David R. Henderson  

The Thriving Middle Class

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Don Boudreaux and Mark Perry have an excellent piece in the Wall Street Journal today, "The Myth of the Stagnant Middle Class." They cover a lot of interesting ground on how standards of living are rising even in the last few decades when Robert Reich and others have claimed that they are stagnating.

Boudreaux and Perry point out three things:
(1) The CPI has overstated inflation for a number of decades and, therefore, incomes that appear stagnant are not.
(2) A higher percent of pay today is not counted as pay in the statistics on hourly pay because it is in the form of benefits.
(3) I'll quote this one: "The average hourly wage is held down by the great increase of women and immigrants into the workforce over the past three decades. Precisely because the U.S. economy was flexible and strong, it created millions of jobs for the influx of many often lesser-skilled workers who sought employment during these years.
Since almost all lesser-skilled workers entering the workforce in any given year are paid wages lower than the average, the measured statistic, "average hourly wage," remained stagnant over the years--even while the real wages of actual flesh-and-blood workers employed in any given year rose over time as they gained more experience and skills."

But wait; there's more. They also note that life expectancy has improved and that the gap between black and white life expectancy has shrunk. Also, they address the issue of income inequality, which, of course, is not the same as the issue of a stagnating middle class. One excerpt:

Today, the quantities and qualities of what ordinary Americans consume are closer to that of rich Americans than they were in decades past. Consider the electronic products that every middle-class teenager can now afford--iPhones, iPads, iPods and laptop computers. They aren't much inferior to the electronic gadgets now used by the top 1% of American income earners, and often they are exactly the same.

Finally, they point out that the quality of most things is improving. (That's a major part of why the CPI overstates inflation.) I addressed some of these same issues in "The Joy of Capitalism," Chapter 8 of my book, The Joy of Freedom: An Economist's Odyssey. After going through similar data and stories about quality in the United States circa 2000, I wrote:
The quality of almost everything we get is higher than it was 30 or 40 years ago. The only things I can think of that have gotten worse are our protection from crime and the quality of education our children receive in schools. Each of these, interestingly, is provided by the government.


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COMMENTS (12 to date)
Don Boudreaux writes:

Thanks for the kind mention, David!

Mercer writes:

They should stick to one baseline instead switching between comparing the past thirty years or the past fifty years.

On point two: More compensation is going to health insurance. This benefits the health sector. Is is questionable this benefits others.

On point three: Looking only at white men does not show much rising income over the last thirty years.

I would like to see them write about housing more. Do they really think it is easier for young people to buy a house then it was thirty or fifty years ago?

Joe Cushing writes:

I like all the posts about the sears catalog. I think those were Don's but I can't remember. The idea was about how many hours of work it took an American to buy anything in the catalog. Usually the product in today's catalog was vastly improved but took many fewer hours of work to come up with the money to buy them. Everyone knows this is true for electronics but is is also true for powered and unpowered tools like drills and hammers and nearly all other categories of goods.

BigEd writes:

"The only things I can think of that have gotten worse [since the '70's]are our protection from crime and the quality of education our children receive in schools. Each of these, interestingly, is provided by the government."

A cheap shot at evil government. I would say.

Crime rates have declined markedly almost everywhere in the USA over the past 40 years. As for the quality of education; what has been happening is that students are being tested much more and held to higher standards. Whether the quality of the of the education has somehow declined as a result of these methods is not proven.

Mercer writes:

" has been happening is that students are being tested much more "

What is also happening is more of the students are the children of low skilled Latinos. If the WSJ does not like the poor scores of Latinos they should not support more of them entering the country.

Steve Sailer writes:

"life expectancy has improved and that the gap between black and white life expectancy has shrunk."

Life expectancy is going up all over the world, often at a more rapid rate than in America (e.g., Britain's life expectancy is growing much faster).

One reason for the shrinking black-white life expectancy gap is that life expectancy for whites without high school degrees is now falling. I don't think that's progress.

David R. Henderson writes:

@Steve Sailer,
One reason for the shrinking black-white life expectancy gap is that life expectancy for whites without high school degrees is now falling. I don't think that's progress.
But in their article they say that life expectancy overall has improved. Given that black people are only about 16 or 17% of the population, my guess is that white people's life expectancy has improved also. That's easily checkable, though. Of course, that doesn't mean that every subgroup's life expectancy has improved. But overall there is progress.
Life expectancy is going up all over the world, often at a more rapid rate than in America (e.g., Britain's life expectancy is growing much faster).
And it's also good that life expectancy around the world is going up also. I'm not sure why you mention that, Steve. It certainly doesn't contradict anything the authors or I said. Or are you saying it to make the point that the world is looking even better than they say? If so, good point. Knowing Don Boudreaux as I do, I would think he would applaud that.

Infopractical writes:

"Whether the quality of the of the education has somehow declined as a result of these methods is not proven."

The literacy rate has declined. That's not a measure of everything, but there are some pretty objective measurements of quality. In making a counterargument, it might be nice to cite some.

David, I always enjoy your blog posts, and this one makes me feel more optimistic. However, I would worry that some of the improvement in quality is a result of borrowing from the future. What if the economy fails? It's hard to quantify that kind of risk and perform something like a Sharpe Ratio calculation to know if we're really better off or whether risk subsumes the gains. I doubt that they do, but it's reasonable to take risk into account.

I also wish other features of life could be factored in: levels of frustration over social alienation (Americans report fewer and fewer close relationships) and political power (is it more concentrated? And how does that affect people?)

I often worry that measuring our well being by the sugar doesn't get to the heart of good health.

"The quality of almost everything we get is higher than it was 30 or 40 years ago."

You are forgetting the mandatory green movement. Dishwashers, laundry detergent, dish detergent, bug killing chemicals, hot water heaters, and shower heads. Not to mention the government’s war on drugs: access to strong medicine.

MG writes:

@Prof Henderson,

This is a great subject. It would be interesting to have the authors (and yourself) address @Mercer's commment about housing. I think this is an area that is always brought up and rings true...However, further analysis may prove enlightening and may refute the claim, but only after dissecting what should constitute housing for the purposes of the authors' thesis. Comparison would have to address the issue of quality. I believe that size-quality adjusted housing indices are rarely ever cited. It would also have to address the role and the extent of substitution. For example, much less expensive housing is now available (e.g., in the South and South West) that was not available 50 years ago. This has provided clear opportunities for moderating housing inflation for those living rising price areas. There is also the issue of stripping out the capital/investment value component of housing from its consumption value. Since a good deal of the appreciation in housing values reflects its increasing capitalized value, which is largely a function of a decreasing risk premia, why should all of housing price increases be considered purely inflationary. (On that basis wouldn't the young couple's inability to buy the S&P 500 at the same P/E level as their gradparents did also be a ding against the thriving hypothesis? I don't think so.) Anyway, as far as housing is concerned, I would just look at the cost of renting as this strips out a bit of the capital appreciation effect.

shecky writes:
The quality of almost everything we get is higher than it was 30 or 40 years ago. The only things I can think of that have gotten worse are our protection from crime and the quality of education our children receive in schools. Each of these, interestingly, is provided by the government.

Yes, I also suspect axe grinding here, too. As BigEd writes, crime has been falling for years now. And I have to say that, with two kids almost all the way through the public school system, their experience far exceeds my own in almost every respect, and I went to fairly exclusive private schools until gradation.

Complaints about education often seem to fall into what I call the "child as vessel" model, where teachers impart knowledge by pouring in information. If the child performs poorly as a result, it's because school is incompetent at pouring. Or information pushing. I find that it's more of an information pulling model. The knowledge is presented there. It is the job of the student (and the parent) to seize it while it's presented, if knowledge is what is being sought. Students are compelled to go to school. Not learn. The latter doesn't take place by osmosis. Not even in the most exclusive schools.

David R. Henderson writes:

@christopher fisher,
You are forgetting the mandatory green movement. Dishwashers, laundry detergent, dish detergent, bug killing chemicals, hot water heaters, and shower heads.
I'm glad you added these examples--all good. I didn't forget them, though. They were not a good example when I wrote the passage I quoted.

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