Category Archives: household income

23/2/20: Fake Data or Faking Data? Inflation Statistics

As economists and analysts, almost all of us are trying - at one point or another - make sense of the, all too often vast, gap between the reality and the economic statistics. I know, as I am guilty of this myself (here's a recent example:

An interesting and insightful paper from Oren Cass of the Manhattan Institute dissects the extent of and the reasons for the official inflation statistic failing to capture the reality of the true cost of living changes in the U.S. over recent years (actually, decades) here: It is a must-read paper for economics students, analysts and policymakers.

His key argument is that: "Economists and families see three things differently:

  • Quality Adjustment. Products and services that rise substantially in price but in proportion to measured quality improvements can become unaffordable, while having no effect on inflation.
  • Risk-Sharing. New products and services can increase costs for the entire population yet deliver benefits to only a very small share, while having no effect on inflation.
  • Social Norms. Society-wide changes in behaviors and expectations can alter the value or necessity of a good or service, while having no effect on inflation."
In other words, over time, official inflation starts to measure something entirely different than the real and comparable across time consumption expenditure. As the result, you can have a paradox of today: low inflation is associated with falling affordability of life. 

An example: "In 1985, ... it would require 30 weeks of the median weekly wage to afford a three-bedroom house at the 40th percentile of a local market’s prices, a family health-insurance premium, a semester of public college, and the operation of a vehicle. By 2018, ... a full-time job was insufficient to afford these items, let alone the others that a household needs."

To address some of the shortcomings of the inflation measures, Cass offers a different metric, called COTI - Cost of Thriving Index - which basically amounts to the number of weeks that a given line of expenditure requires in terms of median income. Or "Weeks of Income Needed to Cover Major Household Expenditures". Two charts below illustrate:

And here is a summary table:

Excluding food, other necessities and looking solely at Housing, Health Insurance, Transport and College Education, the number of weeks of work at an overall median wage required to cover the basics of the necessary expenditure is now in excess of 58.4 weeks. For female workers' median wage, the number is 65.6 weeks. 

Which means that even before you consider other necessities purchases, and before you consider taxes, you are either dipping massively into debt or require a second income to cover these. 

Note: these do not account for income taxes, state taxes, property taxes, dental insurance. These numbers do not cover payments for water, gas, electricity. There is no mandatory car insurance included. No allowances for deductibles coverage savings (e.g. HSAs). No childcare, no children expenditures, no food purchases, and so on.

And even with all these exclusions, median income cannot afford the basics of living in today's America. 

A word from Fed, anyone?

5/5/19: House Prices and Household Incomes

A recent note from Brookings on the nature of the ongoing housing crisis in America has opened up with a bombastic statement:
"Over the past five years, median housing prices have risen faster than median incomes (Figure 1). While that’s generally good news for homeowners, it puts additional pressure on renters. Because renters generally earn lower incomes than homeowners, rising housing costs have regressive wealth implications." 

It sounds plausible. And it sounds easy enough to understand for politicos of all hues to take up the claim and run with it. There is is even a handy chart to illustrate the argument:

Except the claim is not exactly consistent with the evidence presented in that chart.

For starters, Case-Shiller Index covers 20 largest metropolitan areas of the U.S., which is a sizeable chunk of population, but by far not the entire country. And rents, as the Brookings article correctly says, are rising across whole states (the article, for example referencing California, which is way larger than the largest urban areas of the state alone). Second point, the article is completely incorrectly uses nominal house prices inflation against real (inflation-adjusted) income growth figures. If the converse of the article claim held, and real incomes exceeded housing price inflation, it would mean rising purchasing power for American households shopping for houses. However, that is not what the housing markets are historically, longer-term about. They are more about hedging inflation. The third, and more important point is that the article refers to the last 5 years. Why? No reason provided. But even a glimpse at the chart supplied in Brookings paper is enough to say that the same problem persisted prior to the Great Recession, was reversed in the Great Recession, and then returned post-Great Recession.

What's really happening here?

Ok, let's take four time series:

  • House prices 1: Median Sales Price of Houses Sold for the United States, Dollars, Annual, Not Seasonally Adjusted;
  • House prices 2: S&P/Case-Shiller 20-City Composite Home Price Index, Index Jan 2000=100, Annual, Seasonally Adjusted (same as in Brookings article);
  • Income 1: Real Median Household Income in the United States, 2017 CPI-U-RS Adjusted Dollars, Annual, Not Seasonally Adjusted (same as in Brookings article); and 
  • Income 2: Nominal Median Household Income in the United States, Current Dollars, Annual, Not Seasonally Adjusted
Observe that we have data only through 2017 for the last two measures due to data reporting lags.

Now, compute annual rates of growth in all four and plot them:

Blue line is the reference point here. Notice that the grey line (real household income growth) is really underperforming house price growth over virtually all periods, except for one: the Great Recession. Yellow line, however, is less so. Nominal incomes have more benign relationship to nominal prices than real incomes do to nominal house prices. Why would that be surprising at all? I am not sure. It did surprise folks at the Brookings, though.

Let's compute some average rates of growth for all four series and calculate the difference between:
  1. Real Median Household Income growth rate and the growth rate in the Median Sales Price of Houses, percentage points; and
  2. Nominal Median Household Income growth rate and the growth rate in the Median Sales Price of Houses, percentage points.
Instead of using an arbitrary 5 years horizon, consider instead the business cycle and longer term averages. Here they are:

Historical averages are, respectively, -3.71 percent and -1.31 percent. Across the last Quantitative Easing cycle, -2.94 percent and -1.60%, ex-QE cycle, -4.05% and -1.19%. 

So what does the above tell us? Things are not as dramatic, using nationwide house prices, than the Brookings claim makes it sound, and, more importantly, there is no evidence of a significant departure in the current QE cycle from the past experiences. When it comes to property prices, hoses inflation seems to be much less divorced from real and nominal income growth rates in the last four years (the recovery period post-Great Recession) than in the periods prior to the GFC.

20/7/16: McKinsey’s "Generation Worse"…

A new study from McKinsey looks at the cross-generational distribution of income as a form of new ‘inequality’, in words of the authors: “an aspect of inequality that has received relatively little attention, perhaps because prior to the 2008 financial crisis less than 2 percent of households in advanced economies were worse off than similar households in previous years. That has now changed: two-thirds of households in the United States and Western Europe were in segments of the income distribution whose real market incomes in 2014 were flat or had fallen compared with 2005.”

In other words, McKinsey folks are looking at the “proportion of households in advanced economies with flat or falling incomes” - the generational cohorts that are no better than their predecessors.

Key findings are frightening: “Between 65 and 70 percent of households in 25 advanced economies, the equivalent of 540 million to 580 million people, were in segments of the income distribution whose real market incomes—their wages and income from capital—were flat or had fallen in 2014 compared with 2005. This compared with less than 2 percent, or fewer than ten million people, who experienced this phenomenon between 1993 and 2005.”

So that promise of the ‘sharing economy’ and the ‘gig-economy’ where people today are enabled to derive income (and thus wealth) from hereto under-utilised ‘assets’… pwah! not doing much. The ‘most empowered’ - web and gig-economy wise cohorts? Ah, they are actually the “worst-hit” ones. “Today’s younger generation is at risk of ending up poorer than their parents. Most population segments experienced flat or falling incomes in the 2002–12 decade but young, less-educated workers were hardest hit”.

For those of us who, like myself, tend to be libertarian in our view of the Government, McKinsey study tests some of our accepted ‘wisdoms’: “Government policy and labor-market practices helped determine the extent of flat or falling incomes. In Sweden, for example, where the government intervened to preserve jobs, market incomes fell or were flat for only 20 percent, while disposable income advanced for almost everyone. In the United States, government taxes and transfers turned a decline in market incomes for 81 percent of income segments into an increase in disposable income for nearly all households.”

Except, may be it did not, because counting in disposable income while allowing for taxes and subsidies is notoriously difficult and imprecise. And may be, just may be, all the fiscal imbalances that were accumulated in the process of achieving these supports in some (many) countries will still have to be paid by someone some day?

There is a reduced connection between current growth metrics and income outcomes on the ground (don’t we know as much here in Ireland, with 26.3% jump in GDP in 2015?): “Before the recession, GDP growth contributed about 18 percentage points to median household income growth, on average, in the United States and Europe. In the seven years after the recession, that contribution fell to four percentage points, and even these gains were eroded by labor market and demographic shifts.”

And the forward outlook? Bleak: “Longer-run demographic and labor trends will continue to weigh on income advancement. Even if economies resume their historical high-growth trajectory, we project that 30 to 40 percent of income segments may not experience market income gains in the next decade if labor-market shifts such as workplace automation accelerate. If the slow growth conditions of 2005–12 persist, as much as 70 to 80 percent of income segments in advanced economies may experience flat or falling market incomes to 2025.”

There are some wrinkles in the study. For example, in the U.S. case - cross time comparatives do not provide for the same data base, as pre-2014 data does not include state and local taxes. VAT and sales taxes are omitted across the board. And some other, but overall, the paper is pretty solid and very interesting.

So here is the key summary chart, positing the massive jump in the numbers of households on the declining side of market incomes:

And the chart showing that the taxes and transfers side of income supports is no longer sustainable over time:

Which brings us to the main problem: on the current trend line, politics of income supports from the fiscal policy side are unlikely to be able to contain growth in political discontent. Advanced economies are heading for serious tests of democratic institutions in years to come. Buckle your seat belts: the ride is going to get much rougher.