Updated PCE Price Index Shows Median Income Has Risen 20%

Posted by Tina

Certain economists and others have lamented that working Americans have been losing economic ground and are not as well of today as they have been in days gone by. Using the Consumer Price Index (CPI) as a guide they insist that median incomes for working Americans have dropped by 2% since 1973. This has, no doubt, been behind recent union demands for a change in minimum wage to $15.00 an hour. But James Sherk, writing at The Foundry blog at The Heritage Foundation, cites a different measure, the measure preferred by the Congressional Budget Office and the Federal Reserve, that shows median household incomes have risen by 20% since 1973.

The CPI does not account for the fact that people change their buying habits when prices change—for example, Americans bought more smartphones when they became less expensive. Consequently, it overestimates the amount Americans spend on more expensive products.

The CPI also uses surveys that overestimate the amount Americans spend on rent, gas, and utilities—regularly recurring purchases easily remembered in interviews. The prices of these goods have grown faster than overall inflation. These problems artificially inflate the CPI.

The Department of Commerce uses a different methodology free from these problems to calculate the Personal Consumption Expenditures (PCE) price index. Both the Federal Reserve and the Congressional Budget Office prefer the PCE. PCE-estimated inflation typically grows about 0.4 percentage points slower than CPI estimates. Over short periods of time, this hardly matters. Over long periods, it matters a lot.
Adjusting for inflation with the CPI shows median real household incomes stagnating, falling 2 percent between 1973 and 2011. The PCE paints a completely different picture.

The Commerce Department just revised the PCE to improve its accuracy. The old PCE showed median household incomes rising 17 percent between 1973 and 2011. The updated figures show median household income growing even more—up 20 percent.

Taking other changes into account—such as the growth of non-cash benefits and the drop in average household size—would show even larger gains. Researchers accounting for such factors find median incomes rising by 30-50 percent over the past generation. These findings accord with recent research showing that, contrary to popular belief, employees’ compensation has risen in tandem with their productivity. Middle-class households produce more and enjoy substantially higher standards of living today than they did four decades ago.

Sadly the PCE also shows that since 2007 median incomes have fallen by 7%. Still, overall this revelation is fantastic news. It offers a ray of hope, in this dismal Obama economy, that if policies in Washington were more business friendly (repeal and replace Obamacare-adopt smart tax policies), businesses and investors would celebrate and go for the gold again…the economy would take off! History indicates that instead of the part time low wage jobs created under Obama’s redistribution policies we would see a return to the robust expansion that always results in good paying jobs and a multitude of opportunity!
Democrats, always up to the same dirty tricks, have been telling Americans that capitalism is only for the rich and that working class Americans have been losing ground. Americans have been losing ground dramatically following this administrations redistribution, job killing policies, but it has not been true through the mostly positive decades under Reagan, Bush, Clinton, and Bush.

Creating the perception that the rich got rich while the middle class lost ground and the poor got poorer was necessary to sell the American people on redistribution politics. The recession and the economic melt down offered radical Democrats a perfect crisis, a launching pad, to push this economic fallacy. The politically arranged Occupy Wall Street provided visual theatrics that were a constant reminder and was just part of the rich vs. poor theme. And didn’t the media oblige them with 24/7 coverage of the theme.

There is no denying that during this period wealthy people were able to increase their wealth. It is only logical that when conditions are favorable people with money to invest will realize great returns. Democrats shamefully pretend that this gain in wealth was money stolen and hidden away so that wages for working stiffs remained stagnant; it’s all a big deception of perceptions. Don’t be fooled.

Radical Democrats do politics this way because they cannot claim historical success for their economic policies. They do politics like this because Marxist redistribution, when presented truthfully and without theatrics and tricks is anti-American, a tough sell with voters. Since 1973 the policies Democrats prefer always lead to economic stagnation. Carter created the great malaise, Reagan created millions of jobs and a robust economy. Clinton did well only after cooperating with Republicans in the House. GHW Bush was roundly condemned for raising taxes after pledging, “No knew taxes”. George W. Bush erred by spending too much and failing to inspire Congress to enact changes that would have prevented the financial crisis. When policies that were consistent with conservative principles were in play Americans thrived. See here and here.

There are a number of big changes that need to take place to restore our nation to its founding principles and God knows, we support implementation of those changes. It is also apparent that both of the major political parties have serious problems. Both parties are guilty of promising what cannot be delivered, spending too much, and forgetting that the federal government was constituionally charged only to do a few basic things. These problems are separate issues that will require long term efforts by the electorate and a lot of education and pressure, to change. The economy, however, which represents the well-being of every American family is something else again. It is vitally important that we elect representatives and Congressmen that will work to enact policies that support business and the American worker and investor.

Please pay attention in the coming year and vote wisely, pilgrims!