Tuesday, August 19, 2014

MEDIAN HOUSEHOLD INCOME

On its own merit, I find median household income one of the more useless statistical concepts out there.

Median simply means that of 115,226,802 U.S. households (2012), 57,613,401 households had incomes below a yearly median of $ 51,371 and 57,613,401 households had income above the median. So what?

Dig a little deeper, and you will find that the average 2012 household income was $ 71,247, close to 40% above the median.  Now a couple of relevant facts come to light.  The first is that total annual household income was $ 71,247 x 115,226,802 households = $ 8.2 trillion.  The second is that the poorest half of the households - the left leg of the statistical median bell curve - earns significantly less than those on the right bell curve leg, and very significantly less than the tail end of the right hand leg.

In 2012 total household debt in relation to household income - mortgages, student loans, car loans, credit card debt, etc. - was about 90%.  Add that multiplier to total household income of $ 8.2 trillion and what do we get?  U.S. Gross Domestic Product (GDP) of $ 15,7 trillion.

Simplistic, but relevant.  At the end of the day it all comes down to household income plus how much households reasonably can and will borrow for consumption and private investment. In recent past household borrowing grew unsustainably to well over 100% of income, precipitating the 2008 financial crisis.

We must of course add business and government investment into the GDP formula, but where do business and government get their income from?  Businesses from selling goods and services to households, government from taxing households and businesses (which, as noted, get their taxable earnings from household income).

And that brings me around to the question of inequality of income distribution - the unbalanced two legs of the median bell curve.  This inequality is commonly expressed with the help of the so-called Gini Index, which measures the degree of inequality in distribution of family income in a country.  A coefficient of 100.0 would mean that a single family receives all income, while a coefficient of 0.0 would mean that all families earn exactly the same.

The Gini Index of the United States has been climbing relentlessly and without pause from 0.35 in the late 1960s.  It is now 0.45, registering by a wide margin the highest family income inequality among all developed nations.  It outdoes in income inequality terms countries such as Nigeria, the Ivory Coast and Turkmenistan, just to mention three. On the other hand, it may not come as a surprise to find the world's lowest income inequality among the Scandinavian countires, which come in at an average 24.3 on the Gini scale.

Now, is it not the rich that make the economy go around, the supply-side job creators of trickle-down economics?  I beg to differ.  Where there is demand - i.e., purchasing power - there will be supply and consequently the prospects of economic progress. Not the other way around - businesses do not invest where demand for their output is stagnant or absent.  Since the 1960s U.S. economic growth trends have inversely mirrored the Gini Index progression.  I do not consider this to be a coincidence.

When family income surpasses a certain level, consumption and private investment ceases and surplus income gets more or less idly hoarded.  The very rich simply have more money than they know what to do with, at which point they cease to be propellants of economic growth.  And that income level of more than enough really is not all that high.  Not in the millions of dollars, and certainly not in the billions.

As a Scandinavian I am fully aware of the fact that the socio-economic philosophy of that part of the world is not in the American DNA.  All I therefore wish to suggest is that beefing up the earnings power on the left leg of the median bell curve and reversing the Gini Index trend line would significantly boost the prospects for long term U.S. economic growth.

Maybe Henry Ford - no bleeding-heart socialist - could serve as an example for the way forward.  In 1914 he more than doubled the wage level of his workers to $ 5 per day, on the premise that he needed popular purchasing power for all the cars he would be turning out on his revolutionary assembly lines.

This lucid move helped kick-start the birth of the American middle class, now on the endangered species list.