The Standard of Living for the 20th and 40th Percentiles

The use of averages is very misleading in economic discussions. This creates a challenge to find measures that have validity. One approach we experiment with here is simply looking at the standard of living for the 20th and 40th percentiles. We reason thus, if the lower percentiles see a small drop in incomes, they suffer great challenges. In contrast, if the upper incomes experience a significant drop, they will still have enough. Or in other words, the standard of living of the lower classes is a better measure of the economy's ability to create opportunity, than measure which include the upper classes. However, the data shows similar trends to what we show here are true for most of the upper half.

Incomes for the 20th and 40th percentiles

In this graph, we use the inflation adjusted income of the 20th and 40th percentiles to examine economic trends.

An initial look shows incomes tending upwards under Reagan and Clinton, and incomes tending downward under Carter, Bush and Bush. But this picture is missing something. While Carter was president baby-boomers were still rapidly entering the work force. This rapid increase in laborers could potentially drive wages down. We can account for this by looking at wealth concentration instead. That is how much were they earning times how many workers were earning that wage. This is a better measure of how things actually changed.

Wealth Concentration

To consider both job growth and income growth, we graph the less publicized but more meaningful wealth concentration. How do these trends look?

For emphasis we we extrapolate the mid-Reagan trend in purple, the Bush 41 trend in red, Clinton trend in green, and the GWB pre-bubble trend in black. At the beginning of the graph we can see the late Carter years (Arab oil embargo) are about level. Had the Reagan or Clinton patterns persisted most Americans would be better off. Had the Bush 41 trend persisted most would be worse off. By the end of 2009, the economy returned to the same place it was before the bubble.

The graph does not tell us why distinct trends exist over periods. The graph merely shows us that distinct patterns do exist for certain periods. We must be cautious when making assumption about what choices would make various trends persist, or end undesirable trends.

For a closer look we might graph annual change. We can see the early Carter years, the mid-Reagan years, and the Clinton years are distinctly positive. We have a few notable negatives: 1980-1982, 1990-1992, 2001-2003, and 2007-2009.

Change in Standard of Living by Administration

The information above would lead some to ask, how did the economy fare during each administration. So we look at the annual averages. For this graph we include the 20, 40, 60, 80, and 95 percentiles.

Most groups fared best during the Clinton years and suffered loss during the Bush administrations. It is interesting to note that even with the oil embargo and higher tax rate, average annual growth under Carter was slightly higher than under Reagan.

Last Modified 1/12/11

 

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