Straw Men and Low Bars
I understand that it’s hard to resist arguments that tilt against the conventional wisdom, but this tendency led to two particularly frustrating bits of analysis in the Washington Post.
The format for the two pieces is almost exactly alike. They start out—I’m only slightly paraphrasing—“we all know inequality is on the rise and that the middle class and the poor are getting squeezed, right? Wrong!”
Well, I’m sorry, WaPo, but inequality is on the rise and middle- and low-income families are increasingly squeezed.The most common techniques to make these allegedly “counter-intuitive” arguments is to a) set up and then tear down a straw man, b) set the evidentiary bar low, and c) ignore inconvenient truths.
Each was put to use by columnist Steven Pearlstein in the first piece (I’ll discuss the second piece in a separate post). He marshals a set of arguments put forth by the economist Steve Rose intended to warn us against accepting the notion that the middle class is disappearing, or that most people’s living standards have been deteriorating for decades, or that most new jobs are “lousy, low-paying service jobs.”
But while you can always find someone to make any argument, I’ve not seen any of these made by the serious analysts who work in this area. I myself have co-written eight versions of “State of Working America,” a comprehensive review and critique of American living standards, and in literally 1000’s of pages, we’ve never made any such sweeping claims.
We have, however, emphatically pointed to shortcomings in the rate at which different groups’ living standards were rising, and assigned this problem to the growth in the inequality of economic outcomes. We’ve especially emphasized the extent of these problems in the 2000s, a period of surging inequality to which Pearlstein and Rose pay far too little attention.
Then there’s the “low bar problem.” Due to stagnating male wages, most of the income gains to middle-income families have come through increased work by wives. (You won’t get this from Pearlstein, but the real wage of the median male worker is about the same now as in 1973.) Pearlstein calls this a “favorite liberal story line” and cites Rose data showing that even when you take wives’ earnings out of the equation, the real incomes of these families went up.
And they do, by all of three percent, over 25 years, or about 0.1% per year. Including wives’ earnings, their income is up 22 percent. In other words, there’s a good reason for this story line.
Then there’s the story these guys love most of all: over the last 25 years, more households have higher incomes. Talk about your low bars. They’re taking fixed (real) income brackets, like the share of families with income below $30,000 in today’s dollars, and pointing out that more families are moving into higher brackets over time.
Of course they are…and other than during the Great Depression, they surely always have been. After all, the economy expands almost every year. It would take a tremendously skewed system to prevent at least some portion of those gains from reaching most families over 25 years (though over some periods, like the last few years, virtually all income gains have flowed to the top 10%).
The useful question is: how steady has this progress been, and to what extent has rising income inequality precluded more broadly shared gains? In the 1970s, about 10% of families shifted from lower to higher income brackets, but in the more unequal 1980s, that share was cut to five percent (about the same as the 1990s). In the 2000s, the trend actually reversed: there are more low-income families, fewer middle-income families, and the same share of high-income families.
Finally, occupational upgrading—the shift from blue to white collar jobs, from manufacturing to services, from factories to offices—has gone on forever. To tout this as a success story is again setting the bar ridiculously low. The question is the not whether we’re creating jobs for systems analysts. It’s whether the compensation in these jobs is keeping pace with productivity. And here the answer is a clear ‘no.’
Extensive research has shown this expanding gap between productivity growth and compensation is one of the most significant economic problems we face. It violates basic economic precepts and more importantly, fundamental principles of fairness. Why Rose and Pearlstein want to downplay/ignore it is anyone’s guess. (Pearlstein has some squirrelly comments about a cyclical effect here, but the gap is clearly structural in nature.)
What’s so peculiar about their denial is that we’ve reached a point where there is extremely wide-spread agreement about the facts of the case. Non-partisans like Ben Bernanke, chairmen of the Federal Reserve, partisans on the other side of the debate, including no less than Bush himself, acknowledge this problem. Even the Heritage Foundation, a group that has heretofore made a cottage industry of explaining away these problems, recently co-authored a document asserting that “a growing gap between the U.S. productivity and median family income challenges the notion that a rising tide will lift all boats,” and “…the up-escalator that has historically ensured the each generation would do better than the last may not be working very well.”
Now, widespread agreement is not, of course, confirmation of facts, but presumably, folks like Bernanke, Bush, and Heritage have to be solidly convinced before they agree with those of us who’ve been writing about inequality and the productivity/income gap for years.
And finally, majorities of the public themselves are reflecting these concerns, and, while I’d like to believe it, most are probably not learning about them through the Economic Policy Institute’s website. Concerns about the middle-class squeeze and the unfair distribution of growth played a demonstrable role in the 2006 election outcomes, and they continue to drive a populist politics today.
Hillary Clinton, for example, is, like Rose, a centrist democrat, but she’s clearly not swimming in de-Nile. She just gave a great speech on these matters, stressing that “while productivity and corporate profits are up, the fruits of that success just hasn't reached many of our families. It's like trickle-down economics, but without the trickle.” She gets the problem, and she sets forth a convincing set of solutions.
In their quest to be provocative, the Steves miss the diagnosis: the patient isn’t dying—no one in their right mind thinks so. But our economy has a serious inequality infection, and those who deny it will never come up with the necessary medicine to reconnect growth and living standards.
I appreciate everything here. This is another one of the essays which make reading about economics enjoyable to amateurs. I have two questions which I'm wondering whether or not are worth considering:
Thanks again for a fun read.
aMike
May 31, 2007 11:04 AM | Reply | Permalink
May 31, 2007 - 2:04pm amike said:
"As one reader on another post informed me, in 1971 top salaries for baseball stars were in the $30,000.00 range."
According to this page,
http://www.baseball-almanac.com/players/player.php?p=mayswi01
Willie Mays was making $100K in 1958, $120K in 1970, and $180K in 1971. A bit more than $30K.
The same site shows Steve Carleton making $40K in 1971 with the Cardinals, but $167K 2 years late after he had moved to the Phillies.
Yaz was making $125K with the BoSox, in 1970 (no data for 1971).
Pete Rose was making $105K in 1970 (no data for 1971).
May 31, 2007 12:47 PM | Reply | Permalink
I sit corrected (only because it is hard to stand corrected and keep the fingers on the home keys). The baseball player who was cited in the other exchange was Jim Bunning... And the comment was about Average Major League Players rather than Stars. <senior moment>misremembered</senior moment>The same source was quoted, but a different statistic.
Sorry about that. I shall go into the corner, suck my thumb discontentedly, and then write "reminder to self: stay away from numbers, dolt" on the blackboard 1,000 times. :-)
aMike
May 31, 2007 1:26 PM | Reply | Permalink
amike,
I'm with you as to wondering whether the concept of mid-class means much. It was Sen Lieberman, I believe, who recently referred to himself as being in the middle class. People often ask economists to define it and we can't because there is no widely accepted definition (that I know of).
A key, in my thinking anyway, is a word you use: aspire. There's some evidence that poor, mid-class, and rich people all have different aspirations. A poor family might not consider a vacation to be a viable option, a mid-class family might take one to Fla, and a high-inc family might take one to Paris.
But even this I hesitate to push too far. I suspect our core aspirations aren't all that different.
RE jobs, I think the issue is less the type of jobs we're creating by occupation--that's been fairly steady progress as I mention in the post. It's the quality of the jobs--eg, a good job in a good occupation today (eg, computer programmer, financial advisor) is less likely to have decent health coverage than that same job five years ago.
May 31, 2007 5:59 PM | Reply | Permalink
amike--I reply to this below--JB
May 31, 2007 6:00 PM | Reply | Permalink
If I were to try to define the transtion from middle class to rich, I think I'd focus on the point where purchasing all the basics of life in our modern society (home, food, transportation, health care, education, retirement security, etc.) can be done without taking on debt and without any need to juggle priorities among these basics. Most middle class people--even those earning $200,000 per year--have to resort to borrowing to buy a home and get their kids through college--or at least have to plan carefully to be sure they have resources to purchase all the basics. For the truly wealthy, these basics can be purchased at any time, without having to make any special financial plans. Now I know there would be problems with some of the details of this definition. I think if you had to borrow $2 million to purchase a $10 million home, you'd still qualify as rich, since having $8 million on hand to spend on a mansion is certainly not middle class. Similarly, if you lived like a monk, you might be able to get all the basics without having much money at all. So maybe the "basics" have to be defined more precisely as the basics priced within one standard deviation (or something) of the median. But the idea is that the rich don't have to juggle priorities among basics (unless they really overspend on luxuries--but that's a special case).
On the other end of the wealth/income spectrum, you could define the poor as those who cannot actually afford the basics without charity or government support. Simply summarized:
Poor cannot get all the basics without charity or welfare
Middle class can get all the basics, but only by delaying some purchases or financing with debt or by saving over extended periods
Rich can get the basics immediately at any time without debt (unless they want the debt, because it's cheap relative to the returns on their investments) and without any need to delay the purchase of any other basic or specially save to afford the basics
Update: Note with this definition, a middle class person would be in trouble if he or she lost his or her job, because he or she is depending on additional income to purchase basics. The rich person has enough wealth on hand to cover the basics, even without future income. Of course, depending on a rich person's choices with non-basics, the rich person's actual finances (for instance a large loan to buy a fleet of yachts) could mean that a loss of income would be a problem, but not because the basics are unaffordable, but only because the rich person is overcommitted on luxury goods.
One more update: Jared mentioned differences in aspirations between the classes. With my definition I might focus more on differences in worries. Poor people worry about getting by on a daily basis. Middle class people worry that a change in their financial status (or a medical emergency) could destroy everything they've built up. For rich people, worrying about anything is a personal choice.
June 1, 2007 4:57 AM | Reply | Permalink
That typology makes a ton of sense to me, Purp.
In one of the focus groups I once ran around these issues, mid-income families told us that they solidly believed they could afford college of one sort or another for their kids. It might mean other sacrifices, but they would and could make those in order to make that investment.
June 1, 2007 10:52 AM | Reply | Permalink
I've often found it ironic that in our society we have a love-hate relationship with class. We love to use it as a goal to aspire to or as a means to differentiate ourselves as "better off" than someone else. But it's also much like politics and religion: not something you talk about in public.
Purp's typology does indeed make a ton of sense. But I think only to a point. I think that the myriad of other factors and conditions that apply to each class also play enormous roles. My prime example is access to debt (it pains me to view debt as a meritorious tool...). The lower class have virtually no access to debt. The middle class have marginal access and are endlessly encouraged to access what they can of it in order to survive and/or improve. And the upper class have virtually unimpeded access to it and use it to generate even more wealth.
To clarify why I say that the middle class needs to access debt in order to survive is that they live in the increasingly dwindling no man's land between wealth and poverty. In this place there exists the unquantifiable variable of expectation. The middle class can marginally afford to have expectations and can find themselves vulnerable to having those expectations manipulated and/or exploited themselves.
All I know is that if I think about it too much my head begins to hurt. >.
June 1, 2007 1:08 PM | Reply | Permalink
I think there is a practical, objective method of defining class distinctions. For individuals who are of working age, a middle class person is someone who has taxable income, at least 80 percent of which is reported on a W-2 Form. A lower class person is someone whose income is not subject to federal income tax. An upper class person is someone with no more than 20 % of their taxable income reported on a W-2 Form.
June 1, 2007 2:38 PM | Reply | Permalink
I am rich! I am rich!
Together with my wife we are so hesitant to treat something as a "basic need" that we never had to delay any purchase (we just do it, but not because we have to). We financed our house, but after 8 years of indecision (and renting) we had a huge downpayment.
On the other hand, families with 2-3 times more income run debt because of much more expansive definition of "basics".
June 1, 2007 2:48 PM | Reply | Permalink
Re: Rich can get the basics immediately at any time without debt
But rich people do not buy "basics": they buy high status luxuries. This is especially true in housing. While a multi-millionaire might be able to buy a small suburban tract house with cash, that's not what he wants; instead he wants palacial digs that make the Queen of England look like white trash. And that generally means serious debt even for the well and truly rich. And many other luxuries, from resort vacations to top=of-the-line cars also come with hefty price tags. There's a reason the credit card companies have special high-credit limit product lines.
June 1, 2007 3:48 PM | Reply | Permalink
Re: For individuals who are of working age, a middle class person is someone who has taxable income, at least 80 percent of which is reported on a W-2 Form.
That leaves out small business owners and many cpnsultants, most of whom probably qualify as well. If we're going to talk taxes, I would rephrase the above to say "80% of which income is also subject to FICA taxation" to include the self-employed middle class.
June 1, 2007 3:51 PM | Reply | Permalink
If we apply this standard to defining middle class, I think we'd find that the middle class isn't small but really remarkably large. I like Mcboo's description below: "the increasingly dwindling no man's land between wealth and poverty." The issue with the middle class in the US is not its size (it's very large), but its perilous position, balanced as it is on a "knife-edge" between wealth and poverty. With the high cost of certain basics (housing, education, health care, retirement security), it isn't hard for someone with even a rather hefty income to see his/her financial situation collapse, either because of a few bad decisions or some bad luck.
Piotr below makes an interesting point. It is possible for many middle class people with fairly average incomes to get the basics with relative ease (and not too much debt) if they are good financial managers and are willing to moderate their desires a bit (and don't get seriously ill). But on the other hand, it's very easy for people by just being a bit less disciplined with their spending (or maybe a bit unlucky with, for instance, their health) to end up with a large amount of debt and in a rather perilous financial situation, even with fairly significant six-figure incomes. The remarkable thing about the American middle class is we can all afford education with just a bit of discipline in our financial planning and management--but we can all also go bankrupt with just a few bad decisions or a little bad luck. And this is probably true of people earning $30,000 a year and people earning $300,000 a year.
June 2, 2007 7:48 AM | Reply | Permalink
All true, and I think, as I tried to emphasize in the post, that this pricariousness is amplified over the past few decades by greater economic insecurity. This stems partly from the stagnant male wage trends I describe, but also from the increase in prices that Purp mentions ('certain basics').
There's also some evidence that income growth is more volatile than it used to be, which also engenders more stress for families with less to fall back on.
And finally, the institutions and norms that used to bolster mid-class economic security, from unions to Soc Security to employer-provided hth care and pension, are weaker now, and that too contributes to the problem.
June 2, 2007 1:05 PM | Reply | Permalink
Elizabeth Warren has also pointed out another interesting phenomenon that leads to increased middle class insecurity. It's pretty obvious that when it takes two incomes to maintain a middle class lifestyle, there's more stress on a family. But what isn't so obvious is that when you depend on two incomes, your risk of going bankrupt because of unemployment increases. I think a lot of people would think the opposite--that having two incomes increases your security because there's a fall-back income if someone gets laid off. But that's only true if the second income is truly unnecessary to meet your expenses. Consider, for example, two married people, each of whom (if working) earns the same amount and has a 10% chance of losing his or her job. There are three possibilities:
A. Both partners work, but can cover their essential expenses with just one spouse's income
B. Only one partner works, and the couple can cover their essential expenses with that partner's income
C. Both partners work, and both incomes are needed to cover their essential expenses
In the first case, both partners need to lose their jobs before essential expenses can't be met. There's a 1% chance that this will happen. In the second case, with one partner working, there's a 10% chance that the one partner will lose his or her job and that the couple will therefore not be able to meet expenses. In the third case, if either partner loses a job, the couple will be unable to meet their expenses. The odds of one or both of the partners losing their job is 19%. So people in situation C have a higher risk of being hurt by job loss.
What's interesting is that a large portion of the lower end of the middle class is now forced into situation C because one income is not enough to cover essential expenses (a consequence of stagnant income growth combined with significant increases in the cost of essentials like health care). Another (higher-paid) portion of the middle class is in situation C because of choice--they could, for instance, buy a small house, but instead assume they can take on a bigger mortgage because they budget based on both spouses' income. With debt-financed expenses (homes, cars, or consumer goods purchased on credit), this kind of financial management can be very risky indeed. The increase of people in situation C (because of necessity or choice) is yet another reason for the increasingly precarious position of the American middle class.
June 3, 2007 6:30 AM | Reply | Permalink
For the middle class, my definition would be centered around median of income and assets, with upper and lower reaches understandably fuzzy.
A more interesting question would be: do we have a (the) ruling class? I could propose a working definition "a relatively small group of people that collective exercise as much political influence as the rest of the society". Starting from town and country level.
June 4, 2007 1:04 PM | Reply | Permalink