|WACO, October 31 - America has long been known as the land of opportunity, but a flurry of recent reports casts some doubt on our nationís ability to continue to see rising incomes and lifestyles.
One forecast calls for median incomes to fall, and a recent book talks about a ďbarbellĒ economy, where people are either rich or poor (with few in between). While these conclusions may be (and probably are) valid, I disagree to some extent with the grim and disheartening picture of the future these statistics are often used to paint. Letís peel back the onion a bit.
First, a look at the idea that median incomes could fall over the next few decades. Median income is simply the dollar amount at which half of households make more and half make less. So when that number falls, more people are clustering at the lower levels. Economists Richard Burkhauser of Cornell University and Jeff Larrimore, a staffer on the Congressional Joint Committee on Taxation, pointed out that demographic factors could end up pushing incomes down for the next 30 years or more. They went on to note that if something doesnít cause incomes to rise, economic decline could ensue and endure.
This notion is an alarming one: that families could be making less money in the future than they are now. But thatís not the end of the story. As the authors pointed out, itís demographics at work, with the large generation of baby boomers reaching an age where they are retiring or downshifting to part-time work. The mathematical fact is that when more households are making less money, median income falls. But thatís really not the same thing as saying that working-age people will be worse off. It is a well-established fact that an individualís earnings grow over time with work experience, and for many people peak earnings are reached shortly before retirement. This life-cycle phenomenon has been known for decades and is routinely taught in elementary economics classes.
Over the next few decades, the national economy will see people shifting from peak earnings to reduced (or eliminated) incomes at record rates, and median income may well fall. It is less clear, however, that economic decline will follow. Spending and income are not perfectly correlated, and retirees will be spending wealth accumulated over decades. As money now sitting on the sidelines in the form of retirement accounts is reinserted into the economy, there will be a definite upside. Certainly, we would like to see the standard of living continue to trend upward and working families enjoying growing incomes. The simple mathematics of a declining median income level does not eliminate this possibility, and we could well have both patterns (median incomes falling due to a bulge in the retiree population and rising living standards for working families) happening at the same time.
Another alarming story I saw had to do with the ďbarbellĒ economy, with growing numbers of people at the top and bottom ends of the income spectrum and fewer in between. The idea that America is going to see income inequality grow rapidly in the years to come is extremely troublesome for some people. Iíve talked about this before, and Iíll say it again: in and of itself, income inequality is not a terrible thing. If our economy can offer large financial incentives to those with the will to innovate, we all benefit. As the business complex becomes more complicated, individuals who work hard and embrace the changing technologies and methods have the potential to reap large rewards. As long as there are pathways for hard workers to end up in the upper tier (and there are, through education, training, preparation, and perseverance), the simple fact that incomes are unequal is not a terrible thing. Of course, the more people we can move to that upper end, the better. When you just run the numbers ahead and assume no improvement in educational outcomes (and, hence, earning potential) in various ethnic groups, the demographics of population growth again kick in and offer a bleak picture. With improved outcomes, however, upward mobility remains readily achievable.
Few economics-related topics are nearer or dearer to most people than their pocketbooks, and economists spend huge amounts of time and energy analyzing trends in income levels. Sometimes, however, the interpretations of patterns in the underlying data (whether by the original analyst or by pundits reporting on it) verge on scare tactics. Income inequality is a major hot button for many, while others discuss the shrinking middle class. Clearly, these things have the potential to be problematic. However, I would take some of the gloom and doom stories crowding media outlets with the proverbial grain of salt (and a freshly peeled onion).
Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.