What Hillary’s Campaign Missed

What Hillary’s Campaign Missed

November 15, 2016

Last week’s election should be dubbed the revenge of the neglected. The outcome would have been different if Hillary’s strategists had taken to heart James Carville’s famous quip in 1992, “It’s the economy, stupid.” I remember it well, because I pulled together Bill Clinton’s economic program for the 1992 campaign. Of course, today’s economic problems are different from those of a quarter-century ago. But the political manifestation is virtually the same – tens of millions of Americans justifiably dissatisfied with their economic conditions and prospects.

As regular readers of this blog know, I’ve spent several years tracking what’s happened to the incomes of Americans of different ages, races and ethnicities, educational levels and gender, as they grew older. The Brookings Institution published the first results in 2015 covering the period 1980 to 2012. I sent that report to Hillary and Bill Clinton and as many of those who worked for them as I knew. The results refuted the left’s claims that incomes of average Americans have stagnated for two generations – across every category, median household incomes rose at healthy rates, year after year, through the presidencies of both Bill Clinton and Ronald Reagan.

But the results also showed tectonic income changes from 2001 to 2012 as this steady income progress ended. Hillary was particularly struck by the study’s darkest finding: The median income of households headed by people without college degrees — which covers nearly two-thirds of all U.S. households – fell as their household heads aged from 2001 to 2012.  This unprecedented development, of tens of millions of families losing income as they aged from their thirties to their forties, or from their forties to their fifties, held across race, ethnicity and gender, and for all age groups except millennials.

For example, the real median income of households headed by high school graduates ages 35-to- 39 in 2001 fell from $54,862 in 2001 to $49,800 in 2012. (All income data here are in 2012 dollars.) So, these Gen Xers earned $5,062 less at ages 46-to- 50 in 2012 than they did when they were 35-to- 39 years old in 2001. Their counterparts a decade earlier – households headed by high school graduates ages 35-to- 39 in 1991 – saw their real median incomes rise from $51,645 in 1991 to $63,614 in 2000, for gains of nearly $12,000 (about 20 percent) as they aged from their later-thirties to their later-forties.

Baby boomer households headed by high school graduates who were 45-to- 49 years old in 2001 suffered even larger income losses than the Gen Xers: From 2001 to 2012, their real median income slumped from $63,534 to $51,002, falling $12,532 or some 20 percent as they aged from their later-forties to their later-fifties.

Households headed by college graduates didn’t lose income as they aged over the following 11 years, but only barely so. The median income of those households headed by people ages 35-to- 39 in 2001 inched up from $97,470 in 2001 to $100,771 in 2007, and then fell back to $98,845 in 2012, when they were 45-to- 49 years old. Compare that to the 1990s, when households headed by college graduates ages 35-to- 39 in 1991 saw their median income rise from $81,742 in 1991 to $106,454 in 2000, gains of $24,712 or about 30 percent I calculated that about half of all working-age households lost substantial ground as they aged through that decade, and another quarter of Americans treaded water. This was an economic turn the United States has never seen before. It gave meaning to Donald Trump and Bernie Sanders’ claims that the economy is rigged, and it bred the broad anger that ignited their campaigns.

Hillary’s campaign didn’t ignore these developments. But her strategists, intent on reprising President’s Obama winning coalition, focused instead on the special problems of young, minority, and female voters. The campaign offered the Hispanic community a new path to citizenship for undocumented workers, and promised pay equity for women. It called for larger Earned Income Tax Credit checks for working-poor families, and debt relief for recent college graduates. All of these initiatives have merit. But none of them directly addressed or even acknowledged the structural forces squeezing out income gains for much of the country.

Hillary pressed me to explain the long income slump. I told her the truth: These income problems did not bubble up from the trade deals of the 1990s and the offshoring of manufacturing jobs, which happened mainly in the 1970s and 1980s. The fault lay mainly in forces much harder to demonize, namely technological advances and the way globalization and the Internet affect how companies price their goods and services.

Americans love the entertainment and social networks fostered by information technologies and the Internet. But these technologies also restructured the operations of virtually every office, factory and storefront. As that happened, anyone without the skills and confidence to work effectively in an IT-dense workplace saw his or her “labor value” erode and wages fall. College graduates avoided the worst of the income slump, because virtually everyone who earned a bachelor’s degree in the last 15 years is IT literate.

The other major culprits for the recent income squeeze are the Internet and, yes, globalization. Again, manufacturing job losses are not the heart of it. Rather, the Internet and globalization both intensify pricing competition, and businesses facing those strong competitive pressures often find themselves unable to pass along any rising costs in higher prices. So, as energy and employer healthcare costs rose sharply, especially from 2000 to 2008, many U.S. companies were forced to cut other costs. The data show that those cuts started with jobs and wages.

All of these downward forces took hold throughout the 2002-2007 expansion, and the financial crisis and deep recession that followed only amplified them.

The data also show that conditions shifted again in 2013, when energy prices collapsed, Obamacare started to slow employer healthcare premium increases and, with wages and salaries depressed, hiring became an attractive proposition again for companies. The latest data show that incomes have been rising since 2013 across virtually every group. For my friend Hillary, it was too little, too late: A few years of modest income progress have not offset a decade of painful losses.

But Trump’s success as president will depend on sustaining those income gains for four more years. As I’ve said here before, the economy needs a good dose of stimulus, and Trump’s deficit-defying tax cuts should jump-start growth in late-2017 and 2018. But his tax plans are so excessive economically, they could set the Federal Reserve on a course of multiple interest rate increases that slow growth by 2019. Beyond that, the economic challenge that Hillary also would have faced is that income progress ultimately requires healthy productivity gains, but productivity growth have slowed dramatically for few years now. If Trump and the GOP Congress fail to nudge up productivity, they could face their own populist revolt in 2020.



Halloween Special: How Hillary Can Handle Scary Interest Rate Hikes

October 31, 2016

Looking past this weekend’s kerfuffle over Huma Abedin’s emails, Hillary Clinton’s success in her first term as President will depend in large part on whether the incomes of most Americans keep rising. As readers of this blog know, my studies tracking people’s incomes, year to year as they aged, found that the median household incomes of millennials, Gen Xers and boomers all grew at healthy rates in 2013, 2014 and 2015. Moreover, this income progress reached across gender, race and ethnicity, and educational levels. That’s why consumer confidence and President Obama’s approval ratings are now so high.

The catch is that for most households, these gains came after a decade of income losses from 2001 to 2012. Hillary’s first challenge is to avoid a recession that could overwhelm most people’s recent gains — and her opportunity is to provide four more years of income progress that could well make most Americans optimistic again.

The challenge could start between Hillary’s election and inauguration, in December when the Federal Reserve’s Open Market Committee (FOMC) next votes on raising short-term interest rates. At the FOMC’s last meeting in September, its members voted seven to three not to raise those rates; but most Fed watchers expect the Committee to reverse this stance in December. Based on the Fed’s history, that decision will be followed by a long succession of additional interest rate hikes over the next three years. If that happens, growth and income gains could stall or worse as the costs for businesses to invest, and for consumers to buy a home, a car or a major appliance, all rise.

Traditionally, the Fed raises interest rates when the economy threatens to overheat and pump up inflation. But this time, there is little evidence of such a scenario. Inflation has risen at an annual rate of less than two percent for 51 consecutive months, and growth this year has been modest.  Moreover, based on long-term interest rates, U.S. and global investors expect low weak inflation to persist for years.

The only evidence that inflation hawks can cite is the recent strength of job creation. From January 2013 to September 2016, U.S. businesses added an average of 204,000 net new jobs per month. That’s nearly the pace last seen under Bill Clinton, when business created an average of 219,000 net new jobs per month from January 1993 to December 2000. Worrying about inflation may make sense once we reach full employment, since when that happens, competition for workers pushes up wages that are passed on in higher prices.

But the United States is not at full employment today, or close to it. Large numbers of people continue to work part time and not by choice, and labor force participation by prime age Americans remains abnormally low.

 The Fed’s only real argument for raising interest rates is strategic — higher rates create the room for the Fed to cut them in the next downturn. But even with 2.9 percent growth in the third quarter, the economy has expanded at a rate of less than two percent this year, and fixed investment has declined four quarters in a row. In this economic environment, a succession of rising interest rates over the next two years could trigger that downturn. And as the Bank of England has noted, if an economy begins to decline while short-term rates remain near zero, central bankers can still use quantitative easing to stimulate demand.

 It’s worth noting that near-zero interest rates carry risks of their own. With yields on government bonds so low, large investors have shifted to riskier investments with higher yields. That’s why commercial real estate is rising, why there’s a bubble in art markets, why prices for agricultural land and junk bonds are historically high, and why the price-to-earnings ratio for U.S. stocks is now 30 percent above its historical average.

These risky investments could pose a threat to the economy and people’s incomes, if a substantial jump in interest rates triggers a large decline in the U.S. stock, real estate and junk bond markets. Moreover, much like the run-up to the 2008-2009 crisis, the big financial institutions may not have paid enough attention to the risks in their high-yield investments. To be safe, Hillary should call on the Treasury and the Fed to audit those institutions through a new round of “stress tests,” and then ensure that any major institution with a shaky portfolio takes steps quickly to reduce its exposure.

If, as now expected, the Fed goes ahead and raises interest rates, the economic fate of most Americans will rest in the new President’s hands. Hillary’s best response will lie in fiscal policy.  Her first budget should call for more spending on infrastructure, new grants to the states to begin their transition to free tuition at public institutions, bigger Obamacare subsidies to offset the fast-rising premiums expected in 2017, and expanded support for research and development. On the tax side, new incentives for business plant and equipment also are in order. Hillary should cast all of these measures as an investment agenda for long-term growth, and not wave the red flag of “stimulus” in the faces of congressional Republicans.

Her first budget also should include measures to directly support income progress by working people, including the increase in the minimum wage, pay equity guarantees, and the expansion of the earned income tax credit. Finally, she can pay for all of these measures, as promised, by ending carried interest, closing corporate loopholes, and raising taxes on wealthy households.  She can also ensure that these tax changes don’t slow a fragile economy by phasing them in starting a year or two down the road.

The Federal Reserve is a very powerful force in the American economy. But so is the President — and a determined President Hillary Clinton can protect the incomes of Americans even if the Fed prematurely raises interest rates.



Obama’s Expansion Is Finally Paying Off 

October 13, 2016

There’s no debate that the tough economic times of the last decade have helped frame the 2016 elections. In fact, many Americans are so accustomed to seeing the world through their experience of tough times, that it’s hard to recognize when conditions have changed.

Yet, here’s one sign that times are different: American businesses have created almost 9.2 million net new jobs since January 2013, recalling the job creation rates of the 1980s and 1990s. More important, our analysis of the latest Census Bureau data shows that over the three year period from 2013 through 2015, the incomes of most American households grew again, and at rates that matched or exceeded the average for the 1980s and 1990s.

Last month, the Census Bureau reported that the aggregate median income for all U.S. households grew 5.2 percent in 2015, the first such increase since 2007. But as regular readers of this blog know, we apply a statistical approach that digs much deeper into the data. This approach allows us to capture the income experience of typical households of various kinds, by tracking their incomes as they age.

To see if and when economic conditions did truly change, we started by tracking the income path of millennial households, headed by people ages 25 to 29 in 2009, from 2009 to 2015.  Over those same years, we also tracked the income path of Generation X households, headed by those ages 35 to 39 in 2009; and the income path of late boomer households headed by those ages 45 to 49 in 2009.

This analysis found, as expected, that times were tough for most Americans from 2009 through 2012. For example, the median income of the Gen X households was flat over those years, and the late boomer households absorbed income losses averaging 1.1 percent per year.  The only households with rising incomes from 2009 to 2012 were the millennials, and their gains were a fraction of those achieved by households of comparable ages in the 1980s and 1990s. (Table 1, below)

Our analysis also showed that most people’s income paths shifted starting in 2013. Compared to the preceding three years, the income gains by the Gen X households went from zero to 2.9 percent per year; and the late boomer households, whose median income fell 1.1 percent per year from 2009 to 2012, saw gains of 1.4 percent per year from 2013 through 2015. Finally, the median income of the millennial households jumped from 2.7 percent per year to 4.6 percent per year. Also, it’s worth noting that the largest income gains for all three age cohorts came in 2015.

Table 1.  Average Annual Household Income Gains by Age Cohort,
As They Aged from 2009 to 2015

chart1

This analysis also shows that most Americans, finally, are better off than when President Obama took office. The median income of millennial households, in 2015 dollars, rose from $50,875 in 2009 to $63,010 in 2015, as they aged from 25 to 29 years-old, to 30 to 35. Similarly, the median income of Generation X household who were 35 to 39 in 2009 grew from $66,287 in 2009 to $72,028 in 2015. Even the late boomers who were 45 to 49 in 2009 managed small gains, edging up from $70,706 in 2009 to $71,300 in 2015.

We can also compare this record with other recent presidents, using my analysis published by the Brookings Institution last year. In that report, I tracked the income progress by comparable age cohorts during the presidencies of Ronald Reagan, George H.W. Bush, Bill Clinton, and George W. Bush — that is, gains in median income by households headed by people ages 25 to 29, 35 to 39, and 45 to 49 in the first year of each of those president’s terms. Since no president should be held responsible for the economy’s performance in his first year in office, we tracked the income gains of each age cohort from year two of each presidency through year one of his successor’s term.

Using this framework, it’s clear that most American households made more income progress under Obama than households of comparable ages under George W. Bush or his father, George H.W. Bush. (See Table 2, below.)  Moreover, the income gains of 2013 through 2015, like the job growth of the same years, suggest that the U.S. economy is still capable of producing a robust expansion, at least for a few years. The data show, in Table 2 below, that incomes grew at a faster annual rate over the last three years than they did on average over the eight years of Reagan’s presidency for all three age cohorts, and faster than they did on average over the eight years of Clinton’s presidency for two of the three age cohorts.

Table 2.  Average Annual Median Income Gains by Households Headed by People Ages 25 to 29, 35 to 39 and 45 to 49 as They Age through Each Presidency

chart2

 Of course, it’s not truly a fair comparison politically, since Clinton and Reagan delivered strong income gains over their entire terms, while Obama has done so for only three years. But especially after the meager income progress of the 2002–2007 expansion, the data show that the U.S. economy can still deliver robust income growth for almost everyone.

So, the challenge facing the next president is to sustain this recent income progress, in large part by reversing our recent record of faltering productivity.



On Economic Growth, Hillary Delivers and Trump Pretends

September 26, 2016

To prepare for tonight’s debate, I decided to think through Donald Trump’s promise to deliver 4% annual economic growth. First off, if this is Trump’s goal, then his program is as much a fraud as his foundation or university. If anything, his proposals would slow our already modest growth. To be sure, no one has a silver bullet to raise the economy’s underlying growth rate. But that doesn’t mean we’re helpless, and Hillary Clinton’s program will almost certainly raise that growth rate.

Four percent growth is not unprecedented. Under JFK and LBJ, the economy grew an average of 5.2% per year; and Bill Clinton produced 3.8 % average growth over eight years, including five years of 4% growth or more. But they were exceptions: Ronald Reagan and Jimmy Carter each managed 3.4% average annual growth; George H. W. Bush and Barack Obama each achieved 2% annual growth, and George W. Bush eked out just 1.6% annual growth. Moreover, the Federal Reserve forecasts that the U.S. economy will continue to grow an average of 2% annually for the next decade. This forecast and the record under Obama and Bush II all suggest that strong headwinds are hampering America’s economic growth.

By the arithmetic, economic growth measures how much more goods and services the economy has produced in one year, compared to the preceding year. That tells us that two key factors for higher growth are how many more people have jobs producing goods and services, and how productive, on average, everyone is producing those goods and services. By the arithmetic, strong growth rests substantially on increasing the number of people with jobs and the productivity of the entire workforce.

One reason for the disappointing growth of the last 15 years is that the number of net new workers each year slowed sharply. For that, blame the decline in U.S. fertility rates that began 20 years ago, rising rates of retirement by aging baby boomers, the slowdown in immigration sparked by the Great Recession, and steady erosion in the labor participation rate (LPR). All told, the Bureau of Labor Statistics reports that the U.S. workforce is now growing .5% per year, down from 1.25% per year under Bill Clinton.

So, which candidate has proposed anything that would expand the number of Americans working? Both agree on spending more on infrastructure, but that will have modest effects on long-term growth. Beyond that, one striking feature of Trump’s immigration, healthcare and other proposals is their secondary effect of shrinking the number of people working in the U.S. economy.

 To begin, Trump’s signature pledge to deport 8 to 11 million immigrants would reduce the workforce directly, for those caught and deported; and indirectly, by forcing millions to take cover outside the mainstream economy. Similarly, his promise to repeal Obamacare would increase the time that millions of Americans have to spend out of work for health reasons.

Nor should anyone believe that his $4.4 trillion to $5.7 trillion in tax cuts will somehow induce more people to work — that particular supply-side hokum is refuted by the rising labor participation rate (LPR) after Bill Clinton raised taxes, and the falling LPR after Bush II cut taxes.

By happy contrast, much of Hillary Clinton’s program would have secondary effects that increase the number of people in the labor force and working. Her path to legalization for immigrants will allow an additional eight million adult immigrants to participate fully and openly across the economy. Her plans to broadly expand access to child care and provide universal pre-K education would enable millions of parents to reenter the workforce or move from part-time to full-time jobs.

Moving along, her pledge to achieve universal healthcare coverage, once fulfilled, will lessen the number of people forced to stay home or even give up their jobs for health reasons. Her commitment to pay equity, once met, will encourage more women to enter the workforce or to increase their hours at work, as should her pledge to expand employment for 53 million American adults with disabilities. Finally, Hillary’s plans for expanding access to higher education will raise the labor participation rate, because that rate tends to rise with education.

The arithmetic of growth also depends on how fast productivity increases – and progress in productivity, which grew 2.8% per year in the later 1990s, has collapsed: From 2011 to 2015, productivity increased just 6% per year; and over the first half of this year, productivity actually fell at a rate of .6% per-year.

Three factors are mainly responsible. First, business investment in equipment and other technologies has slumped. In addition, the gap between the skills many workers have and the skills they need has widened. Finally, it appears that the development and use of new technologies, processes, and ways of organizing and running businesses — in a word, innovation — has slowed.

Here, too, Trump offers nothing.  His huge tax cuts would balloon federal deficits, and so raise the cost for business borrowing to invest in new equipment and technologies. Trump also offers nothing to help workers improve their skills, and nothing to stimulate innovation and the broad use of new technologies.

By contrast again, Hillary’s agenda would actively promote progress in productivity. Her plans for tuition-free access to higher education will expand the skills of millions of young people, and her blueprint to reduce budget deficits will ensure that federal borrowing does not raise the cost for business borrowing to invest. Hillary also supports innovation by calling for expanded federal investments in basic R&D and promoting more public-private collaborations to commercialize that R&D. And since innovations often come from young enterprises, her program to expand bank lending for such companies is also well suited to promote innovation.

On economic growth, as on many other issues that will shape America over the next decade, Hillary delivers while Trump blusters.

 

 



The Economic Outlook for the Election and Beyond, and How Who Wins Could Change It

September 7, 2016

With nine weeks to go, the economic conditions for the election are set — modest growth, low inflation, and continuing job gains. A few Wall Street forecasters rate the odds of a 2016 recession at one-in-three; but unless a major shock wrenches the economy off its present course, bet with Janet Yellen and Ben Bernanke on the economic expansion continuing into next year.

The tougher question is what economic conditions will confront the new president and the rest of us in 2017 and 2018? Since the fourth quarter of 2015, the economy has grown at an annual rate of less than one percent, and business investment has declined at a three percent annual pace.

Consumer spending and home sales could lift growth and investment next year, if the healthy income growth of the last three years continues. But much of those income gains come from the unusually strong job growth of those years; and with unemployment now below five percent, job creation almost certainly will moderate soon.

If jobs gains lessen next year, healthy income gains will depend on a turnaround in the economy’s disappointing productivity record. A modern economy cannot stay strong indefinitely without strong productivity growth to fuel incomes, demand, profits, and investment. Its recent record explains our slow growth: Productivity gains averaged just .6 percent per year from 2011 to 2015, and even those small gains turned negative in the first half of 2016.

This represents a major change: Productivity increased at an average rate of 2.8 percent per year through Bill Clinton’s second term and remained strong at 2.6 percent per year from 2001 to the financial collapse in 2008. Moreover, it recovered quickly in 2009 and 2010, reaching 3.2 percent per year. Unless productivity recovers again in 2017, wages and incomes could stall and the economy could stagnate in the next President’s first or second year in office.

Yet, the economic debate this year has mainly focused on overall growth rather than productivity. Most economists — Ben Bernanke, Paul Krugman, Larry Summers and Kenneth Rogoff, among others — pin the slowdown in GDP growth on higher savings and the associated weaker spending. So, most economists have called for renewed fiscal stimulus here and for much of the world. They’re right; but the outlook for incomes and investment would be more encouraging if the fiscal stimulus focuses on recent meager, or even negative, productivity gains — and their impact on growth.

Americans are in luck — assuming the pollsters are right that Hillary Rodham Clinton will vanquish Donald Trump. While Clinton has not offered an explicit program to boost productivity, her economic and social policy proposals include the three essential elements of such a program. First, improve overall market conditions for all industries; second, promote innovation through the development and broad use of new technologies, materials, and ways of doing business; and third, give workers access to the skills they need to operate effectively in a more innovative economy.

The big play to improve the efficiency of all U.S. industries and businesses is Clinton’s commitment to expand public investments in infrastructure by $275 billion over five years. Unsurprisingly for Hillary, her program covers every conceivable form of infrastructure. There are new investments not only for roads, bridges, public transit, rail freight, airports, seaports, waterways, dams, and wastewater systems.

Her proposals also cover 21st century infrastructure networks, including a smart electric grid, advanced oil and gas pipeline systems, and universal access to 5G broadband and Next Generation wireless. Since virtually every enterprise and employee depends on these systems every day, her proposals should enable most firms and workers to carry out their business more efficiently.

As stimulus, these infrastructure improvements amount to $55 billion per year, or just three-tenths of one percent of GDP. Fortunately, Clinton’s program includes other measures that also should bolster productivity. To promote innovation, she pledges to scale up federal investments in basic research and development through the NSF, the NIH, the Energy Department and DARPA, across areas from high performance computing and green energy, to machine learning and genomics.

Always a pragmatist, Clinton also has plans to promote the commercialization of advances in R&D through grants for private accelerators and reforms to expand access to capital by the young businesses that play a prominent role in innovation.

Finally, Clinton has a serious program to help Americans upgrade their skills. Computer science training would be available for all high school students, and foreign-born students who complete a U.S. masters or Ph.D. degree in a STEM field would automatically receive green cards to stay and work in the United States.

However, the cornerstone is tuition-free access to public colleges and universities for all young people from families earning $125,000 or less, and tuition-free access to community colleges for anyone. To complete her productivity agenda, Clinton should expand her community college program and give all working adults the real ability to improve their skills, through no-cost access to two training courses per year at community colleges.

From the other side, Trump offers virtually nothing. He says that he, too, would increase federal spending on infrastructure. But his tax promises would balloon federal deficits by upwards of $700 billion per year, leaving no room to upgrade infrastructure, much less promote basic R&D or expand access to higher education and worker training.

His massive deficits also would crowd out business investments in new technologies and new enterprises. Trump’s program, in short, would virtually guarantee that the American economy stagnates, or worse.



Sorry, Donald – The Incomes of Minority Households Grow More under Democrats than under Republicans

August 29, 2016

Donald Trump says that Democrats have failed American minorities, so let’s test his claim by the most basic economic criteria: What happened to the incomes of African Americans and Hispanics under Democratic and Republican administrations over the last 35 years? The data do not lie. The incomes of minority households — and in most cases the incomes of white households, too — grow faster under Democratic administrations than under GOP ones.

Under the last five presidents, African-American and Hispanic households made greater income gains under Bill Clinton than under Ronald Reagan, and more progress under Barack Obama than under George W. Bush despite the financial collapse and deep recession that began under W. Minority incomes also grew much faster under Obama and Clinton — and Reagan — than during George H.W. Bush’s single term.

These conclusions are not based simply on aggregate median income figures for each race and ethnicity. Instead, we use Census Bureau data to plot the real income paths of white and minority households headed by people ages 25 to 29 and ages 35 to 39, as they age through each administration. In this way, we capture the actual income experience of these households. Finally, we start our analysis of each president’s record in year two of his term, because the economic conditions in a president’s first year in office are largely set by the policies of his predecessor. Here are the results.

chart4

We can see, first, that income growth by young African American households, headed by people ages 25 to 29 averaged a remarkable 7.3% per year as they aged under Clinton, compared to 3.8% under Reagan. The incomes of comparable households also grew, on average, 2.9% per year under Obama (2010-2014), compared to growth of 1.8% per year under Bush 2, and income declines averaging 2.5% per year under Bush 1.

Somewhat older African-American households, headed by people ages 35 to 39 at the beginning of each administration, had income gains averaging 4.2% per year under Clinton, compared to 3.3% per year under Reagan. Comparable households saw incomes growth averaging .9% per year under Obama, compared to income declines of .7% per year under Bush 2 and of 2.6% per year under Bush 1.

The same general pattern holds for Hispanics. Young Hispanic households achieved income gains averaging 4.2% per year under Clinton, compared to 1.6% per year under Reagan. Under Obama, the incomes of comparable households grew an average of 1.3% per year under Obama, compared to .7% per year under Bush 1 and zero gains under Bush 2.

Further, the incomes of somewhat older Hispanic households rose at an average rate of 3.1% per year under Clinton, compared to 2.2% per year under Reagan. Comparable households registered income gains averaging 1.5% per year under Obama, compared to 0.3% under Bush 2 and income declines of 1.1% per year under Bush 1.

The pattern of income progress by white households is similar, but not quite the same. Households headed by young whites made more income progress under Clinton, with gains averaging 5.2% per year, than under Reagan when their gains averaged 4% per year. But the income growth of somewhat older white households under Clinton, averaging 2.9% per year, was matched by the gains of comparable households under Reagan.

Young white households also have fared better during Obama’s time in office, with income growth averaging 3.3% per year, than during the administrations of Bush 2 when their gains averaged 2.3% per year or his father, Bush 1 at 2.6% per year. And while the income progress of somewhat older white households under Obama, averaging 0.4% per year, is greater than the 0.1% per year gains by comparable households under Bush 2, Bush 1 outpaced both of them with gains by comparable households averaging 1.5% per year.

The stronger income progress under Democrats by minorities in particular reflects a number of forces and factors, but job creation is paramount. Job growth was much stronger under Clinton and Obama — and Reagan — than under either Bush administration; and minorities benefit most when the jobless rate falls sharply, especially when the economy nears full employment.

Given this record, it is unsurprising that only small percentages of African Americans and Hispanic Americans have favored recent GOP presidential candidates. Trump’s racially and ethnically charged rhetoric will likely drive his support from minorities to record low levels. But the difference in their support for Trump, as compared to Romney or McCain, will likely be pretty modest. In the final analysis, minority Americans usually vote their economic interest, much like most of the rest of the country; and the record of the last 35 years tells them that they will be better off under a Democratic administration than a Republican one.



Rising Incomes Are a Key to Winning in 2016 — But Not Enough

June 2, 2016

 

Even if we accept that the 2016 campaign is a fact-free zone, what precisely are Donald Trump and Bernie Sanders talking about when they rant on about incomes cratering for most Americans? It’s true, as I’ve documented, that a majority of Americans saw their incomes stagnate or decline throughout the Bush expansion (2002–2007), and the financial crisis and ensuing recession aggravated those losses. But that dynamic ended more than three years ago.  Since 2013, the household incomes of most Americans have risen steadily and substantially.

The only candidate who seems to get this is Hillary Clinton, judging by her pledge to preserve and extend the economic gains achieved under President Obama. But Trump and Sanders’s appeal should tell us that, politically, those gains are not enough; and that a wining economic platform for this year’s election has to address the entire picture of the last 15 years. Yes, voters want measures to ensure that their recent progress will continue, a challenge Clinton has met better than her Democratic rival or Republican opponent. They also want a credible pledge that they will never have to endure another housing collapse or muddle through an expansion that leaves them on the sidelines.

Nevertheless, there’s no doubt that most Americans are doing much better than they did four or eight years ago.  Last month, the Federal Reserve’s “Report on the Economic Well-Being of U.S. Households in 2015” found that nearly 70 percent of Americans say they’re “doing okay” or “living comfortably,” versus 18.5 percent who say they’re “worse off.”  Behind those positive views, the Bureau of Economic Analysis reports that Americans’ real personal income grew 1.9 percent from February to December 2013, followed by 3 percent gains in 2014 and another 4  percent gains in 2015.

To be sure, aggregate economic data does not always capture most people’s real experience. To track people’s actual experience, I sorted and collated the Census Bureau data on household incomes from 2009 to 2014. I focused on the incomes of American households headed by people who, in 2009, were 25-to-29 years old (millennials), 35-to-39 years old (Generation X), and 45-to-49 years old (late baby boomers). I tracked their incomes as they aged from 2009 to 2014, and analyzed the results by gender, race or ethnicity, and education.

The results show that most Americans saw their incomes continue to stagnate or decline from 2009 to 2012, with the exception of millennials.  For economic and statistical reasons, young households always make greater progress than older households, and millennial households were the only age group whose income rose from 2009 to 2012.  Moreover, household incomes have risen significantly since 2013 for Gen X and baby boomers, as well as millennials.

 

Average Annual Household Income Gains

  2009 – 2012 2013 – 2014
Millennials 3.2% 4.3%
Generation X – 0.4% 2.3%
Late Baby Boomers -1.1% 0.5%

The results also show that gender and race matter. While the income dynamics of the last decade didn’t create today’s partisan divisions based on gender and race, they probably have reinforced them. For example, while households headed by men generally fared better than those headed by women in the lean years from 2009 to 2012, women turned the tables in 2013 and have made more progress than their male counterparts since the turnaround.

Average Annual Household Income Gains by Gender

  2009 – 2012 2013 – 2014
Men Women Men Women
Millennials 3.5% 2.5% 2.7% 3.0%
Generation X –   0.2% – 0.6% 0.9% 2.8%
Late Boomers – 0.5% -1.1% 0.2% 0.2%

The results based on race and ethnicity also may help explain Hillary Clinton’s strength among minorities, as compared to Trump and Sander’s connections to angry white voters. In particular, the incomes of Hispanic and African-American households across all three age groups have grown faster than their white counterparts since 2013, under Obama’s policies.

Average Annual Household Income Gains by Race and Ethnicity

  2009 – 2012 2013 – 2014
White Black Hispanic White Black Hispanic
Millennials 3.7% 0.0% 1.8% 2.9% 3.0% 3.2
Gen X 0.1% 1.7% – 1.5% 1.6% 2.0% 5.0%
Late Boomers – 0.9% – 4.9% 1.8% – 0.1% 2.0% 2.8%

Finally, the results also show that after the tough times from 2009 to 2012, when Gen X and baby boomer households at every educational level lost ground, every age and educational group but high-school educated baby-boomers have made significant income progress since 2013. These gains even include households headed by high-school dropouts, lifted by very strong job growth since 2013 and the new cash subsidies under Obamacare.

Average Annual Household Income Gains by Education

  2009 – 2012 2013 – 2014
No Diploma HS College No Diploma HS College
Millennials -0.6% 1.1% 4.2% 4.4% 3.0% 5.1%
Gen X -2.2% -1.3% -0.1% 6.2% 4.0% 1.5%
Late Boomers -4.8% -1.7% -0.6% 9.5% 0.0% 0.4%

Incomes do not explain everything. The incomes of white millennials have risen rather strongly throughout this entire period. Yet, they’ve responded to Trump’s and Sanders’s cases that political and economic elites have denied them their hard-earned gains. Maybe they’re angry that their parents lost much of their home equity, or maybe they’re turned off rather than reassured by Clinton’s dispassionate demeanor.  To win them over, she will have offer a credible path to both maintain everyone’s recent income progress and preclude another housing collapse and joyless expansion.

 



Whatever Some Candidates Tell You, the Incomes of Most Americans Have Been Rising

April 4, 2016

After a decade when most Americans saw their incomes decline, the latest Census Bureau income data contain very good news: A majority of U.S. households racked up healthy income gains in 2013 and 2014. The facts may not fit the narratives of Donald Trump, Ted Cruz, or Bernie Sanders.  But they do help explain why President Obama’s job approval and favorability ratings have passed 50 percent.

They also show that Hispanic households made more income progress in 2013 and 2014 than any other group, which may be one reason for their growing support for Demovrats.  A third surprise: Households headed by Americans without high school diplomas racked up their first meaningful income gains since the 1990s, thanks to the large job gains in 2013 and 2014 and the Obamacare cash subsidies beginning in those years.

These findings come from using the Census data on the median incomes of American households by the age, gender, race and education of their household heads, to track their income progress as they aged from 2009 to 2012. I focused first on millennial households headed by young women and men who were 20- to 29-years-old in 2009, which makes them 27- to 36-year-old voters today.

For decades, younger households have been the group with the fastest-rising incomes, and the recent period is no exception. Despite colorful stories of millions of young people living in their parents’ basements, the data show that the household incomes of these millennials (adjusted for inflation) grew 3.6 percent per year from 2009 to 2012, and those gains accelerated to 4.5 percent per year in 2013 and 2014.

The data also show that the incomes of millennial Hispanic households grew 5.4 percent per year in 2013 and 2014, outpacing the progress of white and African American millennial households of the same ages. To be sure, not all millennials did nearly so well: The household incomes of those without high-school diplomas, which had declined an average of 1 percent per year from 2009 to 2012, rose 3.1 percent in 2013 and 2014 — while the incomes of households headed by millennials with high school diplomas or college degrees grew 5 percent per year.

Two main factors are at work here, as well as in the big gains by Hispanic households, First, businesses created almost 2.5 million net new jobs in 2013 and 3 million more in 2014, and such strong job growth disproportionately helps those at the economy’s margin. Second, Obamacare’s cash subsidies for lower-income households kicked in the same years, and Census counts government cash subsidies as a form of income.

The years 2013 and 2014 also were good for most of Generation X. My analysis here focused on households headed by people who were 35 to 39 in 2009, which means they are 42- to 46-year-old voters today. In those two years, the median income of those Gen X households rose 2.3 percent per year — a major turnaround from 2009 to 2012, when their incomes had declined 4 percent per year.

As with the millennials, Gen X households headed by Hispanics made more income progress in 2013 and 2014 than did their white or African American counterparts. And thanks once again to the robust job growth and the Obamacare cash subsidies, Gen X households headed by people without high school diplomas made substantial income progress in 2013 and 2014 — in fact, more progress than Gen X households headed by high school or college graduates.

For many decades, the income gains of most Americans have slowed as they aged. Nevertheless, the new income data contain moderately good news for households headed by late baby boomers, those who were 45- to 49-years-old in 2009 and today are voters ages 52 to 56.  Their median household incomes rose in 2013 and 2014 by an average of .5 percent per year; but even that was a big improvement from 2009 to 2012, when their incomes fell 1.1 percent per year.

As with the millennials and Gen Xers, the Hispanic boomer households again fared better than their white and African American counterparts in 2013 and 2014: The median incomes of these Hispanic households grew 2.8 percent per year in 2013 and 2014, compared to gains of 2 percent per year by African American boomers and .1 percent per year by white boomers. Also, once again, the data show that the incomes of households headed by boomers without high school diplomas grew faster in 2013 and 2014 than the incomes of boomer households headed by high school or college graduates.

The Census Bureau will release the 2015 incomes data in a few months. We already know that the economy created another 2.65 million new jobs in 2015. If, as expected, the broad income progress seen in 2013 and 2014 persists in 2015, it will rebut much of the economic message touted by Trump, and badly weaken Sander’s critique of Hillary Clinton. These data may not penetrate those campaigns and the media that surround them, but American voters know when their own incomes have improved — and that will alter the landscape for next November in ways almost certain to favor Democrats and their nominee.



Will the GOP Break Up?

December 21, 2015

At the risk of spoiling your holidays, it’s time for a serious talk about what’s driving the race for the GOP nomination. It’s not just personality, although Donald Trump and Ted Cruz are certainly more effective messengers than, say, Ben Carson and Carly Fiorina, their ideological doppelgangers. More important, the broad appeal to the party’s base of the extreme attacks by most GOP candidates on immigrants, Muslims, the mainstream rights of women, climate science, and government under both parties raises questions about where the Republican Party is headed.

As is often the case, one reason these messages resonate so powerfully among GOP voters lies in the economy, especially what’s happened to their incomes. New research shows that across groups which account for nearly two-thirds of American households — those headed by people without college degrees — median household incomes fell pretty steadily from 2002 to 2013. (Over the same years, progress by households headed by college graduates slowed but didn’t turn negative.) These data tracked people’s incomes as they aged, capturing their actual economic experience. So, for example, the median income of households headed by people without college degrees who were 35 to 39 years old in 2001 fell about 1 percent per-year from 2002 to 2013, when those same people reached ages 47 to 51.

As documented in my report for the Brookings Institution, these persistent income losses as people aged are unprecedented in modern America. Households headed by people ages 35 to 39 in 1981 and without college degrees saw income gains averaging 2.3 percent per year under Ronald Reagan; and the median incomes of comparable households in the 1990s increased 2.8 percent per-year under Bill Clinton. (An infographic version of the report can be found here.)

White males without college degrees make up a major share of the GOP’s base, and it’s unsurprising that many of them blame their hard times on competition from immigrants and women, abetted by the alleged indifference of the government under both parties. Nor is it unreasonable that people who already feel vulnerable economically also are sensitive to the specter of a new physical threat, including terrorism — so much so that they’re open to ostracizing anyone who shares the faith of the small group of terrorists in Paris and the isolated couple in San Bernardino. Judging by the last GOP debate, most of the candidates (all but Trump and Rand Paul) also expect their base voters to welcome America addressing terrorism by going to war again in the Middle East.

Divisive fights inside the GOP between mainstream conservatives and right-wing populists are not new. In fact, they were features of the 2008 and 2012 nomination races. In the past, the Republican establishment papered over the split by acknowledging the noisy complaints of the right-wing populists. John McCain did so by naming Sarah Palin to his ticket, and Mitt Romney called for anti-immigrant policies so onerous that 11 million undocumented Hispanics would “self-deport.”

This time, the right wing is poised to claim the top of the ticket, intensifying the candidates’ competition for hyper-conservative voters. The race has not only pushed Trump, Cruz and their anti-establishment confederates further to the right; it’s also forced more traditional candidates such as Marco Rubio and even Jeb! Bush to fall in line on most matters. So, come next July in Cleveland, the GOP almost certainly will present itself as a vessel for an anti-immigrant, anti-Muslim, anti-women, anti-science, and anti-government agenda.

These developments present a serious dilemma for the majority of GOP office holders in Congress and the states, who still identify with mainstream conservatism. Across the Midwest, parts of the South, and most mountain and southwestern states, Republican candidates will have to choose between angering their party’s radicalized base and turning off millions of moderately conservative suburban women and millennials, on top of nearly all Hispanics and Asians. Whatever choice these GOP candidates make, many may not survive 2016 — and the day after the elections, the Republican Party will still face its Hobson’s choice.

The hard political truth is that no one can reconcile alienated, right-wing populists and mainstream establishment conservatives. Unless the economic casus belli for these developments disappears — and strong, broad income progress returns — one side or the other may well be forced to look beyond the GOP.

All of this sounds like good news for the Democrats. In fact, 2014 was the first good year for most households’ incomes since 2000. If Hillary and the next Congress can enact policies and programs that sustain broad income progress, the Democrats could become the nation’s default governing party. If not, the Democratic Party may find itself by 2020 in a bind similar to the Republicans — riven by an ideological battle between angry left-wing populists and the party’s establishment.



The Surprising Good News about American Incomes

October 26, 2015

For a change, the latest Census Bureau data on what’s happened to the incomes of Americans is good news. For the first time since the 1990s and 1980s, household incomes rose substantially in 2014, and did so across all demographic groups. You might miss the good news if you looked simply at everyone’s median income or median wage. What’s actually happening becomes clear only when you track, as I have, the income paths of various “age cohorts,” year after year as they grow older. Using this approach, the new data show that across households headed by people in their late 20s, their late 30s and their late 40s in 2013, median household income grew an average of nearly 2.7 percent in 2014.

This is a big and important change: As documented in my recent Brookings Institution report on income progress since 1980, the median income of households headed by people of comparable ages in 2001 declined an average of 0.1 percent per year from 2002 to 2013.

Drilling into the new data, we also see that households headed by minorities made considerably greater progress in 2014 than their counterparts headed by whites; and households headed by men had larger income gains than those headed by women. Yet, all of those groups saw significant income growth. Most striking, households headed by high school graduates, as well as those headed by college grads made substantial income progress in 2014; and even those households headed by people without high school diplomas had significant gains. While all of these happy developments reflect just one year’s data, they nevertheless bear watching.

Let’s step back and put these new data in their larger context. The Brookings study covered the period 1980 to 2013. I followed the incomes of households headed by people who were 25 to 29 years-old in 1975, until they reached age 59; and then repeated that process for households headed by people who were 25 to 29 in 1982; as well as 25 to 29 in 1991, and 25 to 29 in 2001. The analysis showed that across age groups and across gender, race and ethnicity, and education, Americans made strong, steady income progress as they aged through the 1980s and 1990s. Since 2002, however, the median household incomes of the same groups have declined, stagnated or grown much more slowly, depending on their demographics.

I also examined the income progress of three age cohorts under each of the last five presidents, tracing the income paths of households headed by people who were 25 to 29, 35 to 39, and 45 to 49 at the beginning of each president’s administration. (For these income records by president, I began in year two of each administration and ended in year one of the following administration, because economic conditions and income results in the first year of any presidency are set by the preceding administration.)

As expected, the new 2014 data improve Barack Obama’s record. Over his presidency thus far, income growth across the three age cohorts has averaged 1.2 percent per year, as people aged from 2010 to 2014. That’s a big step up from George H.W. Bush and George W. Bush: Income progress across comparable age groups averaged 0.2 percent per year under Bush I and 0.3 percent per year under Bush II. The income progress under Obama is also a big step back from annual gains averaging 2.6 percent under Bill Clinton and 2.4 percent under Ronald Reagan. Nonetheless, income growth in 2014 roughly equaled the strong, sustained gains under Clinton and Reagan.

The question is, why did this happen? First and probably foremost, employment accelerated sharply last year: The United States created 2.95 million net new jobs in 2014, compared to an average of 528,000 net job gains per year from 2002 to 2013; and 1.78 million per year from 2010 to 2013.

Strong job creation can have powerful effects on incomes, especially for people working near the margins of the economy. This effect is evident in the 2014 income progress by people without college degrees. Across the three age cohorts, incomes increased 4.8 percent among households headed by high school educated graduates and by 2.6 percent among those headed by people without any diplomas. In stark contrast, the median incomes of comparable households decline substantially from 2002 to 2013.

Beyond jobs, U.S. businesses also enjoyed relief in 2014 from fast-rising health care and energy costs, which allowed them to attract and retain employees by raising wages and salaries. Spending by employers on health insurance for family medical coverage, for example, rose less than 2 percent in 2014, as compared to increases averaging nearly 7 percent per year from 2002 to 2013 and nearly 5 percent per year from 2010 to 2013. Similarly, energy costs for industrial and commercial businesses, which rose by an average of more than 6 percent per year from 2002 to 2008, virtually flat-lined in 2014.

Yet, even with 2014’s strong gains, years of flat or falling incomes for many Americans have left us with stark inequalities within the middle class. Across our three age cohorts, the median income of households headed by men averaged $71,382 in 2014 — 25 percent greater than the $56,946 median income of households headed by women.

Inequalities based on race and ethnicity are much larger, even though 2014 was a very good year for minorities. In 2014, the median income of households headed by whites across the three age cohorts averaged $74,149, or 85 percent greater than the $40,049 level for the households headed by African-Americans and 56 percent greater than the $47,440 average for those headed by Hispanics.

Finally, the vast income disparities based on education keep expanding. Across the three age cohorts, the median income of households headed by college graduates averaged $101,298 in 2014 — 113 percent greater than the $47,560 average for households headed by high school graduates and 269 percent more than the $30,146 average for households headed by people without any diploma. With such gaping differences, it is no surprise that many of this year’s would-be presidents, especially among the Democrats, have plans to reduce or eliminate tuition burdens at public colleges and universities.