Real household income and the Macro economy

Investment Analysis Clubs Macro Economic Trends and Risks
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As we all know, politics is banned on METAR. The subject of income inequality is like a red flag in front of a bull for some knee-jerk political types on METAR. Political partisan posts will be deleted as usual.

It is important to understand the REAL spending power of U.S. households to gauge the direction of the Macro economy. Statistics that measure household income can distort the real spending figures by excluding transfer payments (“noncash sources of income”) and taxation.

‘The Myth of American Inequality’ Review: Believe Your Eyes, Not the Statistics

Official government measures greatly exaggerate income inequality by ignoring taxation and noncash sources of income.

By Charles W. Calomiris, The Wall Street Journal, Dec. 26, 2022

…“The Myth of American Inequality,” by Phil Gramm, Robert Ekelund and John Early…

Average living standards have improved dramatically. Real income of the bottom quintile, the authors write, grew more than 681% from 1967 to 2017. The percentage of people living in poverty fell from 32% in 1947 to 15% in 1967 to only 1.1% in 2017.

Opportunities created by economic growth, and government-sponsored social programs funded by that growth, produced broadly shared prosperity: 94% of households in 2017 would have been at least as well off as the top quintile in 1967.

Bottom-quintile households enjoy the same living standards as middle-quintile households, and on a per capita basis the bottom quintile has a 3% higher income. Top-quintile households receive income equal to roughly four times the bottom (and only 2.2 times the lowest on a per capita basis), not the 16.7 proportion popularly reported. …

Government statistical reports exclude “noncash” sources of income, which excludes most transfers from social programs. Taxes (paid disproportionately by high earners) are also ignored in official calculations. Furthermore, even the government’s “cash” income numbers are reported in a way that understates improvements in real (inflation-adjusted) income over time because government inflation measures fail to use the appropriate chained price indexes or take account of new products and services. …

The equality of consumption between the bottom quintile (in which only 36% of prime-age persons work) and the middle quintile (in which 92% of prime-age persons work) is a striking finding. … [end quote]

Do NOT turn this into a discussion of whether income support and taxes are good or bad! Partisan and political opinion posts will be deleted!

It is clear that the Macro economy of goods and services is supported when consumption is spread through the entire population. It is clear that a demand-driven economy like ours is maximized when only 1% of the population is poor instead of 1/3 of the population.

I will recommend that my local library buy this book because I would like to read it. It’s necessary to have accurate information to make investment decisions.

Wendy

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Tough to have a conversation about a book authored in part by Phil Graham and then say “no politics!”, but I’ll try.

I haven’t read the book yet, but I’ll look for it in my library.

My main concern is that the authors seem to focus on income, but avoid talking about wealth. Income and wealth are very different from each other.

We’ve all read about people of incredible wealth managing to live on relatively small income by borrowing on their wealth.

So if the focus is purely on income, I think this book’s conclusions may be skewed.

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So stats are out now and “But if you look at it this way…” is in. Anybody can do that when discussing anything. Most arguments (not “arguing”, I mean intellectual back-and forths) are based on it. Why count government assistance as income? If someone needs and qualifies for Gov assistance I’d say their income isn’t keeping up. A few years ago Walmart was saying (or was it some people uncovering their business model…? I can’t recall) their poorly paid workers were actually living much better than their wages indicated because they qualified for assistance programs that filled the gap that wouldn’t exist if they were being paid better. So which is it? Gov programs=bad? Or Gov programs=Good? Capitalism/market rates = good? Or Bad? He’ll have to pick one 'cause they can’t be both. Rich people are really middle class if you don’t count all that money.

And yes, I will have to agree with the previous statement: Any discussion about a book on economics by Phill Gramm is dangerously close to politics by it’s genetic nature.

If you want to pull this I’ll understand but I probably won’t post any follow-ups.

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I won’t.

Phil Gramm: Glass-Steagall Repeal Didn’t Have ‘Anything To Do With The Financial Crisis’
Sheesh.

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I don’t think we can defeat poverty, till everyone living in an area, that is under a drought, has a pool in their back yard.

Andy

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Be careful when reading “interpretations” of income/noncash benefits data proffered by well-known politicos (e.g., Phil Gramm). By far the largest form of noncash benefits to low-income households is Medicaid. Medicaid is a very good thing, but it can be “spent” only on healthcare. It’s not all that fungible: if poor folks don’t have Medicaid, they simply don’t get healthcare. If anything, Medicaid ends up as “income” to health care providers.

Income inequality in the US is not “greatly exaggerated,” as the WSJ headline to the article in the OP purports. It’s real and its origins are largely structural, as has been well documented. US assistance to the directly affected households is hardly generous. Moreover, as income assistance during the pandemic demonstrated, an increase in cash benefits for low-income households would greatly reduce poverty, would get spent mostly on things like rent, clothing, and transportation, and would particularly benefit children, who are literally our future as a nation.

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A very good point. If you are young and healthy, the imputed income of qualifying for Medicaid does not pay the rent.

Steve

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I haven’t read the book yet, but I understand that the income in the government benefits was actual spending, not “imputed” spending.

Wendy

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It’s obviously true that income and wealth are very different.

“People of incredible wealth” are not the subject of the book, which focuses on quintiles of income. The Macro economy is based on mass consumer spending, not on the relatively tiny fraction of consumer spending by people of incredible wealth.

As an investor, I’d rather see 10,000,000 school kids equipped with relatively cheap clothes, computers, etc. than one “person of incredible wealth” buying all the super-expensive goods that person can use. That won’t keep the factories chugging along or workers employed.

Wendy

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I clipped away all the politically slanted comments from the original article when I posted. I am interested in the raw data, which can be spun in many different ways.

The programs are in place. It is what it is until further notice. I’m interested in how this will impact stocks and bonds in the future.

Wendy

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I would expect the book to be talking about averages: ie the average Medicaid recipient received $XXXX in benefits. A lot of people on Medicaid are elderly, or obese, or diabetic, or on dialysis, which runs up their bill. If they were able to work, most would have employer provided medical. I’m talking about a young person who is flipping burgers part time (no employer medical), and going to school, and qualifies for, but makes no claims, on Medicaid. He is not using that imputed income of Medicaid qualification for medical expenses, but he does not have that money available to pay rent, either. Its like the “JCs” who said I had a vacation benefit, but rejected my vacation requests, without reason, and refused to pay me the value of that vacation time. I could not receive that income for the official reason it was supposedly granted to me, but I could not receive that income any other way either.

Steve

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The 1967 to 1980 period were the dynamism of the 681% gain. If the authors are perhaps believable at all. The next thing says not word of truth in their claims.

U.S. Poverty Rate Is 12.8% but Varies Significantly by Age Groups. A . gov website belongs to an official government organization in the United States.

https://www.census.gov/library/stories/2022/10/poverty-rate-varies-by-age-groups.html#:~:text=U.S.%20Poverty%20Rate%20Is%2012.8%25%20but%20Varies%20Significantly%20by%20Age%20Groups&text=A%20.,organization%20in%20the%20United%20States.

Wendy,

The reality is your posted article is a political hit piece. Sorry just is. It does not declare itself as such. Instead it pretends to be honest data when it is no where near being honest.

The data is not real so there will be no effect on the markets. You might buy and sell on false data but most people wont pick up the book.

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