Personal Incomes Drop: Economy Needs an Intervention

We knew from the the Labor Department's awful jobs report for August that today’s Bureau of Economic Analysis report on personal income would show a sharp decline. It does.

Even with a sharp decline in tax payments, total real disposable incomes fell 0.3% in August after falling 0.2% in July. With population growth, on a per-capita basis, “average” real after-tax income fell 0.4% in August after falling 0.3% in July.

Even with a slight decline in real consumer spending in August – the third such decline in the past five months – total personal savings in August plunged to 4.5% of total disposable incomes. This is the lowest savings rate since November 2009 and it comes despite a decline in both consumer spending and tax payments.

The only positive thing my analysis turned up from today’s report is that, while total real employee compensation plunged by 0.4% in August, the total real earnings of entrepreneurs and self-employed people rose by 0.3%. More people may be turning to self-employment for income. As I’ve tracked throughout this long and hard downturn, the real earnings of entrepreneurs and self-employed people plunged much more sharply than the earnings of regular employees in 2008 and still lags far behind. While total real employee compensation in August 2011 remains down 3.7% from December 2007, the total real earnings of non-farm entrepreneurs/self-employed is down-6.7%.

Far more serious attention (not just partisan sound bites) needs to be given to the large and changing numbers of entrepreneurs and self-employed people in this economy.

Despite the decline in total real earnings of the employed and the self-employed over these past 44 troubled months, total real disposable incomes, spending and savings all have risen slightly (although the rise has been so slight that on a per-capita basis both disposable incomes and spending have fallen).

As I’ve emphasized for many months now, the data are very clear that the onlyreason total real private income, spending and savings have recovered beyond their December 2007 levels is because tax payments have plunged and government insurance and other benefit payments have soared. Total real personal tax payments in August 2011 were 14.6% lower than 44 months ago while personal receipts from government insurance and other benefits programs were up by 25.4%.

It is certainly possible to argue (as I do) that the decline in tax payments and/or the rise in personal receipts from government have not been enough to adequately respond to the financial and economic meltdown. But it is simply, plainly false to claim – as many do – that these measures have not had very important, positive economic effects on after-tax personal incomes, spending, saving and therefore on the overall economy.

The very dangerous problem going forward is that total real personal income excluding government transfers remains 4.1% below its levels of 44 months ago and has fallen again in each of the past two months. This strongly suggests that the economy is not strong enough to grow – much less to create jobs, incomes and tax revenues – without further expansionist government policies. And yet the Republican party in Washington seems united in its political insistence on contractionary measures while few Democrats seem to have the stomach to fight for continuing the expansion in the face of today’s understandably massive budget deficits.

Today’s BEA report provides more strong evidence that without continued expansionary federal government policies the economy may well fall back into a downward economic cycle of declining jobs, incomes, sales and tax revenues—and sharply worsening deficits.