Americans are richer than they were in the 1970s

By THE DATA TEAM

AMERICA’S economy has grown massively during the past four decades, but not all of its workers have reaped the rewards. Perhaps the statistic most cited to demonstrate how unequal the gains have been is the median household income. Official statistics from the Census Bureau show that this number has remained flat for 40 years. However, a recent analysis by the Congressional Budget Office (CBO) found that it actually rose by 51% between 1979 and 2014. Why are the CBO’s numbers so much cheerier?

1. The PCE index is different from the CPI in two key ways. First, it includes goods and services that governments and businesses spend on the behalf of individuals, such as health insurance, while the CPI captures only what individuals spend on themselves.

Second, the basket of goods tracked by the PCE index are updated more frequently, which means it better reflects consumers’ tendency to change their purchasing decisions when prices change. For example, if the price of apples were to spike suddenly, consumers would be more inclined to buy other fruit, such as pears, instead.

Both inflation indices have their strengths and weaknesses, and both are commonly used by government agencies. Wage numbers are generally reported using the CPI index, while the Federal Reserve uses the PCE index as its inflation target when setting interest rates.

2. According to the CBO, the average federal tax rate paid by households in the middle quintile of pre-tax earnings fell from 19.1% in 1979 to 14% in 2014, while means-tested transfers such as Medicaid rose from 0.8% of pre-tax earnings to 4.7%.

Sources: Census Bureau; CBO; BLS; BEA; NBER; The Economist