Today we defer on this subject to Bruce Bartlett at National Review Online. Bartlett notes that the most recent reports from the Bureau of Labor Statistics show that the percentage of American households with incomes below $25k/year (2005 dollars) has fallen to 27.1 from 27.6 in 2004 28.9 in 1995 (the glorious Clinton expansion), 30.5 in 1985 (the glorious Reagan expansion) and 33.1 percent in 1975 ("Memories of the Ford Administration" and Whip Inflation Now).
Meanwhile, households with annual incomes above $75k in 2005 dollars are at 28.3 percent in 2005, previously at 27.9 (2004 24.4 (1995) 20.2 (1985) and 14 (1975).
So what has made wages stagnate by other measures? The answer seems to be that a larger percentage of labor costs are devoted to benefits, especially health benefits.
And all of this does not account for the falling costs of many goods, especially those that utilize microelectronics or are produced with the same.
So Bartlett explains what this may mean politically:
In short, despite all the talk about the rich getting richer at the expense of the poor, the fact is that the percentage of households with low incomes has fallen and the percentage of those with high incomes has risen. This is perhaps the main reason why Democrats have had trouble getting traction on the income issue: There are fewer people in the income class to which they historically have directed their message. The more people there are in the $75,000-plus income category the more people there are who are receptive to the Republican message of low taxes.
And we say it's little wonder that Sherrod Brown's attempt to run on William Jennings Bryan-style economic populism isn't going very far. Even in blue-collar Ohio, there aren't enough people with declining standards of living to believe that Robin Hood economics are the way forward.
15 comments:
Isn't this the same blog that told us not too many months ago that arguments about economic well-being based on changes in "real" income are not to be trusted? Or was it that such arguments are untrustworthy only when a certain conclusion is in view? I'll have to go back and look it up.
In any event, one has to wonder if the statistics referred to by Bruce Bartlett, the author of the National Review article, really do constitute good news.
What we learn from that piece is that average incomes for men fell about 4% from 2003 to 2005, average incomes for women fell about 1.3% from 2004 to 2005, and average incomes for households fell about 2.8% from 1999 to 2005. I'm no expert, but so far I'm left wondering what, exactly, is so good about all of this.
The answer, it seems, according to Bartlett, is that fewer households are making less than $25,000 per year now than they were in 1975 and that more households are making greater than $75,000 per year now than they were back then.
Those findings, however, ignore the point made in last week's U.S. News Editorial, by Mort Zuckerman, that "[t]he income from most two[working-]parent families, in inflation-adjusted dollars, leaves them with less discretionary income than in the one-[working-]parent, single-paycheck family of the 1970s." And that clearly isn't good news, because it demonstrates that household income has made advances only at the expense of individual income. As a result, no longer can many families let mom (or dad) stay at home with the kids--something most would agree is a very bad state of affairs, indeed.
Of course, Bartlett could respond by insisting that only those arguments that rely on real income interpreted as "income adjusted for inflation" are acceptable, while those that interpret it as "income adjusted for inflation and non-discretionary necessities" are not, but that would be to quibble over a nuance. The real problem here is with the downward spiral in real individual income--however it's interpreted--over the past few decades. Unless we can reverse this trend, we'll be stuck with a social condition none of us bargained for.
I think our point was not that changes in "real" income should not be trusted but that they should not be relied upon uncritically, not least because they don't account for the way that people change their buying habits as the market changes. Further, tangible measures like the number of cars per person, square feet of living space per person, etc., continue to rise steadily. But the point here is that the evidence is at worst equivocal. Combined with the political evidence, i.e. the lack of economic backlash at the polls, it would seem that people don't perceive themselves to be worse off than they were in the past.
While rising household income may in part have to do with more hours and more people working, I for one doubt that it can be attributed entirely to that, or even mostly in the short term. Certainly there are more two-income households now than in 1970, but are there that many more than in 1995?
Another aspect of this is the norm that is set in this debate by the very unusual economic circumstances of the United States just after WWII. With lots of industrial capacity, a big labor force with strong organization, pent-up consumer demand, and--most importantly--absolutely no global competition, it became possible for people in hourly jobs to expect and receive a generous and ever-increasing wage. But global development created pressure that increases in productivity could only fend off for awhile.
What's remarkable, then, in light of the global reality, is that North American prosperity has continued with only slight abatement. And despite the best efforts of some politicians to tap into some kind of populist resentment about economic decline, no one pays attention.
In other words, if we expect the late 50s "norm" of permanent security and increasing prosperity in low-skilled manufacturing jobs to endure, we are delusional. Still, we're not doing that badly.
One of the best and easiest ways to stretch the spending power of current incomes is tort reform -- something as unlikely to happen as it is doable by our Congress.
SWNID: Zuckerman's point, I believe, is that our current level of economic prosperity has been artificially sustained. The fact (if it is a fact) that household income has kept up with the cost of living over the last few decades is parasitic on our traditional family lifestyle. Whereas only one parent needed to work to maintain a livable income in the 1970s, two are needed now.
As far as I can tell, you offer three replies to this claim: (1) There (probably?) aren't more two-income households since 1995, even though there are more since 1970, (2) We can't expect to maintain post-WWII levels of economic prosperity because the circumstances of that period were unique, and (3) Politicians have been unable to tap into any kind of populist resentment over our economic situation.
Zuckerman has an obvious response to each of these replies: (1) Even if the number of two-income households has remained steady since 1995, the fact that it has increased since 1970 still shows that we're worse off now than we were back then. (2) Even if our current level of prosperity is lower than it was during the post-WWII era because of unique (and unreapeatable?) circumstances, it's still lower. And finally, (3) the fact that politicians haven't been able to tap into widespread resentment over the economy assumes that the populace believes its elected officials are both able and willing to do something about the situation. The recent history of low-voter turnout should put an end to that assumption.
So if Zuckerman's response to point one is granted, then it is simply not the case that we are in a spiral of declining incomes. Certainly one should concede the second point, but to label something a crisis simply because things have returned to normal is kinda extreme. And on the third, since all the populist rhetoric seems to be coming from publishers, academics and politicians and not resonating with the very populace for whom such populists speak, maybe people perceive that their living standards continue to be acceptable to them.
When welfare rolls have been reduced by over half, when home ownership is more common than ever before, when there are more TVs than people in the mean household, it's hard to say that people are doing worse economically than they once were. And though some statistical measures that indicate this counterintuitive claim, others reinforce our intuition that technology, even in a globally competitive economy, continues to raise people's material prosperity.
To some degree the past to present comparison of the # of tv's/cars owned or square footage owned is skewed by the mostly recent, abusive use of revolving debt to purchase these things. Future income is financing a great deal of today's property/quality of life.
Mattc:
Good point.
SWNID:
A. "Zuckerman's response" (which is actually my resonse on behalf of Zuckerman) to the first point does not concede the claim that "the number of two-income households has remained steady since 1995," but simply assumes it for the sake of argument. (Hence, the "even if.") His (or, rather, my conjecture of his) response, therefore, does not rule out a spiral in declining indidvidual wages.
B. Dying is also normal, yet every time it happens, I consider it a crisis. Would you say that's "kinda extreme" too? The fact that something has (mostly) always been a certain way is hardly a recommendation for it. (By the way, if you reread what I wrote, you'll find that nowhere did I label anything a crisis.)
C. I was under the impression that a very large portion of the populist rhetoric was coming from non-publishers/academics/politicians via the internet.
D. To argue that the average number of TVs per household is a sign of overall economic prosperity is a little like arguing that the average height of Yao Ming, Mickey Rooney, and Michael J. Fox is a sign of overall vertical prosperity. The increase in the number of TVs per household may tell us little more than that those few who can afford multiple purchases of such things tend to waste their money, rather than that economic prosperity is evenly distributed.
I do admit, however, that the statistics concerning the steady increase in home ownership look to be very good news. I hope that in reality they are. At the same time, however, I am well aware that such statistics can be extremely misleading. Before we can make a judgment as to what precisely they are saying about our economic well-being, therefore, certain questions need to be answered. For instance, is the statistical increase in home-ownership the result of more affordable housing or of looser lending practices? Does it account for home-ownership among illegal aliens (who are overwhelmingly at the lower end of the economic spectrum) or for citizens and legal aliens only? And is it representative of both single- and dual-income households or of dual-income households alone?
Yes, the consumer debt issue is important, and since the rate of personal bankruptcy is at historic highs, I would, if I were an economist, see that as a a problem. However, let's not miss the fact that while consumer debt is high, so are personal assets, largely because of the appreciation of houses and stocks over the last two decades (http://biz.yahoo.com/brn/061002/19658.html). This, by the way, is akin to the wringing of hands about federal debt in dollar terms instead of as a percentage of GDP or total American public and private assets, which comparison makes the whole thing look different (still not great, but pretty much within historic norms).
What has happened over the last generation is that a greater percentage of Americans' wealth is in capital assets like homes and stocks (largely in retirement funds, which have democratized business ownership) and less in cash (savings accounts and the like). That's a good thing, since the appreciation of capital historically far outshines interest rates. At the marina, they point to the big boats and say, "Those guys bought stocks," while they point to the little boats and say, "Those guys bought bonds."
Of course it may not be wise in the best tradition of wisdom to buy lots of TVs, and of course the average per household can be skewed by a few households with an enormous number (though that is factually not the case here, as the percentage of households with any TV or multiple TVs is at a point where virtually the only folks who don't have them are choosing not to for noneconomic reasons). But that is one of many statistics about consumption that helps to take into account the way that lower costs of production boost the material wealth of people whether they earn more money or not. We could talk about cars and calories in the same way, of course. I will say we have more of those. You will say more of those is bad. I will agree. But the fact that people can have more of those things than they did before suggests that they are better off economically, which is what we're discussing, not whether they're wiser with their money.
What bugs me about analysis like Zuckerman's and other latter-day populists is the zero-sum reasoning that if the rich are getting richer faster than than the poor are becoming middle class or the middle class is becoming rich, that's wrong. It may not be ideal, but why should anyone care that George Soros's wealth is increasing faster than Joe Sixpack's if in fact Joe sixpack has ready access to all necessities and many luxuries and continues to enjoy a progressively better standard of living?
Now to some other details. Amateur that I am, I am still confident that home ownership is on the rise both because of rising personal wealth and because of "looser" lending practices. But selectively looser lending practices are, on balance, a good thing, precisely because they are a powerful force for democratizing wealth. Before WWII, Americans needed a downpayment of abut 25% to buy a home. So only a few could buy a home. Today they can buy with no money down, so anyone with a steady job can buy (in communities with reasonable housing prices; the largest metro areas have issues on this score). Multiple statistical measures suggest that the ability to gain equity in a home is the single most important long-term factor in Americans' ability to accumulate wealth. The rising rate of default on home loans is on balance less than the overall growth of home ownership, so looser lending has benefitted more than it has hurt (not that there isn't room for more effective usury laws, IMHO).
Further, it's not just that a larger percentage of Americans own homes. It's that the homes are bigger and better. That too has its scary aspects, and it may not reflect wisdom. But it doesn't just reflect prosperity, it is prosperity.
On another matter, yes, death is a crisis, but an inevitable one. So would it be responsible for a journalist or politician to declare that America was on the wrong track because it has a mortality rate stuck at 100%?
As to the measure of prosperity for legal versus illegal residents of the US, I am sure that illegals aren't doing as well. And who is happy about that? But they're here presumably because they see the opportunity for prosperity is greater here than at home. What immigrants want, legal or otherwise, is to be hitched to the locomotive of the American economy. So I think that proves my point.
To illustrate: for most of modern history, Ireland was a huge net exporter of people. In the last twenty years it has become an net importer. The country for which millions worldwide would die but in which none of them want to live is now attracting immigrants from all over the world. And it's not for the weather or even the beer. It's because Ireland for the first time since the Middle Ages has a booming economy. By the same token, don't have an immigration "crisis" in the United States because people are worse off than they used to be.
And now to get moralistic, which is maybe what I should stick to anyway. Ours is the first period of history in which people have come to expect that their living standards will improve constantly. The debate, IMHO, is really not about whether people are better or worse off than they were but whether their relative improvement meets their expectations. The envy factor is very powerful here (though not, of course, for gentle readers of this blog).
I neglected to draw attention again to Bartlett's observation that falling per-worker wages have accompanied rising per-worker labor costs. MattC's observation on tort reform is apt here.
One should also keep in mind that surveys of wages, which exclude self-employment and investment income, are not the same as surveys of income, let alone surveys of wealth.
And I would not want to neglect the effect on mean wages of the entry into the workforce since 1996 of 50% of households formerly living on public assistance. Surely on balance that's a good thing, and surely its effect is not entirely negative on those who weren't on welfare in 1996, let alone those who were.
The critics are all wet on this issue. You don't need stats to prove that point. Any dufus can cite statistics that clearly demonstrate the average individual or family is falling behind. And vice versa.
What the critics need is historical perspective. We are filthy rich as a society and have been getting progressively filthier in our richness. To hold up the 50s or the 70s as economic nirvana is ludicrous. Millions of farmers were put out of work in the 50s.
Millions of factory workers were put out of work in the 70s. Inflation was out of control. Unemployment hit 10% or 12%. Yet, still we, as a whole, and the vast majority of individuals and families prospered. Averages are meaningless when data is skewed and data is always skewed. Plus the quality of summary data is poor and easy to manipulate.
Just look back at your own life. You don't need the Bureau of Statistics (Orwell had a better name).
I can remember going to the Big Star Supermarket as a kid in the 70s and Scott sandpaper toilet tissue was 55 cents per roll. It said so on the little sticker stuck to the outside of the individually wrapped roll of paper. How much is that same roll of sandpaper today? CVS has them on sale every so often, 3 for a $1 if you buy 12 of them.
I can remember when Kmart opened their grocery chain called American Fare in the early 80s. To get people in the store they ran a sale on all Coke products: $1 per six pack. I can remember my dad loading up the trunk of the car with dozens upon dozens of six packs of Coke products because $1 per six pack was unheard of in those days. It was a steal of deal that required major stocking up (if you liked Coke products).
Today, once a month, Meijer has 12 packs of Coke on sale for $2. Does anybody give a rip? Do you see people backing up the van and loading up for Y3K? No you don't. Most people walk by the Coke display and don't even look at the giant sale sign. My dad's income is more than twice what it was then and he's doing the exact same job as he was then.
There are 10s of thousands of examples like this. Cars, houses, eating out, % of money spent on music and movies and clothes (not overalls but expensive mall clothes), etc. You would have to be ideologically blinded to not see everybody is getting richer, yes everybody.
American "poor" people are the fattest demographic in the history of the world. If you got money for Cheetos and Oreos, you're rich. If you're not hand plowing and hand shoveling and staying thin because of it, your're rich.
Medicaid started in the late 60s. So we have free health care. We have unemployement, free food, day care tax credits, child tax credits, additional child tax credits, tuition tax credits, retirement savings tax credits, the misnamed "earned income tax credit". The poor in our country are filthy rich. And I am filthier richier.
I know this is a political discussion, but again we need perspective. What will God say to us on judgment day? Will he say, "You didn't vote for the guy who said he wanted to take money from you and give to a little guy, regardless of whether the little guy needed the money or deserved the money, and he was unable to buy more Cheetos and more Oreos and go from morbidly obese to mortally obese?"
Or will he say, "I blessed you beyond measure. I hosed you with blessings. What did you do for your neighbor? And what did you do for the kingdom?" That's my concern. Because I don't have a good answer to those questions God is going to ask. God forbid that I be blinded by my own ideology (as to our unbelievable amount of wealth in this society) or that I be consumed with the politics of this at the expense of the kingdom.
And by the way, it's a mathematical truism that the rich get richer and the poor remain poor. You can't go below $0 but there is no upside limit. If we have any economic growth whatsoever, the rich will progressively leave the poor behind. But the fact of the matter is that the poor are much richer than the poor of the 70s and the poor of the 60s.
The trajectory of wealth in our country is unimaginable by any historical standard. A family from rural Missouri (an hour outside of Kansas City) provides an example. I have a friend there who is 70 years old. He didn't have electric power in his hometown until 1948. His dad worked a 100 acre farm for his whole life (70 to 80 hours per week) and died penniless in the early 70s. He was able to live in a tiny home, and raise several kids (provide food on the table). He never went to high school. His son went to high school, worked the same farm at 15 to 20 hours a week and worked in a factory (40 hours per week) making nuclear bombs during the cold war. He was penniless except for the food on his table until he had accumulated $100000 in 1990 to build a house. $100000 in 1990 in rural Missouri built a gorgeous 3 bedroom brick house (about 3500 square feet plus a basement) on that same farm.
He has retired in style, something his father had no chance to do. He and we and everybody else living in this country are fabulously weathly. Anybody who can't see that has been blinded by ridiculously ahistorical rhetoric.
I'll repeat my point: One income per household was enough to keep up with the cost of living in the 1970s; now, according to the evidence, it takes two.
But suppose that the exact ratio of incomes-per-household required to keep up with the cost of living from then to now isn't 1:2 but (say) 1:1.8. (I don't know that this is the case, but let's suppose it is.) That would mean that a two-income household nowadays would have 1/5 more spending power than a one-income household had in the 1970s. Hence, the two-income household in 2006 could afford more stuff than its one-income counterpart of the 1970s and, for that reason, would look to be better off. In fact, it would be better off as far as household income is concerned.
When considering our overall economic buying-power, however, the isssue isn't whether a two-income household in 2006 is better off than was a one-income household in the 1970s. That would be to compare apples (two-income households) to oranges (one-income households). The issue, instead, is whether individual incomes have more buying power now than they did back then. And the evidence says they don't. Indeed, it says that the buying power of individual incomes has been drastically reduced.
Now a couple of specific comments.
SWNID: Zuckerman doesn't argue that economic affluence is a zero-sum game, but, rather, that political power is and that an increase in economic power entails an increase in political power. Hence, a disproportionate increase in George Soros's wealth gives him a disproportionate increase in political power--which is something, I think, both of us would prefer to be otherwise.
The Hoser: 1. Sure, statistics can be misused, but that doesn't mean they should therefore be abandoned. Indeed, much of our debate has been over their proper interpretation.
2. I'm happy to hear that things have gone so well for you, your family, and your friends. But when it comes to the question of overall economic well-being, do you really believe that personal anecdotal evidence is to be prefered to a representative sampling of the whole country?
JB: I dispute the idea that to maintain the generally accepted standard of living of 1970 requires two incomes whereas it required one in 1970. The problem is that the generally accepted standard of living is much, much higher today than in 1970, by nearly any material measure.
Using invalid anecdotal evidence, I will compare my extensive experience in another developed country, Great Britian, in the 1980. In Margaret Thatcher's Britain as comparied to Ronald Reagan's America, the cost of living was higher, wages and salaries were considerably lower, but the generally accepted standard of living was remarkably lower, and so fewer families "needed" two incomes.
But still, we've got most of the evidence we need right in the statistics: averages wages have declined slightly, but labor costs per worker have gone up. The benefits beast is eating our incomes.
The issue with some of the statistics is that they don't accord well with the interpretation placed on other statistics. And neither do they accord well with the experience of an awful lot of people, and not just what they live but also what they widely observe.
JB in CA:
The government has no idea how much inflation there is. There is constant (that means "non-stop") debate with regard to whether the CPI over or under estimates real inflation. Over 30 or 40 years, compounding of the error completely distorts the trendlines and therefore the conclusions that can be drawn from them.
So yes, I prefer my personal observations over the misplaced confidence of ideologues in certain types of statistics. And strictly speaking, these numbers you are quoting aren't statistics, they are massively egotistical interpretations of qualities (kind of like what paleontologists do with fossils and geologists do with rocks).
The apples and oranges are comparing today to yesterday when yesterday was fundamentally different from today.
A more believable statistic is the percentage of an individual's income spent on different types of "necessities" yesterday versus today. Benefits is one (and the benefits today are much better than they were yesterday, because people used to take 2 aspirin and die before their morning appointment with the doctor).
Percentage of individual income spent on housing: It's improving significantly in light of the fact that the vast majority of apartments, homes, and condos are bigger than they were yesterday.
Percentage of individual income spent on groceries has dropped dramatically. Conversely, the percentage of individual income spent on eating out has jumped dramatically.
Percentage of individual income spent on utitilies (gas, electric, water) has dropped dramatically. Percentage of income spent on transportation (despite the fact that a Civic is far superior a vehicle than the Pinto) has dropped dramatically.
The list goes and on (as I already said). You don't have to believe my personal experience or your personal experience. There is quality data. The data you cite isn't quality data. It is subject to manipulation with the slightest change in assumptions.
Have you ever done retirement forecasting? It's completely meaningless. Why? Because it depends on the rate of return that you plug in to the system. Plug in 6% and you are desperately behind in your savings rate and your gas will be turned off in the middle of winter at the age of 75. Plug in 7 or 8% and the forecast is that you will live in hog heaven and be able to take European vacations every summer. Compounding ruins forecasts. It also ruins historical comparisons. You are forecasting into the past.
Take the 1996 Hamilton County, OH sales pitch on the stadiumS sales tax. It was a 30 year forecast of the rate of growth in the new sales tax. Whoops. The county commissioners conveniently used a 3% instead of a 2% growth rate (or whatever the exact numbers were), and it only took about 4 years for everybody to figure out that we had been completely duped. Of course I knew during the sales pitch the whole thing was bogus. Thanks to the "miracle" of compounding and a naive public.
Bottomline: people today have more discretionary income than ever. And you completely ignored the reality today (compared to yesterday) that people today get free food, subsidized housing, subsidized child care, subsidized utitilities, free health care, free money (EIC and additional child tax credit), WIC, unemployment, worker's comp, Medicare, etc., etc., etc.
The tax burden has also gone up dramatically in the last 30 to 50 years to pay for all of the above. If you just take taxes and benefits, and the percentage of income there, you've covered most of the erosion in purchasing power of a given income, though that erosion is impossible to measure.
On a percentage of income basis: taxes and health care costs have gone up dramatically from yesterday to today. This has definitely eroded take home pay, but there have also been benefits (the social safety net and people live 10 to 15 years longer).
Our society has chosen this route. It wasn't accidental. It wasn't the evil forces of the sinister CEOs and the rich. It was the Democratic party on the one hand (LBJ and friends) and a bipartisan effort on the other (massive regulation of the insurance and health care industries beginning with Nixon and Tip O'Neal). It's a little known fact that HMOs were created by the federal government, not the market.
To put it simply: liberalism created this mess, liberalism by Democrats and liberalism by Republicans, not the "greed" of the rich or capitalists. It is the misplaced dogooders who think taking from the rich and giving to the poor (which will make things "more fair") that have created this mess. Keep up the good work and we'll go back to the days when a bottle of Coke was a nickel. And you won't have two of them to rub together.
Another observational point (it's funny when examples of verifiable history is dismissed as anecdotal evidence): choice is a function of wealth, societal wealth. We have a million more choices today than the people of yesterday.
Choice has to be financed. It has to be paid for. It's always cheaper to offer less choice due to economies of scale. Henry Ford said, you can have the Model T in any color, as long as it is black. His failure to understand that the American people were progressively getting wealthier and could afford choice lead to the massive dominance of GM for the rest of the 20th century. GM offered choice of colors and choice of models. And because GM made that strategy choice they remain the largest car seller in the world today.
The market is completely different today and GM is likely going bankrupt, but GM's recognition (whether by intelligence or by luck) that American society was progressively getting richer, and that they would express that wealth through differing choices was enough of a competitive advantage that they almost became a monopoly. Ford languished for another 50 years. And today there are 10 times as many models and color choices as there were when GM took over.
We can choose where we want to live. We have unimaginable choices with what school we want or what job we want. The grocey store has 75 kinds of tea. Walmart today puts Marco Polo to shame. He brought back Oriental tea for what would cost in today's dollars millions to finance the voyage / trip. The spice rack at the drug store is better than what was available to Napoleon's chef.
Bulk, one size fits all, lack of choice, economies of scale are the ways to conserve resources. Choice is the way to spend them in a free society. There is a reason why there were only Corn Flakes and Oatmeal for cereal 50 years ago. It was all our society could afford. There was no cereal aisle 50 years ago. The breakfast cereal took up about 3 feet. Today we have a whole aisle. It is wealth that finances choice.
That's not anecdotal. It's historical.
SWNID: Are you implying that I was
endorsing "the idea that to maintain the generally accepted standard of living of 1970 requires two incomes whereas it required one in 1970." If so, you misunderstood my point.
The Hoser: Are you implying that I was arguing that we are now worse off than people were in the days of Marco Polo, Napoleon, and Henry Ford? If so, you too misunderstood my point.
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