DeLong on How Income Has Grown in all Quintiles
By David Henderson
In a post entitled “Material Well Being in America Since 1979,” Brad DeLong points out that average real income in all quintiles has grown since 1979. He quotes data from the Congressional Budget Office. Here’s his quote:
[American] real after-tax income for the lowest quintile [was] 49 percent higher in 2010 than in 1979 (see Figure 9). Income growth averaged 1.3% annually for that group over the period. After-tax income for the middle three quintiles in 2010 was 40 percent higher than in 1979–equivalent to an average annual growth rate of 1.1% for the period. Households in the 81st to 99th percentiles… [saw] after-tax income… 64 percent above its level in 1979…. In 2010, household income for the top 1% was 201 percent above the mark for 1979, representing an average annual growth rate of 3.6%, far ahead of any other income group…
But real income gains of 1.3% per year for those bottom-quintile slots in the American income distribution are not chopped liver, are they? The gap with the 1.6% per year real American GDP per capita growth rate is small, isn’t it?
But Brad digs beneath the gross data to look at the components of income growth for the bottom quintile. He writes:
But when you look at the 1.3% per year growth rate of after-tax real income that the CBO calculates for the bottom quintile, 0.9%-points per year of that comes from the growth of the health-care financing programs: Medicare, Medicaid, SCHIP. CBO counts all of that growth as an increase in the after-tax real incomes of America’s poor.
What’s wrong with that? Brad argues:
But that is not money that America’s poor can spend, so some haircut should be applied. Moreover, only half of those expenditures show up as more health care received by program beneficiaries-the other half flow into the general American health-care financing system and cover care that was previously uncompensated. And America’s health care financing system is uniquely inefficient: it really does look like other OECD countries get more bang in terms of health and healthcare services from $1 of spending then America gets $2. Apply all of those haircuts, and it seems to me that a better estimate of the contribution of expanded American public health-care programs to the material well-being of the American poor is not 0.9%-points per year but 0.2%-points per year.
Notice that part of Brad’s argument is similar to an argument that Dwight Lee made in 1997 and that many critics of government spending make: a dollar spent by the government on you will be typically be less valuable to you than a dollar that you spend on yourself.
Brad ends with an on-the-one-hand and on-the-other-hand story about how valuable this health care spending is for lower-income people.
By the way, if you want to note in the comments that, taking Brad’s optimistic estimates of the value of health care, the main contributor to their increase in real income was government at various levels, go ahead. Be aware, though, that you are implicitly assuming that none of these government programs affected their other income. Given the degree of means testing in these programs, especially Medicaid, that is highly implausible. Medicaid, by discouraging earnings, makes earnings lower than otherwise.
HT to Mark Thoma.