One of the most eye-opening findings from the Census data released last week was the stunning deterioration in middle-income Californians’ purchasing power during the Great Recession and its aftermath. Between 2006 and 2011, the state’s median household income – the income exactly at the middle of the distribution – fell by approximately $8,300 after adjusting for inflation, a 13.5 percent decline. California’s typical household income now stands at its lowest level since 1994, which means that virtually the entire increase in median household income that occurred during the economic boom of the 1990s has been erased.
The impact on families of losing $8,300 during the past five years is substantial: That amount of income could have been used to buy enough groceries to feed a family of four for nearly a year. Viewed another way, the income that California’s typical household lost due to the recession would cover nearly half a year’s rent for a two-bedroom apartment in Los Angeles County or approximately eight months’ rent for a two-bedroom apartment in the Sacramento region.
The latest Census data raise an important question: Why didn’t middle-income Californians start to recover from the downturn last year, given that it was the second full year that the national economy expanded since the end of the recession?
As Jared Bernstein discusses, the answer is that the economic expansion has produced gains only for those at the very top of the income distribution. The new Census data show that at the national level the share of income going to the top 5 percent of households – those with annual incomes over $185,000 – rose between 2010 and 2011, while the share going to households in the bottom four fifths declined. In fact, ananalysis by the Center on Budget and Policy Priorities shows that the top fifth of US households’ share of income was the highest on record last year, and records began in 1967. In stark contrast, the share of income going to each of the bottom three fifths was the lowest on record. And most likely these data substantially understate gains at the top because they don’t include income from capital gains – a key source of earnings for the wealthy. Data compiled by UC Berkeley economics professor and inequality expert Emmanuel Saez show that when income from capital gains is counted, a full 93 percent of the increase in total US family income between 2009 and 2010 – the first full year of recovery and the most recent period for which data are available – went to the top 1 percent, largely reflecting the rebound of the stock market that year.
Economic growth reaches low- and middle-income families primarily through the job market, not the stock market. That means gains in employment and wages are the key to a more broadly shared economic recovery. In California, as in many other states, the job market has been slow to bounce back from the downturn, partly because budget cuts resulted in fewer jobs for teachers, school counselors, and librarians as well as other public sector workers. Stemming this job loss by avoiding deeper cuts would help speed up California’s job market recovery, enabling the benefits of economic growth to reach more families. Leading economistsargue that policymakers should avoid a cuts-only approach to closing state budget gaps for this very reason: budget cuts cost jobs. Instead, they argue that “it is economically preferable to raise taxes on those with high incomes” when the economy is weak. Targeting tax increases to high-income earners, who are more likely to save than to spend their incomes, has far less of an impact on local communities.
Our recently released analysis shows that Proposition 30 is part of a balanced approach to closing California’s budget gap – the kind of approach that is favored by many economists. It would raise new revenues primarily from the wealthiest 1 percent of Californians in order to prevent deeper cuts to public schools, colleges, and universities – institutions that enable low- and middle-income children to move up the income ladder as adults. In other words, the measure asks those who benefited the most from recent economic growth to contribute the most to laying the groundwork for the state’s future prosperity.