What Do the Numbers Tell You? It Depends on Your Politics

The numbers I have in mind are economic performance numbers for the US economy.  One of the cognitive biases supported by behavioral economics is the confirmation bias.  Human brains are wired to seek validation of preconceived notions in observed reality.  Economic numbers represent an observed (through measurement) reality.  Thus, we are more likely to interpret economic numbers as supporting the economic policies of our favored political affiliation, while the reverse is true if we support an opposite party.

Last week, the government published various economic results for 2017. One set of news is below:

• Median household income rose by 1.8% to $61,372 in 2017. This is the third consecutive year of positive growth.
• More people were employed full-time in 2017 than the previous year and people overall worked more hours.
• The poverty rate as percent of the population, declined from 12.7% to 12.3%. The poverty rates for blacks and Hispanics, though still higher than that of whites, dropped to their lowest levels since 1972 (to 21.2% and 18.3%, respectively).  Poverty rates also have declined over the last three years.

Another set of numbers is as follows:

• The 1.8% growth of median household income in 2017 was lower than the growth rates of 5.2% and 3.2% realized in 2015 and 2016.
• The median household income of $61,372 in 2017 was statistically indistinguishable from that of 1999 and 2007 (the latter being the year before the financial crisis erupted in 2008).
• Average annual earnings declined in 2017. Therefore, household incomes have increased because more household members work or the same members work more hours and possibly more jobs.
• Between 2007 and 2017 the GDP increased by 16% (after inflation) but the median household income has not changed. This means the bulk of the economy’s growth has benefited the upper-income people.
• Income inequality persists. Household income at the 90^th percentile rose by 7.5% from 2007 to 2017 while that at the 10^th percentile declined by 4.5%.  (Loosely speaking, a household at the 90^th percentile is part of the top 10% of all households in income terms and a household at the 10^th percentile is part of the bottom 10%.)
• While the median income of black Americans in 2017 is still below that of 2007 by 2.9%, that of white Americans is greater by 1.5%. Hispanics have enjoyed the greatest growth, 6.7%.

So, how would we interpret these results?  Confirmation bias suggests that Republicans and conservative economists will concentrate on the top set of numbers and Democrats and liberal economists on the bottom set.

Predictably, the editorial page in The Wall Street Journal focused on the good numbers of the top set.  The New York Times did not editorialize on the economic numbers but its reporting over several days brought attention to the stagnate earnings of American workers and the persistence of economic inequality.

The WSJ editorial further claimed that the promise of tax cuts and deregulation announced by President Trump in 2017 “unshackled animal spirits while tax reform has boosted capital investment,…”  The problem is that deregulation proceeded incrementally through 2017 and the tax cuts did not become law before the end of 2017.  It is not certain whether it was the initial steps toward deregulation and the prospect of tax cuts or it was the momentum from previous years that powered the economy forward in 2017.  If the driving force were the promises of the Trump administration, how do we explain the decline in the growth of median household income?  Why didn’t the business animal spirits and new investment boost worker’s earnings?  It seems to me there is a selective attribution with regard to the consequences of the current economic policies.

There is also the claim that Obama’s economic policies generated a rather weak growth compared to the higher GDP growth rates observed in 2017 and thus far in 2018. Writing in the NYT, Paul Krugman reminds us, though, that the Republican majority first in one and later in both chambers of Congress in the years after the 2010 mid-term elections refused to support more generous spending (as for example on infrastructure projects) for fear of aggravating the federal deficit.  I checked and found that the budget deficits started to decline after 2012 and, as a result, the government’s stimulus weakened significantly over Obama’s second term.  The budget deficit dropped from over $1 trillion in 2012 to $0.585 trillion in 2016.  Republican preoccupation with federal deficits was, of course, a non-issue in approving tax cuts and increases in the federal budget deficit at the end of 2017.  Therefore, comparing growth rates under the Obama and Trump administrations, each operating with asymmetrical constraints on fiscal policy, is disingenuous.

Furthermore, the faster economic growth powered by public debt is not free of costs and future risks.  As reported by the WSJ, the federal deficit grew by 33% to $898 billion in 2018 over a similar period in 2017.  And, so far, spending is up by 7% while revenue (after some adjustments) is down by 4% (with lower corporate tax revenue being a significant drain).  Eventually the current and future generations will have to pay the debt one way or another.  As they say: “there is no such a thing as a free lunch.”