David R. Henderson  

Presentation in Las Vegas

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Watch Out, Tulsa... Against Libertarian Nostalgia...

Next Tuesday, April 13, I'll be making a presentation in Las Vegas at the annual meetings of the Association for Private Enterprise Education (APEE). My topic is "Is the Middle Class Disappearing?" Unusually for me, I actually have the final draft complete a week before presenting.

When I first proposed the topic to session chair Dwight Lee about six months ago, I thought, given all the wailing there is about how much the middle class is hurting, I would find a substantial literature by economists taking that viewpoint. Not so. The one economist willing to go out on a limb and say that the middle class is disappearing is Paul Krugman. So I focus on his arguments and data. I quote him talking about the idyllic childhood he had in the 1950s and 1960s.

Here's the quote:

Those considered very well off lived in split-levels, had a housecleaner come in once a week and took summer vacations in Europe. But they sent their kids to public schools and drove themselves to work, just like everyone else.
Then I write:

I remember the same times he remembers. Take our family, which I think was right in the middle of the Canadian middle class in the 1960s. (I say "I think" rather than "I'm sure" because I don't know my father's income.) Our family owned a house built in the 1880s and not much remodeled after that except for the addition of a small, dark room--we called it the "utility room"--in which my mother had her motorized washing machine with a wringer on top to wring out the water and in which we had our 1955 remodeled black and while 21-inch Philco television set that we bought in 1961. My father was variously a high-school principal and a high-school teacher and my mother, with three kids on her hands, was a housewife who made money on the side by teaching piano lessons. The farthest my mother ever got by the late 1960s was a trip to Vancouver. Occasionally, we drove south of the border to that exotic state of North Dakota. My uncle, a doctor in Winnipeg whom we considered upper-class, had a split-level house built in 1961. Even he and his wife didn't take trips to Europe but did often go to the Caribbean for one or two weeks to escape the long, rough Canadian winter. So right there you have in microcosm the Canadian middle class and upper class in the 1960s. Because the income of the average Canadian family was about 20% below that of the average U.S. family, add 25% to the Canadian picture and you have the American picture.

Now look at what people in the U.S. middle class have today, something that Krugman conspicuously avoids doing. It's not just upper-income people who have split levels. It's middle-income people who have two-story houses. And think about what's in the house, keeping in mind what we had in the 1960s. According to Michael Cox and Richard Alm, an economics professor and an economics writer respectively at Southern Methodist University, in 2005, 82 percent of U.S. households had clothes washers and 79 percent had dryers; my mother, by contrast, never had a modern washer and never had a dryer. In 2005, over 96 percent of U.S. households had a color television. We never had a color TV. Over 89 percent of U.S. households in 2005 had a microwave and 87 percent had a VCR. 73 percent have a computer and 88 percent of people over age 15 have a cell phone. I think you all know how many people had microwaves, VCRs, computers, or cell phones in the early 1960s. It was precisely zero.


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COMMENTS (25 to date)
JPIrving writes:

Yes, but Krugman and his leftie buddies will probably argue that the relative disparity is growing. So it wouldnt matter if the majority of people had rocket cars and personal robot servants, if the rich had 100x more goodies then there would be no middle class, rather two groups:Haves and Havenots. Even if the havenots live like kings.

These people will never be satisfied until income, and wealth fit some type of idealized, low variance "distribution". Never mind that the corporatism and regulation practiced in the U.S. probably leads to greater wealth disparity...

JayT writes:

I always have friends complain about how the middle class nowadays doesn't have as much money, and I always point out that the middle class in the 1960s didn't have to pay for things like cable TV, internet, cell phones and all the other services that just didn't exsist back then.

I somehow doubt that the average person would be willing to give all of that stuff up in exchange for a bit more money.

Devin Finbarr writes:

Except that people my age cannot afford to buy a house, even the cheap houses. My dad bought our house for 2X his income. Now that exact same house would cost me almost 4X my income, and I make more than any of my friends my age. So I have a color TV, but it's much more difficult for me to afford a house. Which would you rather have? This is why we have aggregate statistics, the entire point is to weight multiple factors. You can't just say, "Well quality of life is much better because we have TV's and bigger houses."


These debates about changes in quality life get really boring. In the last forty years, some things have gotten much better/more affordable (manufactured goods, technology, information). But land and certain natural resources have become relatively more expensive. For the typical 30-year old, it's much more financially stressful to start a family today than it was in 1970. But if you don't start a family, the material quality of life will be much better in 2010 than 1970.


kebko writes:

" But they sent their kids to public schools and drove themselves to work, just like everyone else."

Ahh, it's about time someone pointed out how you can't find any fancy private schools that cater to the upper class that were established before 1970. Didn't exist. That's why they always are in new buildings with signs out front that say things like "Established 1987".
On a related note, I heard an interesting story on NPR a while back (sorry I forget the reference info) about restoring FDR's dorm room at Harvard. The elite kids stayed in special rooms, complete with fireplaces & all the latest infrastructure of the time. I thought it was a fascinating insight into how much things have levelled off between the upper & middle class. Of course, this observation didn't seem to occur to NPR.

And, Devin, I'm trying to imagine you making your case to an actual 70 year old, that you have it worse than they did, or that you'd really like to live in the physical equivalent of their first house, but you can't afford it. I'm not sure they would react positively to that assertion.

dougfy writes:

My father, a railroad engineer, made less than 30K in the 1960's where we had a split level house at ~1X salary and we had a B/W TV until ~'68 when it was upgraded to color.

I have a similar house now that is 4X my salary 24 miles outside San Diego because I can't afford to live in town as my folks did. I'm only in San Diego because in '84 that was the only job offer on the table.

Their first house was actually a house but yea it was 1200sqft while mine was a 1500sqft condo 'cause where those little houses are in San Diego is now town center and they go for 600K.

Keep in mind goodies are disposable income and its your choice but in general the housing/transportation is more on the need level. Personally we have been looking at turning off a lot of the "extras" because its been 10 years since I have gotten more than a 1% raise. Obviously I'm ins software and there are global pressures on software salaries. Shame I don't work for some goverment or school. My kids tuition has gone up 10% a year for a decade now including thru college.

I'm not sure how my kids will ever afford a house and its not clear the college debt will pull down a sufficiently high paying wage to repay the costs.

Ryan Vann writes:

If you are going to make a hedonic argument, I think it is at least fair to consider debt to income ratios too. Yes folks might have had far smaller homes, but they probably weren't renting them from banks for nearly as long. I will admit all the new tech gadgets are hard to weight as far as utility, so it is probably better to just use inflation adjusted total compensation packages when addressing well being. Otherwise, you risk being completely arbitrary.

Mr Econotarian writes:

Next week is a wild time to be in Vegas, it is the same week as the National Association of Broadcasters (NAB)!

Charlie writes:

Wow, I see why you didn't link to the original Krugman piece, because you completely ignore his argument. He says, wealth inequality is growing and that has negative political economic consequences.

You pretend he says, middle class people are poorer than they used to be and prove him wrong.

You and I both know that Krugman knows that the middle class has a higher standard of living than they did in the 50s and 60s. He wrote a whole book on this called the Age of Diminished Expectations. He argues that the first 25 years or so since the 50s were great for the middle class, and then they weren't so great. Since the book was written he's argued that especially recently most of the growth is occurring among the very richest percent and tenth of a percent of the population.

There are lots of valid arguments against his points. You can say that Picketty-Saez has problems, you can say that benefits aren't being counted right, you can say that adjusting CPI by income class shows a different picture (the Wal-mart effect), but you can't just pretend he makes completely different arguments than he makes.

You need to rewrite your entire speech, if it ignores all these points.

Stephan writes:

That's indeed good news for APEE. The American Dream Is Alive and Well. And please don't annoy your audience with some disturbing facts:

Early 1970s: Single-Income Family: Median Income US$ 42.450; Fixed costs US$ 22.890 (mortgage, child care, health-insurance, car and taxes); Disposable income US$ 19.560

Early 2000s: Double-Income Family: Median Income US$ 73.770; Fixed costs US$ 55.660 (mortgage, child care, health-insurance, car and taxes); Disposable income US$ 18.110

Zachary writes:

Something always niggled at the back of my mind when I heard these types of comparisons and I finally realized what it was: We're making the wrong comparison or drawing the wrong conclusion when we make the right one.

Step away from the upper verses middle class gap and take a look at the changes in the gap between the lower and middle class. Poor peoples' quality of life has become much closer to the middle class's in the past fifty or hundred years. Rather than lament this as the death of the middle class, we should be celebrating it as the enrichment of the lower class because that is what is happening. And it's happening because of diminishing marginal returns to wealth.

Say you get the same improvement in quality of life by upgrading from no internal plumbing to a dishwasher, microwave, refrigerator, etc as you get from upgrading from those to having a personal chef. But the second upgrade will cost exponentially more than the first. Or, even a completely apples to apples comparison, you gain more when upgrading from an ice box to a refrigerator than you gain from going from a generic fridge to a deluxe, stainless steel model but the second upgrade still costs far more.

This doesn't mean that if you had a refrigerator 50 years ago you are worse off now if you still only have a refrigerator, it means that if you didn't have a fridge 50 years ago and now do you are much better off. Diminishing marginal returns, but still positive.

Why isn't the middle class improving relative to the upper class, then? Look at the definitive items that the different classes consume. Both lower and middle classes consume primarily _objects_: Cars, phones, appliances, food; All things that become cheaper and better as technology improvements increase productivity. But definitive consumption for the upper class is more _labor_: Art, fine dining, personal trainers, chefs, assistants, prestigious education.

When productivity increases, labor becomes more expensive but objects become cheaper. So the poor live more like the middle class, but the middle class does not live more like the rich. Again, diminishing marginal returns, from a holistic perspective.

So, as long as these consumption preferences continue and technology advances, I'd expect to see a continued widening of the gap between rich and average, a closing of the gap between poor and average, and an absolute increase in the value of average.

And housing? Technology cannot create more land in the same proximity to your job. Compounding that, the government has maintained a successful and intensive campaign to get more and more people to buy houses. What was the ratio between single family homes and multi family units when your father paid 2x income for his house, what is it now that you're paying 4x for yours?

David R. Henderson writes:

@Charlie.
"Wow, I see why you didn't link to the original Krugman piece, because you completely ignore his argument. He says, wealth inequality is growing and that has negative political economic consequences."

I don't ignore his argument. I point out in my talk that that's his argument. In other words, in an article that purports to be about the middle class doing worse, he spends almost the whole piece arguing that inequality is increasing and, to the extent he looks at the middle class, he finds that it's doing better, without ever explicitly admitting as much.

zach writes:

"Ahh, it's about time someone pointed out how you can't find any fancy private schools that cater to the upper class that were established before 1970. Didn't exist."

Yeah, who's ever heard of pre-70's fancy private schools? Oh, you meant the 1970s. Well, I'd have to disagree with you on that one.

http://www.exeter.edu/ Est 1781
http://www.andover.edu/Pages/default.aspx Est 1778

Charlie writes:

Seriously, David, what planet are you on?

"I point out in my talk that that's his argument. In other words, in an article that purports to be about the middle class doing worse"

Where does the article purport to be about anything other than it is about? Seriously, he's written a book on this stuff. Most economists thinking about this don't think modest absolute gains over 30 years is impressive. Belarus has done that.

"he spends almost the whole piece arguing that inequality is increasing and to the extent he looks at the middle class, he finds that it's doing better, without ever explicitly admitting as much."

David, we can find the piece even if you don't link to it. How about this from Krugman:

"Over the past 30 years most people have seen only modest salary increases: the average annual salary in America, expressed in 1998 dollars (that is, adjusted for inflation), rose from $32,522 in 1970 to $35,864 in 1999. That’s about a 10 percent increase over 29 years - progress, but not much."

Doesn't that directly contradict what you wrote? He says middle class people are wealthier, but not much wealthier, and then says rich people got much wealthier over that time. Whether this is the right way to look at progress is subject for debate, but what you have written so far is a complete misrepresentation of his views.

I'm just taken aback; I can't imagine what you're thinking. It's like you had a preconceived notion of what his view was, and you are arguing against that view, rather than the actual view that's in the piece. Seriously, what in the piece "purports to be" about the middle class doing worse in absolute terms. You're about to make a huge blunder if you give that talk. Whether anybody will notice or it will just bounce off the right-wing echo chamber (to borrow Kling's turn of phrase) is another matter.

The_Orlonater writes:

The problem I have with some of these aggregative studies is that they don't focus on microeconomic concepts of why certain "fixed costs" such as health care,education, and housing(when it was more so) are so expensive. To quote Roger Garrison (when he has talking about business cycles, but I think the quote fits nicely with this) is that there are "Macroeconomic problems, but microeconomic solutions." Secondly, I think Russ Roberts put it nicely when talking about "income inequality": http://cafehayek.com/2010/03/the-essence-of-the-health-care-legislation.html.

Charlie writes:

I tried to reread your original piece more generously. Maybe you just don't like the CPI? Do you think it is the wrong way to compare wages across time? Maybe 2 to 3 percent inflation is really deflation, if you think we aren't capturing quality changes well enough? Obviously, this would have far reaching consequences, and it's hard to criticize Krugman for using the data the same way every other economist uses it.

David R. Henderson writes:

@Charlie,
Charlie: Seriously, David, what planet are you on?
Me: Earth.

Charlie: Where does the article purport to be about anything other than it is about?
Me: The opening section, which is titled, "The Disappearing Middle."

Charlie then quotes Krugman correctly:
"Over the past 30 years most people have seen only modest salary increases: the average annual salary in America, expressed in 1998 dollars (that is, adjusted for inflation), rose from $32,522 in 1970 to $35,864 in 1999. That’s about a 10 percent increase over 29 years - progress, but not much."
Me: Precisely. I quote that same quote in my piece and I note that he gives it little weight and, instead, in a piece that claims to make a case for the disappearing middle, shows that the middle is doing better. And he understates that progress, as I also point out in the piece.

Charlie: but what you have written so far is a complete misrepresentation of his views.
Me: False. I have represented his views exactly.


David R. Henderson writes:

@Charlie,
Charlie writes: I tried to reread your original piece more generously.
Me: Thanks. I appreciate that.

Charlie writes: Maybe 2 to 3 percent inflation is really deflation, if you think we aren't capturing quality changes well enough? Obviously, this would have far reaching consequences, and it's hard to criticize Krugman for using the data the same way every other economist uses it.
Me: Good point, but here's another part of the piece I'm presenting in "Lost Wages":

Now you might have thought that Krugman, or more, correctly, the CBO, used the standard CPI-U as the way to adjust incomes for inflation and make a comparison. And, as has been well-established, the CPI-U overstates inflation by a substantial amount—probably over one percentage point per year for the relevant time period. But neither Krugman nor the CBO made that mistake and, instead, used the CPI-U-RS, which gives a more-accurate measure of inflation.

What I think happened, Charlie, is that you jumped the gun and concluded that you knew everything you needed to know about my article after reading only a tiny excerpt.

ERIC writes:

Hi David,

Your article caught my attention because I was just re-reading a great article titled: How Poor Are America's Poor (Published on August 27, 2007 by Robert Rector). I think it is a great compliment to your position as it demonstrates how well-off even the "poor" are relative to generations past. You'll have no trouble finding it on Google. Hope it helps.

Charlie writes:

I think my original response got lost in cyberspace.

Look here's the original article (http://smccd.net/accounts/sullivant/Engl100/ho/forricherpaulkrugman1.pdf)

It's obvious "the disappearing middle" means an increase in wealth inequality, an increase in the Gini coefficient in econspeak. I'll just reproduce the first section and you can show us where Krugman says that the absolute income of the middle class is declining.

And yes, I can only point out the problems with the parts of your talk that you put on your blog. If you think you are potentially making mischaracterizations in other parts of the talk, you'll have to post them before I can point them out.

"I. The Disappearing Middle
When I was a teenager growing up on Long Island, one of
my favorite excursions was a trip to see the great Gilded Age
mansions of the North Shore. Those mansions weren’t just
pieces of architectural history. They were monuments to a
bygone social era, one in which the rich could afford the
armies of servants needed to maintain a house the size of a
European palace. By the time I saw them, of course, that era
was long past. Almost none of the Long Island mansions
were still private residences. Those that hadn’t been turned
into museums were occupied by nursing homes or private
schools.
For the America I grew up in -- the America of the 1950’s and
1960’s -- was a middle-class society, both in reality and in
feel. The vast income and wealth inequalities of the Gilded
Age had disappeared. Yes, of course, there was the poverty
of the underclass -- but the conventional wisdom of the time
viewed that as a social rather than an economic problem.
Yes, of course, some wealthy businessmen and heirs to
large fortunes lived far better than the average American. But
they weren’t rich the way the robber barons who built the
mansions had been rich, and there weren’t that many of
them. The days when plutocrats were a force to be reckoned
with in American society, economically or politically, seemed
long past.
Daily experience confirmed the sense of a fairly equal
society. The economic disparities you were conscious of
were quite muted. Highly educated professionals -- middle
managers, college teachers, even lawyers -- often claimed
that they earned less than unionized blue-collar workers.
Those considered very well off lived in split-levels, had a
housecleaner come in once a week and took summer vacations
in Europe. But they sent their kids to public schools and
drove themselves to work, just like everyone else.
But that was long ago. The middle-class America of my youth
was another country.
We are now living in a new Gilded Age, as extravagant as
the original. Mansions have made a comeback. Back in 1999
this magazine profiled Thierry Despont, the ‘‘eminence of
excess,’’ an architect who specializes in designing houses for
the superrich. His creations typically range from 20,000 to
60,000 square feet; houses at the upper end of his range are
not much smaller than the White House. Needless to say,
the armies of servants are back, too. So are the yachts. Still,
even J.P. Morgan didn’t have a Gulfstream.
As the story about Despont suggests, it’s not fair to say that
the fact of widening inequality in America has gone unreported.
Yet glimpses of the lifestyles of the rich and tasteless
don’t necessarily add up in people’s minds to a clear picture
of the tectonic shifts that have taken place in the distribution
of income and wealth in this country. My sense is that few
people are aware of just how much the gap between the very
rich and the rest has widened over a relatively short period of
time. In fact, even bringing up the subject exposes you to
charges of ‘‘class warfare,’’ the ‘‘politics of envy’’ and so on.
And very few people indeed are willing to talk about the profound
effects -- economic, social and political -- of that widening
gap.
Yet you can’t understand what’s happening in America today
without understanding the extent, causes and consequences
of the vast increase in inequality that has taken place over
the last three decades, and in particular the astonishing concentration
of income and wealth in just a few hands. To make
sense of the current wave of corporate scandal, you need to
understand how the man in the gray flannel suit has been
replaced by the imperial C.E.O. The concentration of income
at the top is a key reason that the United States, for all its
economic achievements, has more poverty and lower life
expectancy than any other major advanced nation. Above all,
the growing concentration of wealth has reshaped our political
system: it is at the root both of a general shift to the right
and of an extreme polarization of our politics.
But before we get to all that, let’s take a look at who gets
what."

Charlie writes:

Well, darn, I think I have an obnoxious double post coming. I guess cause I have a link in my post, so I got spam filtered.

I guess I should say why this irks me so much, that I would respond with more vitriol than usual. I think its first because Krugman's position on this issue is extremely well documented over at least 10 years. The Age of Diminished Expectations was an old book when I read it as an undergrad in 2004. So even if it were possible to misread this article, the whole body of work is very clear. Second, it isn't possible to really misread this article, not for someone as smart as David. Third, you seem to be using this piece to try to marginalize Krugman, when his position really isn't all that different that a lot of left-leaning economists on this. Fourth, there are lots of legitimate reasons that right leaning economists have given that a) maybe we are mismeasuring the effect b) maybe we shouldn't care even if it's true that are worth discussing. And finally, most importanly, you're taking all this out into public, where people probably won't have been following the debate and then you're going to marginalize one side that has a reasonable concern that a lot of people in the country worry about and try to paint it like those people are just liars or idiots or some combination of the two.

[Charlie: I'm only posting the second of your two moderated posts. The cause for their being held up wasn't related to the link, but to a couple of other words that just happen to be widely used, by coincidence, in a lot of spam. For the record, your first version was sufficiently rude that it wouldn't have passed muster anyway.--Econlib Ed.]

Nick writes:

Why do people bother comparing real salaries, to show how the middle class is doing and not real compensation. 401k only came around in the early 80s. If i lost my benefits (health, life, disability, long term care, 401k matching, reimbursements) but got a 10% salary increase that would be a significant net loss in compensation.

Kevin writes:

The people in the top few % aren't the same people every year. Lots of people start low, work their way up, and after a few rich years return to the bottom for one reason or another. A long tail on income just means you only need to make it to the top 5% once in order to live "middle class" for a long time. This, coupled with the above discussion of the smaller differences in consumption as wealth increases, together make the whole discussion of inequality mostly irrelevant. This is setting aside the whole question of whether the tournament payoff is the most efficient incentive system.

I wouldn't bet against the Krugmans of the world arguing in 50 years that while everyone in America enjoys widgets, the inequality shown by the top .001% and their offensive ability to afford the rare purple widget necessitates unprecedented action to address this unprecedented social problem that was so tough to imagine back when they were young.

David R. Henderson writes:

@ERIC,
Thanks. I'll take a look.
Best,
David

Charlie writes:

"[Charlie: I'm only posting the second of your two moderated posts. The cause for their being held up wasn't related to the link, but to a couple of other words that just happen to be widely used, by coincidence, in a lot of spam. For the record, your first version was sufficiently rude that it wouldn't have passed muster anyway.--Econlib Ed.]"

Good on stopping the double posting. And I'm glad to hear I got just the right amount of rudeness in the second one.

George X writes:

JayT wrote:

I somehow doubt that the average person would be willing to give all of that stuff up in exchange for a bit more money.

You know for sure they're not willing, because they have a chance to give those things up every month when they send in their cable TV or internet bill, and they don't take it. Cell phones are slightly harder to ditch, what with two-year contracts and penalties, but the principle is the same. I'd say revealed preference is inescapably in favor of your thesis.

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