NEW YORK (CNN/Money) -
John Kerry says the nation's household income situation is miserable. George Bush says it's improving. Economists say the truth is somewhere in between.
The state of household budgets and buying power became another battleground in the campaign Monday, as challenger John Kerry argued that the middle class families are financially much worse off than they were before the Bush presidency. The White House suggested that the Republican tax cuts, some of which Kerry opposed, have improved the condition of the average American family.
But economists say real household income is little changed since 2000, with gains in household income due to tax cuts being wiped out by inflation, and stagnant wages providing almost no help.
Economists cite data to suggest that Kerry is right when he suggests that the wealthy have fared far better than the middle and lower income families during the last four years.
But the economists and data also suggest that much of the hit that household income took from weak wage gains and the impact of inflation in the period were balanced by lower taxes and greater entitlement spending going to individuals.
In fact, average after-tax income, adjusted for inflation, showed about 5.9 percent growth in the three years after Bush took office, said Mark Vitner, senior economist for Wachovia Securities. That works out to about 2 percent annual growth rate during that period. Much of that gain is due to the impact of the tax cuts, Vitner said.
"We've had very little economic growth, virtually no job growth," said Vitner. "The only way you'll get income growth is through wage increases or through tax cuts."
Median income measure
But average income figures can be greatly influenced by larger gains among the wealthy. The median income numbers -- the point at which half the population has more and half the population has less -- are another measure of how the middle-income family is doing.
The Census Department's data shows pretax median household income rose 0.6 percent to $42,409 between 2000 and 2002, the most recent year available from that agency. When adjusted for inflation, that gain became a 3.3 percent decline during the same period -- the figure that Kerry has been using in his "misery index."
At least part of the reason for the decline in median income at the same time that average income rose is that the wealthy have seen more gains from both the tax cuts and the overall economic climate, according to economists.
"It's true there's been a shift of income distribution, with a lot of income gains accruing to upper income individuals. The labor market is paying a bigger and bigger premium for being well educated," said Ethan Harris, chief economist for Lehman Bros. "At the other end of the distribution, if you look at Joe Six-Pack, you've seen a big decline in big paying, low skill jobs in manufacturing."
But the decline in median income, which was cited by the Kerry campaign Monday, doesn't take into account the impact of tax cuts or the rise in federal spending on entitlement programs such as Medicaid and Medicare.
Census data show after-tax median household income between 2000 and 2002, adjusted for inflation, fell only 2.1 percent, not the 3.3 percent pre-tax decline. The median income family's tax bill fell by $625 during that period. Add in government entitlements, which increased by $560, and the income decline was only 0.6 percent to $42,061.
"The debate about tax cuts shouldn't be whether they helped or not -- they clearly helped taxpayers," said Vitner. "The debate should be whether we can afford them and whether they can lead to a sustained recovery in economy."
Vitner said the 2002 number was also before the some of the impact of the Bush tax cut was being felt, as well as before the better performance of the economy in 2003. He said he believed the 2003 census data, when available, would likely show a slight rise in the after-tax median household income since 2000.