Brain Teaser of the Week

What's been happening to the real, pretax income of the middle class (...not to be confused with "real after-tax disposable income")?  You decide.  The two charts below should be self explanatory.

Comments

[Bob]

Steve:

You may have left yourself open on this one. Every Clintonite will point towards the upwards slope from 94 to 99 as well as hammering you that today we're off the peak of his term.

Nevermind the tech bubble and all the unsustainable companies and jobs. Forget about recessions, too. Ignore long term trends. Things were great under Bubba and they aren't now. That's their mantra, they're emotionally invested and have no intention of changing their minds.

[Rick Ballard]

Bob,

Setting the Bubbabubble aside, there is still the demographic tide which saw the ranks of those in their "best" earning decade (45-55) grow by 8.4 million between '90 and '00 while that same contingent will only grow by 4.3 million between '00 and '10. Using BLS and Census census data, it's rather simple to determine that the 45-55 year old contingent within the labor force grew by 20% between '90 and '00 (from 10% to 12%), whereas it will grow by only 8.3% (from 12% to 13%) between '00 and '10, after which it will decline by some 30% by '20.

The focus on the "median" is good political handwaving but closer attention to the age composition of the various cohorts of the working population provides a more reasonable explanation of the 'flattening' of the increase.

[Steve]

Bob:
You're right, I left it wide open. I offered no opinions, just facts. Any reader is wide open to interpret those facts as he or she sees fit.

I do have a prediction, however: one's interpretation will be highly correlated with one's political leaning. I predict the correlation will be close to 0.999, in fact. The universal human tendency called "confirmation bias" pretty much guarantees it.

[Bob]

Rick,

Bubbabubble....I love it. Now incorporated into my vocabulary.

[Don]

Steve,
While household income has risen over time, has it outpaced inflation? Given that I'm a relative econ neophyte, I took $37,000, which appeared to be the average income in 1967, and extrapolated that price to 1997 using the CPI calculator provided by the federal reserve, which indicated that those goods would be worth $178,000. According to my simple analysis, the median family in 1967 would be better off than today. I'm sure there are holes in this logic, and so I welcome your comments.

[Steve]

Hi Don:

Converting "current dollar income" to "real" income is an attempt to adjust inflation out of the numbers. They use the CPI (consumer price index) to do that. In theory, that means $1001 in 2007 is one real dollar more than $1000 in 1997, or 1987, or 1977.

Some experts say the CPI still overstates inflation by about 0.7 points, which would mean that real dollars are understated, primarily because it takes so long for the BLS to adjust for product quality improvements.

[Rick Ballard]

Don,

The $37K median is expressed in current dollars. "Actual" 1967 dollars would be $6,130. Most historical economic data presented by gov agencies will be either "chained" to a particular year or expressed in "current" dollars. There is all sorts of magic involved in median comparisons. Consider the cost of a "median" priced house in 1970 and a "median" priced house today - if no adjustment is made for the quantitaive (let alone qualitative) differences between the two some extraordinary conclusions could be drawn concerning "hyperinflation" and housing. Today's Median family prefers a house that is 40-50% larger than Grandpa Median thought comfortable in 1970 and chooses to devote a higher level of income to having more space.

Are they "richer" or "poorer"?

[Rick Ballard]

Don,

I had missed Steve's response prior to submitting mine. His definition of "real" corresponds more precisely to the definition given in the report from which the chart data is drawn

"All income values are adjusted to reflect 2006 dollars. “Real” refers to income after adjusting for inflation. The adjustment is based on percentage changes in prices between earlier years and 2006 and is computed by dividing the annual average Consumer Price Index Research Series (CPI-U-RS) for 2006 by the annual average for earlier years. The CPI-U-RS values for 1947 to 2006 are available in Appendix A and on the Internet at . Inflation between 2005 and 2006 was 3.3 percent."

The report - Income, Poverty, and Health Insurance Coverage in the United States: 2006 is also a secondary source for the information I referred to in my comment at 12:28. Page 5 contains data on median income by age group.

Steve,

Is there any particular reason why HTML is not enabled for comments?

[PseudoNoise]

Looks to me like wages have been stagnant since 2000.

Seems like those Democrats at the debates have the numbers to back them up.

http://www.optimist123.com/optimist/2007/11/lets-kill-the-s.html

Of course, this was my point there as well -- most people by definition are doing -worse- than breaking even with their 2000 wage. That is why there's no push-back -- it's the truth, and most of use know it! (Half from experience, and a smaller fraction of those above the median who actually know what's going on with their fellow man).

[ilsm]

Considering three periods of graphed income growth roughly associated with Reagan, Clinton and Bush II, the one that did not have huge federal deficit financing is Clinton's.

What is the long term effect of borrowing our way to 'prosperity'?

[cahunga]

Fact: Real median wages for men have been flat for 33 years.

Fact: Growth in median household wages, represent a growth in the numbers of women entering the work force and a slow wage increase toward eqality with men.

Fact: Focusing on small variations in the overall trend misses the important point.

[muirgeo]

I guess I don't get it. Two post ago Steve claimed it was myth for the democratic nominees to claim that wages have been stagnant since Bush has been in charge. Now he proves them right???? So has the myth about the myth about stagnant wages been killed?

The simple fact is that what prosperity we have had the last 7 years was mis-allocated based on Bush's and Republican cronyistic policies. America understands that and they've had enough.

[Steve]

muirgeo:

Sounds like you processed those articles through a thick political filter. Let's test that. Here are two simple questions, followed by my guess at your answers:

1. The better measure of the real return per hour of work for a worker is: (a) the real hourly wage; or (b) real hourly compensation.

2. Interruptions in the real median annual household pretax income (not to be confused with hourly wage or compensation) have historically been highly correlated with: (a) Republicans, especially since the year 2000; or (b) recessions at the end of business cycles.

Now for my guesses at your answers: (a) and (a).

Did I guess correctly?

I thought so. Try googling "confirmation bias."

[Rick Ballard]

Muirgeo,

Funny, what I see is the bursting of the Bubbabubble followed by 9/11 (including it's aftermath) with a solid recovery thereafter.

I've never heard of rewarding the productive described as a "misallocation". Is there a planet where the occupations encompassed by Food Preparation and Serving Related, Building and Grounds Cleaning, Maintenance, Personal Care and Service, Installation, Maintenance, Repair and Transportation and Material Moving pay better than, say, Business and Financial Operations, Computer and Mathematical or Sales and Related?

'Cause those first named are what drags down the famous "median" while the latter keep rising in line with productivity gains.

Or do you just believe in wholesale inflation as the "cure" for lifting the incomes of those in occupations where productivity increases are close to impossible?

[muirgeo]

Yes Steve you guessed right but which of us has confirmation bias?

2 threads ago you showed us a graph labeled Workers Real Compensation, 1981- 2005. I don't see the big dips in that curve. Why?

First, I think policy DOES effect wage distribution. And I'm not just talking about tax policy. Yes history shows Republican policies generally transfer and concentrates wealth upwards to those who already have a lot as opposed to a shared prosperity more commonly seen with democratic policies.

Second I'd sure like to see the median wage trend look more like the trend in your Workers Real Compensation graphic. Why does it not?

Supposedly it is the rich who are rich because they take all the risk. Your two graph suggest the opposite. The rich continue upward while the working class bear the brunt of the downturns.

[muirgeo]

"...a solid recovery thereafter.

I've never heard of rewarding the productive described as a "misallocation"."

Rick Ballard

Rick,

Do you really consider this a solid recovery considering the liquidity issues and the housing bubble?

Regarding "the productive"....do you really consider it productive to underwrite subprime loans and package them along the way making billions of dollars off of a scheme that will bankrupt millions? If they are so productive how come they are needing the backing of billions and billions of dollars infused into the system by the fed? Seems to me they put all the risk on the average person while using the government to minimize their own risks.

Is it productive to make billions off a war? Is it productive to have your lobbyist write the Medicare part D drug bill at a huge cost to the taxpayer?

Is it productive to require the whole of the US military to get your product to market spending trillions in dollars and lives along the way?

A lot of what you are calling productive I would call corporatism. And it is in direct conflict with free/ competitve markets and democracy.

[Rick Ballard]

"Do you really consider this a solid recovery considering the liquidity issues and the housing bubble?"

Of course it is. Schumpeter's machine is going to work as well as the bleeding hearts allow it to in breaking both those who lied to get those bad mortgages as well as those foolish enough to make them. It's very unfortunate that Moody's, S & P and Fitch won't take the hit they deserve but that's a regulatory issue that has existed for decades.

I hate to break it to you but Black Friday sales walloped predictions http://news.yahoo.com/s/ap/20071124/ap_on_bi_ge/holiday_shopping and construction just keeps chugging along http://construction.com/ResourceCenter/forecast/2007/Nov.asp.

"A lot of what you are calling productive I would call corporatism."

I don't doubt that - every socialist feels that way. Say, did you notice that Airbus is threatening its unions with suicide? http://www.ft.com/cms/s/0/1b848ae2-993a-11dc-bb45-0000779fd2ac.html

Now that's a true progressive environment.

Economic slow death.

[Syphax]

Back to the original question...

"Is the Middle Class (a) stagnating, (b) falling behind or (c) getting wealthier?"

The middle class is unquestionably wealthier, although median household income isn't a good measure of the performance of the middle class.

For one thing, there are less people per household(3.33 in 1960, now 2.57). This drags the median down quite dramatically making the "middle class" look poorer.

Second, the number of female headed households are up 50% since 1960 and the number of foreign born workers has doubled since 1960. This makes us look poorer.

Demographics have drastically changed since 1960 and have made the median household income measurement a very poor measure of "middle class" progress.

The fact is that 1960's households are completely different than today's households. People incorrectly leap to the conclusion that since median income per household hasn't increased(which as Steve showed isn't even true although I have heard people say this), the SAME workers in 1960 are worse, ignoring that immigrants have "brought down" the median and households have split up and have fewer people on average.

Find a way to compare similar groups of workers(based on education, age, years of experience etc.) from 1960, 1970, 1980, 1990, 2000, 2007 and get back to me... until then, stats on the "stagnation of the middle class" are universally garbage.

We are better off.

[muirgeo]

"A lot of what you are calling productive I would call corporatism."

I don't doubt that - every socialist feels that way.

It's there...when you admit to me you don't care about rampant corporatism that I know I'm far closer to being a supporter of true competitive markets then you. And I know that you are far closer to being a supporter of fascism then I a socialist.

[A Tanatar]

Rick Ballard, can we please have a look at real income, say, for lawyers? Did we see huge productivity increases for lawyers in the last couple of decades? Frankly, I'm inclined to think otherwise.

In fact, yes, perhaps we need a wholesale inflation. Inflation is as much a measure of relative value of past labour to current labour as anything else, not only the monetary supply/demad thing. Just as "asset inflation" in many senses is an opposite of "monetary inflation": the value of current labour relative to past labour decreases.

[AH·C]

Slightly O/T

Rick, regarding Airbus, note the last sentence of the article: "Unions urged governments to show support by pressing the European Central Bank to take action on the strengthening euro."

Yeah, that's the reality-based ticket -- they now want to weaken the Euro? Easier said than done for the ECB given the EU structure. Actually, Sarkozy will accomplish more for both Airbus & the Euro by busting the unions.

I recall posting somewhere a few years ago that Bush's strategy of weakening the USD had multiple direct benefits in speeding up the recovery from the Bubbabubble & 9/11 recession, mitigating US-based manufacturing losses, pump up employment rolls, increase tax revenues while leveraging dollarized imports from China etc all while reducing imports from Euroland and even help subsidize the GWOT. The bonus was to indirectly punish Schroeder & Cheinraq.

I shudder to think where we'd be if both the dotcom bubble burst & 9/11 happened on Bubba's watch. Price controls anyone?

In any case, now that Sarkozy & Merkle are friends, it'd still take time to turn the ship as it were to strengthen the USD and may yet be for naught depending on who wins 08.

[Grodge]

I find it odd that Steve has become so defensive of the generosity of employers who continue to provide health benefits for employees, even while the percentage of employers providing such benefits has decreased from 65% to 59%-- an almost 10% drop!

Opiners here and at Angry Bear do not seem to be castigating employers so much as recognizing the untenable position all of us are facing with the increasing cost of health care and other necessary goods and services. Is the quality of health care truly improved to account for the increased cost? The quality of gasoline? milk? meat? Please.

Sure, compensation has increased (and kudos to employers for that I suppose!), but the impact of creeping inflation is real, and those effects are especially felt by hourly employees who have seen no increase in wages over 7 years. Nobody is faulting individual employers so much as they at the Angry Bear are faulting the BLS for failing to recognize the negative impact of these inflationary factors and the Fed's failure to reign in inflation with it's piss-poor monetary policy.

I think that is the point of John Edwards' campaign "debate" speeches as well, although Steve did not furnish a link to the debate transcript (and I'll be damned if I could listen to those ridiculous "debates" live.)

Economic cycles are pretty much independent of which party occupies the WH and Congress. Clinton had about as much control over the dotcom bubble as Dubya had over the real estate bubble, although one could argue that the subprime mess could have been mitigated with proper bank regulation 2, 3 or 4 years ago.

Steve started the argument with a swipe at Edwards for recognizing the obvious: wages are stagnant. They are! So what!? Even if total compensation has increased, the median household take-home wage is stagnant and Joe Sixpack feels the pain as his cost of living rises at a greater rate than reflected in the government CPI. At least admit that!

The proper response is to say "the economic cycle will turn, and is turning." To make some grand political case over the issue is ludicrous.

[The Dirty Mac]

"And I know that you are far closer to being a supporter of fascism then I a socialist."

We are assuming that a fascist is not a socialist? I don't think so.

[Rick Ballard]

"Rick Ballard, can we please have a look at real income, say, for lawyers?"

Sure. Steve is looking at the period of '99-'06 and the BLS stats indicate an increase in compensation for lawyers of 26% over that period. Not as good as LVNs at 29% but better than elementary school teachers at 23% or wastewater treatment workers at 19%. The Fed calculator says CPI increased by 21% over the same period.

Personally, I think the wastewater workers are getting screwed. Absence of 80% the service they provide would be felt far more quickly and deeply than absence of 80% of the service provided by most occupations. Local government seems to think otherwise and persists in giving them the shaft - where's AFSCME when you need them?

Muirgeo,

You do realize that you are relying on a mistranslation of Mussolini's 'corporatismo' in order to make your silly point, right? Mussolini's use of the labor movement (sindalicalismo) to control means of production isn't exactly a secret.

[muirgeo]

Call it what you want Rick but when you support or ignore the fact that corporations are serving as organs of political representation and exercising control over persons and activities within their jurisdiction (Merriam-Webster for corporatism) as well as undermining the electoral and policy making process you have abdicated your claim to support competitive and free markets.