Scott Sumner  

Why so glum?

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America's pretty much the same place as it was 6 years ago. If you drive around the country you see the same sorts of neighborhoods you saw 6 years ago. Incomes haven't changed very much. But Kevin Drum has a new post that seems to show that we are nowhere near as rich as we used to be. Is that what it actually shows?

Kevin Drum points to a survey that suggests the number of self-identified upper middle class and rich has fallen from 21% to 14% over the past 6 years, an astounding 7 percentage point decline. I found that highly implausible. Not the fact that many fewer people self-identify as upper middle class, but the implication some might draw that many fewer people are upper-middle class. In other words, is this survey describing economic conditions or states of mind?

[In fairness Kevin reports the data accurately, as attitudes not actual incomes. However I worry that some might misinterpret the survey.]

The census data only goes up to 2012 income. So where do we start, 2006 or 2007? Since the 2007 income cutoff is slightly higher, I'll use that number, which works in favor of Drum and against me. The actual drop in the top 20% cutoff was from $110,739 in 2007 to $104,096 in 2012 (all data is real, adjusted for changes in the CPI). Because inflation in 2013 was only 1.5% (against 2.1% in 2012), I believe the rise in the cutoff between 2012 and 2013 was almost certainly higher than the small rise between 2011 and 2012. So by using the 2012 cutoff instead of estimating the 2013 cutoff I am making another assumption that biases the results toward a bigger loss of upper middle class people than actually occurred over the past 6 years.

But even with those generous assumptions, that's a very small drop in the cutoff real income for the top 20%. How many people lie between those two numbers? I don't know, but I'm almost sure the answer is "close to 2%." That's because between the 60th percentile and the 80th percentile cutoffs, about 1% of the population drops off as income rises by $2000. Between the 80th and 95th percentile about 1% drops off for every $6000 increase. The lower range suggests about 3% would drop off between $104,096 and $110,739, and the upper range suggests about 1% would drop off. Since bell shaped distributions with 100,000,000 households are "super smooth," it's got to be close to 2%. If you don't follow statistics, trust me on this.

So of the top 20% of households in 2007, the net loss in 2012 is about 2%, and I'd guess in 2013 it would be about 1.6%. But even a 2% drop in the upper middle and rich groups is tiny compared to the reported 7%. So why are Americans so glum? After all, the gains between 1997 and 1999 were bigger than the losses over the past 6 years, and no one was saying that America was a completely different country in 1999 as compared to 1997.

Perhaps what really matters is how we are doing relative to expectations. We've been a country of growing affluence for decades. The Bush/Obama economic policies have pushed us onto a slightly downward trajectory. The losses have been small, but the losses relative to expectations have been fairly large.

PS. Of course I'm joking about Bush/Obama, as other developed countries suffered the same real income declines. I'm not sure the cause of this decline (other than monetary policy, which plays a role), but it is almost certainly unrelated to which fool happens to be serving as King of America.

HT: Tyler Cowen.


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CATEGORIES: Income Distribution



COMMENTS (16 to date)
Michael Byrnes writes:

Krugman had a post earlier today that touched on this issue.

I suspect this is not a topic on which you and he would be in agreement, but his framing of the issue was interesting:

"My answer to both of these would be to say that when we talk about being middle class, I’d argue that we have two crucial attributes of that status in mind: security and opportunity.

By security, I mean that you have enough resources and backup that the ordinary emergencies of life won’t plunge you into the abyss. This means having decent health insurance, reasonably stable employment, and enough financial assets that having to replace your car or your boiler isn’t a crisis.

By opportunity I mainly mean being able to get your children a good education and access to job prospects, not feeling that doors are shut because you just can’t afford to do the right thing."


http://krugman.blogs.nytimes.com/2014/01/28/money-and-class/?_php=true&_type=blogs&module=BlogPost-ReadMore&version=Blog%20Main&action=Click&contentCollection=Opinion&pgtype=Blogs®ion=Body&_r=0#more-36372

William writes:

The explanation that seems almost too simple and obvious to me is that when people in power are clamoring to eat the rich, a juicy steak is less likely to identify itself as food.

foobarista writes:

I agree with William: it's an association thing.

Since being in the evil 1% is considered a "bad thing" these days, people don't want to claim membership in it or anywhere near it. I was recently walking in Los Altos where I saw an old S-class Mercedes convertible with a "We are the 99%" bumper-sticker on it (and an old Obama sticker). I suppose it could be driven by somebody's kid, but still looked odd on a car that cost $80K new and in one of the richest neighborhoods on the planet.

Nathan Smith writes:

I assume your data are after-tax income, no? Remember, there was a big tax hike last year, so people with the same pre-tax income may have a lot less disposable income. Also, people with high incomes may be more likely than six years ago to have unemployed kids with no prospects whom they foresee having to help out for years to come. And their houses may have fallen in value, too.

It's certainly plausible that people are scoring themselves against expectations. But, it's also plausible that people with the same incomes would feel more affluent by comparison with a poorer and more struggling US economy. I suspect that if you looked at wealth as well as income, family rather than individual income (ideally, looking at family members not in the same home but maybe still partially dependent) and/or took higher taxes into account, the declining number of upper-middle-class and rich people wouldn't just be a function of the psychology of disappointed optimism.

Scott Sumner writes:

Thanks Michael. I believe that about 85% of Americans call themselves "middle class," which obviously covers a fairly wide range of lifestyles.

William and foobarista, Good points.

Nathan. Perhaps, but I doubt that. The data is for households, not individuals. The payroll tax increase of 2013 merely offset the cut of 2011. Payroll taxes haven't changed much over the past 6 years. The income tax increases were for people far above the 80th percentile, and didn't knock anyone out of the upper middle class.

Steve Sailer writes:

The notion that you can borrow your way to the American Dream seems less plausible today than in 2007.

Michael Stack writes:

Professor Sumner,

Are you suggesting that the Bush/Obama policies of the last decade or so have little or nothing to do with the current economy?

I have no way of assessing whether that is true or not, just curious if that is your position.

Thanks.

Dan W. writes:

Scott,

On average, people are less rich than they were six years ago and the trend does not seem to be reversing. Adjusted for inflation median incomes have declined 5% (rough approximation) since 2007.

All the while "experts", including you, are advocating for policies that will raise costs even more on the people while offering only empty promises of more jobs and higher incomes.

And you question why people might be feeling a bit glum?

Dan W. writes:

And it is not just that inflation is increasing faster than nominal incomes. A sad consequence of the Bush / Obama tax policy is that the tax system is increasingly progressive. This is not so much because of tax brackets but because the value of tax credits drop as one nominal income increases.

Thus, QE may be increasing nominal income but the gains are entirely consumed and then some by higher taxes and cost inflation. At the same time, states and municipalities raise their taxes to compensate for shortages in pension funds that result from depressed interest rates.

All this is just another reminder that anytime lunch is served someone is paying.

Michael Byrnes writes:

Dan W wrote:

"And it is not just that inflation is increasing faster than nominal incomes."

Inflation cannot increase faster than nominal incomes, at least not in a sustained way. Prices can only rise if those higher prices are paid.

JKB writes:

Well, turn on the TV or click around the internet. We're all suffering. Except for those richy riches. There is no hope. The Tea Party is thwarting every attempt to save us. Obama is incompetent, the Congress is intransigent. The Earth is baking even as we freeze. Dogs and cats are living together and making home videos. It's the end of times.

Really the rush to sell ads and political agendas has spawned the idea of "no hope". So even the slightest loss is amplified. Even the greatest gain is insecure. Basically, it's 1977-78.

Will there arise someone who will speak of a great America? Of a special America? Of changes to make success more achievable to those willing to venture?

Although they'd be attacked vociferously by Democrats who see profit in selling doom and gloom, it is surprising that no one has tried to sell real hope, for real change, a plan to reign in regulation. Funny thing is, all they'd have to do is get people to believe, to give them hope for the future, to turn that frown upside down. Actual changes will happen automatically then.

Jay writes:

@JKB

I can't tell if you're trolling or not, but I'll give you the benefit of the doubt. Your first paragraph says the Tea Party is thwarting every attempt to save us. By Tea Party I assume you mean those in congress closely associated with it, if so what saving grace are they thwarting or have been successful at thwarting? The ACA, EPA regulations, sequester rollbacks, tax hikes....hmm they're not very good at it if they are thwarting.

Later on you call for someone with a plan to reign in regulation, yet that is the Tea Party's stated primary goal so I'm really confused by your post.

Roger Sweeny writes:

Perhaps the answer is Tyler Cowen's, "we are not as rich as we thought"--combined with "and many are now realizing it."

If you used to just assume that you would have "security" and "opportunity," you may no longer be nearly so sure.

Dan W. writes:

@Michael,

You are correct. It is unsustainable.

I take it that you are aware that the US government spends anywhere from $600 billion to $1 trillion more annually than it receives in taxes. This deficit spending, a large portion of which is simply direct payments to individuals, is just one factor that results in prices paid for goods growing faster than incomes received for making, selling and servicing those goods.

JKB writes:

@Jay

I was just streaming the glut of negativity that we are bombarded with day in and day out. We could add some different nightmare scenarios if you like. I thought the dog and cat climax would give it away.

People are glum because no one, on either side, or in the media are willing to speak hopefully of the future of the US. Right now, glum sells.

You'd think someone would try something new, but I guess its like Hollywood, no one is willing to try something different when moody vampires sell so well.

Scott Sumner writes:

Michael, No, that's not my position. They have affected the economy. But the main factor was monetary policy. I suppose you could argue they are indirectly to blame there, but I blame the economics profession.

Dan, Given that I have frequently advocated abolition of the income tax, I'm puzzled that you think these are somehow my policies that are hurting the economy.

And inflation has run below the 2% target since 2008, so I hardly think high inflation is the cause of our misery.

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