The Myth of a Stagnant Middle Class
online.wsj.com
online.wsj.com
"the CPI overestimates inflation by underestimating the value of improvements in product quality and variety"
The extreme right-wing has been making this argument since the early 1980s. I used to believe this argument, as it once sounded believable. But Newt Gingrich used this issue (among others) to engineer a Republican resurgence in 1994, and one of the first things they did was force the Bureau of Labor Statistics to change the way it calculates the CPI, so that more attention was paid to quality improvements of goods and services.
What surprised me was that the right-wingers continued to use this argument, as if nothing had changed. It was then that I realized they were arguing in bad faith. No matter how many changes were made to the CPI, they were going to keep repeating the mantra "The CPI overstates inflation".
Regarding what the Republicans achieved during 1994-1995, here are some articles worth reading:
http://www.shadowstats.com/article/no-438-public-comment-on-...
http://bluemassgroup.com/2010/11/the-1995-gop-revolution-scr...
Do you believe this is actually the case?
Similar issues crop up in industry after industry, and are basically impossible to "normalize" into something objective. The best you can do if you're worried about making sure folks on COLA-adjusted assistance don't starve is weight for the essentials (bread, milk, gasoline, housing square footage). But now you're not capturing huge swaths of quality of life improvements.
"Bill Gates in his private jet flies with more personal space than does Joe Six-Pack when making a similar trip on a commercial jetliner. But unlike his 1970s counterpart, Joe routinely travels the same great distances in roughly the same time as do the world's wealthiest tycoons."
Completely ignores the convenience that a private jet can take off and land closer to destinations, less messing about with immigration and security which all add significantly to journey times.
1) Pointing out that things have gotten cheaper is specious. Things have gotten cheaper for rich people too. One would expect technological progress to make things cheaper over time--what does that have to do with income distribution within the country?
2) Average worker productivity has increased since 1965 while real wages have stagnated. You can't use the "women and minorities are dragging the average" down there, because they are included in the worker productivity average as well.
3) Most importantly, the share of national income earned by the middle class has decreased: http://www.interest.com/files/2012/08/pew_income_distributio.... Technology makes things cheaper, sure. Is it enough that the middle class can afford more widgets than they could before? The real debate is who is getting the benefit of the fact that Americans are working longer and more productively than they did 50 years ago. Prices are irrelevant to this question. What the data shows is that the upper class is receiving the vast majority of the increased production. Why is that the case? Are that much smarter and harder working than they were 50 years ago?
(Adopting the same dismissive tone as your first sentence, can we thus conclude your refutation is pretty much geared for people "who can't do reading"?)
Nothing. But the article makes no attempt to address income inequality.
These are two different questions:
1. Has the middle class stagnated over the last n decades?
2. Has the middle class improved its share of national income over the last n decades?
In fact, it's possible to believe that income inequality is ultimately a good thing that improves the standard of living across all income brackets.
Edit: The short version of this argument: It's good to let some people get very rich creating the iPhone if the end result is that we all end up with iPhones.
Right, because that's a losing argument for him. But that's the concern of "progressives." He's using the classic tactic of pretending that the other side is arguing something different than they are, then attacking that argument.
> 1. Has the middle class stagnated over the last n decades?
What does "stagnated" mean? Humans think relatively, not in terms of absolutes. Has the middle class stagnated relative to the upper class? Yes, it has.
The argument this article makes is that the pie is getting bigger, so everyone's share is bigger. You might still think this is a bad thing, but you should at least understand the argument.
More importantly, of course everyone's share is getting bigger. That's been the long-term trend ever since people started farming. What's important is whose slice is getting bigger faster relative to the other slices. Pointing out that the middle class's slice is getting bigger in absolute terms and saying they should be content with that is like saying you should be fine with a stock that returns 1% over inflation. Why should you complain--you're getting richer! Of course, an investor expects to get richer. What he cares about is his return relative to that of other stocks.
It argues that Bob is still being rewarded fairly for his continually increasing productivity, even if his net volume is stagnant and his share of the whole pie is falling, simply because the pie is getting better tasting.
It's nigh-on-tautological that technological advances will ensure that being middle class in 2010 is 'better' than being middle class in 1970. [1]
But more air conditioning, computers and even cell phones does not negate the argument that productivity and wage gains have diverged.
And how else would one fairly assess, in the aggregate, if workers are being rewarded for their work, than to see if greater productivity is being rewarded with greater wages? And how else does one describe the situation where continued productivity gains were met with low-to-no gains in wealth, other than "stagnation"?
For we're not talking about absolute shares of national income here. Economics is no zero-sum gain. There are net increases. There is wealth creation. And we're talking about where this created wealth has gone. And for the last several decades, it hasn't gone to the workers. Even though their productivity has continued to increase and, historically at least, those two have tended to increase together.
Framing the situation in terms of your first question is tantamount to the arguments that poverty today isn't a problem simply because, historically, the poor have never lived so well.
It's an irrelevant distraction used to keep people from asking the second question. [2]
[1] If technological gains stopped delivering improved quality of life, we'd be facing a civilization-level calamity that would render concerns about productivity gains less than irrelevant. Because it would necessarily imply that technological advances had topped out and resources were now becoming scarce.
[2] Asserting that questions of economic fairness and health are answered solely by whether today's workers are doing at least as well as yesterday's workers is pretty close to anti-American. To accept that argument, one would have to believe that it's not necessary for hard work to be rewarded. All those "up by your boot-straps" stories are contingent upon harder and smarter work being rewarded. And here we're staring at an economy-wide case where harder and smarter work has simply been the baseline for continued employment. It's no longer "do well and move up." It's "do well or move out."
It's another hallmark of bad faith arguments to respond to a disagreement-in-degrees as if the other side were advocating extreme positions.
No-one's seizing the means of production here.
Now, if worker compensation was growing significantly faster than inflation, wouldn't we expect the amount of disposable income to be higher, and hence savings and debt to be lower? Why were Americans forced to tap home equity and credit cards to continue consumption? Either prices went up, or people started consuming a lot more. The article claims disposable income went up, but if that's the case, why the credit binge? Doesn't add up.
Moreover, even if you ignore this, the share of national income of the bottom quintiles has been dropping monotonically over the last 30 years, but it was rising with the rest of the quintiles prior to that. That tends to indicate that broad based productivity increases were accruing benefits to workers. Now it tends to indicate that productivity increases accrue solely to capital and not labor. It is not a stable situation.
The apologetics seem designed to avoid debate about the problem, just like climate change, because the assumed solutions would conflict with closely held ideological beliefs. That is, ideological belief trumps contradictory data.
Not necessarily. If college education and its financing became more broadly available and increased expected lifetime earnings by more than the cost of the debt to pay for it (+ opportunity cost), you might expect to see many more households with college debt without your expected lower incomes.
We've been living through two decades of historically low rates of interest and inflation. It's possible that had folks in the 1970's seen rates like that, they might have chosen to debt-finance more as well.
It does seem to me however, that given the loss of manufacturing jobs, and the increase in low end retail / service jobs, that there has been downward pressure on wages.
Imagine we still had slavery in the US in 2013. Who would argue that slavery is perfectly ok because, by golly, slaves live longer and have access to nicer clothes and improved healthcare? And look, we had to deal with an influx of new slaves, so it's actually their fault! Really, those are your arguments?
After seeing this and the hopeless single mother making $260k infographic, WSG seems to be pretty out of touch.
[I'm not trying to compare low wage workers to slaves. At all. I'm making an analogy concerning red herrings.]
I wonder if the wall is being worn down now that RM owns it.
EDIT: People who are interested in the middle class squeeze should really check out Elizabeth Warren's book The Two-Income Trap.
"spending by households on many of modern life's "basics"—food at home, automobiles, clothing and footwear, household furnishings and equipment, and housing and utilities—fell from 53% of disposable income in 1950 to 44% in 1970 to 32% today."
There's a reason why the middle class today can buy so much MORE stuff, it's all much cheaper. The article is saying people are not richer, but the quality of life is not significantly different for the middle class then it is for the rich (the same access to long life, short travel, etc...)
"spending by households on many of modern life's 'basics'" The article factors in auto payments as a basic, but not gas prices - which have risen for people since the 1950s. It does not factor in the increased amount of money going to their HMO (some of which is then sent as a dividend to GMO stockholders, there's a racket...) It also does not factor in that people have to spend more on their own training and college education just to make the same wages as someone without these things could make at a factory in 1950. You would be correct in saying food prices have fallen in the past 60 years, but their claims that the middle class now has more disposable income is false.
The fact which they can not deny is that inflation-adjusted hourly wages have fallen since the early 1970s. Many of the points they make are sophistic. They do make the point that commercial airplane travel has improved since the 1970s, but how often does the average middle class person use that? Most of the people I know who fly regularly are made to do so by their jobs and are usually unhappy having to spend so much time away from home in order to make a living.
This is a very bizarre analogy. The claim is that the real average wage isn't a good barometer of the economic and social condition of the middle class, despite often being held up as such. Nobody would claim that the existence or absence of slavery isn't a good barometer of the economic and social condition of the (potential) slave class.
Slavery was the omission or suppression of freedoms and privileges that were considered rights. Slaves were bought and sold, and didn't have the right to choose to work (or not), or for whom. Slaves were not afforded the right to participate in democratic process.
Middle-class Americans are not restricted the way slaves were. A middle-class American is not restricted by law from deciding not to work, or for pursuing other career opportunities. They are allowed to vote. They are allowed to travel freely, and choose where they will live. To own property.
The thing that truly separated slaves from free people was not an income gap. It was that slaves were legally restricted from living like free people.
The concern will rise if and when middle class people are truly institutionally restricted from participating in society. If they were to institute policies to say only people with net worth over some value, or only landowners were allowed to vote. Or if laws were passed solely based on the lobby of big business to the detriment of the majority opinion. Or if people were legally restricted from changing jobs, or forced by law to work.
Some of these things are actually coming to pass. Particularly the manipulation of government and law by the very wealthy. The greater the income gap becomes, the more legislative power the wealthy have. The more legislative power the wealthy have, the easier it becomes for them to change the laws to maintain that power. When that power becomes enshrined in law, then we can start comparing the middle class to slaves.
We're not there yet, but I think there are people with a lot of wealth who would much rather see us there than lose their wealth.
http://www.chrisstucchio.com/blog/2011/immigrants_simpsons_p...
(The data compares the income of Americans to that of their parents, thereby excluding people who's parents are not Americans.)
Note that this observation (by itself) is not an argument against immigration. http://openborders.info/compositional-effects/
To contrive a stark example, say 30 years prior the median household size was 4 people, and the household income was $100K (in real dollars). Fast-forward to a later period, median household size 3 people (due to later marrying, fewer children, more people living alone), and median household income $90K.
A politician or publication wanting to preach stagnation will run with the headline: "Household Income down 10%!". But in actuality, the household income per household member has risen from $25K to $30K, a 25% increase.
(Real-life effects are much subtler than this, but I believe in the same direction for most recent analyses of 'household income'.)
No teenager can afford this. They, or their parents, go into debt for it.
And that is the problem. The ability of middle class Americans to buy what they are implored by our consumerist society to buy has fallen sharply. General unhappiness and massive amounts of personal debt used to finance knickknacks is the outcome.
Sure, if you're one of the lucky teens who can get a job but doesn't have to rely on it to live, you could probably save up for an ipad pretty easily. On the other hand I've never met a teenager who did. Every single teen I've met with any sort of electronic device was given it as a gift by their family.
He is also ignoring the effects of the average households going from 1 working adult to 2. Obviously, when household income doubles that family will have much more spending power to buy expensive i-devices. But the loss of a stay at home parent whose full time job is to take care of the home also has severe consequences not always seen in economic indicators.
This is a big red herring, since this article comes in the context of a broader societal discussion about whether we should raise taxes on the rich.
Another problem is that the author chooses his examples very selectively when making the argument that the rich are barely better off than the middle class. There are too many counterexamples to count, but the most important difference is that the rich, because they live primarily on passive income and can hire domestic help, have free use of their own time, in contrast with middle class people who have to work 8+ hour days to maintain their standard of living.
However, the analysis about why wages have been stagnant is good stuff.
So, in the end the author is basically saying "Quit your grousing, middle-class drones, you may still be struggling to house and feed yourselves (just like the good old recession days of 1982) but you can get the latest, spiffy cell phones and HDTVs as the rich. So, what are you complaining about?"
Clueless. So, it bears saying again: One of the clearest indicators of a civilization's downfall is income inequality (not that it exists at all but the sheer magnitude of it). Prosperity should be floating all boats to a degree but when only the gold-plated yachts are rising, we're all in danger.
1. CPI underestimating product improvements. 2. Increase in fringe benefits. 3. Influx of lesser skilled workers.
Product improvements and fringe benefits effect both middle and upper class living standard equally. These two improvements would increase both upper and middle classes equally, so I can't see how these would make middle income workers better of relative to upper income workers.
The third point, an influx of lesser skilled workers "women and immigrants" as the article puts it, does not change the fact that the middle class's wages are stagnent, it just is a changing of demographics.
But it does change a key consequence of the claim that middle class wages are stagnant. That claim is often used to argue that "the middle class is no better off"; but if the stagnant wages are due to changing demographics, then all the individual people in the middle class may in fact be better off. Some used to make the average wage and now make more; some used to make nothing at all or made the average wage in a much poorer country, and are now making less than the average wage here, which is still an improvement for them. The point is that "average wage" is a poor measure of how individual people are actually doing, since it really reflects changing demographics, not changes in individual fortunes.
Right, but that suggests it's not a problem.
If you want to reason from a composition change, there is a very simple solution: increased immigration by high income people only. That'll raise our average wages, albeit without necessarily making anyone better off.
Some parts of the UK do have cheaper housing but with good reason, low levels of employment.
Interested to hear the US and wider perspectives.
As a younger Baby Boomer, I am prime political fodder for appeals to "protect Social Security." Yet I support entitlement reform, even at my short-term detriment, because I care about my children. I do agree that young people today need to have older people like me drain less of the money they earn through work to fund entitlements paid to me. Rather, I support reforms that raise the retirement age and age of eligibility for other old-age benefits and put more of the economy's money in the hands of working people who can best decide how to spend it, funding entitlement programs on a more actuarially sound basis. Understanding the basic facts about the economy is an important first step for hackers and other entrepreneurs to have a business environment in which they can innovate and invest. Current policies are unsustainable and anyway are based on false factual premises. Americans can buy more of what they want for fewer hours of work than ever before in human history. Hackers can keep right on innovating, because Americans will never feel like they have enough. History makes that clear.
As others have pointed out this is very debatable. Especially since CPI is corrected for that already. Also consider certain goods have gone down in quality due to being mass produced instead of hand tailored. "Fresh" produce are more available but often old and stale because they come from far away. Inflation is overestimated on these types of items.
"health benefits, pensions, paid leaves and the rest now amount to an average of almost 31% of total compensation for all civilian workers"
Health care is costlier, securing a pension is costlier (due to low investment returns), more paid leaves are probably due to both adults working in a family which is unsustainable in times of family crisis. This is related to:
"Third and most important, the average hourly wage is held down by the great increase of women and immigrants into the workforce over the past three decades"
So let me get this straight, previously a single income was enough to sustain a family of often 5 or more and now you need two incomes for a family of only 3 or 4 and this dude thinks that makes people feel richer?? Also consider that one reason people don't have 5 kids anymore is that they wouldn't be able to afford them and can't take care of them because both parents have to be working.
"spending by households on many of modern life's "basics" fell from 53% of disposable income in 1950 to 44% in 1970 to 32% today." Is that for median households or is this number skewed by including the super rich in the average? I'm suspicious that this isn't specified. Also this is a complex number with lots of caveats. For a single earner family (remember this used to be sufficient), is this still true?
"Before airlines were deregulated, for example, commercial jet travel was a luxury that ordinary Americans seldom enjoyed."
The fact that technology has made air travel's costs more in line with other forms of travel, doesn't make a person richer. Sure it gives that person more options, and some quality of life improvements if he or she chooses these options. However, if a median worker could afford only a few train tickets a year in 1980 he still can't afford many more train or plane tickets today with his dwindling salary.
1) They have access to a higher quality of goods. 2) Don't forget deductions for health care and 2 weeks of vacation! 3) We pay women and minorities less, and since they've been entering the workforce in bigger numbers, it only looks like white males are being paid the same since the 60s.
Seriously?! Can we please keep politics off the front page? Or else we'll all be subjected to countless polemic summaries like this one and who wants that?
(But honestly, fuck this article.)
So one point they make is workers are paying more to their HMOs than ever, so the % of fringe benefits to wages has increased. This is proof against a stagnant middle class?
Then that a one income household can not cut it any more is mentioned. What does this have to do with a stagnant middle class? "The U.S. economy was [and is] flexible and strong". No kidding, I can see GNP going up as well. This has nothing to do with a stagnant (falling, actually) middle class.
The mention of 32% of disposable income - again, money is going to HMOs that went to nicer housing, cars, clothes etc. Also, I don't know what NBER report they're citing, those numbers look much lower than other reports I have seen. To believe this you would have to believe the middle class today has 68% play money with the 32% covering housing, cars and essentials.
"Joe Six-Pack when making a similar trip on a commercial jetliner. But unlike his 1970s counterpart, Joe routinely travels the same great distances in roughly the same time as do the world's wealthiest tycoons."
I know many people in their 20s and 30s with middle class jobs, many of them have never been on an airline ever. that airplanes have been improved means little to them.
The article sounds like just a lot of sophistry. The fact is that inflation-adjusted hourly wages are lower today than they were in the early 1970s. Even if you don't give a flying fuck about the average American, it means there are less consumers to buy new commodities coming out. They can go into debt to get it, but we all just saw what happened when the whole system is gamed so that these now poorer middle class people can buy houses with sub-prime mortgages.
Personally I don't have a Robert Reich/Paul Krugman/Keynesian view of this. My personal view is the economic system has much greater essential underlying weaknesses that little Keynesian measures won't fix over the long run. Which is just to say that just because I think Boudreaux and Perry are wrong doesn't mean I think Reich's suggested minor tweaks to the economy would work either.
You really think you'd rather be the median income 25 year old in 1973 vs. 2013? It's not sophistry to point out that today's median 25 year old has massive advantages in health, education, technology and basic quality of life over his 1973 equivalent. The real average wage captures none of this improvement, which is the point of the piece.
And the idea that life expectancy is what counts is absurd. 79 years of fighting for jobs where you're worked like mad fighting every week to stay out of debt while trying to get your kids some semblance of education in shittier and shittier school systems sure sounds a hell of a lot nicer than the past because what, iPhones exist?
Also, in the '70s, it wasn't the "spouse" raising the kids at home, it was the wife. The huge increase in available roles for women is another thing not captured by the average real wage (and as the piece points out, probably had a negative impact on it).
My real point is that, regardless of whether or not wage stagnation has occurred, the "middle class" is not in a good position. Median household income is $52,000. You can survive on that while raising 2 kids, paying rent or a mortgage, and paying for a car if you are smart about it. But you aren't very well positioned to get ahead and you certainly aren't in a position to have a couple of smartphones, premium cable tv on a big flat screen tv, with the newest computers, etc. like we are taught to aspire to.
Yes, there is more tech, better healthcare, etc., but your money goes a lot less far than it did when you could have a single worker earning enough to afford the "same" (relatively) overall quality of life. It's not a perfect comparison by any means, but saying wage stagnation doesn't exist and therefore we shouldn't care about it seems utterly bizarre when you look at what most of the nation has to live on.
I just can't wrap my head around how anyone can look at this article and especially that horrible infographic that the WSJ published and think anything except how out of touch and frankly stupid people are about the reality of our collective situation.
Nobody's forced to go to college. They do it (hopefully) because it's a good investment in their own success and happiness. And let's be frank: The government has made sure it's incredibly easy to finance, and if it feels like a huge burden to be there rather than working shifts at a steel mill, you're probably doing it wrong.
No, the point is that compensation/worker is up, but wages/worker is down, implying that non-wage compensation/worker is up.
Then that a one income household can not cut it any more is mentioned.
Define "cut it". If "cut it" means "purchase the same basket of goods and services that the typical family had in 1970", they almost certainly can.
A worker who purchases the same basket of goods and services that the typical family has in 1970 is not going to "cut it". To make the same wage he did in 1970, he will now have to pay for his own job training, college degree and so forth. Employers now require more education from workers. The typical family is now forced to pay a new expense in their basket - their own training and educational costs - forced meaning if they want to remain a typical family, and not fall further then they already have.
The skyrocketing health costs pay for fancy new treatments which didn't exist in 1970. CPI includes no hedonic adjustment to health care - it focuses and ignores benefits. (In contrast, some categories such as food and housing attempt to incorporate hedonic adjustments.)
Last Feb I had spine surgery that didn't exist in 1970, guided by a scanner which didn't exist in 1990. This Feb I'm on track to deadlift well over my bodyweight. None of this was free. Suffering back pain in 1970 was. I'm quite happy to pay a bunch of money today for these benefits, happier than I would have been suffering with back pain in 1970. I.e., my real wage went up relative to my hypothetical 1970 self because of health care.