US incomes fall to 1989 levels. How did that happen?

A Census report signals that for much of America, the economic downturn has produced not one lost decade but two. But the data also show that federal safety-net programs helped keep people out of poverty.

Kristen Wyatt/AP
Claudia Pedroza, 39, and her eight-year-old daughter Karla Osorio at the Jefferson Action Center in Lakewood, Colo., in July. Pedroza’s family struggles to make ends meet and she was waiting to apply for help with food, toiletries and seeks a new frying pan.

The typical US household saw its income fall last year to 1989 levels. 

That news, contained in a US Census Bureau survey released Wednesday, points to difficult questions of how the US can get back on a track of job growth and rising prosperity.

Median incomes fell 1.5 percent in 2011, while the official poverty rate remained essentially unchanged at 15 percent.

A family right in the middle of the income spectrum had an income of $50,054, which is actually lower than the 1989 median level of $50,624 expressed in 2011 dollars. The implication: For much of America the economy has produced not just one lost decade but two. Stagnation has even hit wealthier and more educated households (the 95th percentile in the Census data) for the past decade.

Why the hard times? And what can be done about it?

Those questions were already urgent before this latest data release. The presidential election campaign is pivoting largely around the economy and what role the government should play in it. This year, since the time period of the Census data, conditions have improved somewhat – with about a million Americans gaining jobs and hourly wages rising about 5 cents an hour. But the unemployment rate remains high, as does economic anxiety, even among people with jobs.

Economists haven't reached a consensus about what forces have caused the middle-class stagnation, but they have pointed to some that may be involved to varying degrees:

  • Globalization: The rest of the world is playing catchup to the nation that came to dominate in technology and sheer productive muscle during the 20th century. In theory, the US can still prosper as emerging nations from China to Brazil rise, but recent years have seen fierce global competition. America needs to boost its skills faster to stay in the game.
  • Technology: As with globalization, in theory this isn't a job-destroying force, just one that causes the nature of jobs to change. But some argue that rapid technological advances are having an especially hard impact on many middle-wage jobs that can be largely automated.
  • Inequality: A wage premium for the educated, the decline of labor unions, and the failure of the minimum wage to keep up with inflation have been among the factors widening the income gap between the rich and the middle class or poor. Some economists say that gap makes for a less vibrant nation. "Lack of opportunity means that its most valuable asset -- its people -- is not being fully used," Joseph Stiglitz of Columbia University has argued. When the rich are able to win big tax cuts it "leads to underinvestment in infrastructure, education and technology, impeding the engines of growth."
  • Debt and government: Another line of reasoning, taken by some conservative economists, is that economic growth is slowing as America becomes more of a European-style welfare state, with more people receiving public services and government spending accounting for a larger share of the economy. Some say the rising level of public debt, in particular, is emerging as an obstacle to be reckoned with. Others cite high levels of regulation and "crony capitalism," in which government policies favor some industries or companies at the expense of others.

Two other factors, mentioned by Census officials as affecting the recent data, are demographic aging of the population (income typically goes down as people hit retirement age) and a skewing of new jobs in 2011 toward the lower end of the wage spectrum.

The prescriptions for the road ahead depend on the diagnoses of causes, but many economists agree on the need for stronger education, better matching of skills with job opportunities, and an effort to overhaul the nation's fiscal policy, including taxes.

Some economists also argue for policies targeted to boost the level of innovation and entrepreneurship.

"Policymakers need to recognize that the United States is engaged in a fierce race for innovation-based economic growth," write Robert Atkinson and several co-authors, in a report released Wednesday by the Information Technology and Innovation Foundation in Washington. To enhance US science and entrepreneurship, they argue that political leaders should recognize "that both parties bring good ideas to the table."

"We do need to keep [government] debt from rising faster than the economy grows," Robert Greenstein, president of the liberal Center on Budget and Policy Priorities in Washington, said in a conference call about Wednesday's Census numbers.

The challenge, he said, is to set a long-term course away from huge deficits, while also avoiding the "fiscal cliff" – a $560 billion package of mandatory spending cuts and tax hikes that take effect at year's end, including the expiration of the Bush tax cuts, that could cause a recession unless Congress takes countermeasures to prevent a big drop in consumption.

Mr. Greenstein argues that, given that high-earning Americans have seen their share of national income grow, there is a "need for those at the top to share in the sacrifices that lie ahead." His viewpoint stands in contrast to Republican presidential candidate Mitt Romney, who emphasizes low taxes for everyone as a key to reviving job creation.

While the Census data won't settle the debate over the proper size of government, it did provide some evidence that federal safety-net and social-insurance programs have helped to keep poverty lower than it would otherwise be.

Some 21.4 million Americans would be in poverty were it not for Social Security income, including 14.5 million people over age 65 and others who are on disability insurance, the report said.

Meanwhile, the Census report showed that the share of Americans who don't have health insurance declined in 2011, in part because of rising enrollment in Medicaid, the federal-and-state program for the poor.

Programs including food stamps (now known as the SNAP program) and the Earned Income Tax Credit have a significant impact. Although two Census gauges show similar levels of overall poverty in the US, the inclusion of SNAP and the EITC in a "supplemental poverty rate" suggest the more widely watched official poverty rate overstates the share of children in poverty.

By both measures, however, children in the US have a higher poverty rate than adults.

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