The Economic News From the Census Bureau Is Very Good
The Census Bureau released the 2018 Income and Poverty in the United States report. The news is good.
Between 2017 and 2018:
· Real median family income up 1.2%
· Real median earnings up 3.4%
· Full-time, year-round workers up 2.3 million
· Poverty rate down from 12.3% to 11.8%; childhood poverty fell faster; net 1.4 million people left poverty
· Income in the bottom 80% of households was up significantly, only the top 20% of households saw an income decline, as a result, the Gini coefficient (a measure of income inequality, higher numbers mean more inequality) fell from 0.489 to 0.486
· Usually when the Gini index falls, incomes go down for everyone; it’s been 20 years since we’ve seen this big a decline in the Gini index when incomes went up
The news coverage didn’t seem to jibe with the numbers. The real good news about income, earnings, employment and poverty was overlooked entirely to focus on the more abstract Gini coefficient. When income and employment go up, and poverty goes down, that’s unalloyed good. The Gini coefficient is more complicated. It mainly fluctuates based on how financial markets are doing, because top earners depend largely on investments, and those are more volatile than the salaries that underpin middle-class incomes. Moreover many top earners compensation is dependent on financial markets—executives with stock options and profit shares, Wall Street professionals with market-dependent bonuses, business owners paid out of profits.
Therefore, if the Gini coefficient goes up, meaning more inequality, that generally means financial markets did well, so the rich got richer. If the Gini coefficient goes down, that doesn’t mean society got more equal in any substantive or long-term sense, just that the stock market was down that year.
However, 2018 worked for everyone. The economy did well, all the real measures of economic well-being were improved, and the Gini coefficient went down. More money, more equality. But you wouldn’t know it from the headlines.
· Ben Holland wrote at Bloomberg under the headline, “Census Says U.S. Income Inequality Grew ‘Significantly’ in 2018” and suggested the culprit was, “the impact of President Donald Trump’s end-2017 tax bill, which was reckoned by many economists to be skewed in favor of the wealthy.”
· Business Insider’s take was “US income inequality jumps to highest level ever recorded” , and quoted Professor Timothy Smeeding, "Wages remain low, there is a lack of childcare for single-parent families, and so on."
· Mike Schneider’s AP headline was “Census: US inequality grew”.
These are just three examples, the sentiments were echoed in many other news outlets, and chewed over by many opinion columnists. How did people get things so wrong? I can’t explain overlooking all the good news in the report except perhaps by the old newspaper adage, “If it bleeds, it leads,” meaning bad news sells more papers (or collects more clicks) than good. Or perhaps reporting good economic news would be considered support for Trump and might reduce enthusiasm for anti-poverty spending.
Reversing the news on the Gini coefficient has a technical explanation. Some writers took not the one-year Gini calculation but the five-year. The most recent five-year Gini, covering 2014 – 2018, is higher than the previous five-year, 2013 – 2017, basically because the 2018 number was higher than the 2013. But this increase happened from 2016 to 2017, so it’s old news today. Other writers compared the one-year number released by the Census Bureau in 2017 (0.482) to the 2018 number of 0.486. But the methodology changed this year, and the 2017 number to compare to the 2018 was 0.489.
Deeper problems are confusing inequality and poverty, and attributing changes to recent political events. When the Gini index goes up, everyone’s real income goes up. More inequality generally means less poverty. And the changes take many years to play out, so pinning 2018’s numbers tax changes passed at the end of 2017 is implausible.
The 0.6% decline in the Gini index from 2017 to 2018 may not be unalloyed good news. On average, real income for the top 20% changes twice as much as the Gini index. The top 20% lost only 0.3%, not 1.2%, so they can count themselves lucky.
Changes in the Gini coefficient do not have significant effects on the real income for the bottom 80% in the same year. However, for each of the next three years, real incomes in the bottom 20% change by 0.8 times as much as the Gini index changes. The 0.6% decline from 2017 to 2018 predicts about a 0.5% real income decline in each of the next three years for the bottom 20%. For the middle 60% the multiplier is 0.5, so this group would be expected to lose 0.3% per year in real income. The simple explanation is richer people benefit immediately from good times with better investment returns and salaries and bonuses sensitive to economic conditions. The benefits for the bottom 80% are seen in more jobs and higher wages after about a year lag, and last for about three years.
This is just a simple statistical relation, the actual economic relation between Gini scores and real income changes is complex. But just looking at the Gini number, without considering trends, real income levels, poverty and other statistics is misleading.
It’s hard to imagine a better Census report whether your main concern is overall economic growth or how the poor and middle class are doing relative to the upper middle class and rich. If these are the headlines for this kind of report, imagine what we’ll see when the economic news is only average, or grim.