I will be posting soon on the living standards of the poor, but I first wanted to take some time to respond to Mike Konczal of Rortybomb. Mike argues that incomes have stagnated since 1999, which coincides with a dramatic rise in consumer borrowing. Kevin Drum picks up his post and runs with it. Let me start out by saying that I wasn’t so much objecting to Mike’s (or more specifically, Raghuram Rajan’s) hypothesis as I was objecting to general claims that wages have stagnated.
But Mike’s analysis has some problems. First, while he wants to argue that 1999 represented the start of a period of stagnation, a quick look at his chart will reveal that the significance of that year is that it is a cyclical peak year. The trend line hits local peaks at the height of the business cycle going all the way back through the late 1960s. The decline in real income from 1999 through the early 2000s isn’t any steeper than in previous downturns (it’s the recovery from the mid-2000s forward that’s weak). So it’s unclear to me why consumers became overleveraged this time but not in previous recessions.
Beyond that, Mike’s chart on household credit market debt is misleading. He’s comparing income levels in his first chart to debt changes in the second one. Conveniently, they sort of support his hypothesis. But he should be comparing levels to levels. Here’s the chart showing levels of household credit market debt:
Put the two charts together and you get this one:
If you can find a relationship there, you are more creative than I am. One more thing: “credit market debt” includes mortgages, car loans, and credit card debt. But the first two of those are secured by assets, so charting the change in debt without accounting for changes in assets is also misleading.
OK, Mike’s next objection is that the increase in income that I documented is due to households working more hours—in particular, wives. But here’s the thing—part of the reason that male compensation has “stagnated” (in quotes because I don’t believe that’s true) is due to the increase in work among women (increased supply of labor leads to lower wages). We don’t know what the counterfactual would have been had women not increased their hours.
As for “middle class woes,” foreclosures have risen dramatically, but they are a tiny percentage of mortgages (and a sizable chunk of homeowners don’t have mortgages because they’ve paid them off). The Calculated Risk post that Mike links to shows that other than Florida and Nevada (where many foreclosures are properties owned by speculators), between one and six percent of mortgages were in foreclosure as of mid-2009.
Oh, and about that “stagnation” since 1999—if you compare 1999 to 2007 (both peak income years), median household income using a comprehensive measure (that nevertheless does NOT include the value of health insurance) rose from $44,205 to $46,201 (in 2007 dollars, using the CPI-U-RS). [See Alternative Measures of Income and Poverty, Definition 14a.] Using my preferred PCE deflator, the increase is from $42,786 to $46,201—an 8 percent increase.
As for Kevin’s contrasting of per capita income growth and household income growth, see Steve Rose’s explanation of why these comparisons are apples-to-oranges.
The views expressed in this piece do not necessarily reflect those of the Progressive Policy Institute.
Tags: Economy, Inequality, Middle class, Poverty, Taxes, wages
[...] Scott Winship responded with a thoughtful post addressing my argument. I want to finish my argument and then respond to [...]
[...] Scott Winship responded with a thoughtful post addressing my argument. I want to finish my argument and then respond to [...]
[...] Scott Winship responded with a thoughtful post addressing my argument. I want to finish my argument and then respond to [...]
I’ve always viewed the CPI as faulty; it vastly OVERstates inflation, particularly since the mid-1990s, when imports of consumer goods really took off, and systems and software passed the 50% mark as a fraction of corporate capex.
The hedonic adjustments which BLS makes don’t go nearly far enough. Medical care is probably the most egregious example. Nowhere in the data for medical inflation are there adjustments for life expectancy, which has risen by 4.8 years just since 1995. What has greater real value than extra years of life?
The implications of this sort of statistical “miss” are manifold. They include real interest rates that have been too high for too long (a powerfully deflationary force), as well as real growth, productivity and profits higher than reported. It also answers the riddle about the supposed lack of real wage growth since 1980. Wages are defined by what they will buy in real terms, and the average wage earner in the U.S. today has a demonstrably better quality of life than he or she did in 1980, no matter what the data say.
Ask yourself how it is that the Wilshire 5000 has outperformed the U.S. Long Term Treasury index by only 140 bps annually since January 1980, with the entirety of this premium earned in just the last 9 months? Maybe the bond market has a clue about the “broken CPI” problem? If inflation is overstated, it means the fraction of the total return from either bonds or stocks that is attributable to offsetting inflation is overstated as well. If, over time, the bond market (which historically is more inflation sensitive) sees less of a need for this premium relative to stocks, bond returns will gravitate toward stock returns. This is in fact what happened.