Personal income information released this week by the Bureau of Economic Analysis shows total personal income increasing 0.4 percent, or $54 billion, from April to May 2010. Year over year, personal income is up 1.6 percent, or $191 billion. In spite of recent growth, total personal income is still down $24.4 billion, or 0.2 percent, from the peak reached during May of 2008.
In short, personal income has gone nowhere over the last two years as it plummeted $479 billion, or 3.9 percent, from May 2008′s peak to March 2009′s nadir. It has generally increased each month since.
Now that personal income has nearly recovered to where it was during the peak time, it is important to look at where the income has come from.
Job creation has been extremely weak since 2008. More than 7 million jobs have been lost, and as new high school and college grads have entered the work force, there simply haven’t been enough jobs to provide for growth in the work force. Hence, unemployment hovers near 10 percent, and job creation in the private sector is essentially zero.
So, how is it that income growth has recovered? The answer lies in what is included in the income numbers. Total personal income statistics include wages earned, whether from public-sector or private-sector jobs, and will also include wages from government-funded stimulus jobs such as highway construction and other similar projects.
But more important for our analysis here is the fact that personal income totals also include “personal current transfer receipts” which include “benefits received by persons for which no current services are performed.” Such benefits show up as personal income in the form of Medicare, food stamps, unemployment compensation, public assistance and a variety of other forms of income.
While personal income peaked in 2008, then crashed and slowly recovered, income in the form of transfer receipts have only increased. At the same time that personal income fell 0.2 percent from May 2008 to May 2010, personal current transfer receipts increased 12.2 percent. During those two years, as personal income saw a net decrease of 24.4 billion, transfer receipts increased 244.3 billion.
Indeed, a look at the last ten years shows that transfer receipts increased far more, both in absolute terms and in percentage increases, during the last two years than during any previous economic downturn dating back at least to 1959. (Although, there are almost certainly would have been very large increases in transfer receipts had they been measured during the New Deal.)
Today, the Dow rallied on news that personal income had grown faster than spending and that households were beginning to save more. This would be excellent news if this income had been produced by increases in wealth and income in the private sector, but unfortunately, increased personal income, while not totally due to public sector spending, has been largely buoyed by public sector spending, and has been a very significant portion of the growth in income that is now being trumpeted as proof that the recovery is taking hold.
However, as long as income growth is largely dependent on public-sector spending, growth is just a matter of income being redistributed from net tax payers to tax receivers, which is largely why personal income continues to improve in spite of only very small gains in private-sector employment. Ultimately, however, economic “growth” that is driven by mere transfer payments, cannot be growth founded any any true creation of wealth.
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Funded by taxpayers? More like, funded by holders of usd (china?)
“will also include wages from government-funded stimulus jobs such as highway construction and other similar projects.”
I just witnessed in the last couple of days a few of the “stimulus” bridge-building projects and I have to agree that these are not going to create any wealth. In each case the new bridge looked impressive, and of course would be welcomed as a much bigger and spiffier version of the old bridge, but I simply could not understand why these particular bridges were being built in these places. A couple of the bridges were being built in quiet, backwater areas where there will never be sufficient traffic to justify these huge suspension bridges. Another bridge was being built across a deep valley already crossed by a major interstate highway, but a new bridge is the last thing that this particular highway needs. The highway is a very old turnpike design which is crying out for improved medians, wider shoulders and smoother grades and curves. Not to mention that it could use a complete resurfacing for its entire length.
But obviously spiffy new bridges look a lot sexier to politicians. Who would want to be photographed cutting the ribbon on a highway project that only widened the shoulders and straightened out a lot of sharp curves and tedious grades? These are not exactly bridges to nowhere, but overly-elaborate bridges that would never have been started if the state and local governments had to fund them out of their own pockets, or rather out of their own citizens’ gas and income taxes.
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