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In the Wake of the Great Recession, Wealthy Families Bounce Back, While Middle-Income Families Fall Further Behind


California Budget Project - June 12, 2012 - by Sam Sellers

Recently released data from the Franchise Tax Board (FTB) illustrate that the wealthiest Californians started to recover from the Great Recession in 2010, while middle-income Californians continued to lose ground. The average income of middle-income Californians reached a more-than-two-decade low in 2010, according to the FTB data. That year, the middle fifth of California taxpayers earned $34,621, on average, more than $800 (2 percent) less than in 2009, after adjusting for inflation, and nearly $7,000 (17 percent) less than in 1987 – the first year for which data are publicly available. In fact, the average income of middle-income Californians has declined every year since 2004, after accounting for inflation.

In contrast, the average income of the wealthiest Californians, which lost purchasing power during the Great Recession, has started to bounce back. Between 2009 and 2010, the average inflation-adjusted income of the top 1 percent of taxpayers grew by an astonishing $250,000 (21 percent) – to over $1.4 million. This substantial increase in the aftermath of the recession partly reflects strong growth in investment earnings, which make up a large share of the incomes of the wealthy.

These trends indicate that the gap between the incomes of the wealthy and those of middle-income Californians began to grow again in 2010, after narrowing briefly during the downturn. This is troubling. Some experts suggest that widening income gaps could make it harder for low-income children to move up the income ladder as adults because the rungs of the ladder are farther apart. And as we illustrated in a CBP report on inequality released last fall, mobility up the income ladder is far less common than many people realize. Two out of five US children who grow up in families in the bottom fifth of the income distribution remain in the bottom fifth as adults. In addition, children who grow up in low-income families in the US are less likely to move up the income ladder as adults when compared to children in many other industrialized countries.

The continued decline in the incomes of middle-income families is also a troubling trend – one that could have significant consequences for the pace of California’s economic recovery. Consumer spending is a key driver of the economy. But with their incomes losing purchasing power, many middle-income families cut back their spending in recent years, according to national data from the US Bureau of Labor Statistics. Middle-income families tend to spend a large share of their incomes. This means that as their earnings increase, so does their spending, which helps to spur job creation and fuel economic growth. With declining incomes for middle-income families, our economy is likely to grow more slowly.

Given the continued struggles of middle-income Californians in the wake of the most severe economic downturn since the Great Depression, policymakers should avoid more devastating budget cuts to programs that help families make ends meet. As policymakers work to close the state’s budget gap before the constitutional deadline at the end of this week, we urge them to take a balanced approach that preserves the public services and structures that provide the foundation for a strong economy.