January saw the biggest one-month drop in personal income since 1993

March 1, 2013 at 12:25 pm

CNN reports today that personal incomes saw the biggest one-month decrease in 20 years, dropping 3,6 percent or $505.5 billion from December.  There are a few reasons for this. First, the fiscal cliff negotiations at the end of last year and the rise in corporate income taxes that took place on January 1 meant that corporations paid out dividends to their shareholders before the end of 2012 so that they wouldn’t have to pay the higher taxes. This essentially inflated the Commerce Department’s personal income numbers for December.

Second, the expiration of the payroll tax, which includes the amount of income that is deducted for things like Social Security and Medicare. The Commerce Department excludes these amounts when determining personal income, so this decreased the personal income numbers for January.

These two factors together account for the severe drop in incomes between December and January. They also illustrate the dramatic effect that public policy can have on our economy. The sequester is in effect as of today, and the impact of these funding cuts will have significant and far-reaching impacts across our economy and in every community. Consumer spending, which drives our economy, is only able to increase if people have money to spend. CNN also reports that gas prices increased by 10 percent in February. So while we have an increase in costs, we are also cutting essential programs— unemployment benefits, Medicaid, child care subsidies, rental assistance  small business contracts, education, workforce training, etc– that help people gain economic security. This is especially true in difficult economies, and as we’ve  said before although we’re in a period of recovery, many communities are still struggling.

But just as public policy can incent corporations and individuals to behave in ways that do not benefit the common good, public policy can also be crafted in ways to level the playing field, provide a safety net, and encourage fairness and equity.

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Entry filed under: Economic Development, Economy, Jobs & Employment. Tags: , , , , , .

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