During his economic speech at Knox College, President Obama stated, “The link between higher productivity and people’s wages and salaries was severed – the income of the top 1 percent nearly quadrupled from 1979 to 2007, while the typical family’s barely budged.”
In other words, America’s three-decade, pro-market shift helped only the rich. Sorry, middle-class families.
But this is certainly wrong.
The CBO finds that, before taking taxes and transfers (like Social Security or the Earned Income Tax Credit) into account, real median household incomes grew 19.9 percent between 1979 and 2007; after taking transfers but not taxes into account, they grew 30 percent; and after taxes, they grew 38.2 percent … real median household incomes in America are growing, and it’s inaccurate of Obama to suggest otherwise.
In addition, economist Richard Burkhauser finds that median income rose 21% from 1979 through 2007 — pre-tax, pre-transfer — and 37% — post-tax, post-transfer, and including health benefits. Then there’s research from the University of Chicago’s Bruce Meyer and Notre Dame’s James Sullivan, who find that “after-tax money income plus non-cash benefits for the median family grew by 54.6% between 1979 and 2007, growing from $31,880 to $49,298.”
Obama seems to have taken his data from the work of economists and inequality gurus Thomas Piketty and Emmanuel Saez, who claim median household income rose just 3% over those three decades. But their narrow market income measure misses a lot — including how to correctly gauge household size — as these other economists and the WaPo point out.
2. There is also a problem with that bit about the “link between higher productivity and people’s wages and salaries” being severed. Left-liberal economist argue that over the past four decades, productivity doubled even as wages stagnated or even dipped.
But AEI’s Stephen Oliner, a former Fed economist, argues that (a) the measure of labor income should include all forms of compensation, not just wages, and (2) the price index used to calculate real earnings should be a broad output price index not the CPI (because businesses make decisions about labor use based on a comparison of labor costs and the revenue they can earn from employing that labor).
When you run the numbers that way, as the Heritage Foundation recently did, you find that productivity rose 100% and compensation rose 56% rather than falling 7%. There’s still a gap, which might at least be explained by an overestimate of productivity growth, but not nearly as huge as left-liberals contend.