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Declining Income is Long-Term, Widespread

February 03, 2014 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

In his State of Union address, President Obama noted that one of the most serious problems confronting the nation is growing income inequality. Perhaps the most troubling manifestation of this problem is the real decline in income among middle- and lower-income families. The national problem of declining income is also a Minnesota problem—affecting all regions of the state and commencing well before the start of the Great Recession.

For approximately the last half century, Minnesota median household income has surpassed the national average. However, during the first decade of the current century, Minnesota lost ground to other states on this measure. In 2000, Minnesota median household income was $65,560, compared to the national median of $55,987. Over the next ten years, median household income in Minnesota fell by $7,216 (11.0 percent), while the national median fell by just $3,302 (5.9 percent). By 2010, Minnesota’s median household income was still greater than the national median, although the gap between the two had shrunk considerably.

Median household income represents the income level that divides a population in half, with the incomes of 50 percent of households below the median and the other 50 percent above. Because it is not skewed by extremely high incomes at the upper end of the income spectrum, median household income is a useful way to gauge the income of the typical household. The following analysis is based on real median household income data from U.S. Census Bureau’s American Community Survey (ACS) as compiled by Minnesota Compass for the years 2000 and 2006 through 2012. (Information for 2001 to 2005 is not included in this data set.) All amounts presented below are in constant 2012 dollars.

From 2010 to 2012, Minnesota fortune vis-à-vis the rest of the nation has improved. Over this two year span, Minnesota’s median household income increased by $484 (0.8 percent), while nationally it fell by another $1,314 (2.5 percent). However, both in Minnesota and nationally, 2012 median income remains significantly below the level it was at 2000; in Minnesota median household income had shrunk to $58,828—$6,732 less than it was twelve years earlier; the decline in total U.S. median household income over the same period was $4,616.

Both nationally and in Minnesota, the decline in median household income is not just a product of the Great Recession. Well before the start of the Great Recession, both the Minnesota and U.S. median income was declining (although the decline in U.S. median household income from 2000 to 2008 was slight). The decline in median household income is due to long-term trends—including globalization, automation, and deterioration in collective bargaining rights—that predate the Great Recession and that are not likely to recede simply because the recession is over.

The same median household income trends visible in national and state data are also evident within each of the state’s regions. Minnesota Compass divides the state into seven regions. In all seven regions, median household income is slightly to significantly less in 2012 than it was 2000. The Twin Cities—the region of the state with the highest median household income ($65,768 in 2012)—is also the region with the greatest decline in median income over the twelve year period, both in dollars ($9,934) and as a percentage (13.1%).

In six of the seven Minnesota regions, the median household income decline since 2000 began before the start of the Great Recession and persisted during and after the recession. The one exception to this rule is the West Central region, where a strong agricultural economy, growth in energy production, and spillover prosperity from the North Dakota oil boom contributed to a $1,712 (3.5%) growth in median household income from 2008 to 2012. In all seven regions, median household income declined during the eight years preceding the recession—further proof that the problem of declining median income did not originate with the Great Recession.

This information underscores that growing income inequality is not simply the result of skyrocketing income among the “one percenters.” The problem is not that the incomes of the wealthiest households are growing more rapidly, while the incomes of the less affluent are growing less rapidly. Rather, the problem is that the income of the typical American family is falling as demonstrated by the decline in median household incomes.

Conservative advocacy groups like the Heritage Foundation urge us not to worry about income inequality, but rather to focus on growing the economic pie so that everyone benefits. However, this recommendation overlooks the fact that the economic pie—as measured by real per capita GDP—has grown since 2000, yet the median income of U.S. and Minnesota households has fallen. Growing the pie won’t help the typical Minnesota or American family if their slice of that pie is shrinking faster than the total pie is growing.

The economic pie will grow faster if working families are able to get a bigger piece of it. The backbone of the U.S. economy is middle class consumer demand. When the income of middle class increases, consumer demand increases, which in turn will spur business and job expansion and robust and sustainable economic growth. As Paul Wellstone said, “We all do better when we all do better.” If, on the other hand, median household income continues to decline, consumer demand will decline, and the state and national economy will limp from recession to recession, punctuated only by lackluster recoveries.

The problem of income inequality is ominously manifested by the decline in real median household income—a trend that is both long-term and widespread, persisting through two economic recoveries and affecting the nation, state, and every region within the state. These trends—and the pernicious economic consequences that they spawn—will likely continue until state and national policymakers make a concerted effort to reverse them. Increasing the minimum wage and—beyond that—strengthening collective bargaining rights would be a good place to start.

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  • KJC says:

    February 10, 2014 at 8:55 am

    This is the real story of the American Dream in the 21st Century.  Collective dreams of rising incomes and success like American in the 50’s and 60’s?  Distant memories.  Instead, incomes keep falling.. the opposite of that expectation.
    How do we respond?  Looking at how one political party demonizes those who are taking the brunt of the recession. I am not optimistic.  UNLESS?  “We The People” are willing stand-up for the Common Good.  That is what is required…. and then, with a solid base of public support, we’ll make some economic policy changes (like was done in the first Gilded Age) to reverse this ominous economic trend.  Sadly, so many people don’t seem to be willing to face this… until it squarely hits them, or their family.  They forget the lessons of history apparently?  Too many are still taking the “bait.”  Oh?  Yes, they allow their understandable disappointment (and anger) to be misdirected.  They slip into “bully” mode…where you pick on somebody weaker, instead of holding those responsible accountable (always a lot harder.)  How can you tell?  It’s when you’re being told that another group of Americans… who also doesn’t have that much… is “the problem.”  Usually some politically unpopular group (of course.)  When America stops taking that bait, and shrugs off these divide-and-conquer tactics… then there will be an opportunity for a brighter future.  Until then it’s mostly status quo…and looking at the graphs, who wants our great country to ride this down further?  That’s the choice we’re all going to have to make, to have the courage to stand-up for the Common Good, or continue to say “not me” ... and then we’ll continue riding this down, as the American Dream slowly shatters.

  • Herb Davis says:

    February 10, 2014 at 11:13 am

    Not just is world wide and the issues are the same. First, the “1%” have been organized around a plan and have stuck to it. They have been aided by the superstitious and some individuals they have co-opted into believing they can join the club, Secondly, Unions world wide have joined the greed train and decided to go with two-tiered systems ( lots for us and not so much for newcomers). Newcomers and potential newcomers have seen the hypocrisy of co-opted union leaders and decided it is every man for himself.
    Not that Lewis Powell ( later appointed to the USSCt ) is the originator of the greed campaign but, if you Google the “The Powell Memo” you will probably have to agree with my perspective

  • KJC says:

    February 10, 2014 at 11:58 am

    I certainly agree that the Powell Memo:  written by a tobacco industry lobbyist to the US Chamber of Commerce that was soon made a Supreme Court Justice by Nixon…was the manifesto for the Big Corporate Lobbying we see now.  Indeed he wrote the majority opinion in striking down one of the campaign finance laws just a few year later: Bank of Boston vs. Bellotti (AG of Mass.)
    Fastforward from the early 70’s to the mid-90’s for more current proof?  Here an excerpt from a 33 page 2005 CitiGroup memo:
    1) “The world is dividing into two blocs - the plutonomies, where economic growth is powered by and largely consumed by the wealthy few, and the rest. Plutonomies have occurred before in sixteenth century Spain, in seventeenth century Holland, the Gilded Age and the Roaring Twenties in the U.S. What are the common drivers of Plutonomy? Disruptive technology-driven productivity gains, creative financial innovation, capitalist-friendly cooperative governments, an international dimension of immigrants and overseas conquests invigorating wealth creation, the rule of law, and patenting inventions. Often these wealth waves involve great complexity, exploited best by the rich and educated of the time.
    2) We project that the plutonomies (the U.S., UK, and Canada) will likely see even more income inequality, disproportionately feeding off a further rise in the profit share in their economies, capitalist-friendly governments, more technology-driven productivity, and globalization.”
    What could be more blunt, and more unfortunately predictive… and this was a 8 years ago!

  • William Pappas says:

    February 11, 2014 at 6:33 am

    There is a colossal failure of mainstream economic thought to comprehend the significance of falling middle class incomes with respect to consumer demand.  The downward pressure on wages and salary has had a severe impact on the total Minnesota economy.  This same failure of comprehension applies to the minimum wage.  In reality, raising that wage stimulates economic activity as more money changes hands and magnifies itself throughout the LOCAL economy.  Middle class consumption has fallen dramatically as benefits must be replaced with savings, the cost of health insurance has risen, home values have fallen and wages fail to keep up with the cost of living.  In addition, with each cut to social security, out economy takes another hit as the elderly pull back out of the economy a little bit more and edge closer to poverty.  All of this is taking place within an increasing GDP and record corporate profits.  The failure to see the unfairness of this situation is a challenge to our collective morality.  The future is indeed uncertain as one of the biggest hits to Middle Class fortunes is looming just ahead in the form of the TPP.  That trade agreement has the potential to permanently lower worker compensation while unbelievably infringing on much of the sovereignty of our nation, detracting much from our quality of life, consumer and environmental protections and especially food and product safety.  This trade bill will accelerate the concentration of wealth in the hands of trans corporations while diminishing the freedom and integrity of our democracy.  Somehow, the electorate must take back their own fortune and find the courage and intelligence to oppose corporate purchasing of our government.  This is the central struggle of our time.

    • KJC says:

      February 12, 2014 at 10:46 am

      As an entrepreneur and venture capitalist, I’ve started or helped get off the ground dozens of companies in industries including manufacturing, retail, medical services, the Internet and software. I founded the Internet media company aQuantive Inc., which was acquired by Microsoft Corp. (MSFT) in 2007 for $6.4 billion. I was also the first non-family investor in Inc. Even so, I’ve never been a “job creator.” I can start a business based on a great idea, and initially hire dozens or hundreds of people. But if no one can afford to buy what I have to sell, my business will soon fail and all those jobs will evaporate.
      That’s why I can say with confidence that rich people don’t create jobs, nor do businesses, large or small. What does lead to more employment is the feedback loop between customers and businesses. And only consumers can set in motion a virtuous cycle that allows companies to survive and thrive and business owners to hire. An ordinary middle-class consumer is far more of a job creator than I ever have been or ever will be.  When businesspeople take credit for creating jobs, it is like squirrels taking credit for creating evolution. In fact, it’s the other way around.
      It is unquestionably true that without entrepreneurs and investors, you can’t have a dynamic and growing capitalist economy. But it’s equally true that without consumers, you can’t have entrepreneurs and investors. And the more we have happy customers with lots of disposable income, the better our businesses will do.
      That’s why our current policies are so upside down. When the American middle class defends a tax system in which the lion’s share of benefits accrues to the richest, all in the name of job creation, all that happens is that the rich get richer.
      And that’s what has been happening in the U.S. for the last 30 years.
      Since 1980, the share of the nation’s income for fat cats like me in the top 0.1 percent has increased a shocking 400 percent, while the share for the bottom 50 percent of Americans has declined 33 percent. At the same time, effective tax rates on the superwealthy fell to 16.6 percent in 2007, from 42 percent at the peak of U.S. productivity in the early 1960s, and about 30 percent during the expansion of the 1990s. In my case, that means that this year, I paid an 11 percent rate on an eight-figure income. I can’t buy enough of anything to make up for the fact that millions of unemployed and underemployed Americans can’t buy any new clothes or enjoy any meals out. Or to make up for the decreasing consumption of the tens of millions of middle-class families that are barely squeaking by, buried by spiraling costs and trapped by stagnant or declining wages.
      If the average American family still got the same share of income they earned in 1980, they would have an astounding $13,000 more in their pockets a year. It’s worth pausing to consider what our economy would be like today if middle-class consumers had that additional income to spend.
      We’ve had it backward for the last 30 years. Rich businesspeople like me don’t create jobs. Middle-class consumers do, and when they thrive, U.S. businesses grow and profit. That’s why taxing the rich to pay for investments that benefit all is a great deal for both the middle class and the rich.
      So let’s give a break to the true job creators. Let’s tax the rich like we once did and use that money to spur growth by putting purchasing power back in the hands of the middle class. And let’s remember that capitalists without customers are out of business.
      Nick Hanauer (condensed)

  • Patti Taylor says:

    February 11, 2014 at 11:46 am

    Why is it we aren’t hearing any specifics on the plight of the rural, elderly, disabled, single fixed income families of 1 person. There are a LOT of us “out there” with very little financial, physical, or emotional help. One reason, I believe, is that fewer rural people can AFFORD to volunteer any more.

    • KJC says:

      February 13, 2014 at 10:12 am

      Robert Reich: America has forgotten its 3 biggest economic lessons
      The former labor secretary reveals how our country has abandoned the winning formula it developed post-World War II
      Why has America forgotten the three most important economic lessons we learned in the 30 years following World War II?
      Before I answer that question, let me remind you what those lessons were:
      First, America’s real job creators are consumers, whose rising wages generate jobs and growth. If average people don’t have decent wages there can be no real recovery and no sustained growth.
      In those years, business boomed because American workers were getting raises, and had enough purchasing power to buy what expanding businesses had to offer. Strong labor unions ensured American workers got a fair share of the economy’s gains. It was a virtuous cycle.
      Second, the rich do better with a smaller share of a rapidly growing economy than they do with a large share of an economy that’s barely growing at all.
      Between 1946 and 1974, the economy grew faster than it’s grown since, on average, because the nation was creating the largest middle class in history. The overall size of the economy doubled, as did the earnings of almost everyone. CEOs rarely took home more than 40 times the average worker’s wage, yet were riding high.
      Third, higher taxes on the wealthy to finance public investments — better roads, bridges, public transportation, basic research, world-class K-12 education, and affordable higher education – improve the future productivity of America. All of us gain from these investments, including the wealthy.
      In those years, the top marginal tax rate on America’s highest earners never fell below 70 percent. Under Republican President Dwight Eisenhower the tax rate was 91 percent. Combined with tax revenues from a growing middle class, these were enough to build the Interstate Highway system, dramatically expand public higher education, and make American public education the envy of the world.
      We learned, in other words, that broadly shared prosperity isn’t just compatible with a healthy economy that benefits everyone — it’s essential to it.
      But then we forgot these lessons. For the last three decades the American economy has continued to grow but most peoples’ earnings have gone nowhere. Since the start of the recovery in 2009, 95 percent of the gains have gone to the top 1 percent.
      What happened?
      For starters, too many of us bought the snake oil of “supply-side” economics, which said big corporations and the wealthy are the job creators – and if we cut their taxes the benefits will trickle down to everyone else. Of course, nothing trickled down.
      Meanwhile, big corporations were allowed to bust labor unions, whose membership dropped from over a third of all private-sector workers in the 1950s to under 7 percent today.
      Our roads, bridges, and public-transit systems were allowed to crumble under the weight of deferred maintenance. Our public schools deteriorated. And public higher education became so starved for funds that tuition rose to make up for shortfalls, making college unaffordable to many working families.
      And Wall Street was deregulated — creating a casino capitalism that caused a near meltdown of the economy six years ago and continues to burden millions of homeowners. CEOs began taking home 300 times the earnings of the average worker.
      Part of the reason for this extraordinary U-turn had to do with politics. As income and wealth concentrated at the top, so did political power. The captains of industry and of Wall Street knew what was happening, and some played leading roles in this transformation.
      But why didn’t they remember the lessons learned in the 30 years after World War II – that widely shared prosperity is good for everyone, including them?
      Perhaps because they didn’t care to remember. They discovered that wealth is also relative: How rich they feel depends not just on how much money they have, but also how they live in comparison to most other people.
      As the gap between America’s wealthy and the middle has widened, those at the top have felt even richer by comparison. Although a rising tide would lift all boats, many of America’s richest prefer a lower tide and bigger yachts.