My last post tackled inequality trends in the U.S. and how progressives ought to think about them. Now I want to look at middle-class living standards. In the course of basically agreeing with Dalton Conley that progressives should be more concerned with poverty than inequality, Kevin Drum argues that what got lost from the Conley analysis is the stagnation of the middle class (“sluggish middle class wages in a country that’s been growing energetically for decades”). And yesterday he endorsed the views of economist Raghuram Rajan, who blames the financial crisis on “the purchasing power of many middle-class households lagging behind the cost of living.”
Kevin has always been one of my favorite bloggers, but I have to disagree with him here—both in terms of the level of income the typical American has and in terms of recent trends, a careful look at the data implies that the middle class is doing pretty well. The common belief among progressives that this isn’t the case causes us to misdiagnose what the nation’s most pressing economic problems are and to put forth an agenda that doesn’t resonate as strongly as we think it does.
My friend Steve Rose really deserves the most credit for trying to draw attention to the reality of middle-class living standards being better than the left believes. In a much-circulated report for PPI and in his analyses for Third Way, Steve showed that, for instance, when measured correctly, the typical working-age American’s income is much higher than official statistics imply.
Many progressives thought that Steve was somehow pulling a fast one, a view with which I strongly disagree, but let me make similar points in a more transparent way here. First, consider what many progressives consider “the good old days”—the height of the pre-1970s economic boom. In 1973, the median inflation-adjusted income was higher than it had ever been and higher than it would be again until 1978—$45,533 (in 2008 dollars). Call this the gold standard before, in the conventional progressive telling, things started going south.
How much did things go south? Well, in 2008 the median was $50,303. That’s right—about $5,000 higher (after adjusting for changes in the cost of living). This improvement understates things because households also became smaller over time, and because the inflation-adjustment here probably overstates inflation. For instance, if one uses the Bureau of Economic Analysis’s Personal Consumption Expenditures deflator, the increase from 1973 to 2008 was about $7,700, or 18 percent. Not only does that still not adjust for declining household size, it also doesn’t include changes in taxes, non-cash benefits, the value of health insurance, and capital gains. Incorporating these adjustments shows an increase in living standards that is more like 40 percent.
Rather than household income, others on the left point to stagnation in men’s wages (women’s wages have increased dramatically by any measure). For example, the Economic Policy Institute estimates that the median male worker’s hourly wage was $16.88 in 1973 and $16.85 in 2007. However, EPI’s figures show that when fringe benefits are taken into account, the median male worker’s hourly compensation increased by somewhere between 5 and 10 percent over this period. And these estimates don’t use the PCE deflator. Nor do they account for changes in taxation and public benefits—the very means we use to mitigate low income.
To review, “stagnation” of household income or male wages means that after adjusting them for the rising cost of living, they are as high as they were in the glory days of the 1960s and early 1970s–they have actually increased. When analysts on the left concede these increases, they then move the goal posts and argue that wages have not grown as much as they should have. Typically, they contrast modest wage growth with more rapid productivity growth. But too often these analyses are done on an apples-to-oranges basis. Critics left, right, and center have all pointed out flaws with the kind of comparisons that EPI and others make. Careful analyses reduce the gap between productivity growth and wage and income growth, though they don’t necessarily eliminate it. At any rate, economic theory says that compensation will increase with productivity all else being equal, and all else has not remained static.
It is certainly true that wage growth has been slower since 1973 than in the two previous decades. But that isn’t a realistic bar to use. The U.S. was the only major economy left standing after World War II, and there was little foreign competition putting downward pressure on manufacturing wages and jobs. The period between WWII and 1973 was anomalous—it could not have been expected to have lasted.
The other way to judge middle-class living standards in the U.S. is to compare them to those in other countries. The Luxembourg Income Study shows that at most points in the income distribution (the 25th percentile, the median, the 75th percentile), income in the U.S. exceeds that in nearly all European countries, including Sweden, the model for many on the left. (The most accessible evidence on this is in a 2002 article in the journal Daedalus by Christopher Jencks.) Determining how to incorporate publicly provided benefits such as education and health care is very complicated, but the evidence we have indicates that American middle-class living standards are at worst comparable to those in European nations.
Trying to persuade the middle class that it is worse off than it is potentially has harmful side effects. For one, as economist Benjamin Friedman and sociologist William Julius Wilson have argued, people are more generous when they feel they are doing well. When they feel economically threatened, they are more inclined to protect what they have than to help others. What’s more, widespread economic malaise can be a self-fulfilling prophecy, preventing people from making the individual choices that ensure, for instance, a strong recovery from recession. In terms of policy, the belief that the middle class is doing poorly can lead to scarce public resources being diverted to those doing relatively well rather than being used to help those truly in need. And politically, it can lead to a tone-deaf and unpersuasive populism that does little to help Democrats win in swing districts and close elections.
Again, the point here is that progressives should care about the facts. Up next…the poor.
The views expressed in this piece do not necessarily reflect those of the Progressive Policy Institute.
Tags: Economy, Inequality, Middle class, Poverty, Taxes
[...] Click here to read the next post in the series. The views expressed in this piece do not necessarily reflect [...]
[...] this conjecture is that middle-class incomes have not been stagnating. Over at Progressive Fix, Scott Winship lays down the data and reminds the left of the importance of an reality-based stance. I think it’s pretty clear [...]
[...] there’s an interesting dissent to the hypothesis. Scott Winship at Progressive Fix lays out data that goes against this argument, concluding “Again, the point here is that [...]
I know it is terrible to come off acerbic but this blog post sounds like another rationalization of the rich post.
A realistic minimum needs income (A.K.A., poverty line) for a family of three is $45,000/yr if they have to pay for their own health insurance. (See tables on p. 44 of the 2001 book “Raise the Floor” — quotes $5/day for food; no entertainment — don’t forget to adjust for inflation since 2001. The official federal poverty line, $18,000+ for a family of three, developed mid-50s and adopted mid-60s, is based on 3X the price of an emergency low cost diet — period.)
The $45,000 family in the U.S. Census (average 3.3 people, close enough) was 37%, last I looked. Shave 7% for those whose health care is paid and we have 30% of US families below the minimum needs (poverty) line not counting government helps like food stamps, etc. Count gov helps and we get 18% of US families below the poverty line — DOUBLE THE AVERAGE INCOME since LBJ. I worked this out here: http://ontodayspage.blogspot.com/2008/02/are-38-of-american-families-living.html
Income in the US exceeds European mostly because we work much longer hours per capita — reportedly 50% more than Germans!
Which brings up another point. Much income growth — or hold-the-line — for American families of past decades has resulted from ever more of their members being pressed into service.
The numbers presented by Scott shows that the middle class, basically, went nowhere, in terms of income growth, during the 30 years from 1978 to 2008. He’s trying to put a positive spin on the numbers by using absolute numbers.
For instance, the median inflation adjusted income grew by 0.3% annually, from 45,533 in 1978 to 50,303 in 2008, compared to average real GDP growth of 2.88%. The 0.3% is almost within the error margin (for national economic statistics). Median inflation adjusted income went, more or less, nowhere for 30 years. Scott spins this as a big victory for the middle class. What is he smoking?
Scott’s message is that the middle class should be happy with a 1970’s style living standard, in spite of working harder with greater insecurity and skyrocketing college costs, while the top tier of society have accumulated, more or less, all the productivity gains since then.
I’m still waiting for a reason that justifies the growing inequality. Inequality is justified in a micro-economic setting, we want to reward hard work and creativity, but we’re discussing macro-economics here.
Inequality, on a macro-economic level, is a political choice. The root cause of the current recession is the growing inequality. The middle-class kept up for a while through borrowing, but it’s now time to pay the piper. The financial crisis is just a symptom of the growing inequality.
To Lagman: You state that “The numbers presented by Scott shows that the middle class, basically, went nowhere, in terms of income growth, during the 30 years from 1978 to 2008.”
Try 40 PERCENT increase.
Please re-read this section from what Mr. Winship wrote ” This improvement understates things because households also became smaller over time, and because the inflation-adjustment here probably overstates inflation.
For instance, if one uses the Bureau of Economic Analysis’s Personal Consumption Expenditures deflator, the increase from 1973 to 2008 was about $7,700, or 18 percent.
Not only does that still not adjust for declining household size, it also doesn’t include changes in taxes, non-cash benefits, the value of health insurance, and capital gains. Incorporating these adjustments shows an increase in living standards that is more like 40 PERCENT.”
[...] this conjecture is that middle-class incomes have not been stagnating. Over at Progressive Fix, Scott Winship lays down the data and reminds the left of the general importance of a reality-based [...]
Correct me if I’m wrong, but aren’t more people working per household now then in the past. Women have entered the work force in vast numbers over the last 30 years, shouldn’t that have raised household income by more then just 18 percent? I would sure like to see data for household income adjusting for the number of workers per household.
http://www.census.gov/prod/2009pubs/p60-236.pdf
September 10, 2009
Real Median Earnings of Full-Time, Year-Round Workers by Gender: 1960 to 2008
(Male earnings) *
2008 ( 46,367)
2007 ( 46,846)
2006 ( 45,130)
2005 ( 45,644)
2004 ( 46,502)
2003 ( 47,609)
2002 ( 47,189)
2001 ( 46,548) Bush
2000 ( 46,576)
1999 ( 47,024)
1998 ( 46,625)
1997 ( 45,041)
1996 ( 43,924)
1995 ( 44,184)
1994 ( 44,325)
1993 ( 44,616) Clinton
1992 ( 45,403)
1991 ( 45,358)
1990 ( 44,201)
1989 ( 45,822) Bush
1988 ( 46,619)
1987 ( 47,042)
1986 ( 47,338)
1985 ( 46,171)
1984 ( 45,827)
1983 ( 44,956)
1982 ( 45,153)
1981 ( 46,022) Reagan
1980 ( 46,303)
1979 ( 47,026)
1978 ( 47,642)
1977 ( 47,336) Carter
1976 ( 46,295)
1975 ( 46,422)
1974 ( 46,713) Ford
1973 ( 48,452) (High)
1972 ( 46,956)
1971 ( 44,557)
1970 ( 44,367)
1969 ( 43,899) Nixon
1968 ( 41,567)
1967 ( 40,480)
1966 ( 39,851)
1965 ( 38,183)
1964 ( 37,647)
1963 ( 36,787) Johnson
1962 ( 35,886)
1961 ( 35,242) Kennedy
1960 ( 34,152)
(Female earnings) *
2008 ( 35,745)
2007 ( 36,451) (High)
2006 ( 34,722)
2005 ( 35,136)
2004 ( 35,610)
2003 ( 35,968)
2002 ( 36,148)
2001 ( 35,530) Bush
2000 ( 34,336)
1999 ( 34,005)
1998 ( 34,116)
1997 ( 33,403)
1996 ( 32,399)
1995 ( 31,560)
1994 ( 31,900)
1993 ( 31,909) Clinton
1992 ( 32,139)
1991 ( 31,686)
1990 ( 31,655)
1989 ( 31,467) Bush
1988 ( 30,791)
1987 ( 30,661)
1986 ( 30,424)
1985 ( 29,815)
1984 ( 29,173)
1983 ( 28,589)
1982 ( 27,880)
1981 ( 27,261) Reagan
1980 ( 27,856)
1979 ( 28,057)
1978 ( 28,319)
1977 ( 27,892) Carter
1976 ( 27,866)
1975 ( 27,305)
1974 ( 27,446) Ford
1973 ( 27,440)
1972 ( 27,169)
1971 ( 26,514)
1970 ( 26,340)
1969 ( 25,841) Nixon
1968 ( 24,173)
1967 ( 23,391)
1966 ( 22,936)
1965 ( 22,881)
1964 ( 22,268)
1963 ( 21,685) Johnson
1962 ( 21,280)
1961 ( 20,881) Kennedy
1960 ( 20,722)
* In 2008 adjusted dollars
To WJ:
You may be right but from 1973 to 2008 average income grew 66% even if you only count cash — according to a not universally accepted Census inflation measure (CPI-U-RS) which conveniently for incumbent administrations yields lower inflation numbers and correspondingly higher growth numbers than other federal inflation measures.
http://www.census.gov/prod/2009pubs/p60-236.pdf
September 10, 2009
Real Median Household Income, 1968-2008
2008 ( 50,303) *
2007 ( 52,163)
2006 ( 51,473)
2005 ( 51,093)
2004 ( 50,535)
2003 ( 50,711)
2002 ( 50,756)
2001 ( 51,356) Bush
2000 ( 52,500)
1999 ( 52,587) (High)
1998 ( 51,295)
1997 ( 49,497)
1996 ( 48,499)
1995 ( 47,803)
1994 ( 46,351)
1993 ( 45,839) Clinton
1992 ( 46,063)
1991 ( 46,445)
1990 ( 47,818)
1989 ( 48,463) Bush
1988 ( 47,614)
1987 ( 47,251)
1986 ( 46,665)
1985 ( 45,069)
1984 ( 44,242)
1983 ( 42,910)
1982 ( 43,212)
1981 ( 43,328) Reagan
1980 ( 44,059)
1979 ( 45,498)
1978 ( 45,625)
1977 ( 43,925) Carter
1976 ( 43,649)
1975 ( 42,936)
1974 ( 44,091) Ford
1973 ( 45,533)
1972 ( 44,632)
1971 ( 42,798)
1970 ( 43,219)
1969 ( 43,557) Nixon
1968 ( 41,995)
* Income in 2008 adjusted dollars
I think Scott is saying that increased health-care costs, skyrocketing college tuition, and a 401K account instead of a pension, are “non-cash benefits” that make up for the lack of income.
Rune, you are probably right — but WJ’s position was wrong in any case. I was wondering about Scott’s capital gains in particular.
Bottom line: in 1968 the median wage was $12.50/hr in today’s money. Double the average income later it is now $15/hr. As I commented yesterday earners at the 90-97 percentile level just kept pace with average income growth — so it is not a matter of high tech labor getting a bigger share in a higher tech economy. Relative value of labor seems to stay pretty much the same. More people going to college means you have to have college to be a cop, that’s all.
$1.2 million was average top 1% household income in 2006. That was not your family doctor. It was not even 180,000 Wall Street gamblers who averaged $180,000 bonuses on top of their average $120,000 salaries in 2007. American — UNIQUELY; didn’t happen everywhere so it is not higher tech — income growth all went to the tippy tippy top who did nothing special to earn it but be in the right place in the wrong era.
Most all American poverty or inequality in my opinion is caused by supposedly more market oriented American labor not understanding the first thing about the labor market: that to get as much as the market is WILLING TO PAY you — you have to be able to withhold your labor with the same effect on bargaining as ownership can have withholding its capital (no problem with the “hidden hand” at all). This means unions which in the modern era can only mean something already working for working people all around the better paid OECD world (including French Canada right next door — excluding labor strangled Japan): SECTOR-WIDE LABOR AGREEMENTS: unionization by law with all who do the same job in the geo locale working under the same universally negotiated contract. Wal-Mart just pulled 88 big boxes from Germany where they had to pay the same wages and benefits: it works!
It just plain works — simple as that. Just don’t ever expect any of our most brilliant and progressive economists to every bring sector-wide agreements to America’s attention. They are waiting for someone over here to re-invent the wheel all by themselves or something. ???
[...] don’t know enough economics to add anything of real value to the ongoing conversation about economic inequality, middle class wages, and the extent to which former is increasing and the [...]
This is kinda ridiculous. In the 70’s, a college tuition was not required to become a member of the middle class and was more affordable besides. And counting skyrocketing healthcare costs as a benefit requires a Pollyanna world view. This is just tallying every possible benefit while hiding the most dramatic costs. Of course you’ll get a favorable picture that way.
Can the author please explain why he chose to treat household size as an exogenous variable? I would expect there are many factors contributing to the change in household size, but surely the higher monetary costs associated with larger households is one of them. In other words, it may be that smaller households are a strategy for mitigating the effects of stagnant wage growth.
[...] Last week, I spent some time looking at the living standards of the middle class, showing that they have improved notably over time and giving evidence that they are better than or comparable to middle-class lifestyles in other industrialized nations. I will be returning to this issue in a later post in order to address the “two-income trap” argument of Elizabeth Warren, which was raised by Reihan Salam and by Rortybomb. [...]
[...] “Inequality, Living Standards, and the Middle Class”, Scott Winship (Pew Economic Mobility Project), Progressive FIX, 12 January 2010 – Part One and Part Two. [...]