Comment 77: US Economic Recovery Analyzed from the Income Side (August 16, 2010)

Economic activities of any society consist of two phases, the consumption phase and the income phase. In a society like The United States where consumers’ activity dominates the economic scene, the analysis of both the personal income and the personal consumption become essential for a comprehensive understanding of the current status of the economy. Unfortunately many analysts emphasize only the consumption phase but ignore the income analysis so they fail to understand why so few jobs are created and why the mood of general public is so grim. In this writing we provide an analysis of personal income to supplement those neglects.

Monthly values of personal income is plotted as the black and the red curves in the conventional logarithmic scale in the graph at the right. The data are obtained from the website of Bureau of Economic Analysis. The black curve represents the data before the annual revision of August 3, 2010, and the red curve shows the data after the annual revision. The revision changes data back to the beginning of 2007 but has left the data before 2007 untouched. Though the level of personal income since the end of 2007 has been revised up substantially, the general trend of the red curve has not changed from that of the black curve. We can see in both curves that the ground lost during the recession has been recouped by July of 2010. This general trend is the same as the personal consumption that is not discussed here. The ensuing question is why with the recovery of both the personal income and consumption the 8 million jobs lost have no sign to come back in near future and why the mood of general public is still so subdued. In order to solve this mystery we need to dig deeper from the side of personal income, but the meddling with the personal consumption will not provide useful clues.

Among the components of the personal income three components are progressive indicators of the economy in the sense that the strong growth of those progressive indicators imply a robust economy. Those three components are "private wages and salaries", the income of "non-farm proprietors" and the income from "interests and dividends". Two other components included in the personal income are reverse indicators since the strong growth of those two components imply that the economy is in distress. The first of the two reverse indicators is called "the transfer of government social benefits to persons". Included in this component are three sub-components. The first is the social security payment, officially called "old-age, survivors, disability and health insurance benefits". The second one is "government unemployment benefits"; it should be obvious that this sub-component will explode when the economy is in distress. The third one is called "others" that include various payments related to social safety nets. When the economy is in distress, more and more people fall below the poverty line, and thus the government payments related to the social safety net will balloon. It may be less obvious why the social security payment is also a reverse indicator. It is due to the rule that people have the option to receive social security payment starting from the age of 62 instead of waiting for the full retirement age of 65. It is understood that if one opts for receiving social security early, the total payment one receives during the life time will be substantially less compared to the case to start the benefit at the full retirement age. Thus in a robust economic condition, there is no much incentive to opt for early social security payment. But when the economy is in distress, many want cash desperately so that more will opt for the early payment course to make government’s social security payment grow much faster than normal. The second reverse indicator is the "rental income". More rental income implies that more home owners have become renters due to the increased number of foreclosures.

The "wage and salaries paid by governments" component is neither a reverse indicator nor a progressive indicator. During a boom time, governments collect more taxes and may be inclined to expand their payroll, but during a recession the federal government may use expanded public work payroll to stimulate the economy. "Supplements to wages and salaries paid by employers" is a more tricky component. It includes contributions by employers to workers’ pension plans, to social security taxes, and the contribution to workers’ health insurance premium. The contributions to pension plans and to social security taxes are synchronized with "wages and salaries" paid by employers. A close inspection shows that the component of "supplement to wages and salaries paid by employers" has only dived a little during the recession and then exploded upward much stronger than the overall personal income, don’t need to mention that its growth way outstrips the growth of "private wages and salaries". The phenomenal growth of this component is apparently due to the continuing explosion of health care costs. It is rather absurd to think that the economy is recovering strongly because the health-care costs have exploded. Two smaller sub-components, "proprietors' income from farming" and "transfers from businesses to persons" are ignored in this discussion.

With the components of the personal income understood, we can now look into their behavior in details. In the second graph at the right monthly values of the sum of three progressive components as discussed before are plotted as red dots, again in the conventional logarithmic scale. Monthly values of "government social benefits to persons" is plotted as the blue cure, also in the conventional logarithmic scale. We can see that the sum of three progressive components has hardly recovered from its severe beating during the recession, but the component measuring government hand outs has exploded upward. To make things more quantitative, we took March, 2090 as the nadir of the recession. From the nadir of the recession to July, 2010, the personal income has increased by about 450 billion dollars. The amount of increase of each component and their percentage contributions to the increase of overall personal income are tabulated below:

Amount of increase from March, 1090 to July, 2010 in billion dollars for each component and their percentage contributions to the overall increase of the personal income
Component Name Amount of increase in billion dollars Percentage contribution to the increase of personal Income
Personal Income 453.9 100.0%
Sum of three progressive components 119.9 26.4%
Government social benefits to persons 232.1 51.1%
Rental income 37.6 8.3%
Wages and salaries paid by governments 28.9 6.4%
Supplements to wages and salaries paid by employers 63.1 13.9%

From the above table we can see that the majority of increased personal income comes from government hand outs, whereas the sum of three progressive components only counts less than 30% of the increase. Massive fiscal stimulus enacted by the federal government supposed to stimulate the progressive components but has achieved little success. That is the reason why high unemployment is persisting. It is natural that the general public is very pessimistic because they understand that the majority of the money of their increased spending comes from government hand outs rather than from their own increased progressive earnings.