The Congressional Budget Office did its best to adjust after-tax incomes for inflation between 1979 in 2011. In figure 1, I added an extra 1% inflation adjustment in every year from 1979. 1% per annum is a common estimate of the inflation bias introduced by the inability of most measures of inflation to account for new goods and upgrades in the quality of existing goods to name but a few bias is in the measurement of consumer price inflation.
Figure 1: Cumulative Growth in Average Inflation-Adjusted After-Tax Income, by Before-Tax Income Group, USA, 1979 to 2011, 1% upward annual adjustment for inflation bias for new goods and quality upgrades
Source: derived from Congressional Budget Office, The Distribution of Household Income and Federal Taxes, 2011.
As can be seen from figure 1, with a 1% up left for measurement bias, instead of increases of 48% and 40% in the incomes of the lowest quartile in the middle three quartiles respectively, their after-tax, after inflation incomes about doubled since 1979.
Well done, capitalism. Everyone was on a working class income in the 1970s is now on a middle-class income. Such are the joys of compounding 1% per year over more than 30 years.
Source: Congressional Budget Office, The Distribution of Household Income and Federal Taxes, 2011.
The original Congressional Budget Office diagram above with the higher income quartiles is presented for comparison. I didn’t present the top quartiles in figure 1 because it made it unreadable because of the dominant influence of the top 1%’s increase in income.
The lesson for the day is small inaccuracies in the measurement of prosperity can over several decades through compounding lead to massive misunderstandings of the increases in prosperity.
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