ECONOMIC STAGNATION MAY BE OVER (IF WE CAN AVOID A RECESSION SOON)

The following information was released by the Cato Institute:

Jeremy Horpedahl

The Census Bureau recently released a massive amount of new data on Americans and the US economy, as they do each year with their "Income, Poverty, and Health Insurance Coverage in the United States" release. The latest data cover the year 2024 and contain a lot of good news about how Americans are faring. In this post, I will focus on the income data that was released in this report.

The most recent data show a convincing, optimistic story: contrary to the pessimistic, populist narrative that dominates our current political moment, the data show that last year, Americans of all stripes enjoyed record incomes and that gains appear to have accelerated since the mid-1990s. We should probably expect more gains in the years aheadunless another recession ruins them.

It will probably not surprise you that the past five years have been a rocky time in the US for household and family incomes. The brief but sharp recession in 2020 knocked down incomes, and then the inflation that ramped up in 2021 and peaked in 2022 made it hard for incomes to keep up. And we can see this in the data. Thankfully, real (inflation-adjusted) income growth resumed in 2023, and by 2024, most measures of income in this report had returned to or even exceeded their 2019 levels.

This first chart shows inflation-adjusted median incomes for US households and families (which are a subset of households that contain related people living together), but we can get into more detail than just the median with this data release, too. Here are the long-run outcomes: since 1967, real median family income has increased by 74 percent, household income has increased by 53 percent, and personal income has increased by 71 percent. That's all adjusted for inflation.

For the wonks interested in different inflation adjustments, I am using the Census's preferred measure of inflation, the chained CPI back to 2000 and the retroactive CPI before that. If we had used a chained inflation measure throughout the series, such as the Personal Consumption Expenditures price index, the gains would have been even larger (e.g., 88 percent for family income, rather than 74 percent).

Five years of no or slight growth in incomes might not seem like much to celebrate, unless you realize this was probably the most turbulent economic period in the living memory of most adults today. It's also useful to put those 2019 and 2024 peaks in historical perspective. And the return to growth and recovery of pre-pandemic income levels happened rather swiftly, at least as compared to recent history.

For example, if we were looking at this data a decade later in 2014, we would notice that there had been essentially no improvement in median incomes since the year 2000, thanks to the slow recovery from two recessions in the 2000s. We observe this pattern throughout the history of the income data: when recessions happen frequently, median income stagnates, never getting a chance to surpass its prior peak. That's the cautionary tale of this history: if another recession hits the US soon, we could be returning to a long stagnation of staying near the 2019 peak in income.

The chart above shows median income, the middle of the distribution. But it is also useful to look across the distribution of income to see if all are benefiting from economic growth. As the chart below shows, real household income declined across the distribution, bottoming out in 2022, and then recovered to at least the level of 2019. It's true that growth has been best at the top of the income distribution, but the recovery happened across the distribution. In other words, Americans at all income levels are now at record high incomes (as always, adjusted for inflation).

Another way we can examine income changes across the distribution is to take a longer historical perspective and look at the percent of families (here I am switching from households) that fall within certain income ranges.

Where the breaks between groups should be isn't an exact science, but I use about $50,000 above and below the median family income as reasonable cutoffs for the middle-income group. As we can see, the middle-income group was over half of the total in 1967, but this group's size gradually shrank by about 10 percentage points over the next almost six decades. But notice that the lower-income groups shrank too. That's because this chart shows one astonishing fact: the number of rich American families has skyrocketed, with over one-third now having at least $150,000 in income.

These trends are not sensitive to choosing different income cutoffs: if we use $200,000 as our definition of rich, the number has grown from 2 percent of families in 1967 to 21 percent in 2024. It also is not a trick of using families instead of households, as Mark Perry's similar chart using households (and different income cutoffs than my chart) shows the same general trends.

What can we learn from these income trends?

The long-run positive trends show us that the American Dream is not dead, incomes are rising, more and more Americans are becoming quite wealthy, and the gains are spread across the distribution. While free markets in the US are infringed on by governments and special interests using government to tilt outcomes in their favor, the market continues to deliver the goods.

The decline of incomes through 2022 and the continued uncertainty equally show the folly of those government interventions. Government restrictions on business activity caused or, at the very least, contributed to the economic downturn in 2020. And the federal response through both monetary and fiscal policy in response to the downturn in many ways made things worse, especially the disastrous inflation of 20212023. The dramatic expansion of the money supply in 2020 was combined with multiple rounds of fiscal stimulus. Especially noteworthy is the 2021 American Rescue Plan, which was passed well after the initial crisis when the labor market had already been in recovery mode for almost a full year.