Our real economic outlook

Last week the Census Bureau released its annual study of household incomes, poverty and health insurance – often called the nation's “economic report card.” Its hard numbers seemed to confirm how many Americans feel: We're prosperous; but prosperity is fraying. Except for the rich, living standards are stagnant. Poverty is up; health insurance coverage is down.

Though echoed by policy wonks, pundits and politicians, the conventional wisdom is wrong or, at least, misleading. Here's a more accurate assessment. For most Americans, living standards are increasing, albeit slowly, over any meaningful period. But rising health spending is eroding take-home pay, and immigrants are boosting both poverty and the lack of health insurance. Unless we control health spending and immigration, the economic report card will continue to disappoint. Unfortunately, neither Barack Obama nor John McCain seriously addresses these problems.

Convention wisdom misleading

Superficially, the conventional wisdom seems convincing. Census found that median household income in 2007 was $50,233. Though up 1.3 percent from 2006, that was still less than the peak of $50,641 in 1999. (The median is the midpoint; all figures are in inflation-adjusted 2007 dollars.) The share of people below the government's poverty line – about $21,000 for a family of four – rose to 12.5 percent from 11.3 percent in 2000. Finally, the uninsured have increased in six of the past eight years. They're now about 15 percent of the population.

Case closed? Not exactly. Here are three reasons why.

First, comparisons are made to an artificially high benchmark – the late 1990s “tech bubble.”

Remember the dot-com binge. Wages rose sharply; bonuses and cash incentives mushroomed. Unemployment and poverty dropped. In 2000, the jobless rate among white men 20 and over was 2.8 percent. But all these gains reflected an unsustainable boom. Stocks are now trading below their 2000 highs. Using these years as the base for comparison makes later years look bad.

Picking 1997 – the last pre-boom year – is more realistic. From 1997 to 2007, median household income rose $2,600, roughly 5 percent. Though hardly spectacular, that's not stagnation. The poverty rate in 2007 was slightly lower than in 1997.

Second, immigration distorts commonly cited statistics.

Low-skilled immigrants, concentrated among Hispanics, outnumber high-skilled. They drag down median incomes and raise poverty and the uninsured. One way to filter out the effect on income is to examine groups with few immigrants. Consider non-Hispanic white families. From 1997 to 2007, their median incomes rose about $6,000 to $69,937, a gain of about 9 percent. For black families, the increase was also about 9 percent, though only to $40,222. Again, not stagnation.

Immigration's effects on poverty and health insurance coverage are greater. Since 1990, Hispanics numerically account for all the increase in the number of officially poor. Similarly, immigrants represented 55 percent of the increase of the uninsured from 1994 to 2006, says the Employee Benefit Research Institute. Many unskilled workers can't get well-paid jobs with insurance.

Third, the Census figures understate income gains by not counting fringe benefits.

Census counts only money income – wages, salaries, dividends, interest payments. But compensation growth is increasingly channeled into fringes. From 2000 to 2007, only half the increase in average compensation came from wages and salaries, says Brookings Institution economist Gary Burtless. The rest went to health insurance (21 percent), pension contributions (19 percent) and payroll taxes (6 percent). Americans understandably feel they're on a treadmill. They don't see fringe benefits in their paychecks, and small year-to-year cash gains barely register.

Long-term threats

The real economic report card is both better and worse than the imagined. The big advances of the rich (which occurred mostly in the 1980s and 1990s and reversed slightly last year) haven't prevented most Americans from achieving grudging gains. But a continuation of present trends would imperil future prosperity.

If health spending remains uncontrolled, Americans will see more of their compensation diverted from take-home pay into insurance that mainly benefits a small proportion of very sick people. Similarly, if the immigration of low-skilled workers continues unabated – whether legal or illegal – the ranks of the poor will swell, as will the uninsured or the costs of providing government insurance.

Given the 2008 economy – higher unemployment and inflation – next year's Census numbers will probably be worse than this year's. But it's the long-term threats that really matter. Obama and McCain don't confront them because doing so would be unpopular and there's no strong public case for action. That's the biggest cost of misreading the economic report card.