US Household Income Growth

by Income Bracket

How is the distribution of US household income growth different from other developed countries?

See the chart below for the answer.

What does this mean? 

Here's how I believe the above chart was produced. They measured household income in 1976 for every household in the US and summed up the figures. They then measured the same quantity in 2007 and adjusted it for inflation. Next, they calculated the difference between these two quantities and called it "income growth" across all households. Finally, they asked, how much of this income growth belongs to households in the bottom 90% of income, to households in the next 9%, and finally to those in the top 1%? The answer is what got plotted in the chart. 

The chart shows that in the US, about 20% of income growth in 1976-2007 belongs to households in the bottom 90% of income. (To understand what this means, the number 20% should be replaced with "small" while the number 90% should be replaced with "large".) At the other extreme, in Denmark, about 90% of income growth belongs to households in the bottom 90% bracket.

The flip side would be to compare income growth belonging to the top 1% bracket and the next 9% bracket ... The chart speaks for itself. The top 1% of households by income captured more than 40% of income growth while the next 9% captured almost 40% of income growth.

To put it in words, income growth in the US has predominantly gone to the top 10% of households. It has been narrowly distributed; actually, more narrowly distributed than in any of the other countries in the above chart. The country where income growth has benefited the largest percentage of households is Denmark.

In a nutshell, the chart presents countries in sorted order where the ordering starts with the country where income growth has benefited the largest percentage of households (Denmark) and ends with the country where income growth has benefited the smallest percentage of households (US).

What is the next chart about?

The chart below shows real median household income in the US by year. We can see that real median household income in 2013 was about $52,000 versus about $47,000 in 1985. This is an increase of 10.6% over 28 years and represents a small increase. 

The reason it represents a small increase is because when this 10.6% is annualized, it corresponds to a 0.36% compounded annual growth rate. This is a real growth rate, i.e. it has been adjusted for inflation. What it says is that the median household income has essentially been flat over the 28 years ending in 2013.

"Median" household income is that level of income such that half of households have a lower income than the median while the other half have a higher income. It represents a convenient (and meaningful) way to talk about a single, representative household in any society where household income happens to be distributed across a wide spectrum.

The above charts were excerpted from an article that appeared on ft.com on July 24, 2015 and was entitled "US income inequality rises up political agenda".

---------------

Sanity check: 

I wonder why the first chart leaves out Germany and Italy which are major European countries. Also missing is Japan even though it represents one of the top economies of the world. 

Second, it would have been interesting if that chart has also included some of the countries from emerging markets such as China, India, Russia, and Brazil. I will venture to guess that there, income growth is even more narrowly distributed than the US ... 

Third, notice that the bottom 5 countries on the first chart are all English speaking countries.

The second chart actually shows that US real median household income has been falling since 1999 (except for a brief rise in 2005-2007)! The more nuanced way to interpret the second chart would be to notice that median household income has grown in waves: The first wave was from 1985-1995 during which US real median household income grew. The second wave was from 1995-2005 during which it grew again and this time much more than the previous time. The third wave was from 2005 onward during which it has not grown but fallen!

Author is also on Twitter.

What Nelson Mandela said to the Prison Officer

The following was recounted by African National Congress (ANC) stalwart Mac Maharaj who spent 12 years in prison plotting with Nelson Mandela; as excerpted from an article published by the Financial Times on July 25, p. 17 of the Life & Arts section.

---------------

Mac recalls Mandela raising prisoners' complaints with General Steyn, the visiting head of correctional services, "an extremely polite man ... in a black suit with a hat, spotless white shirt ... General Steyn turns around and says, 'Mr. Mandela, you are not in a five-star hotel, you are in prison.' And I'm listening and saying, 'Oh boy, that man is in trouble.' Mandela says, 'General, you and I are at war. In a war nobody can predict who is going to win, but one thing we know, that at the end of the day we will have to meet, even if it is for you to accept my surrender. How that happens will be determined by how we treat each other.' Steyn changed overnight."

---------------

Mac Maharaj is now 80 and one of the last survivors of the "golden" generation of Robben Islanders (the prison). Before his 12 years on Robben Island he suffered appalling torture at the hands of the police, including being suspended by one ankle out of a seventh-floor window.

He holds a unique record as confidant of three of the last four ANC party leaders (including Nelson Mandela). He first embraced liberation politics in the 1950s.

Author is also on Twitter

That Little Piece of Glass

If someone time traveled from 1990 (let alone from 1900) to 2015 and was asked to describe the difference between then and now, they might report back:

"Well, people don't use light bulbs any more; they use these things called LED lights, which I guess saves energy, but the light they cast is cold. What else? Teenagers seem to no longer have acne or cavities, cars are much quieter, but the weirdest thing is that everyone everywhere is looking at little pieces of glass they're holding in their hands, and people everywhere have tiny earphones in their ears. And if you do find someone without a piece of glass or earphones, their faces have this pained expression as if to say, 'Where is my little piece of glass?' What could possibly be in or on that piece of glass that could so completely dominate a species in one generation?"

Excerpted from an article appearing in the Financial Times on June 20, 2015, p. 20, Life & Arts section. The article was entitled 'The Prozac Principle' and written by Douglas Coupland, artist in residence at the Google Cultural Institute in Paris. Twitter @dougcoupland

Author is also on Twitter

US Fed Interest Rate Policy Update

Three months ago, I had written about the US Fed's interest rate policy. (See articles dated March 22, March 27, and April 23.)

Here's an update.

Janet Yellen spoke last week at her quarterly press conference. She advised listeners not to spend time wondering whether the first rate hike will come in "September or December or March".  Instead she advised her audience to concentrate on the pace of the rise in rates and said that the pace would be "gradual".

Her words hint at the possibility that the first rate hike may not occur this year. Prior expectations were for this to occur in September. Prior to that, expectations were for this to occur in June (this very month).

The Fed Funds futures market -- used for hedging purposes -- is implying with virtual certainty that there won't be a rate rise in September. In contrast, at the beginning of this year the futures market was signaling with virtual certainty that there would be a rate rise by then.

The futures market is now signaling a 50-50 chance of a rate rise by the end of the year.

Expectations about the timing of first rate rise continue to get postponed.


Excerpted from a Financial Times article printed on 20 June/21 June, p. 16.


Afterthought:  Bond expert Jeff Gundlach, who is CEO and chief investment officer of Doubleline, doesn't think that the Fed will raise interest rates this year. He shared his mind on June 3. See article here.

Author is also on Twitter

Concept of Time

"Italians' concept of time is radically different from most people I know in New York, and I'm realizing that I don't have to accomplish 29 things every day, and read the entire New Yorker while drinking my coffee from a paper cup and texting on a treadmill."

Jhumpa Lahiri, 47

Pulitzer-Prize-winning writer

Human Connection

"Here [in Rome at the local food markets], you know the person who bakes your birthday cakes, who makes your salami and cheese every day, and the people who sell everything you put in your body. And they know everything you put into your body because there's this deep, human connection that you create day after day."

Jhumpa Lahiri

Excerpted from Financial Times, 23 May/24 May 2015, page 16 of House & Home FT Weekend.

Author is also on Twitter

Excerpts from Bill Gross' 

Investment Outlook of May 4, 2015

A Sense of An Ending

Here's the link to Bill Gross' investment outlook report of May 4. (Note added on Dec. 5, 2015: They moved the article. Here's another link.)

The following comments stood out for me.

1) "[S]uccessful, neither perma-bearish nor perma-bullish managers have spoken to a “sense of an ending” as well. Stanley Druckenmiller, George Soros, Ray Dalio, Jeremy Grantham, among others warn investors that our 35 year investment supercycle may be exhausted."

2) "Since capital gains have dominated historical returns, investment managers tend to focus on areas where capital gains seem most probable. They fail to consider that mildly levered income as opposed to capital gains will likely be the favored risk / reward alternative."

Author is also on Twitter

20-year Interest Rate Forecasts

On September 24, 2014, I wrote about Joseph Stiglitz' review of Martin Wolf's latest book. 

In that article, the topic of interest rate forecasts came up. 

I had written that the Geneva Report was predicting that interest rates worldwide would have to stay low for a "very, very long" time to enable households, companies, and governments to service their debts."

An article published in the Financial Times on April 18, 2015 puts numbers to these predictions. The prediction is from Micheal Gavin at Barclays. Michael Gavin holds a PhD in economics from MIT, according to his LinkedIn profile.

Quoting from this article, "Mr Gavin estimates that all things being equal the natural real interest rate will rise by about 1 percentage point over the next five years, 2.25 percentage points over the next decade, and 3.5 percentage points over the next two decades."

Critics are likely to dismiss these forecasts as being unreliable. After all, who can say what the world is going to look like in 20 years? Nevertheless, I think that these forecasts ought to figure into one's thinking.

For reference, as of the time of this writing, the 10-year Treasury yield stands at 1.96%. The general expectation is for the Fed to raise interest rates sometime in the second half of 2015. This would be the first rate hike in nearly a decade. The Fed has held the Fed funds rate at close to zero since the Great Recession of 2008/2009.

Author is also on Twitter.