Americans have lost out on $6.6 trillion

Why are so many Americans feeling squeezed economically even as the economy expands at an accelerating pace?

Last month set a new record for sustained job creation: 52 straight months of added jobs, with a robust 288,000 more jobs in June and more than 9 million jobs created since February 2010. The unemployment rate is down to 6.1 percent, and the number of long-term unemployed has been slashed, from about 5 million people to about 3 million.

The stock market is soaring, reaching a record high on July 3. The Dow Jones industrial average passed 17,000 — amazing compared with its Great Recession low of 6,627 in March 2009, just weeks after President Barack Obama took office.

So what’s missing? Why did Obama acknowledge in a television interview last week that the “underlying trend for middle class families, that they don’t feel, no matter how hard they work, they’re able to get ahead in the same way that their parents were able to get ahead.”

The answer lies in a very large sum of missing money — about $6.6 trillion by my count — over the first 12 years of this century. That’s as much money as everyone in the United States made from New Year’s Day 2012 through late September of that year. It may also explain Obama’s low approval ratings.

How could such a gigantic sum go missing and not get noticed? 

I calculated that enormous figure by comparing the average income Americans reported on their 2000 tax returns with what they reported each year for 2001 through 2012, adjusting for inflation and the growing population. Add up the income for 12 years and it turns out to be $6.6 trillion less than if we had maintained the prosperity of 2000 for a growing population.

Why use 2000 as a benchmark? Well, first off, it marks the end of one era and the start of another. More important, that very good year economically was when George W. Bush, running for president, said American prosperity would get even better if he was elected and his tax cuts — key aspects of which he kept secret until after the election — would ensure American prosperity.

The results: The prosperity of the prior decade was lost. Job growth fell far behind population growth. The median wage (half make more, half less) has been mired since 1998 at a bit more than $500 per week. 

In 10 of the 12 years when the Bush tax cuts were in effect, the average income shown on tax returns was lower than in 2000. In the two upside years, average income rose modestly, up $504 for 2006 and $1,744 for 2007.

Total those 12 years and the net shortfall per taxpayer comes to $48,010.

Consider what $48,000 of additional income over those 12 years would have meant to you. It is the equivalent of $11 appearing in your wallet every morning from the start of 2001 through the end of 2012.

How much better off you would be if your income had been $48,000 higher over those 12 years? To be sure, you would have owed taxes on that money. If you were not in the top 1 percent, federal income tax would have taken on average about 10 percent of that, leaving you with $43,200. (The top 1 percent would have paid 23.5 percent in tax.) In addition, if the extra income was all in wages, then Social Security and Medicare taxes also would have taken a bite, leaving you with about $39,500.

So how much better off would you be right now if you had another $39,050? And remember that is just the extra after-tax income you would have enjoyed had the prosperity of 2000 been maintained, while then-Gov. Bush promised greater and more widespread prosperity.

Add up the shortfall of every taxpayer, taking into account both inflation and the growing population, and the cumulative shortfall comes to $6.6 trillion before taxes. More than half the shortfall occurred during the first four years of the Obama administration, which inherited the worst economic collapse since the Great Depression.

You will not find these missing income figures in any official government report. I calculated them from IRS data. But measures like this explain why so many Americans feel they are not getting ahead, as Obama observed last week.

As I reported in an earlier column, the average real hourly wage is now 6 percent smaller than in 1972 and 1973. Of the total national increase in income in 2012 over 2009, an astonishing one-third went to just 16,000 households, and almost 95 cents of each dollar went to the top 1 percent, while the bottom 90 percent lost ground.

Had that $6.6 trillion shortfall been realized as income, it would have been enough to pay off all the student loans in United States ($1.26 trillion), all the automobile loans ($892 billion) and all the credit card debt ($827 billion). After paying all that debt off and taking taxes into account, Americans still would have more than $2.4 trillion left in their pockets and bank accounts.

For the average taxpayer, that nearly $48,000 of additional gross income, after taxes and paying off all those debts, would leave more than $17,800 for anything from retirement savings to spending sprees.

In a December 1999 speech to Iowa voters, the future President Bush vowed, if elected, to put into law a “tax cut designed to sustain our nation’s prosperity — and reflect our nation’s decency … The entrepreneurs of America create jobs, take risks and make their profits with honor. My tax cut plan will expand their ranks by encouraging American enterprise … Low tax rates are a powerful economic tool to promote a higher standard of living for all Americans.”

Americans went along, congressional Democrats joined Republicans to enact the tax cuts, and now we know the results. Instead of swimming in jobs, savings and cash, the United States suffers chronic unemployment, with 3.1 million Americans out of work for more than six months and another 7.5 million forced to work part time because they cannot find full-time work.

There is more than enough empirical evidence to demonstrate that the Bush tax cuts failed to produce the promised result. The country needs to stop the continuing economic damage by adopting different policies. 

Editor's note: Some numbers in this column have been revised to correct a spreadsheet error.