Census: Income rose, middle class grew in 2007

From the perspective of their pocketbook, Americans had a good solid year last year.

The standard of living rose and the middle class grew while the number of wealthy actually shrank somewhat compared to 2006. At the same time, the official poverty rate was basically unchanged. And the number of Americans without health coverage fell for the first time during the Bush administration.

Those are some of the conclusions from the US Census Bureau's annual survey, a report that gives scholars a longer view of the nation's economic health.

"It's a good solid report," says Mark Zandi, chief economist at Moody's Economy.com.

From an economic point of view, this is the last official broad look at Americans' pocketbooks before the November election. As such, many Republicans will be cheered by the Census Bureau's snapshot. However, there are also some disturbing trends that will give Democrats, meeting in Denver this week, some fodder to criticize eight years of Republican control of the White House.

The Census Bureau found that child-poverty rose, mainly because the income of households headed by women fell. And overall incomes, while they grew 1.3 percent from 2006, were only on par with the high water mark set in 1999, once adjusted for inflation.

"There are plenty of things for both Democrats and Republicans to yell about," says Ron Haskins, an analyst at the Brookings Institution in Washington.

The survey is important as an official poverty measure and may affect how federal benefits are distributed to the states. But because the economy has turned sour this year, many Americans may wonder what the Census Bureau has been measuring.

The survey, taken in February, March and April of last year, will only partially reflect the economic problems that have beset the nation. For example, the economy last year continued to add jobs, albeit at a slower pace than previous years. Employers stopped adding to their workforce this March. The fall in housing prices won't be reflected in the survey either since home prices peaked in 2006 but did not start to seriously fall until last fall, shortly after the financial shock from subprime loans hit.

The survey also doesn't reflect the steep rise in gasoline prices. Between March of 2006 and March of 2007, prices at the pump were about $2.50 a gallon. However, when Census puts together its data for 2008, the price of gasoline will have gone up about $1 a gallon.

"We will see the real brunt of the mortgage crisis and energy crisis next year," says Mr. Zandi.

The report has not had much bearing on many recent presidential elections. But this year, Barack Obama is talking about raising taxes on high-income earners. States trying to bridge gaps in their budgets are discussing millionaires' taxes. "This makes the distribution of income more important economically and politically," says Zandi.

However, the Census Bureau's numbers indicate that the gap between the middle class and the wealthy has shrunk. In 2007, the top 5 percent of wage-earners garnered 21.2 percent of all income compared to 22.3 percent in 2006. At the same time the middle class saw its share increase from 14.5 percent to 14.8 percent in 2007. "That's a relatively big change in these numbers," says Zandi.

The Democrats are sure to compare this survey's numbers to 2000, asking "Are you better off now than you were eight years ago?"

In 2000, the economy was at the end of a long and positive roll. There was a rapid drop in the number of Americans living below the poverty line. "Literally, employers were hiring workers they might not hire in normal economic times," says Sheldon Danziger, professor of public policy at the University of Michigan in Ann Arbor. "We haven't seen those days for the last eight years."

The survey will also have some real effect on some state budgets since federal programs use it to determine the distribution of some $300 billion in grants to state and local governments. "If poverty is up or down in a state it plays a role in the money they get," says Mr. Haskins, a former staff member of the House Ways and Means Committee.

In that case, it might be helpful to the state of Michigan, the only state in the nation to have a decline in real income last year and the only state to have an increase in the poverty rate.

Changes in the poverty level can also have an impact on the federal budget, says Haskins. "If poverty is up, it can be another argument for increasing spending."

He says there are many means-tested programs that could be affected, ranging from Medicaid to the earned-income tax credit.

The data may also play a role in the healthcare debate. The latest numbers indicate that the number of uninsured Americans fell from 47 million to 45.7 million from 2006 to 2007. According to David Johnson, an economist with the Census Bureau, this represented an increase in the number of people on public health insurance, such as Medicaid and Medicare.

In July, Rep. Jim McDermott (D) of Washington held hearings on establishing a modern poverty level, last defined in the 1960s shortly after President Johnson declared his War on Poverty. The thrust of the measure would be the creation of a more accurate measure of food, clothing, and utility costs, which would then be used to determine Americans' income, including their "near cash" benefits such as food stamps. His proposed legislation would also account for geographical differences in the cost of living.

Research librarian Leigh Montgomery contributed to this report