Earlier today I posted a short quiz for readers on income and tuition inflation. I would never post such a thing to trick you. The answer to the quiz is simple and straightforward. Not many folks were willing to venture a guess, but some people nailed it. Thanks to some readers who pointed out other potential flaws in the graph.
The Sober Look graph uses normalized, inflation-adjusted aggregate income, represented as disposable income per-capita. Here's the definition.
Let's look at each part of real per-capita disposable income so that we can understand what it means and why it is important. Personal income in the U.S. consists of all income that is received by U.S. residents in a given year, originating from all sources. Thus personal income is the sum of wage and salary disbursements, other labor income, proprietor's income (rental income), dividend and interest income, and transfer payments to individuals (welfare, unemployment insurance, etc).
Disposable personal income is the portion of personal income that is left after personal taxes are subtracted, and thus is the amount of personal income available to people for consumption spending and saving. Per capita disposable personal income is found by dividing a country's total disposable personal income by its population. Finally, real per-capita disposable personal income is found by adjusting per-capita disposable personal income for inflation.
In the following explanation, I will refer to the 3 charts below.
When I last looked this morning, not a single person, neither the bloggers nor the commenters, at Sober Look, Pragmatic Capitalism, zerohedge, or the Business Insider had noted that almost all the income gains of the last 30 years went to the top 20% of wage earners, and among those income gains, most of then went to the top 5%, and among those gains, most of them went to the top 1% (Figures 2 and 3).
If you were to take this unhappy data into account, the actual differential between rising tuition costs and disposable income per-capita for the bottom 4/5ths of American wage earners would look something like the new rust-colored line I added to Figure 1 (the original graph). The difference between the cost of college and what the bottom 80% of Americans make is staggering, and getting worse all the time. That's why total student loan debt has risen above one trillion dollars ($1,000,000,000,000) in recent months.
You might ask, are these people at other websites just stupid? What's the deal? No doubt some of them are not too bright, but stupidity is not the problem. These are economic websites (or articles) after all. These people can not be a complete dummies if they are reading there. At least they know how to read a graph, or think they do.
No, the problem is that most of these people, along with almost all of our "educated" fellow Americans, are thoroughly indoctrinated in standard economic theory. And that theory says—I'm simplifying here, but not much—that one person's liability is another person's asset. See my 2011 post Dude! Where's My Recovery?
To quote Paul Krugman, "my spending is your income, and your spending is my income." It matters not who is doing the spending and who is getting the income.
It is but a very short leap to the conclusion that all income is equally weighted, regardless of who receives it. Your "liabilities" (forgone income gains over the last 30 years) are another person's "assets" (realized income gains for the top 5% over that same period). So aggregate income data is taken to be a valuable, useful and accurate picture of the state of this crucial aspect of the American economy.
That's the misleading flaw in the graph.
Needless to say, the distribution of the income in the United States is an abomination. And so is neo-Keynesian (standard) economic thinking. The two go hand-in-hand. To make things much worse, many (most?) Americans believe our skewed income distribution is just fine the way it is. Otherwise, you're some kind of Socialist. Certainly, the vast majority of Americans don't know that the distribution of income is as skewed as it is.
Figure 2. Used in my post The Sound Of One Hand Clapping.
Figure 3. Used in my post Household Debt Rises — Does Anyone Care?