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Brooks Wilson's Economics Blog: Trends in Personal Income

Tuesday, May 25, 2010

Trends in Personal Income

(HT Dredge Report) Dennis Cauchon of USA Today wrote a very good article describing changes in the composition of personal income in the first quarter of 2010 and the causes of the changes ("Private pay shrinks to historic lows").
Paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of this year, a USA TODAY analysis of government data finds.

At the same time, government-provided benefits — from Social Security, unemployment insurance, food stamps and other programs — rose to a record high during the first three months of 2010.

Those records reflect a long-term trend accelerated by the recession and the federal stimulus program to counteract the downturn. The result is a major shift in the source of personal income from private wages to government programs.

The article explains that the long-term trend is in part due an aging America where a larger portion of people are retiring, which reduces wages, and collecting social security and medicare benefits, which increases government-provided benefits. The recession, the government response to it, and the Obama administration's expansion of healthcare benefits accelerated the trend. Cauchon provides comments from four economists on the trend. I provide the comments is a different order than Cauchon to distinguish between short-run and long-run affects. The first, Paul Van de Water, believes that the acceleration of the trend is the result of an effective stimulus.
The shift in income shows that the federal government's stimulus efforts have been effective, says Paul Van de Water, an economist at the liberal Center on Budget and Policy Priorities.

"It's the system working as it should," Van de Water says. Government is stimulating growth and helping people in need, he says. As the economy recovers, private wages will rebound, he says.
The wild-eyed libertarian economist in me feels constrained to point out that an ineffective stimulus would have the same short-run impact of increasing government benefits relative to private wages and that the economy would recover with or without government intervention. The remaining three economists focus on the long-run problems caused by the trend.
The trend is not sustainable, says University of Michigan economist Donald Grimes. Reason: The federal government depends on private wages to generate income taxes to pay for its ever-more-expensive programs. Government-generated income is taxed at lower rates or not at all, he says. "This is really important," Grimes says...

Economist Veronique de Rugy of the free-market Mercatus Center at George Mason University says the riots in Greece over cutting benefits to close a huge budget deficit are a warning about unsustainable income programs.

Economist David Henderson of the conservative Hoover Institution says a shift from private wages to government benefits saps the economy of dynamism. "People are paid for being rather than for producing," he says


  1. I feel like as long as their are these goverement hand outs the economy will never fully recover and me may always be in debt. I feel that if the goverment would tax these people instead of giving them a hand out it would force the people to get tuff and try and find a job which would add on to the GDP of America causing the economy to grow

  2. Kristina H.27/5/10 8:16 AM

    Although this seems to be fixing the short term problem of the seemingly to us, relatively high unemployment rate by making it so that more people can support themselves without having a job, in the long term it will cause more taxing of income on the American people to support these hand-out programs. With the new healthcare plan, and the Bush presidency approved medicare/medicade funding increase, this generation and the next will see tough times and much lower pay checks to support these costly programs. These programs while beneficial to a portion of the population, taxes the labor force significantly. The next question being is how will this affect the populations willingness to work? Just as when minimum wage raises, it mainly affects the teen population and more teens want to work, will this theory apply in the opposite direction? When a lesser wage is to be earned by this income tax, it will effect the entire population of the workforce. Will this lower unemployment? Which portion of the population will be the ones to be likely to decide not to work as a result of their lower income? Many questions that time will answer.

  3. If the government keeps giving hand outs our unemployment rate will continue to increase. As we have learned that people respond to incentives and the government is giving America an incentive not to work.