Posts Tagged ‘ Inequality ’

Nobel Laureate Joseph Stiglitz is All Sorts of Wrong on Inequality

Tuesday, April 12th, 2011
Scott Winship


Scott Winship is research manager of the Pew Economic Mobility Project and a recent graduate of Harvard's doctoral program in social policy. The views he expresses do not represent those of Pew.

by Scott Winship

I’m never going to win a Nobel Prize.  Maybe in literature.  I don’t know why Joseph Stiglitz’s new Vanity Fair piece on inequality is so off-base.  But it is.  And it’s incredibly frustrating (1) to see someone so intelligent be thwarted by ideology and (2) to watch as his views are propagated on the basis of his name recognition.

What’s a lonely uninvited-to-Davos blogger to do?  Blog.  Herewith, my fact check of the VF article.  Stiglitz writes

The upper 1 percent of Americans are now taking in nearly a quarter of the nation’s income every year.  In terms of wealth rather than income, the top 1 percent control 40 percent.  Their lot in life has improved considerably.  Twenty-five years ago, the corresponding figures were 12 percent and 33 percent.

Stiglitz doesn’t cite any of his figures (possibly a limitation of the outlet), but the Piketty & Saez estimate of the top one percent’s income share in the most recent year (2008) was 18 percent, which is just a hair closer to “nearly a quarter” than it is to “just over a tenth”.  Their data says that share was 9 percent in 1985, but that should be adjusted upwards to 13 percent.  Similarly,  CBO says the top one percent’s share was 17 percent in 2007 for after-tax income, up from 11 percent in 1989.  Saez’s estimate of the top one percent’s share of wealth is 21 percent for 2000, 21 percent for 1990, and 22 percent for 1985.  Edward Wolff’s is 35 percent for 2007, up from 34 in 1983 (which I doubt is statistically different from 35 in this case).  The top appears to have experienced income and wealth losses from 2007 to 2009 while the bottom experienced gains.  Taken together, the top one percent’s income share rose from 11-13 percent twenty-five years ago to 17-18 percent according to the most recent data.  The top one percent’s wealth share basically hasn’t risen.

MIT economist Erik Brynjolfsson’s comments led me to add this paragraph:  Brynjolfsson raises an important point (though I wouldn’t call it a mistake) in noting that Stiglitz may have been referring to the Piketty and Saez numbers that include realized capital gains in “income”.  I chose the series excluding capital gains because the timing of when capital gains are realized has everything to do with tax law, the strength of the economy, and when people retire.  The P&S series including capital gains still doesn’t account for all the unrealized gains accruing to people (most importantly, those accruing to people in their retirement accounts).  Capital gains realization is “lumpy” in a way that makes trends problematic.

But I will concede that the level of the top’s income share (including realized capital gains) is closer to 25 percent than the P&S numbers I cite above suggest.  Now whether their share of income including unrealized capital gains is closer to 25 percent or 17 or 18 percent is an open question.  And I still say the series excluding capital gains is the way to go for trend estimation.  But look, all this aside, the CBO series includes realized capital gains (but also considers taxes and other things the P&S series leaves out).  And it shows the same basic trend and level as my conclusion above.]

While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall.  For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone.

The 18 percent figure looks to be from Piketty and Saez (the change from 1998 to 2008).  The claim about median incomes falling is incorrect if one takes into account the value of employer- and government-provided health insurance.  (Majorities of workers with employer coverage say they prefer more generous coverage to higher wages, so it turns out employers aren’t crazy in substituting ever-more-costly insurance for wages over time.)  The decline in earnings (not income) for men with just a high school diploma is probably less than 12 percent.  Based on some analyses I’ve been working on using the Current Population Survey, I find that men with a high school diploma but no four-year college degree saw a 12 percent decline in earnings over the roughly 33-year period from 1971-73 to 2003-2007, but that doesn’t take into account the caveats I mention in this post.  And earnings among women with the same level of education  rose by over 50 percent, so that’s inconvenient for Stiglitz.

The change in household or family income among men with just a high school diploma was, I’d wager, positive even before factoring in the caveats.  And while I can’t cite the paper yet, research I’ve seen using the PSID rejects the conclusion that wives have been forced to work more due to stagnant husband earnings—the biggest increases in work were among wives with the best-educated husbands, and while the hours of married men declined, those of single men did not (suggesting that the decline among married men was a reaction to increased work among their wives).  I’ll update this post when I can cite the paper (though that won’t be for a couple months anyway).  But think about it–did all these women increase their college-going simply in anticipation of marrying men with stagnant earnings, or did they prefer the fulfilling professional options that a college degree afforded them?  Or consider–is declining fertility, delayed marriage, and increased college-going among women in developed countries around the world all somehow related to rising American inequality?  You can get the basic trend on work by sex by marital status from Table 1 of this paper while you anxiously await my update.

All the growth in recent decades—and more—has gone to those at the top.

Nope, not if “the top” refers to “the top 1 percent” cited two sentences earlier.  According to the Piketty and Saez data, depending on whether one uses the share of nominal or real (inflation-adjusted) gains and whether one includes or excludes capital gains in “income”, the share of income growth going to the top one percent from 1998 to 2008 was between 22 and 33 percent.  If you go back to 1988, the range is from 19 to 32 percent of gains since then.  And keep in mind that when you start from an unequal distribution, if everyone experiences the same rate of income growth, a disproportionate share of gains will go to the top.

In terms of income inequality, America lags behind any country in the old, ossified Europe that President George W. Bush used to deride.  Among our closest counterparts are Russia with its oligarchs and Iran.

Compared to nearly all of the major nations of western and central Europe, the U.S. does have higher inequality (but it may not be that far off from the U.K. or Canada).  The only numbers I could find for Russia and Iran are from the CIA World Factbook (the quality of which I can’t speak to).  Out of 136 countries, the U.S. is ranked 40th worst.  Iran is ranked 43rd and Russia 52nd.  So that sounds bad, right?  Meh.  Hong Kong and Singapore rank worse than the U.S., and Indonesia, India, and Ethiopia rank much better than Russia.  Stiglitz will have to do better than this if he wants to argue that American inequality is a big deal.

First, growing inequality is the flip side of something else; shrinking opportunity….Second, many of the distortions that lead to inequality—such as those associated with monopoly power and preferential tax treatment for special interests—undermine the efficiency of the economy.

OK, so now Stiglitz is trying to tell us why we should care about the inequality that he exaggerates.  But these are just assertions.  The best evidence suggests that opportunity for men to move from the bottom to the top over the course of a career hasn’t changed much over the past 35 to 40 years, and it has unambiguously increased for women (see Figures 15A and 15B).  Across generations, the evidence is extremely thin, but it doesn’t point to an unambiguous increase or decrease in opportunity over the past few decades.  As for inequality and efficiency, my dissertation advisor, Christopher Jencks, has found that there is little correlation between economic growth and inequality levels, which doesn’t exactly help those who believe inequality promotes growth but is equally problematic for Stiglitz and others who believe that inequality is inefficient.

When you look at the sheer volume of wealth controlled by the top 1 percent in this country, it’s tempting to see our growing inequality as a quintessentially American achievement…

Here Stiglitz is conflating income inequality (growing) with wealth inequality (basically flat and at a historic low in the U.S.).  Whatevs.

America’s inequality distorts out society in every conceivable way.  There is, for one thing, a well-documented lifestyle effect—people outside the top 1 percent increasingly live beyond their means.

So document it!  The share of families with any debt rose from 72 percent in 1989 to 77 percent in 2007, though note that the share with assets also grew.  Median net worth (assets minus debt) rose from $75,500 to $120,600.  In the wake of the housing bust, it fell, but it was still around $92,000 in 2009.  Among people with debt, median debt payments rose from 15.3 percent of family income in 1989 to 18.6 in 2007.  These are pretty small changes in indebtedness, and I’m not sure how Stiglitz could empirically link them to inequality.

Inequality massively distorts our foreign policy.

Ummm…going for the Peace Prize next?

The chances of a poor citizen, or even a middle-class citizen, making it to the top in America are smaller than in many countries of Europe.

What little evidence there is suggests that upward mobility is lower in the U.S. only for men and only for those who start out poor.  [UPDATE: Just to clarify, I'm talking about only men who start out poor, not men plus all people who start out poor.  See the linked paper for details, but we're talking about 12 to 13 percent of the population, roughly.]

All of this is having the predictable effect of creating alienation—voter turnout among those in their 20s in the last election stood at 21 percent, comparable to the unemployment rate.

Oh boy, the shift to political science by economist pundits is always fraught with danger.  The 2010 election is a single data point (and an off-year election, when voting rates are much lower).  I’ll just quote from a fact sheet from a Tufts research center that studies civic engagement among youth:  “The 2008 election marked the third highest turnout rate among young people since the voting age was lowered to 18.”  What any of this has to do with inequality is anybody’s guess.

In recent weeks we have watched people taking to the streets by the millions to protest political, economic, and social conditions in the oppressive societies that they inhabit….The ruling families elsewhere in the region look on nervously from their air-conditioned penthouses—will they be next?…As we gaze out at the popular fervor in the streets, one question to ask ourselves it this: When will it come to America?

My guess is never.  By the way, Joe, be honest–were you using a pseudonym here?

 

Crossposted at ScottWinshipWeb

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Posted in A New Framework for Growth and Equity, Daily Fix | 1 Comment »

Inequality and Government

Tuesday, August 24th, 2010
Ed Kilgore


Ed Kilgore is a PPI senior fellow, as well as managing editor of The Democratic Strategist, an online forum.

by Ed Kilgore

It’s one of the great ironies of this political era of discontent that some of the most exceptional indicia of economic inequality in recent American history are being accompanied by a populist backlash against income redistribution, even in its most time-honored forms.

Jacob Hacker and Paul Pierson, who wrote an important analysis of latter-day conservatism and it impact on political discourse in Off Center, have returned with a book on the politics of inequality: Winner-Take-All Politics: How Washington Made the Rich Richer–And Turned Its Back on the Middle Class.

I’ve done a full review of this book for the Washington Monthly, and you can check that out at your leisure. But the book is useful in two major respects: (1) It focuses not just on the ever-growing divide in wealth and income between the top and everyone else, but between the top-of-the-top and everyone else, a process that has been largely immune to the economic vicissitudes of the last decade. (2) It makes a very strong case against the assumption that this sort of inequality is the “natural” product of market forces, rather than the artificial results of government policies deliberately promoted for that purpose.

I tend to think that Hacker and Pierson underestimate the deep-seated, non-contrived extent of anti-government sentiments among Americans, and the contributions of poor public-sector performance in abetting them, but all in all, their book is a very valuable contribution to our understanding of the politics of the economy today and yesterday. It’s a book that will probably make you mad–but in a constructive way. It’s certainly an appropriate read for the upcoming Labor Day weekend.

This item is cross-posted at The Democratic Strategist.

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Posted in A New Framework for Growth and Equity, Daily Fix, Issues | 1 Comment »

Prices, Wages, Food and Inequality

Friday, June 4th, 2010
Scott Winship


Scott Winship is research manager of the Pew Economic Mobility Project and a recent graduate of Harvard's doctoral program in social policy. The views he expresses do not represent those of Pew.

by Scott Winship

Mike Konczal’s inequality post as a guest blogger for Ezra is getting a bit of attention in the blogosphere. Konczal jumps off of an interesting post by Jamelle Bouie to argue that contrary to those who argue that “inequality isn’t so bad,” the unhealthy nature of the cheaper food that is purchased by the poor negates the fact that the poor face a lower inflation rate. Since he suggests I (and Will Wilkinson) think that “inequality isn’t so bad,” I wanted to correct a misconception that Konczal has about the argument of economist Christian Broda that he is responding to. Broda’s actual argument really doesn’t have anything to do with how healthy the things purchased by the poor are.

Here’s Konczal:

One argument that has become popular recently is that the increase in income inequality isn’t quite as bad because both the rich and the poor have different ‘inflation’ rates — the prices at which goods increase for the rich have been increasing much faster than the prices at which goods have been increasing for the poor. So even though the poor or median person hasn’t had any wage growth, he has much more purchasing power because of this effect.

This isn’t quite the argument that has become popular recently. What fans of the Broda research argue (i.e., what Broda and his colleagues argue) is that the apparent increase in income inequality may overstate the actual increase in inequality because the poor appear to have a lower inflation rate than the rich. If true, then it’s not that “the poor or median person hasn’t had any wage growth,” it’s that they have had wage growth because of their lower inflation rate — and the wage growth has been big enough that it has kept the ratio of rich-to-poor incomes roughly constant.

Think of it this way. Broda and his colleagues find that the prices of what the poor buy (that is, “price” when the satisfaction derived, or utility, is held constant) have risen less than the prices of what the rich buy. That’s because when prices of related goods change, the poor are more likely to switch to cheaper goods, all the while maintaining their overall level of satisfaction with their purchases. If it becomes cheaper to maintain a constant level of satisfaction, then one’s wages have effectively grown. So poor consumers may switch from Green Giant frozen veggies to generics when the latter go on sale, or they might buy their frozen veggies at the chain a couple of neighborhoods over rather than the local grocery store when the latter’s prices go up. Rich consumers, on the other hand, may be relatively unlikely to stop buying Whole Foods vegetables when the plebian chain’s prices are cut. They may not switch to generics as those products become cheaper relative to those on offer at the farmer’s market.

It’s not that we should be excited about how great the generic frozen veggies bought by the poor are compared with the Whole Foods produce. It’s that we should be excited that the poor are either more willing or more able to economize to maintain a constant lifestyle than the rich are, and so inflation eats into their quality of life to a lesser extent than it does among the rich, holding in check other forces that would increase inequality.

Now, Broda’s research is based on purchases of a limited number of commodities and over a limited number of years, but if his findings extend to other goods and services and to earlier periods (which he believes they do), then the implication is that inequality between the poor and the well-off — though not necessarily the richest of the rich — has not grown. We can still worry about the quality of the food purchased by the poor and their health outcomes, but that’s a story about poverty and deprivation, not about inequality or growth in inequality.

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Explaining Inequality Trends: Pretty Simple?

Friday, May 7th, 2010
Scott Winship


Scott Winship is research manager of the Pew Economic Mobility Project and a recent graduate of Harvard's doctoral program in social policy. The views he expresses do not represent those of Pew.

by Scott Winship

James Kwak, coauthor of the new financial crisis book 13 Bankers, recently sought to explain his thesis “in 4 pictures.” And impressive pictures they are. But I’ve been particularly struck by one of them — this chart, from a paper by economists Thomas Philippon and Ariell Reshef, showing the close correspondence between deregulation trends on the one hand and the ratio of financial sector wages to private sector wages on the other. My reaction to the chart was essentially, Huh. Those trend lines look like the basic income inequality trend line.

But to my knowledge, no one has really made this point since the chart has circulated widely. Certainly no one has tried to illustrate it.

Maybe people just lack my whiz-bang PowerPoint and Excel skills, or maybe I’ve actually had an Original Thought. But take a look at the chart I created, which overlays a trend line showing the share of income received by the top one percent (the black line) on top of the Philippon-Reshef chart. The trend line comes from the widely cited work of economists Thomas Piketty and Emmanuel Saez, who used IRS data to look at the incomes of the very rich:

I’ve argued before that I think the Piketty-Saez top-share trend line overstates the recent rise in income inequality, but I don’t see much reason to doubt the basic U-shape of the trend since the Great Depression. For all of the consensus around the basic inequality trend, there’s surprisingly little agreement or understanding as to why it looks the way it does (a major theme of Paul Krugman’s Conscience of a Liberal). Could it really be as simple as the extent of financial regulation? Every analyst bone in my body says this is too easy, but…but….

Of course, saying it’s all financial regulation trends isn’t necessarily inconsistent with Krugman-esque arguments that it’s all about changes in cultural acceptance of inequality.  Maybe financial regulation flows from public attitudes about inequality.

Anyway, interesting — no?

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Don’t Ask, Don’t Tell: A Pragmatic Progressive Argument for Repeal

Monday, March 8th, 2010
Kyle Bailey


Kyle Bailey is the former chief operating officer and interim executive director of the National Stonewall Democrats. He is chair of the Young Democrats of America LGBT Caucus and a participant in the 2010 New Leaders Council Institute-Atlanta.

by Kyle Bailey

In the 1990’s, pragmatic progressives led the way in reinventing government. Under the leadership of President Clinton, wasteful spending was cut from the federal budget and new cost-effective strategies were implemented that reduced inefficiencies. However, for all our achievements in the ‘90’s, some of the reforms enacted during those years were less than successful. Today, pragmatic progressives must own up to past mistakes and propose fixes to outdated, ineffective and costly policies. Among those failed reforms is “Don’t Ask, Don’t Tell” (DADT).

Mandated by Congress in the 1994 Defense Authorization Act and signed into law by President Clinton, the DADT policy targets for expulsion from the armed services those who have a propensity for, display behavior associated with, or commit acts of homosexuality. It’s important to note that DADT prevented baseless initiation of investigation into a service member’s orientation, which the military’s former policy allowed, and was, in fact, the compromise policy that emerged from President Clinton’s original proposal to allow gays to serve openly in the military.

Opinions and conjecture aside about this compromise in 1993, DADT is plainly in need of repeal now — and support for such a move is rock solid. Defense Secretary Robert Gates, Chairman of the Joint Chiefs of Staff Admiral Mike Mullen and former Secretary of State General Colin Powell have recently joined other active and retired high-ranking military and Defense Department officials in calling for its end.

The support for repeal among military brass underscores the pragmatic value of doing away with the policy. For one thing, the policy has inarguably done harm to our national security efforts. Under DADT, almost 800 “mission-critical” troops have been discharged in the last five years, including at least 59 Arabic and nine Farsi linguists. These unnecessary discharges create additional challenges and risks for our brave young men and women on the ground in Iraq and Afghanistan.

In addition, our military continues to face an overall recruiting crisis. DADT unnecessarily limits the pool of potential recruits, including some of the best and brightest young minds we need to win the war on terror and run our military in the decades to come. According to recent estimates, some 4,000 service members each year choose not to re-enlist because of the policy, and 41,000 gay and bisexual men might choose to enlist or re-enlist if the policy were repealed.

Under DADT, more than 13,500 gay soldiers have lost their jobs and medical, educational and other benefits. Many of those discharged are young Americans who enrolled with the promise of a college education and a better life. Others given the boot have served for decades and have lost more than a job — their entire careers have been wiped out, too, because of their sexual orientation.

And then there’s the financial downside of the policy. It costs up to $43,000 to replace a discharged service member. Add at least $150,000 more to that figure for officers and $1,000,000 for Navy and Air Force pilots. If you consider inflation and the cost of additional required training for service members to fight the war on terror, you can imagine the average price tag on this policy has increased — and will continue to increase — significantly over time.

With 75 percent of Americans, including 64 percent of Republicans, calling for an end to DADT, the political risk to overturning this policy is minimal. In fact, when one considers the size of the pro-equality voting bloc, which includes an overwhelming majority of young Americans, one could argue the benefits greatly outweigh the costs of action on this reform.

Rather than approaching DADT as strictly a cultural or social issue — which is how our conservative opposition would like to define it to inject homophobia in the debate and divide Americans — progressives should also frame DADT as a matter of national security, civil service and fiscal responsibility. Taking up this policy challenge under these terms would reflect our progressive values and “third way” approach — to cut wasteful government spending, focus our national security to fight global terrorism and the wars of the 21st century, reduce unemployment and reward work, and promote national service.

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More on Wages and the Middle Class: A Response to Rortybomb

Thursday, January 14th, 2010
Scott Winship


Scott Winship is research manager of the Pew Economic Mobility Project and a recent graduate of Harvard's doctoral program in social policy. The views he expresses do not represent those of Pew.

by Scott Winship

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.

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Inequality, Living Standards, and the Middle Class, Part 2

Tuesday, January 12th, 2010
Scott Winship


Scott Winship is research manager of the Pew Economic Mobility Project and a recent graduate of Harvard's doctoral program in social policy. The views he expresses do not represent those of Pew.

by Scott Winship

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.

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Inequality, Living Standards, and the Middle Class

Monday, January 11th, 2010
Scott Winship


Scott Winship is research manager of the Pew Economic Mobility Project and a recent graduate of Harvard's doctoral program in social policy. The views he expresses do not represent those of Pew.

by Scott Winship

Happy New Year everyone! I am very late to this debate, but I wanted to weigh in on the conversation launched by Dalton Conley’s pre-holiday American Prospect article on progressivism and inequality. In case you missed it, Conley argued that progressives shouldn’t care that much about inequality and that we should instead care about the poor. Inequality, he showed, has grown between the rich and the middle, but not between the middle and the poor. Bruce Bartlett, weighing in from the right, agreed.

I’ll address the living standards of the middle class and the poor in subsequent posts, but let me add my two cents about inequality trends in this one. An analysis I conducted back in November showed that what has likely happened is that the very top—the top one-half of one percent—has pulled away from everyone else, though the increase from 1980 to 2009 has probably been fairly modest. Whether this has been a good or bad thing—or aside from trends, whether higher inequality in the U.S. than elsewhere is a good or bad thing—ought to depend on three questions, empirical and normative, none of which we have much of a handle on.

First, how does letting the rich get richer affect the absolute living standards of everyone else? As Alan Reynolds has argued, measures of inequality tend to reinforce a fixed-pie conception of national wealth—gains by the rich come at the expense of everyone else. But of course, the pie is not fixed in size, and it may be that allowing the rich to get a greater share of the pie makes for a bigger pie and bigger slices for everyone (a point made by Bartlett). Think about Rawls’s maximin rule—that any inequality that results in the worst-off being better off is just. It’s not necessarily the case that greater inequality must help out those who fall behind, but it’s certainly plausible.

Second, how does letting the rich get richer affect the relative deprivation experienced by everyone else? There are two questions here. When the rich get richer, people at the bottom and even in the middle may get priced out of certain goods and services, as prices get bid up by the wealthy. On the one hand, it may be that yachts become less affordable to the non-rich, which presumably no one would get too worked up about. On the other hand, if the price of an Ivy League education or prime neighborhoods becomes unaffordable to the non-rich, that would have bigger implications. Beyond the issue of being priced out of goods and services, inequality may make the non-rich feel less well off—even if their absolute living standards improve. If the Nissan Sentra you own is nicer than the Chevy Cobalt you used to have but feels no better since more people are driving Jaguars than in the past, then there’s room for debate about whether you are “better off”.

Third, if inequality makes most people better off in absolute terms (by making the pie bigger) but makes them feel worse off in relative terms (if their bigger piece feels smaller than before because of how much bigger others’ slices have gotten), then how much weight are we to give each effect? Unlike the other two considerations, this one has empirical and normative dimensions. You may think that being better off but feeling worse off is a net change for the worse, while I may think that it’s only being better off that matters. Robert Frank has made the case—not entirely convincingly, in my view—for the former view.

If you’re looking for the answer to these questions in a blog post, then my heart goes out to you. What I will say is that a situation in which the top 1 in 200 pulls away from the bottom 199 is quite a bit different than a situation in which the top 40 pulls away from the bottom 160, since relative deprivation is likely to be a bigger problem in the latter case.

More to the point, reflexive soak-the-rich tendencies among progressives are unjustified—the details and the facts matter, unless you simply are opposed to inequality regardless of whether it might help the bottom and middle.

Middle-class living standards next…

Update: Click here to read the next post in the series.

The views expressed in this piece do not necessarily reflect those of the Progressive Policy Institute.

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Posted in A New Framework for Growth and Equity, Daily Fix | 20 Comments »