Were “The Good Old Days” in the 1990s Really Better Than Today?

For most Americans, according to official economic statistics, the 1990s were the best of times. Anne Lowry explains:

This week, the Census Bureau came out with its big annual report on income and poverty in the United States, and it reconfirmed that as a country, we peaked in the late 1990s.

To be more specific, median household income peaked. Back in 1999, the average household made $56,895 in today’s dollars. That number took a hit when the dot-com bubble burst and never reached the same high note again. It plummeted once more during the Great Recession and has slinked lower through the recovery. That middle-of-the-road household is now making $51,939. In other words, for the past 15 years, a growing economy has failed to translate into rising incomes.

It is a big problem. And it goes a long, long way to explaining the squeeze lower and middle-income families feel. If the economy had kept on performing the way it did in the late 1990s, that median household would be making $20,000 more than it currently is.

Where did that $20,000 go?  Most is GDP that has gone to wealthy households instead of to middle America.  Some income was permanently was lost in the great recession of 2008 partly because of inadequate policy responses.   And finally, productivity growth has slowed as inequality has risen.  In theory, we could be growing slower because we have too much inequality.  Excessive inequality means that most Americans have too few resources to invest in themselves (less education) and most people have less incentive to contribute to society when the gains tend to go to someone else anyhow.

One flaw in Lowry’s article is that she is overly pessimistic about monetary policy.  She cites Lawrence Summers saying that expansionary monetary policy will just inflate more bubbles, but there is little evidence for that assertion.  There have been bubbles under every kind of monetary policy regime and low interest rates don’t contribute much to the risks at all.  For example, there have been dramatically fewer bubbles in Japan since 1995 during the last two decades of low-low interest rates than there were in the two decades before 1995 when Japanese interest rates averaged over 20 times higher.  The biggest and most problematic Japanese bubbles inflated when Japanese interest rates were high, not during their historic low rates.  It is possible that more expansionary monetary policy might not work to raise median incomes, but nobody has tried to achieve this objective and there is very little risk from trying.  Higher inflation is the worse case scenario and the Fed is absolutely confident in its ability to reduce inflation, so that is a very manageable risk.  A bit higher inflation would help the median American anyhow.

The above article only looks a statistics about median annual income.  Median wealth statistics tell an even more depressing story.  A new Russel Sage Foundation study revealed that the median household is 20% poorer in 2013 than it was in 1984 in real purchasing power.

median wealth


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Posted in Inequality, Macro, Medianism

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