BOSTON — CIRCLE the correct answer:
A. Working Americans are better off today than in the 1970s.
B. They are worse off economically now than in the 1970s.
Republican politicians will likely pick "A"; Democratic politicians "B."
Who is right?
"There are a zillion ways to cut these things," says David Bradford, a member of President Bush's Council of Economic Advisers (CEA).
In the coming federal elections, perceptions may be as important as facts. If the economy putters along in low gear through the summer, many voters are likely to blame those in office for the economic misery. If the pace steps up, Mr. Bush will find it easier to get reelected.
Whatever happens to the business cycle, campaigners will be pointing to their favorite statistics - all of which may well be factual, but often are "selected." Even efforts to be scientific and relatively nonpartisan in analyzing the numbers may produce somewhat different conclusions.
For example, the CEA devotes a chapter in its 1992 annual report to "government and the level and distribution of income." Though the chapter is obviously a response to the importance of economic welfare in the forthcoming election, the economists who wrote it were given the freedom to present the "facts" as they saw them. One such "fact" is that median family income (the point at which there are as many families earning more as there are earning less) grew from $28,563 in 1967 to $35,353 in 1990. Measur ed in constant dollars, this represents an increase of about $6,800, or 23.8 percent. Between 1982 (the start of a recovery) and 1990 (the start of a recession), median family income increased by about $3,300, or 10.4 percent. Since 1973, an earlier business cycle peak, median family income has risen by about $2,000, or 5.9 percent, the CEA notes. A different view
The Congressional Budget Office (CBO), which insists it is nonpartisan, offers different "facts." It says pretax real income of those in the middle of the income spread declined from $34,505 in 1977 to a projected $31,970 this year, or by about 7 percent. (See chart in the center to the left.)
Why the difference?
Of course, the periods analyzed are different. But in this case that's not so important as the method of analysis. The CEA took its numbers straight from the Census Bureau, measuring money income, including government cash transfers, but excluding capital gains or noncash income such as food stamps, Medicaid, or Head Start. The CBO adjusts those same figures to take account of the shrinkage in the size of the average family in the last decade.
Economists at both the CEA and the CBO say their numbers are fair, though the CEA shows a modest improvement in income, the CBO a modest decline. Recognizing that income statistics are not especially accurate, both agree on a basic conclusion: The typical American in the middle income area has had a relatively stagnant income in the past 15 years. Income has not grown nearly as rapidly as it did in the 1950s or '60s. Curbs on income may be reduced
When median income is charted, the line rises during economic recoveries as productivity and wages increase and falls in recessions as millions get laid off. Undoubtedly, the median income fell in the 1990-91 recession. Should that recession be over, as many economists say is the case, median incomes could start to rise again in 1992. Says the CEA report: "The most effective and durable way to raise the income of typical families and households has been through sustained, long-term economic growth."
Within the averages, however, the rich got richer, economists agree. Real money income for the richest fifth of families grew by 35 percent between 1967 and 1990, note the CEA economists.
According to the CBO analysis, the wealthiest 1 percent of families saw an increase in their average pretax real incomes of 115 percent between 1977 and 1992 - from $314,526 to $675,859.
The poor, contrary to the saying, have not gotten poorer, according to the CEA analysis. Indeed, the poorest fifth of families saw their real money income grow 25 percent between 1967 and 1990. That growth happened early in the period. The average income of the poorest fifth, after a sharp drop in the 1979 to 1982 recessionary period, is about the same today as in 1977.
"Average incomes for families in each fifth, or quintile, of the income distribution have increased," the CEA report finds. "Income growth, however, has been uneven for different segments of the population, and the distribution of income has gradually grown more dispersed since the mid-1960s." The CEA uses the neutral word "dispersed" rather than the word "unequal" favored by Democrats.
The CBO analysis finds the incomes of the lowest 20 percent of families down 13 percent between 1977 and 1992. The second quintile (21 to 40 percent) was down 10 percent, according to the CBO.
The Democratic Policy Committee emphasizes shares of total income, rather than income levels. "In 1990, the share of income going to middle-income families (all families except those in the poorest fifth or the wealthiest fifth of families) was lower ... than in any other year since 1987, except for 1989. In 1990, the share of income going to the top fifth of families was higher than in any year since 1947, except 1989."
Republicans note that many middle-income families have become well-to-do. "The proportion of families with real income above $50,000 showed a sustained increase, from 14.9 percent in 1967 to an all-time high of 31.6 percent in 1989, before it declined slightly in 1990," says the CEA report. It adds, "The proportion of families with real money income below $15,000 fell from 20.3 percent in 1967 to 16.9 percent in 1990." Further, the CEA maintains that the improvement in the income of poorer families has b een understated because it omits noncash transfers. "For households in the lowest quintile, money income plus the estimated value of noncash transfers [Medicaid, Medicare, food stamps, and other government programs], adjusted for inflation, increased by 48 percent between 1967 and 1990, nearly double the 25-percent growth for money income alone." Income mobility in the US
Republicans point to statistics showing that the income of many families shifts between quintiles rapidly - substantial mobility across income classes from year to year. Thus annual income numbers tend to overstate the degree of income inequality.
Democrats prefer to see those numbers as showing the instability of incomes under a "Republican" economy beset by layoffs, corporate mergers, leveraged buyouts, failures, and so on. In general, those with some college education or better did extremely well in the 1980s; those with high school graduation or less education did poorly.
About the time Bush came into office, policymakers at the Federal Reserve decided to slow the economy to reduce inflation. They supplied money to the economy at a rate below the inflation rate. The result was that national output grew in constant dollars at 2.5 percent in 1989 and 1 percent in 1990, and shrank 0.7 percent in 1991. Economists expect around 1 percent growth this year. Though the Fed makes its decisions independent of the administration, the government in office takes credit or gets the bla me for the impact of monetary policy on the business cycle.
So Democrats can point out that since January 1989, disposable personal income has been flat, that the January 1992 unemployment rate of 7.1 percent is up from 5.4 percent, and that the number of those with jobs stands today slightly below the number when Bush took office.