When will incomes return to their 2006 level?

By Felix Salmon
June 9, 2011

What happens if, instead of measuring GDP by adding up all the money spent in the country, you measure it by adding up all the money earned in the country? Theoretically, the two measures are identical, but in practice, there can be differences. Justin Wolfers has this chart:


The red line, here, is a more reliable measure of national income than the blue line, which is the official GDP number. And it gives a sobering indication of just how devastating the Great Recession was: a drop of more than 7% in real GDP per capita between the end of 2006 and the end of 2009, with most of that decline taking place before the collapse of Lehman Brothers and the subsequent financial crisis.

Writes Wolfers:

It’s going to take a long while to return to where we were back in 2006. Most forecasters are expecting GDP to grow by around 3 percent, implying per-capita growth closer to two percent. At those rates, average incomes in 2013 will (finally!) be back around the levels of 2006.

I’d note that “average”, here, refers to the mean, not the median. The effect of Ben Bernanke’s monetary policy has been to funnel large amounts of income to bankers and plutocrats, even as the employment situation remains woeful, so you can be sure that median incomes are going to take significantly longer to return to their 2006 level than mean incomes. They’ll get there eventually, I’m sure. But it could take a decade.


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What is it with these silly measures economists use? The only three that are even remotely relevant to the question what the country’s standard of living is like are median income, modal income, and gini. The rest is just used for obfuscation. And the exact same thing applies to GDP and stock market index values as (proxy) measures of economic health.

Posted by Foppe | Report as abusive

Changes in the Gini are not necessary for improved economic conditions.

If nobody talked about ‘income inequality statistics’, would anyone pay attention to income inequality?

Posted by davew | Report as abusive

I haven’t read the Brookings work and am not completely familiar with US GDP data, but I don’t think the BEA produces real GDP on an income basis. If this is true, then someone had to produce it, meaning they had to figure out what deflators to use to how to deflate the nominal values of income. That seems like a difficult task for some of the component of income-based GDP. Does anyone know how this was done?

Posted by jussibjorling | Report as abusive

If I remember back to econ 101, the income method is supposed to be less accurate than the expenditure method, in large part because it misses a lot of unreported income and non-market activity. So it’s not really surprising that the measure would be lower overall.

Posted by loudnotes | Report as abusive

If you go to BEA.gov they have all of the gdp, income and corporate profits numbers. The Brookings paper is explaining why earlier estimates of GDP calculated from income data ended up being a better predictor of actual GDP than the early estimates of GDP based on expenditures. So basically it’s better at producing a more accurate delta in the short term, less accurate in overall sizing with more time and data to get expenditure data. And one of the main data points they have is that trend growth of GDP (i) was more accurate in the late 1990s when early GDP (e) numbers were underestimating growth. Still just because this trend was true in the past doesn’t mean it will continue to be true in the future, in this case hopefully the GDP (i) numbers have been underestimating growth and overestimated the decline.

Posted by tuckerm | Report as abusive