Commentary: Are We Better Off Than 4 Years Ago?
Ronald Reagan struck a nerve during his 1980 Presidential campaign against Jimmy Carter when he asked Americans: "Are you better off now than you were four years ago?" The economy had gone through a recession earlier that year, so the answer for many was a resounding no. Ask the same question about President Bush's tenure today, though, and the response isn't so clear-cut.
Families have made some real gains. Surprisingly, average wages managed to outpace inflation right through the downturn of 2001 and are about 2% higher today, after inflation adjustments, than they were before Bush took office. His mammoth tax cuts, while top-heavy, also put money into average household's pockets. And low interest rates have propelled home ownership to record heights.
But at the same time, the data show an apparent contradiction: that despite the wage gains of the past four years, family incomes have nonetheless declined after inflation. Why? Because employment is down and so are hours worked, outweighing the pay gains. Even the affluent haven't been spared. To compensate, Americans have refinanced mortgages, piling on the debt and lowering their average net worth. Soaring medical costs, which employers have been shifting onto workers, have further depleted the family purse. Those at the bottom of the ladder have fared the worst: Poverty climbed steadily throughout the Bush years.
Add it all up, and the average U.S. household is somewhat worse off today than in 2000 -- several years of pain followed by not enough gain to make up the difference. "Americans barely held their own in the past four years, with bottom-half families clearly losing ground and some top-half ones maybe a little better off, mostly from the tax cuts," says Economy.com Inc. Chief Economist Mark M. Zandi.
The hot-and-cold experience of most families may explain why Democratic Presidential candidate Senator John Kerry has not been able to gain more traction on the issue. Certainly, he and running mate Senator John Edwards have tried, attacking Bush on sluggish job growth, the middle-class squeeze, and two Americas, rich and poor. But the fact that real wages have largely held up, as have households' ability to maintain their purchasing power, seems to have offset the wider backlash that Kerry might expect after four years of sagging family incomes. "Americans have been borrowing to sustain their consumption, which means they're optimistic about the future," says Kevin A. Hassett, the director of economic policy at the American Enterprise Institute (AEI), a conservative Washington think tank.
Perhaps the most unusual aspect of the Bush economy is the growth of wages through the recession even as the recovery came up short on job creation. Although unemployment rose and then slowly declined, wages beat inflation for the first three years of Bush's term, according to an analysis of Census data by the Economic Policy Institute (EPI), a liberal group in Washington. Only this year did real hourly pay fall a bit.
Tax cuts, meanwhile, benefited everyone, though most of the money went to the upper brackets. The average taxpayer's total annual income boost: $647 from three major tax reductions, according to an analysis by Washington's Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute.
Unfortunately, the jobless recovery is still causing pain. Employment has climbed in the past 13 months but remains at about 1 million jobs less than before the downturn began more than three years ago, according to the Bureau of Labor Statistics. That's by far the worst showing in decades. Not only are 1 million fewer people earning paychecks than in 2000, but several million more have withdrawn from the labor market or didn't join it in the first place, according to BLS data showing stagnation in the growth of employment relative to population. In addition, a decline in work hours has lowered the pay of many of those who have held on to their jobs. The average family put in 2,965 hours of work last year, a 5.5% decline from 2000, the EPI found.
The punishing combo of fewer jobs plus fewer hours worked has left family incomes in the hole. The average household earned $43,588 last year, 3.4% less than in 2000, after adjusting for inflation, according to Census Bureau data. That's a decline of about $1,500 a year, which $647 in tax cuts couldn't fully offset.
Further biting into the family pocketbook: more health insurance cost shifting from employers onto workers. Employees' share of annual medical costs are up to 32% this year, vs. 25% in 2001, according to a survey by benefits consultants Hewitt Associates Inc. (HEW ) Employers are also covering fewer Americans -- 60% last year, down from 64% in 2000. As a result, the ranks of the uninsured have jumped by 5 million since 2000, to 45 million. Loretta Marcin, a $10.81-an-hour kindergarten aide in Carson City, Nev., says her medical premiums have jumped 50% since 2000, to $200 a month, all but eclipsing the small pay hikes she has seen. "I'm making more than I was then, but I'm not taking any more home," says Marcin, 48, who says her husband, a self-employed construction worker, can't afford to be on her plan and thus has no health insurance.
The Rich Get Poorer
Affluent families have been hit, too. Average family incomes of those in the top 5% have trailed inflation by 6% since 2000, sinking to $253,000 last year -- a $16,000 drop. Meanwhile, the tax cuts gave them back an average of $11,600, according to the Tax Policy Center. Economists think a lot of the lucrative stock options cashed in at the peak of the market boom dried up. In addition, many high-paid tech jobs got wiped out with the Internet bubble and haven't come back. Indeed, the jobless rate for computer scientists and electrical engineers hovered above 5% last year, a level neither had ever reached in more than two decades, according to an analysis of BLS data by Ron Hira, a public policy professor at Rochester Institute of Technology.
Bush advocates don't deny the negative numbers but argue that most families have been able to keep spending more nonetheless. The AEI's Hassett says that given how much people are buying, there's scant evidence of a middle-class squeeze. He points to a 2% rise in consumer spending from 2000 to 2002 among middle-income households. The numbers aren't available for later years, but Hassett predicts they will be better than during the recession. "The best measure of whether someone is better off is consumption, which has shown gains during the worst period," he says. In addition, Americans have continued to increase home ownership. Although the ownership rate bumped up and down in the recession, it started climbing again in 2003 and hit a record 69.2% in the second quarter this year.
Home equity loans and credit cards probably aren't the best ways to prop up your spending when your income stalls. Yet that's what many have done -- lowering the median household's net worth from $89,300 in 2000 to $84,400 today, after inflation adjustments, according to Zandi's analysis of Federal Reserve Board data.
Of course, most families don't have an exact fix on how much they're worth at any given moment. This likely has muted the political impact of lower family incomes and higher debt. The overall reality is ambiguous and complicated -- not the sort of stuff that is likely to move the political needle sharply.
By Aaron Bernstein