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Economy leaves workers behind


RISING PRODUCTION is good for both economies and for politicians -- in a prosperous country, more widgets are needed. But jobs and income are even better for both economies and for people -- especially for politicians.

As the United States heads into another national election season, there is a growing disconnect between production on the one hand and jobs and income on the other. At some point, the disconnect is either going to go away or George W. Bush is going to find himself in trouble.

Last week's news of another spike in the country's output of goods and services -- the largest spike in nearly 20 years -- was tempered by the well-known fact that while the nation's economic output was recovering and then spurting over the six-month period that began last April, the number of jobs in the country was shrinking.

As it turns out, there was more.

The day after the Commerce Department announced the 7.2 percent spike in gross domestic product during this year's third quarter, it also made public information about personal incomes and expenditures for September, the final month of the period.

Right off the top, three developments struck me as interesting.

The first was the fact that overall personal income (salaries plus rents, investment earnings, and other goodies) was up by the same amount -- 0.3 percent -- in September that it was up in August.

The second was what happened after all federal taxes were removed from the equation. On this basis, what economists call disposable income was off by 1 percent after having risen by 1 percent in August. In actual dollar terms, federal tax payments by individuals rose by $110 billion in September after having fallen by $50 billion and $106 billion in July and August. With inflation discounted as well, real disposable income dropped by 1.2 percent in September after having risen by 1.4 and 0.7 percent in July and August.

The third was what happened to consumer spending. It was down 0.6 percent in September after having risen by 0.8 percent in both July and August. Spending on so-called durable goods (cars, stoves) plunged by 4.6 percent after having soared by 3.8 and 4 percent in July and August.

Connecting these dots, it would appear that Americans got a decent windfall this summer from the latest round of income tax cuts. They took the cash to the stores and spent it, largely on durables, and when the windfall was exhausted they mostly paused. To the extent that there was any strength in consumer spending in September, it came out of savings, not income. As a percentage of disposable income, the rate of savings was below 3 percent for the first time since the beginning of 2000 -- not a healthy development.

It also helps to remember that there is one increasingly important development these days that is not reflected in the national numbers. In nearly all 50 states, severe budget deficits caused in part by cuts in federal aid have been leading to property tax increases at the local level, a harmful process that is ongoing. The situation faced by American households is thus somewhat worse than the federal figures indicate.

When taxes and inflation are subtracted from gross income, what is left is a rough expression in dollar terms of our standard of living. Put in terms of each individual in the country (something like 290 million at last count), what economists call real disposable income per capita would appear almost flat -- not just this year but ever since Bush became president.

During the first quarter of 2001, the figure was $23,470. In September it was $24,874. That is an increase of $1,404, or only 5.1 percent, over nearly three years. I would not brag about that puny performance, much less campaign on it.

In February, the figure was $24,585 per person. During the time of tax cuts this summer, it spiked at $25,211 in August before falling in September. That is an increase of just 1.2 percent this year, with the best news apparently already in hand. At that rate historically during an election year, presidents and parties in power tend to be turned out of office. The rhetoric in campaigns may be dominated by talk of the fast and of the future, but voters have an understandable habit of reacting to what is happening to them in the present.

With the tax cut goodie bag empty, gains in income are going to have to come from sharp gains in new jobs and higher wages and salaries. Production has indeed spiked, and if it keeps rising at sustainable rates, the effects will spill over into jobs and income.

It hasn't happened yet, however, and the evidence from the third quarter was that it wasn't happening in September. People are hurting, and they have been for a long time.

Thomas Oliphant's e-mail ddress is

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