Economics as Classical Mechanics: Americans are getting richer and richer

8/12/13

Americans are getting richer and richer

Americans are getting richer and richer. The share of Gross Personal Income (GPI) in the U.S. GDP has been increasing since 1960 (or 1940) as Figure 1 shows. People get a larger portion of the GDP as personal income and pay more taxes on it. But the overall tax rate on production and imports (as defined by GDP or Gross Domestic Income) has not been changing over last seventy years as Figure 2 demonstrates. We may consider the rise in GPI share as a mere taxation play with a zero gain. Formally, the GPI takes some more income from GDP but pays for it as if this money is still the same portion of GDP.

Table 1 shows major ingredients of the GPI as defined by the Bureau of Economic Analysis. Some items are decoded into smaller components. Let’s take a look at some components and find out which part has been the driver of the observed income growth (see Figure 3). We normalize all components to the measured GDP in order to illustrate significant changes in proportions over time. “Wage and salaries” have been on a negative trend since 1970: dropped by ~8%. At the same time, the increase in “Government social benefits to persons” more than compensated the fall in wages and salaries. This is redistribution in action. Figure 1 shows also the ratio of money income estimated by the Census Bureau where “salaries and wages” as well as “government social benefits to persons” are two major parts. The change in their proportion does not affect the portion of money income in GDP since 1960s. This is an important message – the portion of money income in GDP has not been suffering any decline since the 1960s. The estimates of GPI and CPS are very similar in this regard. What are the drivers then?

Two principal gainers are “Personal income receipts on assets” and “Personal current transfer receipts” which added since 1945 10% and 15% of GDP, respectively. Together, they added 25% of GDP to the GPI since 1945. What do these names mean?

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Excerpt from BEA documents.

Personal income receipts on assets. Personal interest income plus personal dividend income

Personal current transfer receipts. Consists of income payments to persons for which no current services are performed and net insurance settlements. It is the sum of government social benefits and net current transfer receipts from business.

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There are two losers as well: “Proprietors' income with inventory valuation and capital consumption adjustments” and “Rental income of persons with capital consumption adjustment” which lost altogether 10% of GDP since 1945.

Overall, the GPI gain was 10% of GDP from the 1940s. This GPI gain was almost fully accumulated by the richest 1% of population by mechanisms external to income definition given by the Census Bureau.

If the current positive trend in GPI/GDP ratio is extended into the 2020s, the top 1% will receive all the benefits through “Personal interest income plus personal dividend income”.

Table 1. Components of Gross Personal Income