David R. Henderson  

Krugman's Strange Conclusion

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UPDATE: I was wrong. Alex Tabarrok has provided the data from FRED. I should have done so. Median family income was $56,447 in 1984, down slightly from $56,585 in 1980. Given how wrong I was, I would rather not have written this post. But to delete now would be strange, given that people have already commented.

His graph is inconsistent with his words.

Paul Krugman makes a good point about the timing of recessions. Jimmy Carter had the misfortune of having a recession during the last year of his 4-year term. Ronald Reagan had a deeper recession early in his 4-year term. The decline of family income during Carter's last year arguably cost him reelection. The increase in family income in the last two years of Reagan's first term arguably won him reelection.

So the point is a good one and he shows a graph of median family income from 1976 to 1985 to make his point.

But then he goes too far, writing:

Make sure that the bad stuff happens early in your rule; then you can claim credit when things get better, even if you leave the nation in a worse condition than it was when you arrived.

He seems to be saying that that connects with his graph. But it doesn't. His graph shows that median family income under Reagan was higher than when Reagan took office.


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CATEGORIES: Macroeconomics




COMMENTS (12 to date)
E. Harding writes:

Bush had the misfortune of the Fed allowing two recessions under his two terms; fortunately for him (as with Reagan) recovery was taking place during re-election season.

JLV writes:

This depends on what we mean by "leave" and "arrive". If we take this to mean "The country was in a worse state when Reagan was running for a second term than when he was running for his first", Krugman is right: median income is higher in 1980 than in 1984. If we take it as "The country was worse at the end of Reagan's first term then Krugman is wrong, as median income is higher in 1985 than in 1981. Since his post is about elections, the first reading seems plausible to me.

Pierre Lemieux writes:

I don't know what you wrote first nor what Alex wrote. But the Census data on family income are notoriously unreliable: they conflict with the BEA's national accounts data, which have many cross-checks. See https://www.bea.gov/papers/pdf/arnold_katz_fcsm_paper.pdf.

Vivian Darkbloom writes:

"Alex Tabarrok has provided the data from FRED. I should have done so. Median family income was $56,447 in 1984, down slightly from $56,585 in 1980."

It should be emphasized that the historical median family income data represents real, not nominal income. The gyrations of real family income during this period had a lot to do with the very high rates of inflation which were significantly reduced during and after Reagan's first term. Perhaps the lesson here is that a President should be lucky enough to align his presidential term with the effects of successful monetary policy over which he has little control. And, because the data is based on real incomes rather than nominal incomes, the discussion suggests that the median voter does not suffer from "money illusion".

Also, the data reflects gross income and not net after-tax income. The data would look different during Reagan's first term if median family real *net* income were the measure rather than median family real gross income due to the effects of the 1981 ETRA. The median voter likely suffers from money illusion and they certainly do seem to believe that with respect to the bottom lines of their pay stubs more is always better.

James Hartwick writes:

It is possible for the median family income to go down but for most people to be better off. Imagine five households with the following incomes in 1980:
A: 50,000
B: 49,000
C: 48,000
D: 46,000
E: 45,000
Median: 48,000

And imagine they had the following incomes in 1984:
A: 51,000
B: 50,000
C: 47,000
D: 47,000
E: 46,000
Median: 47,000

The median income went down. But, if asked "Are you better off than you were four years ago?" most people could honestly and accurately answer "Yes!"

guthrie writes:

David I applaud your integrity. The fact that you will not only post your admission of being incorrect, but do so at the top of the post, is remarkable and refreshing. This is the kind of thing that keeps me coming back.

(I'm mildly discouraged that such integrity seems so remarkable. One would hope posts like this will have an ultimate effect on the blogosphere culture)

Zack writes:

Isn't Household Income generally considered the more relevant statistic? By this measure, it was slightly higher in '84 than '80- $47,866 vs. $47,668.

Zack writes:

Also, regarding unemployment:

When Carter took office it was 7.5%, and falling.
When he left office it was 7.5%, and rising.

When Reagan left office it was 5.4%, and falling.

Krugman seems to be dodging a bit by noting that the average rate was lower under Carter. By this measure, the average unemployment rate under George W. Bush was actually relatively low- much lower than the average rate under Obama. In the future, will Krugman also use this metric when comparing those two administrations?

Finally, according to the Census Bureau numbers, real median household income increased by just over 8% in Reagan's entire eight year term. In Carter's four years in office it increased by just under 1%.

James Hartwick writes:

@Zack

Why is household income (47,866 in 1984) so different from family income (56,447 in 1984)? That says household income is only 85% of family income. I looked up the definitions, and tried to think of a few things that would pull household income below family income...

A young single person living alone, say with the first post-college job. Are they both a household and a family? If so, that shouldn't cause a difference in the two medians.

Two young singles living as roommates, first jobs after college: they're one household but two families? In that case, they would tend to pull median family income below median household income -- i.e. the opposite of what we see.

Empty nesters: They're often on low fixed incomes. Do they count as both a household and a family (if they're both still alive)?

If a widow or widower is living alone, does he or she count as a household but not a family? That would help pull median household income below median family income.

Also, regarding your other post, regarding unemployment:

If unemployment is falling, we're saying that most people see the future prospects as brighter than if unemployment is rising. So they can honestly say that they're better off in 1984 than in 1980 even if their family has less income because they (just like any stock buyer) are rationally considering future expected earnings discounted at an appropriate rate.

Michael writes:

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Zack writes:

James,

I think the main difference is that a single adult living alone is considered a household, but not a family. As far as I can tell, economists typically cite household income rather than family income when they make historical comparisons, presumably because of the increase in non-family households in recent decades.

The Census Bureau numbers also probably tend to understate income growth over time. They don't include capital gains, they use pre-tax rather than post-tax income, and they don't include non-cash fringe benefits.

Also, good point about unemployment.

James Hartwick writes:

@ Zack

Thanks for the explanations.

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