Income Stagnation

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The change in real annual household income for the majority of U.S. households has been flat since the 1970s and various coping mechanisms have been used to supplement languishing household incomes: a move from one-income households to two-income households in the 1970s and rising debt levels since the 1980s.

As stock market gains and Fed rate influence in the 1980s and 1990s started to take hold, a divergence can be seen, between the percent change in real income of the bottom 90% of income earners and the top 10% of income earners.  Median household incomes held out somewhat longer, stagnating and trending down in the very late ’90s, eventually falling to levels not seen since 1994.

As a result of the trend in Fed rate-target reductions since 1982, US household debt as a percent of disposable income has risen while US household interest payments as a percent of disposable income have remained constant.  Lower interest rates allowed and encouraged more debt to be taken on by minimizing the interest rate burden that debt has.

However, as a larger portion of the economy adds unproductive debt they are more easily affected by any interest rate increase and their spending is more severely restricted when this happens, which also places a restriction on economic growth.  In other words, interest rate sensitivity increases because smaller interest rate shifts will now produce more significant changes than before in the overall amount of interest payments due with respect to income.

Long-term implications are that economic growth is pulled forward (short-term economic growth is substituted for long-term economic growth), corporate profitability is temporarily inflated, financialization occurs and risk assets are temporarily boosted, and a widening income gap is seen.  Furthermore, if the beneficiaries of the temporary boost are able to use their wealth to influence changes in law, they can even further entrench their position, side-stepping some of the fundamental concepts of capitalism.

The serious implication is that wealth is concentrated with a smaller group that is unable to attain the previous growth levels of the economy.  Broad economic growth depends on the spending and incomes of a majority of the population.