Shapiro on the Economy

Rising Incomes Are a Key to Winning in 2016 — But Not Enough

Even if we accept that the 2016 campaign is a fact-free zone, what precisely are Donald Trump and Bernie Sanders talking about when they rant about incomes cratering for most Americans? It’s true, as I’ve documented, that a majority of Americans saw their incomes stagnate or decline throughout the Bush expansion (2002-2007), and the financial crisis and ensuing recession aggravated those losses. But that dynamic ended more than three years ago. Since 2013, the household incomes of most Americans have risen steadily and substantially.

The only candidate who seems to get this is Hillary Clinton, judging by her pledge to preserve and extend the economic gains achieved under President Obama. But Trump and Sander’s appeal should tell us that politically, those gains are not enough, and that a wining economic platform for this year’s election has to address the whole picture of the last 15 years. Yes, voters want measures to ensure that their recent progress will continue, a challenge Clinton has met better than her Democratic rival or Republican opponent. They also want a credible pledge that they will never have to endure another housing collapse or muddle through an expansion that leaves them on the sidelines.

Nevertheless, there's no doubt that most Americans are doing much better than they did four or eight years ago. Last month, the Federal Reserve’s “Report on the Economic Well-Being of U.S. Households in 2015” found that nearly 70 percent of Americans say they’re “doing okay” or “living comfortably,” versus 18.5 percent who say they’re “worse off.” Behind those positive views, the Bureau of Economic Analysis reports that Americans’ real personal income grew 1.9 percent from February to December 2013, followed by 3.0 percent gains in 2014 and another 4.0 percent gains in 2015.

To be sure, aggregate economic data does not always capture most people’s real experience. To track people’s actual experience, I sorted and collated the Census Bureau data on household incomes from 2009 to 2014. I focused on the incomes of American households headed by people who in 2009 were 25-to-29 years old (millennials), 35-to-39 year sold (Generation X), and 45-to-49 years old (late baby boomers). I tracked their incomes as they aged from 2009 to 2014, and analyzed the results by gender, race or ethnicity, and education.

The results show that most Americans saw their incomes continue to stagnate or decline from 2009 to 2012, with the exception of millennials. For economic and statistical reasons, young households always make greater progress than older households, and millennial households were the only age group whose income rose from 2009 to 2012. Moreover, as I’ve also documented, household incomes have risen significantly since 2013 for Generation X and Baby Boomers as well as millennials.

Average Annual Household Income Gains

                2009 - 2012      2013 - 2014

Millennials    3.2%              4.3%

Generation X  - 0.4%            2.3%

Late Baby Boomers -1.1%  0.5%

The results also show that gender and race matter. While the income dynamics of the last decade didn’t create today’s partisan divisions based on gender and race, they probably reinforce them. For example, while households headed by men generally fared better than those headed by women in the leans years from 2009 to 2012, women turned the tables in 2013 and have made more progress than their male counterparts since the turnaround.

Average Annual Household Income Gains By Gender

                  2009 - 2012    2013 - 2014

                 Men Women Men Women

Millennials 3.5% 2.5% 2.7% 3.0%

Generation X - 0.2% - 0.6% 0.9% 2.8%

Late Boomers - 0.5% -1.1% 0.2% 0.2%

The results based on race and ethnicity also may help explain Hillary Clinton’s strength among minorities, as compared to Trump and Sander’s connections to angry white voters. In particular, under Obama’s policies, including Obamacare cash subsidies, the incomes of Hispanic and African-American households across all three age groups have grown faster than their white counterparts since 2013.

Average Annual Household Income Gains, By Race and Ethnicity

                2009 - 2012                2013 - 2014

               White Black Hispanic White Black Hispanic

Millennials 3.7% 0.0% 1.8%     2.9% 3.0% 3.2%

Generation X 0.1% 1.7% - 1.5% 1.6% 2.0% 5.0%

Late Boomers - 0.9% - 4.9% 1.8% - 0.1% 2.0% 2.8%

The results also show that after the tough times from 2009 to 2012, when Generation X and baby boomer households at every educational level lost ground, every age and educational group but high-school educated baby-boomers have made significant income progress since 2013. These gains even include households headed by high-school dropouts, lifted by the very strong job growth since 2013 and the Obamacare cash subsidies.

Average Annual Household Income Gains, By Education

        2009 - 2012                      2013 - 2014

        No Diploma HS College No Diploma HS College

Millennials -0.6% 1.1% 4.2% 4.4% 3.0% 5.1%

Generation X -2.2% -1.3% -0.1% 6.2% 4.0% 1.5%

Late Boomers -4.8% -1.7% -0.6% 9.5% 0.0% 0.4%

Incomes do not explain everything. The incomes of white millennials have risen rather strongly throughout this entire period. Yet, they’ve responded to Trump and Sander’s cases that political and economic elites have denied them their hard-earned gains. Maybe they’re angry that their parents lost much of their home equity, or maybe they’re turned off rather than reassured by Clinton’s dispassionate demeanor. To win them over, she will have offer a credible path to both maintain everyone’s recent income progress and preclude another housing collapse and joyless expansion.

This post was originally published on Dr. Shapiro's blog.

Whatever Some Candidates Tell You, the Incomes of Most Americans Have Been Rising

After a decade when most Americans saw their incomes decline, the latest Census Bureau income data contain very good news:  A majority of U.S. households racked up healthy income gains in 2013 and 2014.  The facts may not fit the narratives of Donald Trump, Ted Cruz, or Bernie Sanders.  But they do help explain why President Obama’s job approval and favorability ratings have passed 50 percent.  They also show that Hispanic households made more income progress in 2013 and 2014 than any other group, which may be one reason for their growing support for Democrats.  A third surprise: Households headed by Americans without high school diplomas racked up their first meaningful income gains since the 1990s, thanks to the large job gains in 2013 and 2014 and the Obamacare cash subsidies beginning in those years. 

These findings all come from using the Census data on the median incomes of American households by the age, gender, race and education of their household heads, to track their income progress as they aged from 2009 to 2012.  I focused first on millennial households headed by young women and men who were 20-to-29 years old in 2009, which makes them voters ages 27-to-36 today.  For decades, younger households have been the group with the fastest-rising incomes, and the recent period is no exception.  Despite colorful stories of millions of young people living in their parents’ basements, the data show that the household incomes of these millennials (adjusted for inflation) grew 3.6 percent per-year from 2009 to 2012, and those gains accelerated to 4.5 percent per-year in 2013 and 2014.

The data also show that the incomes of millennial Hispanic households grew 5.4 percent per-year in 2013 and 2014, outpacing the progress of white and African American millennial households of the same ages.  To be sure, not all millennials did nearly so well: The household incomes of those without high-school diplomas, which had declined an average of 1.0 percent per-year from 2009 to 2012, rose 3.1 percent in 2013 and 2014 – while the incomes of households headed by millennials with high school diplomas or college degrees grew 5 percent per year.  Two main factors are at work here, and in the big gains by Hispanic households.  First, businesses created almost 2.5 million net new jobs in 2013 and 3 million more in 2014, and such strong job growth disproportionately helps those at the economy’s margin.  Second, Obamacare’s cash subsidies for lower-income households kicked in the same years, and Census counts government cash subsidies as a form of income.

2013 and 2014 also were good years for most of Generation X.  My analysis here focused on households headed by people ages 35-to-39 in 2009, which makes them 42-to-46 year old voters today.  In those two years, the median income of those Gen X households rose 2.3 percent per-year – a major turnaround from 2009 to 2012, when their incomes had declined 0.4 percent per-year.  As with the millennials, the Gen X households headed by Hispanics made more income progress in 2013 and 2014 than their white or African American counterparts.  And thanks once again to the robust job growth and the Obamacare cash subsidies, Gen X households headed by people without high school diplomas made substantial income progress in 2013 and 2014 – in fact, more progress than Gen X households headed by high school or college graduates.

For many decades, the income gains of most Americans have slowed as they aged.  Nevertheless, the new income data contain moderately good news for households headed by late baby boomers, those who were 45-to-49 years old in 2009 and today are voters ages 52 to 56.  Their median household incomes rose in 2013 and 2014 by an average of 0.5 percent per year; but even that was a big improvement from 2009 to 2012, when their incomes fell 1.1 percent per year.  As with the millennials and Gen Xers, the Hispanic boomer households again fared better than their white and African American counterparts in 2013 and 2014:  The median incomes of these Hispanic households grew 2.8 percent per year in 2013 and 2014, compared to gains of 2.0 percent per-year by African American boomers and 0.1 percent per-year by white boomers.  Also, once again, the data show that the incomes of households headed by boomers without high school diplomas grew faster in 2013 and 2014 than the incomes of boomer households headed by high school or college graduates.

The Census Bureau will release the 2015 incomes data in a few months. We already know that the economy created another 2.65 million new jobs in 2015.  If, as expected, the broad income progress seen in 2013 and 2014 persists in 2015, it will rebut much of the economic message touted by Trump and badly weaken Sander’s critique of Hillary Clinton.  These data may not penetrate those campaigns and the media that surround them, but American voters know when their own incomes have improved – and that will alter the landscape for next November in ways almost certain to favor Democrats and their nominee.

This post was originally published on Dr. Shapiro's blog.

Donald Trump’s Chutzpah: His Tax Plan Doubles Down on Inequality and Gives His Own Company a Huge Tax Windfall

Donald Trump, often a master of snide generalities, has been very precise about not only his plans for undocumented immigrants and Obamacare, but also his approach to taxes. The presumptive GOP nominee has laid out detailed proposals to cut tax rates, expand the standard deduction, and sharply shift the approach to business taxes. I’ve reviewed his proposals, and the conclusions are sobering. For a starter, Trump’s tax cuts are so expansive, they would decimate either the federal budget or the U.S. credit rating. Moreover, the GOP “populist” channels most of the benefits from his tax cuts to the country’s wealthiest individuals and businesses. So, Trump characteristically doubles down on the Democrats’ central meme of income inequality, and ensures that one of the biggest winners would be the Donald himself, through a giant tax windfall for The Trump Organization, LLC and other privately-held enterprises.

Just to begin, Trump’s proposals are wildly reckless as fiscal policy. According to the Tax Policy Foundation, a joint enterprise of the Brookings Institution and the Urban Institute, Trump’s tax plan would gut federal revenues by $9.8 trillion over 10 years. In 2020, his plan would reduce personal income tax revenues by $695 billion or more than 36 percent, and gut corporate income tax revenues by $196 billion or 50 percent. All told, the revenue losses under Trump’s plan in 2020 come to $915 billion, equal to all defense spending projected for that year ($570 billion), plus 44 percent of all Social Security retirement benefits in 2020 ($793 billion) . If Trump wants to finance his tax plans by borrowing instead of cutting spending, he should know that such a large, additional burden on credit markets would push up interest rates and slow growth, and likely trigger a U.S. debt crisis.

Turning to the details, one feature of Trump’s plan that would help some middle-class Americans is his proposal to expand the standard deduction from $6,300 to $25,000 (singles) and from $12,600 to $50,000 (couples). His plan also simplifies and lowers marginal income tax rates to 10 percent, 20 percent, and 25 percent. But these changes provide nothing for the 45 percent of U.S. households with low or moderate incomes, because they are not liable today for any federal income tax.

Apart from the big standard deduction, Trump channels virtually all of his tax benefits to high income people and businesses. Trump’s plan would save an average household that pays income taxes $2,732 in 2017, mainly from the expanded standard deduction. Those in the 95th to 99th percentile, however, would save $27,657 in 2017, 10 times the benefits for an average taxpayer. Further, households in the top 1 percent would save $275,257 in 2017, 100 times the benefits for the average taxpayer. And those at the very top of the income ladder, the richest one-tenth of 1 percent of households including Donald Trump, would save $1,302,887 in 2017, or 480 times the benefits for average taxpayers.

These windfall gains are driven mainly by Trump’s proposals to reduce the top tax rate from 39.6 percent to 25 percent and slash taxes on businesses. So, Trump would cut the corporate income tax rate from 35 percent to 15 percent. Trump’s enthusiasts will note that his business tax reforms include ending the right of U.S. multinationals to defer their U.S. tax on income earned abroad, much as President Obama has proposed. But only Trump would cut the U.S. corporate rate to 15 percent. Some 96 percent of the foreign income of U.S. companies is earned in countries that tax corporate income at rates of 15 percent or more, and those U.S. companies get U.S. tax credits for the taxes they pay abroad. So, under Trump’s 15 percent corporate tax rate, 96 percent of the foreign-source income of U.S. multinationals would be free of any U.S. tax – much more than under current law.

Trump provides equally large tax windfalls for non-corporate businesses such as LLCs and partnerships, which account today for more than half of U.S. business revenues and profits. Here, Trump appears to agree with Obama and Hillary Clinton about closing down the “carried interest” loophole, which taxes most of the income earned by hedge fund and private equity fund partners at the 23.8 percent capital gains rate. But Trump’s version of this reform is meaningless, because he also cuts the top tax rate for income earned in all “pass-through” entities such as hedge funds and private equity funds to 15 percent: So, they would pay even lower taxes under Trump’s plan than under the current, carried interest loophole.

That’s not even the worst of it: This 15 percent rate would apply not only to hedge funds and private equity funds, but to all partnerships and privately-held businesses, including the Koch Brothers’ companies and The Trump Organization, LLC. Instead of paying taxes at the current 39.6 percent top personal rate, or the current 23.8 percent capital gains rate, or even the 25 percent top personal rate under Trump’s plan, the Koch brothers, hedge fund partners and the Donald himself would pay 15 percent. Under Trump’s plan, he and his company would pay a lower tax rate than an average American earning $47,750 today. That’s chutzpah even for Donald Trump.

This post was originally published on Dr. Shapiro's blog.

The Surprising Good News about American Incomes

For a change, the latest Census Bureau data on what’s happened to the incomes of Americans is good news. For the first time since the 1990s and 1980s, household incomes rose substantially in 2014, and did so across all demographic groups. You might miss the good news if you looked simply at everyone’s median income or median wage. What’s actually happening becomes clear only when you track, as I have, the income paths of various “age cohorts,” year after year as they grow older. Using this approach, the new data show that across households headed by people in their late 20s, their late 30s and their late 40s in 2013, median household income grew an average of nearly 2.7 percent in 2014.

This is a big and important change: As documented in my recent Brookings Institution report on income progress since 1980, the median income of households headed by people of comparable ages in 2001 declined an average of 0.1 percent per year from 2002 to 2013.

Drilling into the new data, we also see that households headed by minorities made considerably greater progress in 2014 than their counterparts headed by whites; and households headed by men had larger income gains than those headed by women. Yet, all of those groups saw significant income growth. Most striking, households headed by high school graduates, as well as those headed by college grads made substantial income progress in 2014; and even those households headed by people without high school diplomas had significant gains. While all of these happy developments reflect just one year’s data, they nevertheless bear watching.

Let’s step back and put these new data in their larger context. The Brookings study covered the period 1980 to 2013. I followed the incomes of households headed by people who were 25 to 29 years-old in 1975, until they reached age 59; and then repeated that process for households headed by people who were 25 to 29 in 1982; as well as 25 to 29 in 1991, and 25 to 29 in 2001. The analysis showed that across age groups and across gender, race and ethnicity, and education, Americans made strong, steady income progress as they aged through the 1980s and 1990s. Since 2002, however, the median household incomes of the same groups have declined, stagnated or grown much more slowly, depending on their demographics.

I also examined the income progress of three age cohorts under each of the last five presidents, tracing the income paths of households headed by people who were 25 to 29, 35 to 39, and 45 to 49 at the beginning of each president’s administration. (For these income records by president, I began in year two of each administration and ended in year one of the following administration, because economic conditions and income results in the first year of any presidency are set by the preceding administration.)

As expected, the new 2014 data improve Barack Obama’s record. Over his presidency thus far, income growth across the three age cohorts has averaged 1.2 percent per year, as people aged from 2010 to 2014. That’s a big step up from George H.W. Bush and George W. Bush: Income progress across comparable age groups averaged 0.2 percent per year under Bush I and 0.3 percent per year under Bush II. The income progress under Obama is also a big step back from annual gains averaging 2.6 percent under Bill Clinton and 2.4 percent under Ronald Reagan. Nonetheless, income growth in 2014 roughly equaled the strong, sustained gains under Clinton and Reagan.

The question is, why did this happen? First and probably foremost, employment accelerated sharply last year: The United States created 2.95 million net new jobs in 2014, compared to an average of 528,000 net job gains per year from 2002 to 2013; and 1.78 million per year from 2010 to 2013.

Strong job creation can have powerful effects on incomes, especially for people working near the margins of the economy. This effect is evident in the 2014 income progress by people without college degrees. Across the three age cohorts, incomes increased 4.8 percent among households headed by high school educated graduates and by 2.6 percent among those headed by people without any diplomas. In stark contrast, the median incomes of comparable households decline substantially from 2002 to 2013.

Beyond jobs, U.S. businesses also enjoyed relief in 2014 from fast-rising health care and energy costs, which allowed them to attract and retain employees by raising wages and salaries. Spending by employers on health insurance for family medical coverage, for example, rose less than 2 percent in 2014, as compared to increases averaging nearly 7 percent per year from 2002 to 2013 and nearly 5 percent per year from 2010 to 2013. Similarly, energy costs for industrial and commercial businesses, which rose by an average of more than 6 percent per year from 2002 to 2008, virtually flat-lined in 2014.

Yet, even with 2014’s strong gains, years of flat or falling incomes for many Americans have left us with stark inequalities within the middle class. Across our three age cohorts, the median income of households headed by men averaged $71,382 in 2014 — 25 percent greater than the $56,946 median income of households headed by women.

Inequalities based on race and ethnicity are much larger, even though 2014 was a very good year for minorities. In 2014, the median income of households headed by whites across the three age cohorts averaged $74,149, or 85 percent greater than the $40,049 level for the households headed by African-Americans and 56 percent greater than the $47,440 average for those headed by Hispanics.

Finally, the vast income disparities based on education keep expanding. Across the three age cohorts, the median income of households headed by college graduates averaged $101,298 in 2014 — 113 percent greater than the $47,560 average for households headed by high school graduates and 269 percent more than the $30,146 average for households headed by people without any diploma. With such gaping differences, it is no surprise that many of this year’s would-be presidents, especially among the Democrats, have plans to reduce or eliminate tuition burdens at public colleges and universities.

This post was originally published on Dr. Shapiro's blog.

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