Arnold Kling

Baker vs. Summers

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Dean Baker writes,


Larry Summers got fired from his last job as president of Harvard. He doesn't seem to be doing much better at his current job, working as a columnist at the Financial Times. Today's column rightly notes the anger produced by growing inequality in the United States, but he misses both the dimensions of this inequality and its causes.

...He attributes the problem to a redistribution from wages to profits, noting that the bulk of income gains since 2001 have gone to profits. Profits are hugely cyclical, as economists know. Profits fell sharply in the 2001 recession. They have since grown very rapidly, but they are just now coming back to their 1997 share of output, the profit peak of the last business cycle. While there was a redistribution from wages to profits in the 80s and 90s, the upward redistribution that has kept most workers from benefitting over the last decade has been entirely from workers at the middle and bottom to workers at the top.


I think I understand what is going on at the top of the income distribution. I see stable, affluent families acting like machines for cranking out wealthy, assortively-mating kids.

I think I understand what is going on at the bottom of the income distribution. I see very dysfunctional people having very dysfunctional kids, out of wedlock.

In between? Not so clear. What is going to happen to my writing-challenged students at George Mason? Are they headed for middle-class jobs in nursing or social work, or for something worse?

When it comes to making the case that the middle is hurting, Dean Baker is going to have to work hard to overcome my skepticism. If middle-class squeeze is such a problem, how come almost everyone but me has cable? Why are flat-panel TV's flying off the shelves? Why are there so many Starbucks? Why are there so many restaurants? Why are there so many leaf-blowers and snow-blowers?

Last month, a county employee was driving a vehicle that was blowing the leaves off of the bicycle path, for crying out loud. Granted, we live in a bubble of affluence, because the Washington DC metro area benefits especially from the "harvesting cash" phenomenon of siphoning taxpayer money.

But even when I go home to St. Louis, the area looks much more prosperous than it did 30 years ago. They're putting up what looks like a 15- or 20-story luxury condo building in the Central West End. I don't think there were that many affluent people in the whole metro area back in the 70's.

Larry Summers says that the newly-elected Congressional Democrats are up in arms about the troubles of the middle class. I would not have accepted that story so uncritically.

Thanks to Greg Mankiw for the pointer.


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CATEGORIES: Income Distribution



COMMENTS (16 to date)
talboito writes:

Consumer debt.

Brad Hutchings writes:

Really cool stuff is getting less expensive. One or two really cool things are in the realm of the affordable for more people. $1000 for a giant flat screen TV is a great gift for a family to give itself instead of a bunch of little things.

RWP writes:

I left Saint Louis at the Fall of 2005 and came home in 2006. It seems to me that certain areas in Saint Louis metro area have hit a critical mass. Even old City Hospital has been made into a condo building.

Dean Baker writes:

I hope you don't mind if I follow the old-fashioned method of relying on the government data showing wage and income stagnation for the middle class, rather than personal anecdotes.

Arnold Kling writes:

Dean,
But the Census data on ownership of durable goods are consistent with the anecdotes. The data on home ownership (and size of homes) are consistent with the anecdotes. The wage and income data are what seem out of line, perhaps because of mismeasurement of the cost of living.

aaron writes:

I am a writing challenged kid. Do you any recommendation of how I can learn basic grammar and punctuation, since public school and college have failed me?

Mike writes:

I appreciate your reliance on the government data Dean, but then we are going to get back into an extended argument about the shortcomings of the data. For instance, the data you are relying do NOT follow the same people over time, among other challenges (such as ignoring total compensation and other living quality indicators - good and bad), which makes me very skeptical of ANY claims about how the middle class is doing.

And, what is the proper unit of analysis anyway? Is it the individual, family, household? The household data do not show that much evil is happening, even in the cross-section data. Then we'll see the usual complaints that it is because two people are now working to do what one person used to do.

(1) Since the beginning of time, everyone worked, so there is nothing ususual about having two people working.

(2) These are people making choices - unless the world is one where we all do things as last resorts only, I am inclined to recognize that these choices are superior to the ones not made, on average.

Chris writes:

As someone who is firmly middle class, living in a middle class subdivision, of a middle class suburb I would love for someone to explain to me how life is bad.

I feel really left out not knowing what I should be whining about.

Randy writes:

Chris,

Me too. As best I can tell, I'm supposed to be making about $2,000 more per year than I am. But when I compare my middle class standard of living to my father's middle class standard of living, I find myself more than willing to give up that 2K. It does make a great sound bite for people trying to get elected though.

Jim writes:

"They're putting up what looks like a 15- or 20-story luxury condo building in the Central West End."

Wow, what a convincing argument that the economy is lifting all boats.

Jim writes:

But seriously, since those people who end up at the bottom of the income distribution are generally those people who started out there, why does Arnold think that poor people are more 'dysfunctional' than others? Could it - just maybe - have something to do with low income? And if that's so, wouldn't - just maybe - increasing the resources and incomes of the poorest help?

aaron writes:

Or that they just aren't taught how to function socially.

Dean Baker writes:

Arnold,

I'd make a couple of points on the data. First, the claim is not that there has been zero improvement in living standards. The data show real wage growth of about 8 percent over the last quarter century. Median family income has risen by close to 20 percent, the difference being due to the growth in two-earner households.

I've been around the block too many times with the things are better, but we're not measuring it right folks. Yes, houses are bigger, but they are also further away and commute times are longer. The house that sells for $150,000 in West Virgina, would sell for $1.5 million 3 hours away in a good neighborhood in Dc (or $150,000 in a bad neighborhood). People also have more work related expenses from two-earner households (e.g. child care, 2nd cars). How do we factor in things like AIDS and Lyme disease, largely non-existant concerns 25 years ago?

I am not convinced by someone looking at the CPI, then grabbing a few places where we think things have improved more than the data show and then pronouncing that living standards have risen much more than the data indicate. You can look at my book for my story on this, Getting Prices Right: The Debate Over the Consumer Pirce Index (M.E. Sharpe, 1997). It's a bit dated now, but it gives the flavor of the argument.

But, I'm a generous guy. I'll give you any price index you want, but you just have to use the same one in all contexts. This means that if we beleive that the CPI overstates inflation by say, 1.0 percentage point, then this has to apply everywhere.

This would mean that we would be adjusting not only our past growth for real wages and income but also our future projections. So, for example, our projections would now show that real hourly compensation will have approximately doubled in 30 years.

This information would be very important in debates over issues like the budget deficit and Social Security. Our backward adjustments to the CPI imply that mnay of us baby boomer types grew up at income levels that are below the current poverty level. Looking forward, before tax compensation will nearly double in 30 years. This means that if we are on a budget path that will require a massive increase in taxes 30 years from now(e.g. say 10 pp), then real after tax compensation will still be close to 80 percent higher than it is today.

Now, i know that many (most?) economists are intergenerational flat taxers, but the relative burdens acrosss generations is a political decision in which everyone gets their input, not just the boys and girls who have been admitted to the fraternity of economists. My guess is that few people would believe that we have committed a serious generational injustice if we created a situation in which 30 years from now, average real after-tax compensation was 80 percent higher than it is today.

It would be nice if the economists who ardently believed in the overstated CPI story would help educate the public about the true prosperity of future generations (and our own recent poverty) so that they can make more informed decisions on issues like Social Security.

Paul Zrimsek writes:

OK, if that's what it takes to get you guys to admit that a massive tax increase 30 years from now is your big plan. (But why not a massive benefit cut 30 years from now instead? Your argument supports that idea equally well.)

loki on the run writes:

I might be dumb, but it seems to me that there has to be some redistribution of income for the economy to work, otherwise all the money ends up in the hands of a few at the top.

Personally, I would want that redustribution to be as little as possible, though.

Christina writes:

The reason I just can't care about the so-called plight of the middle-class (or any class for that matter) is that as long as people are still able to freely exchange their labor for wages/goods/services, then I hold them personally responsible for their financial situations. As soon as slavery is legalized I'll get worried.

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