Why $1 Trillion of US Income Disappeared

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Why $1 Trillion Disappeared

Since the pandemic started in February 2020, over $1 trillion has vanished from working Americans.

Over the last three years, many Americans witnessed a collapse in their standard of living as inflation outpaced income and left them over $1 trillion behind.

Let me explain.

From the beginning of the last expansion in 2009, after the Great Financial Crisis, real personal income excluding all government transfer payments, rose steadily at a 3% annual pace.

I exclude all the government payments because we want to get a sense of how strong the private sector is at generating real income gains without the support of government programs. 

Real Personal Income Excluding Government Transfer Payments
Real Personal Income Excluding Government Transfer Payments

The average American saw their earned income rise by 3% per year in real terms – after adjusting for inflation.

However, since February 2020, real private sector income has only increased by 0.5% per year.

If real income increased at the historical pace of 3.0%, Americans collectively would have earned more than $1 trillion.

This massive gap between what actually happened after the pandemic and what workers were accustomed to is the exact reason why many people feel like they are falling behind, struggling to maintain their previous lifestyle and advance through their family formation years.

We cannot completely discount all the government payments that occurred throughout 2020 and 2021 because they were substantial. The problem, however, is that they were temporary.

In February 2020, real disposable income per capita was just under $46,000.

Today, in February 2023, the latest data reports real disposable income per capita of $45,491.

After Americans burn through the generous transfer payments, it’s clear that the average person is worse off today than three years ago. 

Real Disposable Income Per Capita
Real Disposable Income Per Capita

The deterioration in the standard of living is not something that is unique to the pandemic.

In fact, this is a trend that has persisted quietly for the last 20 years.

Over the last 20 years, there has been a trend of worsening real income growth.

Let’s have a look.

The chart below, again, shows real personal income excluding government transfer payments.

We want to know how much real income increased in every economic cycle. We have to include both the recession and the recovery for an honest assessment.


In other words, in 2001, the economy entered a recession and then experienced a recovery until 2008. How much did income rise throughout that period (from the first red arrow to the green arrow). 

Real Personal Income Excluding Government Transfer Payments
Real Personal Income Excluding Government Transfer Payments

We can do the same thing for the next economic cycle, measuring income growth from the green arrow to the second red arrow.

When we do this for each economic cycle back to the 1950s, we notice an alarming trend that should concern every American.

The private sector has increasingly struggled to generate sufficient real income gains.

From 1960 through 2007, real private sector income increased at 3.3%. This includes the expansion years and the recession years. This is healthy income growth from a historical perspective.

Something changed after the 2000 recession. Income growth did not exceed 2.0% in the aftermath of the DotCom bubble and the 2008 housing crash.

After the COVID pandemic, we are down to less than 1% real income growth.


What is happening?

Real Private Income By Cycle
Real Private Income By Cycle

Why is the private sector becoming weaker and weaker, unable to come close to the historical 3% average?

From 1960 through 2007, real private sector income increased at 3.3% per year.


From 2007 through today, real income has increased at half the historical pace, just 1.7%. 

Real Personal Income Excluding Government Transfer Payments
Real Personal Income Excluding Government Transfer Payments

Problem #1: Debt

Two main problems are contributing to the degradation of the private sector and
they go hand-in-hand.

First is that as the level of debt in the economy increases, it strangles the
capacity for new productive investments which are the foundation for increases
in worker productivity and real income gains.

The chart below shows the ratio of both public and private debt to GDP for the
United States.

It’s important to measure debt levels on a rolling basis rather than year to year
because we want to get a sense of how sustained the debt burden is – we
don’t want to capture one-time spikes.

Measured on a 5-year rolling basis, public and private debt in the US economy is 3.5
times larger than the entire economy or stated another way, the debt to GDP
ratio is over 350%.

Economist Dr. Lacy Hunt, famous for his research on the impact of debt, has cited studies that draw a threshold at 275%.

Stated another way, when public and private debt rises above 275% of GDP, the economy starts to weaken dramatically. 

US Public and Private Debt to GDP
US Public and Private Debt to GDP

The US crossed this critical threshold after the 2000s recession which is why it’s unlikely to be a coincidence that the private sector’s ability to generate income growth collapsed around that same time.

The excessive indebtedness of the public and private sector are severely weakening the economy and the response to the pandemic of adding even more debt has worsened the problem, clearly shown by just 0.5% real income growth in the post 2020 era.

Problem #2: Government Size

The second problem that is increasingly impacting the private sector is the ever-growing size of the government sector.

How big is the government? How big is too big?

There are many ways to measure the size of the government. Graphed below is my preferred method which takes total government spending as a percentage of the economy.


Again, I choose a 5-year rolling average to capture sustained increases rather than transient increases. 

Government Spending As A % of GDP
Government Spending As A % of GDP

The chart shows that “government size” has increased from about 26% of the economy to almost 36% of the economy, a 10% increase in government size.

The research of economists Andreas Bergh and Magnus Henrekson alert us to the fact that a 10% increase in government size is associated with a 0.5% to 1.0% reduction in real economic growth.

To be fair, the research also says there is an initial benefit to increasing levels of government. The increase from zero government to 5%, 10% and perhaps even 15% government size can lead to social benefits and improve growth prospects.

It’s clear, however, that as government sizes increases beyond 25% and moves towards 35% and higher, the private sector is weakened by the all encompassing public sector.

The future outlook is not overly optimistic if we agree with the data-backed premise that higher levels of debt and an increasingly large government are primary drivers to the weakening of private sector income growth.

The nature of future US entitlement spending virtually assures that government size will increase as well as government debt.

The Road Ahead

Over the last three years, American’s are missing $1 trillion in real spending power and this has created significant hardship.

Unless we tackle the issues addressed, this gap of $1 trillion will grow towards $2 trillion by 2030.

We can make improvements through shared sacrifice, but if we find ourselves a decade from now with 400% debt to GDP instead of 350%, and a government that’s 40% of GDP instead of 35%, we should expect the results to be worse than they already are. 

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Eric Basmajian is an economic researcher focused on providing an advanced and comprehensive analysis of the business cycle.

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