Jason Furman has been tweeting about how real disposable personal income has been falling behind its trend growth. After the August data came out last week, Jason tweeted that per capita real disposable income was 8.0 percent below its pre-pandemic trend growth pace. Since Jason is generally very careful in his work, and this would be a big falloff, I thought it was worth a closer look.
The first question to ask, is what growth should we have expected? Jason is projecting a pre-pandemic trend. It is generally reasonable to expect the future to be like the past, except when we know there will be some important differences.
In this case, we did know of an important difference even before the pandemic: the retirement of the baby boom generation. The bulk of the baby boomers is now in their sixties and seventies. We are in the peak years of baby boomer retirement, which means the labor force would be expected to grow more slowly than it had in the recent past.
If we want to know where we should have expected to be in terms of disposable income, we need projections that take baby boomer retirements into account. A useful place to start is the Congressional Budget Office (CBO) projections from January of 2020, which were made before anyone knew of the impact of the pandemic.
Table 1 below derives growth in real per capita personal income from the CBO projections. (I used population projections from the 2019 Social Security Trustees Report.) The CBO data is given quarterly rather than monthly, so I used the projections from the first quarter of 2020 (which would correspond closely to levels for February of 2020) and the third quarter of 2022 (which would correspond closely to August of 2022).
The first row shows projected personal income for the first quarter of 2020 and the third quarter of 2022. As can be seen, CBO projected cumulative growth over this period of 10.4 percent. CBO doesn’t directly give real income growth, but it does have projections for the CPI. They projected that cumulative inflation over this period, as measured by the CPI, would be 6.4 percent. This implied real income personal income growth of 3.8 percent.
CBO does not directly project disposable personal income, but the difference between personal income and disposable income is taxes. If the tax rate does not change, then disposable personal income would increase at the same rate as personal income. I’ll come to the issue of taxes shortly.
The next issue is population growth. The Social Security Trustees Report projected a 1.9 percent population growth over this period. (I assumed the population for the period from the start of 2020 to the middle of 2022 was half the growth projected for the five years from 2020 to 2025.) This leaves us with a projection of real per capita personal income growth of 1.9 percent over this period.
Table 2 shows the actual and predicted values of real per capita personal income and real per capita disposable income for February 2020 and August 2022. As can be seen, the actual value for real per capita personal income was almost exactly what we would have expected based on the CBO projections from January 2020. It is just 0.03 percent lower than the projected value.
However, the value for disposable income is 3.3 percent less than what would have been expected based on the CBO numbers. It turns out there is a simple explanation for this difference. People were paying a much larger share of their income in taxes in August of 2022 than in February of 2020.
Since there have been no major increases in personal taxes in the last two and a half years, the most obvious explanation for this increase in taxes is that people are paying capital gains taxes on stocks they sold at a profit. The capital gains themselves do not count as personal income, however, the taxes they pay on these gains are subtracted from disposable income. Insofar as we are seeing disposable income fall behind its projected growth path, it seems an increase in capital gain tax payments is the main factor.
In short, it looks as though income growth has held up surprisingly well through the pandemic, as well as the disruptions created by the war in Ukraine. The economy clearly faces serious problems, but these have not as yet had a major impact on the growth of disposable income.
This first appeared on Dean Baker’s Beat the Press blog.