The Economy

The economy is doing poorly. This is something we have heard over and over again, since the housing market collapse, but continuing into today. It is the excuse of companies unwilling to give raises, the complaint of a neighbor out of work, the reason for the Fed keeping interest rates low. Politicians use this as justification for their agendas. We are told that the economy is bad. But how can we quantify that? How can we measure the economy?

Gross domestic product – GDP. Although this is just one measure of the economy, it is a significant one. The “monetary value of all the finished goods and services produced within a country’s borders” (http://www.investopedia.com/terms/g/gdp.asp). Typically, this is referred to on a yearly basis. In 2015, the US GDP was $18.036 trillion (http://bea.gov/histdata/histChildLevels.cfm?HMI=7). That’s a lot of money! But to most of us, that number is so large it loses meaning. Divide by the number of households in the US in 2015 (125,819,000), and the current GDP is $143,354 per household. And it grows every year, too.

But what about inflation? Things cost more as time goes on – we all know that. The US Bureau of Labor Statistics tracks the cost of living for many different categories, and summarizes it in an index called the CPI-U (http://www.bls.gov/news.release/pdf/cpi.pdf). Since the cost of living is increasing, then the GDP certainly must increase as well. We can normalize the GDP by the cost of living every year, to see how much the GDP has effectively changed. This is the GDP per household in 2015 dollars (normalized by the CPI-U).

Even accounting for inflation, the GDP has still increased substantially since 1975. It has seen a 54.4% increase, to be exact. That’s 1.46% per year, compounded annually. This makes sense – gains in automation and robotics have significantly increased manufacturing efficiency, while gains in technology and the internet have opened up completely new industries altogether. This increase in productivity allows people to do more at work, so they must earn more as well.

Interesting. The country is improving economically, but median household income has barely moved. Since 1975, median household income has increased only 19.6%, or 0.6% per year (compounded annually). In addition, median household income has fallen 2.4% since 1999. But why do I keep talking about the median? If you rank every household in America according to income, the one right in the middle is the median household income. This can also be called the typical household income. What about the average (or mean) household income in the US?

The mean household income has increased 43.6% since 1975, or 1.21% per year. Not quite the same as the GDP, but substantially more than the typical household income. This reflects the continually increasing incomes at the high end of the scale, which follows the increase in GDP and productivity. After all, increasing GDP means more money, and the money has to go somewhere. Let’s review all three once again, in 2015 dollars, normalized by their values in 1975 to show their behavior:

GDP rises significantly – 1.46% per year. Median income increases only 0.6% per year – significantly below GDP. Mean income also rises, 1.21% per year. The difference – mean rising faster than the median – shows that incomes above the median are rising faster than average incomes. They are growing close to the growth rate of the economy; however, typical income is not changing. Together these trends reflect the growing income inequality in the US – the economy continues to rise while typical wages do not.

DISCUSSION

There are two arguments here, both valid. I won’t try to convince you of other, just discuss my personal opinions.

On the one hand, a growing economy with stagnant wages is not fair – the workers support and create the economy, but they are unable to reap the fruits of their labor. No matter how much productivity is gained, all financial gains are going to those at the top.

On the other hand, our society is one where capitalism reigns. If a person works hard and establishes their own business, the additional income generated should rightfully belong to that person. Also, median income has risen slightly when adjusted for inflation, so the typical American’s purchasing power has not declined – they can support the same standard of living since 1975.

HOMEWORK

Curious to see where your income aligns with respect to inflation? Fill out the history in this spreadsheet (http://www.mathorlies.com/notes/data/01-income/01-Income-Homework-Income.xlsx) and see for yourself! Are you actually getting a raise every year?

WHY SINCE 1975?

The data referred to comes from several different sources, but the median & mean income starts at 1975. I plan to show similar trends from before 1975 in the future, though data becomes more scarce and varied the further back we go in time.

WHY 2015 DOLLARS?

The CPI-U calculates cost of living relative to a certain date in time. This is useful for judging inflation, as it takes nearly all expense categories into account. This metric has changed over time. In order to make values as comparable as possible, the CPI-U-RS (research series) has been established – read more here: http://www.bls.gov/cpi/cpiurs.htm. In the data attached, the US Census has computed values for “2015 dollars” using the CPI-U-X1, an experimental series related to the CPI-U-RS. However, their calculation is not entirely clear and differs slightly (in the smaller decimal places) from values calculated using CPI-U-RS. To be consistent, I have simply recalculated the cost of living index from the Census’ mean & median data.

DATA

All the data presented here is available in Excel format in the attached spreadsheet (http://www.mathorlies.com/notes/data/01-income/01-Income-published.xlsx).

I support discussions that revolve around data. If you disagree with the data I’ve presented, leave a comment or send me an email (mathorlies@gmail.com).

 

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