What's Happening To Americans' Income?

Policy Backgrounders | Economy

No. 138
Monday, January 29, 1996
by W. Michael Cox & Beverly J. Fox

Gross Domestic Product and Consumption: The Long View

Figure I - Per Capita Real GDP and Consumption%2C 1869 - 1994

A thorough assessment of Americans' living standards must include a host of considerations that matter to people, such as leisure time, working conditions, life expectancy, pollution and crime.2 Clearly, people care about more than purely pecuniary considerations -- wages, earnings, income. However, most recent studies have focused solely on monetary measures of Americans' well-being. In an attempt to sort through the conflicting information, this backgrounder focuses narrowly on some of the same money issues.

GDP Growth. GDP is the broadest and most longstanding of the aggregate output and income statistics.3 Much of the hand-wringing in the news media has been over the GDP's apparently lackluster performance over the past two decades, particularly compared with that of the 1950s and 1960s. Figure I shows per capita real GDP, the inflation-adjusted measure of the economy's output per person going back in time more than 100 years. As the figure shows:

  • Per capita real GDP growth averaged 2.1 percent annually over the 1954-73 period, then slowed to 1.6 percent through 1989.4
  • Although the half-point lower growth rate after 1973 represents a significant slowdown, the rate of growth during the 1954-73 period was quite high by historical standards.
  • Over the 84 years from 1869 through 1953, per capita real GDP growth averaged 1.6 percent annually -- a rate virtually identical to that of the 1974-89 period.5

"Arguably, the country's period of abnormal growth was the 1950s and 1960s."

More recently, GDP has been recovering from the 1990-91 recession. After stalling during 1989 and 1990 and subsequently turning down, per capita real GDP hit a trough in the fourth quarter of 1991.6 Since then, it has grown at an average annual rate of 2.5 percent (nearly 3 percent in 1994), well above the 1.6 percent growth needed to eventually restore the long-term trend.

In this light, America's recent economic progress does not appear to be below par. Arguably, the country's period of abnormal growth was the 1950s and 1960s, during which U. S. consumers sought to catch up from the scarcity of the Great Depression and World War II.7

Figure II - Four Measures of Americans' Well-Being%2C 1973-93

"Four measures of economic progress that a lay audience would expect to be interchangable appear to diverge sharply."

Consumption. Presumably consumption, not production, is the end goal of economic activity, and it is from households' consumption experience that their impressions of living standards are formed. The data in Figure I show that consumer spending rose even faster (2.4 percent) than GDP during the 1950s and 1960s, as the vast military expenditures of World War II (and later the Korean War) were steadily reduced. With labor and industry freed from government control, factories turned to producing cars rather than tanks, and the share of output going to private consumer goods rose from 56 percent in 1953 to more than 63 percent by 1973. And that's not all. Researchers have found that about 23 percent of government nondefense spending is on goods and services that households value and consume. When this portion of government spending is added in, the effective total share of production going to consumers rose from 58 percent in 1953 to 68 percent by 1973.8

In effect, paring military expenditures from 13.2 percent of GDP in 1953 to 5.7 percent by 1973 boosted consumption growth by nearly 0.4 percentage points annually over those two decades. Clearly, this boost was transitory, but it nonetheless helped feed the consumer euphoria of the era. No such boost occurred subsequently, even when the Soviet Union dissolved. The end of the Cold War has resulted in paring military expenditures to 4.7 percent of GDP, but that represents a relatively small gain for consumers.9 Thus again the statistics highlight the uniqueness of the 1954-73 experience.

Other Measures of Well-Being. With these historical perspectives on GDP and consumption, America's more recent economic performance may look better. Still, skeptics cite other statistics that paint a bleak picture of the nation's recent economic progress. Figure II shows four measures of Americans' monetary well-being frequently cited by economic reports: per capita personal income, median family income, median household income and average hourly wages.10 One can preach four distinctly different sermons on Americans' recent economic progress, depending on the statistic wielded. For example, from 1974 through 1993:

  • Per capita real personal income increased an average of 1.4 percent a year.
  • Median family income increased an average of only one-tenth of a percentage point annually.
  • Median household income fell about a tenth of a percentage point per year.
  • Average wages fell by one-half a percentage point annually.

Thus four economic series that a lay audience would expect to be interchangeable appear to diverge sharply. Let's take a closer look.

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