The good old days?

Contrary to conventional wisdom, US household incomes started to drop only about a decade ago.

The income problems that US households are currently facing are a relatively recent phenomenon, according to a report from the Brookings Institution. In fact, it says the declines have occurred mainly in the past decade or so, and may be linked to the policies of the last two presidents.

In the report, economist Robert Shapiro uses Census Bureau statistics to analyze income by age cohorts, following their incomes as they age. This is quite different from the usual aggregate technique of analyzing income over many decades.

According to the aggregate view, the median household income rose from US$46,058 in 1975 to a peak of US$56,814 in 2000, where it remained flat until 2007, before receding to US$51,816 by 2013.

The reading by age cohorts paints a more nuanced picture. The median household incomes of Americans aged 25 to 29 who were starting on their career path in 1975, 1981 and 1991 experienced healthy gains as they aged. The 1975 cohort, for example, witnessed an average household income growth from US$48,499 that year to a peak of US$78,458 in 2000. After that, income declined steadily to US$50,017 by 2013, a drop that retirement can explain only in part.

The last cohort (2001) started from a higher income of US$53,389 and saw it grow to US$65,000 by 2013. That US$11,611 increase over 12 years is much smaller than the US$20,000-plus experienced by all previous cohorts in their first 12 years of income growth.

The largest average annual gains occurred during the Clinton and Reagan administrations, Shapiro observes, in sharp contrast to the Bush and Obama years. Under the last two presidents, income growth has been lower for young people, small for those entering middle age and negative for the 45-to-49 age group.

The positive drivers linked to the Clinton and Reagan eras, Shapiro claims, were fiscal approaches that supported stronger rates of business investment, public investment to modernize infrastructure, broader access to education and larger research and development support.