Hold off on the victory dance.
The 2014 “Economic Report of the President” and many media reports indicate that the U.S. economy has finally recovered. But has it?
One measure of economic health is household income.
Historically, America has prospered, as each generation typically has earned more inflation-adjusted income than the generation that preceded it. The American Dream is not just to succeed yourself, but to provide your children with a better life.
A better life means more than money, of course, but money enables the next generation to do more, live more comfortably and worry less about making the mortgage payments. Materialistic though it may be, it’s part of the American Dream.
So it’s alarming to see the drop in income that has taken place since 2007, when the financial crisis began. Median household income has dropped from $56,000 to $51,017, which is a dip of nearly 10%.
We’ve had dips before, as the chart below shows, particularly during the “stagflation” years of the late ’70s and early ’80s. But this has been the most dramatic drop in income in recent history.
When household income shrinks, some in the middle class risk sinking down to the lower class and those on the cusp of becoming middle class no longer are able to achieve that status. As the lower class grows, government expenditures grow, resulting in higher taxes and even further erosion of discretionary income for those in the middle class.