President Obama's recent economic speech at Knox College, and the intense subsequent media interest, made me realize just how poorly many liberals understand simple concepts of economics. Five of them in particular are central to our current economic debates, and it's time to clear up what they mean once and for all.
1. Unemployment Rate. Whenever the official U.S. monthly unemployment rate ticks down, it becomes world news. I often receive my monthly BLS job report on Twitter: 7.4% for July. While the official rate had gone down slightly from June, and far from the 10% we saw a few years ago, this statistic is overrated and masks weaknesses in the labor market. The official government unemployment rate is an incomplete indicator of joblessness: It does not count those who have stopped looking for work, and it says nothing about net change in jobs as compared to expectation from economists — we came under expectation in July. About 4 million people gave up looking for work in July. Many jobs created were part-time, partly as result of businesses’ wariness regarding Obamacare compliance. In order to boost employment numbers and avoid political backlash, the White House recently suspended enforcement of the employer mandate in Obamacare for one year, a desperate attempt to spur job growth prior to the 2014 election, even if it means shooting themselves in the foot.
The U6 unemployment rate, which is the broadest reported indicator that accounts for underemployment and those who are only “marginally attached to the workforce,” still stands at 14%. This statistic remained flat for the last 12 months. While the official unemployment rate has gone down marginally, we still have 11.5 million people without work. That should be our top focus as a country and we should not pat ourselves on the back every month when the number fluctuates slightly in either direction.
2. Median Household Income. The president said in the same speech at Knox College, "The average American earns less than what he or she did in 1999.” I scratched my head and thought maybe the president was referring to census numbers that show a reduction in median household income. If so, his statement accounts solely for income and fails to assess wealth gained during the period. The census definition of income excludes taxes and non-cash benefits. This method would peg a rich, retired couple with much wealth in financial securities as poor, as their income will be dramatically less as result of retirement. Using a more extreme example, assume the U.S. government takes all of our income and redistributes it back to us through transfers. Our median household income would be zero, despite the fact that we’ll have government transfers to sustain household consumption. Therefore, the measure does not capture financial well-being and consumption very well. Average (mean or median) American households have actually gained in after-tax income, according to the CBO graph. According to economists Bruce Meyer and James Sullivan, median income and consumption both rose by more than 50% in real terms between 1980 and 2009.
3. Gender Pay Gap. The often-cited statistic that women only make $0.77 in wages compared to their male counterparts doing the same job fuels much of the hype on the left about equal pay legislation, yet even PolitiFact called out this misrepresentation last year. Diana Furchtgott-Roth, a senior fellow at the Manhattan Institute, testified against this myth in a Senate hearing in 2010. The statistic cited is the average between all male and female workers in the population. It does not compare women’s pay in any specific occupation to that of men, nor does reflect the reality that many women are single and work part-time. In fact, a single woman in 2009 received on average 95% of male pay. For those women working 1-34 hours a week, they make 104% of men’s pay. Similarly, for those women working 35-39 hours, the pay ratio is even greater at 109%. A woman’s choice to have children and flexibility in work-life schedule affects her pay scale. The 0.77 ratio hides many of these life choices and preferences. While discrepancy still exists, one cannot automatically assume that the persisting percentage gap is result of gender discrimination.
4. The Top 1%. Not since Occupy Wall Street — well come to think of it, not since the dawn of times — has the 1% ever been a popular group in society. The president mentioned the group in his Knox College speech: “Nearly all the income gains of the past 10 years have continued to flow to the top 1%,” and went on to tout his tax hike on this group. While the statement is largely true, the implication is misleading in the context of his speech. It almost sounds as if the top 1% had sucked dry all the income gains and perhaps even harmed the chances of other groups from advancing in America. The fact is that after-tax household income had gone up for all households (Congressional Budget Office). The top quintile minus the top 1% gained 65% in income between 1979 and 2007. The middle 60% (middle class) gained about 40% in income. While the top 1% has gained much more in income, the group also pays a significantly higher amount in taxes.
A piece from The Atlantic in April sums up tax burden in one chart. While the top 1% makes more than the bottom 40%, it pays more taxes than the bottom 60% combined. Using another source, the top 1% pays 30% of the country’s federal income tax. The bottom 20% essentially pays nothing (courtesy of Huffington Post reporting).
5. Federal Deficit. The president claims that since he’s taken office, his administration has cut the deficit in half. While that is technically true, it is an attempt to cover up Obama's own spending addiction, which led to a deficit of more than $1 trillion during his first term in office. Under this administration, deficit as percent of GDP averages about 8%. The president often likes to blame Washington or the Bush administration for his economic woes. But under President Bush, the federal deficit, while still large as result of two wars and the Bush tax cuts, averaged 2.26%, with a maximum of 4.8% in 2008.
So yes, I suppose the president has succeeded in cutting down his own self-induced deficit by half, partly as result of the sequester. Hooray! The administration itself projects the deficit to be $759 billion for the fiscal year. The reduction comes primarily from increased tax receipts. Social Security, Medicare, and Medicaid actually saw an increase in funding from July of last year. The choice is plain: We could continue to tax ourselves out of the deficit (and growth), or we could get serious about spending. Entitlements consume about two-thirds of the federal budget. Any serious sound fiscal plan would begin there.