declining incomes as they aged from 2002 to 2013. Yes, the incomes of the more fortunate third of the country continued to rise, but at less than half of the rate of their counterparts in the 1990s and 1980s. These are the top-line results from a new study of mine that Brookings released earlier this month; and this is the first essay in a series reviewing my findings — and what policymakers can do about it.

The study tracks the income paths of many different types of households, as the heads of those households aged from their mid-20s to their late-50s. Since politics and policy matter, I also tracked the incomes of households of various ages through each of the last five presidencies. (And since the economy’s course in every president’s first year is set by his predecessor, we begin each president’s accounting in year-two of his first term.) For example, let’s consider households headed by people in the late-30s and early-40s at the beginning of each president’s term. Their incomes rose, after inflation, by an average of 2.8 percent per-year as they aged through Ronald Reagan’s presidency (1982-1989); and under Bill Clinton (1994-2001), the comparable age-cohort has gains averaging 2.5 percent per-year through his two terms. But the gains by that age group plummeted to 0.3 percent per-year under George W. Bush (2002-2009) and rose only slightly, to 0.6 percent per-year, through Barack Obama’s first term (2010-2013).

It’s no mystery why so many Americans still revere Reagan and Clinton. Under their presidencies, every type of household shared in broad income progress — whether those households were headed by men or women; by whites, African-Americans, or Hispanics; or by those with college educations or those without degrees. It’s also no mystery why so few Americans revere Bush-2 or Obama, since under their presidencies, those steady income gains shrank sharply or, more often, turned into substantial income losses. For example, let’s look at households headed by high school graduates, who throughout this period account for about half of all Americans. Under Reagan, households headed by high school grads in their late-30s and early-40s when he took office had steady income gains averaging 2.6 percent per-year; and under Clinton, the comparable group registered steady income gains averaging 2.4 percent per-year as they aged through his terms. Yet, under Bush-2, households headed by high school graduates of comparable ages saw their incomes fall steadily by about 0.3 percent per-year; and under Obama, their losses accelerated to 1.8 percent per-year.

The results also reveal a distinctive life-cycle to the income growth of most of us. Across every group, people achieve their largest percentage-gains in income in their mid-20s to mid-30s; their income growth slows in their late-30s to mid-40s, and then it plateaus for most people in their late-40s and early-50s. With this in mind, let’s turn to the income paths of younger households headed by young African-Americans under each president. Households headed by blacks in their late-20s and early-30s when Reagan took office saw income gains averaging 3.8 percent per-year as they aged through his two terms, and the income growth of comparable households under Clinton was even stronger, averaging 7.3 percent per-year. Yet, under Bush-2, the income gains of households headed by relatively young African-Americans slowed sharply to 1.8 percent per-year; and under Obama, the same group’s gains averaged just 0.1 percent per-year.

If income stagnation and decline are central issues in the 2106 elections, what could the next president and Congress do about it? The necessary policy shifts fall into two categories. The first category covers those economic policies which both Reagan and Clinton followed, and which Bush-2 and Obama effectively abandoned. The second category involves responses to the structural changes in the economy that have blunted broad, normal income gains.

Here, I’ll sketch the outlines of the first category, which touch on three basic elements of a mainstream economic program. First, both Reagan and Clinton supported substantial increases in long-term public investments, especially in education and infrastructure. Second, both Reaganomics and Clintonomics addressed growing budget deficits through substantial revenue increases and some spending reforms – from the very beginning in Clinton’s case, and more belatedly under Reagan. The combination supported strong rates of business investment and healthy increases in productivity, and both in turn helped to life people’s incomes.

Contrast that with Bush-2, who not only cut federal support for education and modern infrastructure. Bush also enacted outsized tax cuts to deal with a mild recession and the first entitlement (prescription drugs for seniors) ever passed without a dedicated revenue source; and on top of all this, he prosecuted two wars with no provisions to pay for either. Obama had to take on Bush’s fiscal legacy, compounded by the 2008-2009 economic collapse. He properly proposed a large stimulus, including some public investments; but he soon had to accept premature austerity, including cuts in public investments. It now appears that unless the next president changes course, much of Obama’s progress on the deficit will prove to be temporary.

The third element is politically touchy, but the economic benefits are clear: Both Clinton and Reagan successfully pushed measures that liberalized trade and foreign direct investment. There was the first free trade pact with a developing economy (NAFTA, proposed by Reagan, negotiated under Bush-1, and enacted under Clinton), the historic Uruguay round that created the World Trade Organization (initiated under Reagan, negotiated under Bush-1 and Clinton, and enacted under Clinton), the U.S. accession to the Asian-Pacific Economic Cooperation (APEC) group under Bush-1 and Clinton, and the 1999 U.S. trade pact with China under Clinton. These measures cost some Americans their jobs; but they created even more jobs by helping U.S. businesses tap into foreign demand, especially in fast-growing developing nations. These measures also have intensified competition, which normally leads to changes that produce innovation and higher productivity. Yet, for all of their obvious benefits, multilateral trade talks under Bush-2 and Obama have failed to produce any new agreement, although Obama continues to press for new accords with the European Union and 11 Pacific Rim nations, including Japan.

In the next installment in this series, we’ll look at what happened to the incomes of households headed by women and by older age cohorts without college degrees, and review some measures to end-run some of the adverse effects of globalization on broad income progress.


Income growth and decline under recent U.S. presidents and the new challenge to restore broad economic prosperity

March 5, 2015

The condition of most American households, and of the country as a whole, is set largely by people’s income – both the levels, and the income progress that people make as they age from their 20’s to their 30’s, 40’s and 50’s. For generations, most Americans have believed that if they work hard, they’ll have real opportunities to earn steadily rising incomes. Such broad based upward mobility is one of the reasons that Americans have been generally optimistic and willing to extend opportunity to successive minority groups. But is that the way America really works? One common view argues that wages have stagnated and most Americans have made, at best, modest income progress since the 1970s. This view is based on a time series of a single statistic, “aggregate median household income.” In fact, the true picture is more complex.

Today, the Brookings Institution issues a new report which I worked on for the past year. Using new Census Bureau data, I analyze household incomes by age cohort – say, people age 25 in 1980 or in 1990 –and then follow those age cohorts as they age. The results revise what we thought we knew about incomes. The data show that broad, strong income gains were hallmarks of the 19809s and 1990s. Moreover, the steady progress of the Reagan and Clinton years covered just about everybody — households headed by men and by women; by whites, blacks and Hispanics; and by those with college degrees, high school diplomas, and no degrees at all. This broad upward mobility, however, simply stopped under Bush and has not recovered under Obama. Moreover, this dramatic turnaround, including declining incomes from 2002 to 2013 for a majority of American households, affects every demographic group.

I’ll be writing more about what’s really happened to income, why, and what we can do about in coming weeks and months. If you want to read the report for yourself, click here