© AP Photo/Julie JacobsonPersonal income posted its biggest monthly drop in 20 years in January, mainly a result of Washington's austerity fever.
As you have probably heard, today is Sequester Day, when the Austerity Badger sneaks into America and sets our money on fire. In truth, austerity is here already.
Personal income plunged 3.6 percent in January, the
Bureau of Economic Analysis reported, the biggest drop in 20 years. The decline was driven by a couple of unusual one-time effects, according to the BEA. Both are direct results of Washington's suicidal obsession with budget deficits at a time of persistent economic weakness.
The biggest of these was a reversal of a surge in dividend income in December, as companies rushed to pay stock holders dividends before the "fiscal cliff" hiked dividend tax rates in the New Year. That amounted to about 2.6 percentage points of the total income drop, according to Capital Economics.
The second hit to income was the reinstatement of the federal payroll tax after a long holiday. The 2 percent increase in Social Security withholding cut nearly $127 billion from income in January, according to the BEA, Goldman Sachs economists pointed out (h/t Quartz's
Matt Phillips). The bump and decline in dividend income is a wash. The payroll-tax cut is going to be harder to shake off, leaving Americans with smaller paychecks for the rest of the year.
The higher payroll tax, along with the
sequester budget cuts that will start to kick in on Friday, and other lingering effects of the "fiscal cliff" that loomed at the start of the year, will
cut economic growth this year by 1.5 percent.
But economic growth has already been hampered for the past two years by the government's biggest spending cutback since the end of the Vietnam war, as the New York Times pointed out earlier this week. We entered the age of austerity long before the sequester.
