American Incomes Shrunk in Two Consecutive Years

A very distressing set of statistics turned up on the IRS website this week that shows the income of American in 2001 and 2002 declined year-on-year. That is the first time this has happened since the current tax code was set up after World War II. For the two years combined, and adjusted for inflation, Americans made 9.2% less in 2002 than in 2000. Tempting though it may be to apportion 100% of the blame to the Bush administration's economic management, the fault here is a bipartisan one. The economy of 2001, when Mr. Bush took over, was already sputtering.

Among the ultra-rich, the stock market decline was, not surprisingly, the most severe factor in their losses. After all, in a down market, those most heavily invested in the stock market suffer the most. Since the little guy doesn't have the money to play the game, he doesn't suffer the heavy loses any more than he enjoys an up-market's hefty gains. But those whose adjusted gross income exceeded $10 million fell to 5,280 from 11,215. The remaining 5,280 saw their incomes plunge an average of 22%, with the mean dropping from $26.8 million to $20.9 million.

But one needn't feel sorry for them. Their capital gains income fell by more than 29%. In other words, the value of their assets declined (stocks and other such wealth) by more than the lost income -- which means that income derived from actual work (or whatever they do for their W-2s) actually had to rise by 7% to keep the equation balanced.

For those making $25,000 to $200,000 (a cohort so broadly defined as to be almost useless), the IRS said that incomes were almost flat. The subcohort between $50,000 and $75,000 had an increase in their average change income per taxpayer rise 0.2% between 2000 and 2002; the next bunch up, those making $75,000 to $100,000 saw a rise of 0.1%. For those under $25,000, there was a 1.3% increase. This might look like good news for the poor, but that is only because the IRS figures are percentage based. At $20,000 a year, a 1.3% increase over two years is a whopping $2.50 per week, not enough for a Big Mac and fries.

The thing to consider is how very much worse this could have been. Had the Fed not slashed interest rates (expansionary monetary policy) and had not the federal government opted for deficits (reflationary fiscal policy if one prefers to sugar coat it) in 2001 and 2002, the recession would have been much worse. Of course, the tax cuts that went to the rich to make up for their stock market losses was not the most efficient way to reflate (giving money to the poor to spend on the fundamental of life is), but they were better than an increase.


© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.


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