According to official government statistics, the income of the average US citizen is increasing, after adjusting for inflation. Here is the official census statistic. Of course, this statistic is completely false.

The defect in the methodology is that it is "adjusting for inflation" using the CPI. The CPI understates the true inflation rate. I prefer to use the Federal Reserve's M2 statistics instead of CPI.

In 1980, median US household income was $17,710 in constant dollars, with no inflation adjustment. In January 1980, M2 was 1486.2 billion. Dividing 17710 by 1486.2 yields 11.92.

In 2005, median US household income was $46,326 in constant dollars, with no inflation adjustment. In January 2005, M2 was 6408.4 billion. Dividing 46326 by 6408.4 yields 7.23.

I use median instead of mean, because that better represents the condition of the typical American. Very high incomes distort the mean.

Dividing 11.92 by 7.23 yields 1.648. From 1980 to 2005, the money supply grew 65% faster than the median household income.

One final adjustment is needed. I need to correct for the increase in the number of households. If there are 10% more households, then the money supply can increase by 10% without causing inflation (although the financial industry still books this inflation as seignorage revenue).

From 1980 to 2005, the number of households increased from 82,368 thousand to 114,384 thousand. Dividing 114,384 by 82,368 yields 1.38869. Dividng 1.648 by 1.38869 yields 1.187. Technically, I should look at the reciprocal: 0.842.

Summarizing, the purchasing power of the median household income in 2005 is 84.2% of what it was in 1980.

My calculation is more valid than the "official" government calculation, because M2 is a much more accurate measure of inflation than the CPI. The CPI understates the true inflation rate.

The median American in 2005 is only paid 84.2% of what they were paid in 1980, when you correct for money supply inflation divided by population growth. If you use M3 instead of M2 to measure money supply inflation, then the median American is in even worse shape. I didn't use M3 in my calculation, because the Federal Reserve stopped publishing M3 in 2006. However, from 1980 to 2005, M2 grew by 331% and M3 grew by 419%. If you use M3 instead of M2, then the median American's paycheck is only 70% of what it was in 1980.

Depending on how you count, the median American has lost 15.8% or 30% of his paycheck since 1980. I use money supply inflation instead of the CPI, because the CPI is biased. When you correct for money supply inflation and population growth, the median American has lost 15.8%-30% of his purchasing power from 1980 to 2005.

## Tuesday, November 27, 2007

### Real Annual Income is Decreasing

Posted by FSK at 12:42 AM

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