6 Comments

  1. David E. Coffman CPA/ABV, CVA December 17, 2007 @ 2:28 pm

    Percentages can be deceiving because as the base grows the same increase in income (dollars) will appear as a smaller percentage increase. A better measure would be the increase measured in constant dollars.

  2. Franklin December 17, 2007 @ 2:51 pm

    Thanks David,
    But then again we have the problem of the 1996-2006 plateau and the apparent beginning uptrend. Would it mean the base is not growing?

  3. The Politics of Debt » Is Gold the Next Bubble? January 10, 2008 @ 5:28 am

    [...] problem in the near future? Hyperinflation. Which should top around 2020. [...]

  4. The Politics of Debt » A Streetcar Named Wishful Economic Thinking April 15, 2008 @ 11:29 pm

    [...] shrank at the pace of our increased debt. This goes beyond the simple fact that we have less Disposable Personal Income to keep us employed (by means of increasing consume expenses) but the reality is that we are fast [...]

  5. The Politics of Debt » American Workers’ Dwindling Participation in America’s Riches May 2, 2008 @ 7:58 pm

    [...] As salaries went down, so did the America’s Disposable Personal Income. [...]

  6. Raju March 30, 2010 @ 2:15 am

    A nice post. You did it handsomely. I appreciate you.

Disposable Personal Income Shows Disturbing Historical Trend

Economics Comments (6)

How do you measure personal wealth? As a standardized way to measure the wealth of individuals as part of a nation, it is the average disposable personal income. Disposable personal income, is the total after-tax income received by persons, or the income available to persons for spending or saving. By using this, it is easy to say if the population of a country is richer or poorer overall. Disposable personal income, however, does not measure how that wealth is distributed (if I ate two loaves of bread and you ate none, it will still show that we each ate one loaf), but that is not the subject of this post.

The US has been in a worrisome trend for the past 30 years. Although disposable personal income has been growing (we are “richer” than our parents), the percentage at which disposable personal income grows year by year is smaller and smaller. To provide an example, it is like driving a bicycle uphill. You will still go higher, but the amount of energy needed to advance gets higher as you climb. This example should make it clear that, if we don’t change this trend, disposable personal income will stop growing and will start decreasing.

How steep is the hill that Americans are climbing up? Pretty steep indeed.

image

What this means to you, personally, is that, for instance, if your father was a factory worker in the 70s, and was able to put 3 or 4 kids through college, being the sole “earner” in the family, you may not be able to do the same even though you have a blue collar job.

Another way of understanding this trend is comparing it to the growth rate in humans. As you grow older, the growth rate decreases, then stales, and finally you enter a deterioration phase.

The data from 1930 to 2006 will help you see more clearly.

image

I do not believe there is any particular reason for the acceleration rate of disposable income growth to follow the same pattern as the human body. In other words, it is perfectly possible that we are able to change this trend.

The reasons of why this is going on are beyond the scope of this post, but the long term trend coincides with several societal trends. Whether it is because of the transformation from an industrial society to a financial/services society, or the increase in health care expenses after the health reform in the mid 1970s, or the retirement reform in the late 1970s, the truth is that between 1973 and 1982 the trend of the speed of wealth accumulation peaked.

By looking at the 10-year moving average, it could be argued that we may be at the bottom of a cycle, and that the acceleration of accumulation of wealth may be starting a new cycle.

image

Finally, another possible explanation is that the percent change from preceding period is only related to inflationary overheating of the economy, and it is not related to any social trends. If that is the case, the trend shows a neat 40-year inflationary cycle, which should peak somewhere around 2020. I personally never found a good explanation for inflationary cycles, so I do not have an opinion on the matter but these guys, interestingly enough, think the next peak may be in 2018.

Some times you don’t have an answer, but you can come up with a good question.

Data from:

National Income and Product Accounts Table

Table 2.1. Personal Income and Its Disposition
[Billions of dollars]

Last Revised on November 29, 2007 Next Release Date December 20, 2007

See for yourself at http://www.bea.gov/national/nipaweb/TableView.asp#

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Franklin @ December 13, 2007

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