2008 April 09 Wednesday
Latest US Peak Median Income Less Than In 2000

The latest business cycle never brought median income back up to the level it peaked at in 2000.

The bigger problem is that the now-finished boom was, for most Americans, nothing of the sort. In 2000, at the end of the previous economic expansion, the median American family made about $61,000, according to the Census Bureau’s inflation-adjusted numbers. In 2007, in what looks to have been the final year of the most recent expansion, the median family, amazingly, seems to have made less — about $60,500.

This has never happened before, at least not for as long as the government has been keeping records. In every other expansion since World War II, the buying power of most American families grew while the economy did. You can think of this as the most basic test of an economy’s health: does it produce ever-rising living standards for its citizens?

In the second half of the 20th century, the United States passed the test in a way that arguably no other country ever has. It became, as the cliché goes, the richest country on earth. Now, though, most families aren’t getting any richer.

Demographics plays a large role in this outcome. The large growth in lower income Hispanics has begun to weigh down American living standards. I'd like to see these numbers broken out by race. Did whites achieve as high a median income in this business cycle as they did the last time around?

Still, other things are going on as well. Globalization is one big one. The owners of capital are using lots more foreign labor and this is holding down wages of employees. Though the decline of the dollar is cutting demand for imports and boosting domestic demand for labor.

Another biggie? The commodity price rise. The high costs of energy, food, and raw materials weigh on living standards. I expect oil prices to go much higher when global oil production starts declining. Due to the coming of Peak Oil I do not see how living standards can rise in the next 10 years.

Share |      By Randall Parker at 2008 April 09 09:13 PM  Economics Living Standards


Comments
HellKaiserRyo said at April 9, 2008 9:17 PM:

Randall, what probability do you place on doomer scenario for peak oil? Peak oil is going to hurt badly.

Kenelm Digby said at April 10, 2008 3:15 AM:

There is only one 'law' in economics that is actually worth anything - the law of supply and demand - all the rest of the subject is worthless bullshit, forget all the pseudo-sophistry of left-wing 'academics' bending 'research' and 'evidence' to fit whatever preconceived notion they have in their heads.
That said the reason for the wage impairment is obvious - the mass migration of millions of unskilled superfluos workers in thepast decades and the competition from far-eastern made goods that has eliminated much productive employment.
The upshot to the 'neoliberal' trend of the past 30 years is that the rich have got richer and the poor have got poorer.

c.o. jones said at April 10, 2008 7:25 AM:

Great point about high commodity prices Randall. Which makes me wonder if the flood of cheap labor from Mexico and points south has not been a deliberate, albeit unpublicized policy of the Bush administration, designed to mask the true rate of inflation. I have no idea how large a component labor is in determining CPI and PPI inflation rates, but if you create a large enough surplus of inexpensive labor, I am sure it creates a distortion of some kind that can skew the figures.

vinod said at April 10, 2008 9:00 AM:

also.... they're measuring *household income* rather than *per capita GNP*. Our recent housing boom (coupled with other demographics like more single folks buying homes, etc.) mean that a given basket income is being spread across more houses...

some graphs...

Ned said at April 10, 2008 12:48 PM:

Vinod's point is excellent. The graphs tell an interesting story. The current emerging recession, plus stepped-up enforcement efforts, have caused a big drop in the number of illegals entering this country. Some have even decided to return home because of the lack of employment opportunities. Now would be a good time to build the border fence so that, when the economy recovers and jobs are plentiful, we don't have a new flood of illegal immigrants to deal with. (By the way, Mexico has its own problem with illegal immigrants from Central America. Here's a nice look at the brutal treatment they receive from Mexican authorities - http://www.vdare.com/).

Randall Parker said at April 10, 2008 8:37 PM:

HellKaiserRyo,

My take:

1) I expect oil production to decline by 3%-6% per year when the decline takes hold.

2) We are going to go thru a period of declining per capita energy usage for several years. 5? 10? Even 15?

3) Replacement energy technologies can't save us from declining living standards for a few reasons:

A) Lots of existing capital stock will be obsolesced. The existence of new designs does not avoid the loss of value in existing equipment.

B) Developing new energy tech and building up new capital that incorporates that energy tech will take time.

C) We will have to spend money on efficiency that would otherwise go toward consumption. That shift in spending lower living standards.

4) Two things make the world decline per year bite us even more heavily than the percentage decline rate:

A) The current exporting nations will cut back exports faster than their production rates decline.

B) Rising Asian demand will shift oil away from us and drive up prices even higher. This is already happening before the world decline starts. So just on the production plateau US oil consumption has finally started dipping.

I don't expect a total societal collapse. But I do expect economic contractions that run for years with lots of layoffs and unemployment.

My advice: work long hours and save your money and look for jobs, skills, and living arrangements that lower your energy needs and that lower your risk of unemployment.

ziel said at April 10, 2008 8:49 PM:

Rising Asian demand will shift oil away from us and drive up prices even higher.

Probably, but I'm still skeptical there's any real rising economy in Asia independent of the U.S. economy - in other words, will Asia's economies actually rise (or rise much) with a stagnant U.S. economy?

JSBolton said at April 10, 2008 9:25 PM:

What would median personal income show?
One reason the median is especially relevant is productivity.
Whether to invest in productivity-enhancing metal-and-bricks
depends on the median personal income
more than it does on the average, with all the rich and their incomes added on.
If one reasonably predicts that median personal incomes will not rise in years soon to come,
investing in productivity increases will in most cases, be unjustified.

anon said at April 11, 2008 4:56 AM:

c.o.jones, I doubt that. A flood of cheap labor may lower inflation (CPI and PPI) to the extent that it increases economic output, but the resulting downward pressure on real wages would be especially damaging in a low-inflation environment.

vinod, with housing prices increasing as much as they have, one would expect more people living in the same house, not less. This has occurred in Japan which underwent a devastating real-estate bubble in the 1980's.

Randall, it is a mistake to view "oil production decline" in purely physical terms. In a low-interest-rate environment with high forecast demand by emerging economies, non-renewable resources such as oil and metals will be withheld from production for purely economic reasons. This applies not so much to "conventional oil" where there's evidence that we're physically running out, but to unconventional oil reserves which are slightly more difficult to extract.

JSBolton, if exports increase due to the dollar decline, productivity-enhancing investments will still be justified even if median real incomes decline domestically. This is to be expected since the Chinese yuan is finally decoupling from the dollar, and other Asian currencies may follow suit.

Randall Parker said at April 11, 2008 5:46 PM:

anon,

Sure, some countries will withhold production in order to sell later at a much higher price. Others will withhold production due to limits in their credit markets and property laws: i.e. incompetence. So oil production won't just decline due to resource exhaustion. These other reasons will make the decline even more painful in the medium run.

ziel,

I do not understand why you think the Asians can't consume their own goods. They do so in enormous quantities. They just manipulate their currencies to do enforced savings.


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