Brookings: Experts - Scott Winship

How Much Do Americans Care About Income Inequality? Part II

Scott Winship — Wed, 15 May 2013 16:00:00 -0400

Recently in this space, I criticized an op-ed that claimed to resolve a paradox related to inequality and public policy. Ilyana Kuziemko and Stefanie Stantcheva argued that while Americans are "deeply troubled about the current level of income inequality," support for government policy to reduce it is low. Based on a series of randomized experiments they conducted with Emmanuel Saez and Michael Norton, Kuziemko and Stantcheva speculated that rising inequality has eroded trust in government, resolving the paradox.

In my previous essay, I argued that there is little evidence to indicate that Americans are particularly concerned about inequality, so their lack of interest in having the government intervene should be unsurprising. Here I want to draw attention to a problem with the conclusion of Kuziemko and her colleagues that providing people with information about inequality reduced trust in government.

In their experiment, some survey respondents were provided information about their ranking in the income distribution and about inequality levels. Receiving this information produced a decline in expressed levels of trust in government. Kuziemko and her colleagues conclude that,"emphasizing the severity of a social or economic problem appears to undercut respondents' willingness to trust the government to fix it-the existence of the problem could act as evidence of the government's limited capacity to improve outcomes more generally." But the information in their survey did not simply emphasize the severity of inequality, it exaggerated economic hardship.

Respondents randomly selected to receive information about inequality first input their "annual household income" and were told the share of "US households" that earn less than their own "household." But the information the survey gave respondents made them feel richer than they were. I typed into the survey form the 2011 median household income according to the Census Bureau-$50,054. The survey should have told me that "my" household was richer than 50 percent of American households-that's what the median is. Instead, I was told I was richer than 66 percent of households.

In fact, what the information provided by the survey told the subject was the percentage of tax returns that have less gross income than the household income she reported. Tax returns are not households. Two roommates living together, a cohabiting couple, a married couple filing separate returns-all of these constitute one household but two tax returns. More to the point, a sixteen-year-old burger-flipper or a fulltime college student with a work-study job are also distinct tax returns even if they live at home. Furthermore, gross income on tax returns (AGI with adjustments put back in) is not "household income" as most people think of it. For example, non-taxable public transfers-including most Social Security benefits and all welfare benefits-are excluded. So are the tax-favored employee benefits commonly deducted from paychecks, such as health insurance premiums, retirement plan contributions, and flexible spending accounts.

The result of these differences between the income of households and the gross income of tax returns is that the median for the former is quite a bit bigger than the median for the latter (and the same is true for other parts of the income distribution, such as the "richest ten percent" or the"poorest third"). The survey tool reports that $33,800 is the median "household income"-one-third less than the actual median.

The respondent, then, "learned" that she was richer than she was, and if she correctly thought that her standard of living was average before responding, she learned that it was better than average. More people were doing worse than her than she thought, and fewer people were doing better than her. The next step in the survey drove that home by inviting her to move a slider to see how "households" with different income levels rank compared with other households. This step reinforced that Americans were poorer than they actually were.

Different subjects were shown additional screens subsequently. However, everyone randomized to receive the information about inequality proceeded through the rest of the survey-with its questions about policy preferences and trust in government-having been given this overly-negative data about how Americans are doing economically. The subjects randomized to bypass the informational screens were not primed in this way. The design of this experiment does not allow us to assess whether getting accurate information about the distribution of household income reduces trust in government. Instead, trust in government may be eroded by getting anxiety-provoking (and inaccurate) information.

Interestingly, Kuziemko and her colleagues report results from a separate experiment they conducted indicating that among below-median households, being primed with negative information about the state of the economy reduces opposition to inequality and support for redistribution and for progressive approaches to deficit reduction. It may be that attempting to convince middle class Americans that economic insecurity is more pervasive than it is will prove counterproductive to those who wish to help the truly insecure.

I have argued elsewhere that conventional accounts on the left do, in fact, systematically overstate both the extent of economic insecurity and the strength of the evidence that income inequality is harmful. It would be a regrettable irony if an excessive and distorted focus on inequality turns out to be more harmful to struggling families than income inequality itself.

Authors

Scott Winship

Publication: Real Clear Markets

Image Source: © Carlo Allegri / Reuters

How Much Do Americans Care About Income Inequality?

Scott Winship — Tue, 30 Apr 2013 10:14:00 -0400

Since the financial crisis, income inequality has been a topic of obsession in many journalistic and advocacy quarters. There is some irony in this, because the crash brought about the first reversal of inequality between "the 99 percent" and richer Americans in years, and there was much less concern about the subject during the period in which inequality was rising steadily. A very visible group of academic, policy, and media elites is convinced that rising inequality is the problem of our time, and many of them struggle to understand why the issue has not inspired an outcry from the broad middle class and poor.

The head-scratching and excuse-making was recently put on display in an unintentionally revealing way in a recent op-ed attempting to explain Americans' views toward economic inequality. In it, the authors, Ilyana Kuziemko and Stefanie Stantcheva, laid out what they believe to be a paradox: Americans care about inequality but do not want government to address it. Kuziemko and Stantcheva go on to describe research they have conducted with famed inequality scholars Emmanuel Saez and Michael Norton that they believe explains the "complicated" views of Americans. Their conclusion: rising inequality may have weakened faith in government.

However, a fair read of polling on inequality refutes the idea that Americans are self-contradictory. There is little evidence that Americans are particularly bothered by inequality; therefore, it is unsurprising that they do not want government to reduce it. On the other hand, there is ample evidence that Kuziemko, Stantcheva, Saez, and Norton believe Americans should be more bothered by inequality. But you can't always get what you want.

Kuziemko and Stantcheva (K & S) cite a December 2011 Pew Research Center poll finding that 66 percent of Americans agreed there was strong conflict between rich and poor Americans. This result is regularly interpreted as indicating the public is concerned about inequality but indicates no such thing. The question measures respondents' sense of the existence of conflict, not whether that conflict is worrisome. You may recall that in late 2011, Occupy Wall St. had finally made inroads with the general population, as the economy sputtered. Respondents to that poll accurately perceived that there was more conflict than there had been even a few months earlier. Indeed, upper-income respondents were no less likely than poor respondents to agree there was strong conflict.

The increase in perceived conflict the poll found between 2009 and 2011 looks worrisome, but 2009 was a historical low point. The level of perceived conflict at the end of 2011 was no higher than in 1992, and it dropped to 58 percent in late 2012. That level was the same as in 1987 and just a bit higher than in 2000. K & S do not show that concern for inequality is high, let alone rising.

K & S cite research by political scientist Larry Bartels to argue that most people understand inequality is rising and that most of those believing it has risen disapprove. That is true, but it is worth emphasizing that 45 percent of those who believed inequality has increased did not call it "a bad thing," and even among those who did believe it was bad, we don't know how many felt particularly strongly in their view.

In early 2011 Gallup polling that asked for an open-ended response to the question of what is America's most important problem, just one percent said inequality, well below pressing issues like "lack of respect for each other" and "foreign aid," to name just two that outranked inequality. Viewed against this evidence, it is unsurprising that the Gallup poll they cite from later in the year indicated only a minority of Americans thought it was important for the federal government to reduce inequality.

In short, there is little evidence that "Americans are deeply troubled about the current level of income inequality," as K & S put it. In fact, one suspects that they are recent converts to this talking point. You can envision them, along with Saez and Norton, initially hypothesizing that it must be that Americans don't understand how much inequality we have and how harmful it is. If we could educate them, they would surely demand more government intervention. Hence, the research study they designed that randomly gives a "tutorial" on income inequality to some participants but not others and that then considers how policy preferences differ between the two groups.

It turned out that the tutorial had little effect on policy preferences toward redistribution, despite it being designed to make inequality look more harmful and redistribution less so than the evidence has established. But the tutorial did reduce respondents' trust in government. From this narrow result, they conclude that rising inequality may have reduced faith in government. So Americans' preferences for government inaction on inequality, it turns out, are not because they are ill-informed about the subject. And if they are well-informed, it can't be that they simply don't care about inequality, right? So Americans, they conclude, are "troubled by" inequality but they need to be convinced "that their government is up to the task of addressing it."

There is more to be said about the study itself, which I will take up in a second essay.

Authors

Scott Winship

Publication: Real Clear Markets

Image Source: © Jim Young / Reuters

How Much Money Are U.S. Workers Earning?

Scott Winship — Mon, 08 Apr 2013 00:00:00 -0400

Mike Konczal has a post up at Wonkblog attempting to clarify why different researchers say such different things about trends in income. I’ll disclose that I gave Mike some feedback on the first draft of this post after he reached out to me—a commendable gesture, particularly since his original draft pegged the post off of my criticism of David Cay Johnston’s claim that income below the top 10 percent had essentially not budged since 1966. Rather than a $59 dollar increase, I argued in this space that the true increase was greater than $20,000.

Mike’s post, relying on the same CBO data I used, argues that “cash wages” for the middle quintile increased by only $1,728 between 1979 and 2007 (or 4.5 percent). Add in fringe benefits (“important from your employer’s point of view,” but perhaps not to a worker?) and the increase is $4,832 (11 percent). Government transfers, by comparison, rose $5,100, or 165 percent. Mike uses these figures to argue that different claims about income trends largely amount to different people being interested in different questions—what labor markets provide workers versus how much people get when broader measures of income are used that include government benefits. So, hey, $59, $1,728, $20,000—maybe they’re all right. He also suggests that if not for government benefits, the income gains of the middle class would be unimpressive.

Here’s the thing though. The CBO data combine the working-age population and retirees. Because retirees are included, the middle quintile contains a lot of households that have no labor income. Mike’s figures are based on a table where households are ranked by “market income,” which consists of not just wages and other labor income (fringe benefits and employers’ share of payroll taxes), but of investment, business, and private retirement income. The middle fifth of the market income distribution became increasingly dominated by retirees over time, which makes the increase in wages appear smaller than the increase for the middle fifth of the working-age population was.

To see that Mike’s estimates are affected by retirement trends, one can use the CBO spreadsheet that was his source. One of the categories of market income CBO distinguishes is “Other Income,” representing “income received in retirement for past services and other sources of income”. That “other sources of income” part is a residual that has little practical importance here. In 1979, the entire “Other Income” category accounted for 4.3 percent of all market income for the middle quintile of households, but by 2007, it was 10.9 percent. So when Mike looks at the middle fifth of market income, the representation of retirees (with little or no wage income) more than doubles over time.

That means his figures underestimate by a lot the growth of wage and labor income of working-age households (which, of course, are the only ones that can have such income). Take his $1,728 estimated increase in wage income. I know of three sources that look at wage trends for earners, removing retirees from the picture. The IRS-based estimates of Thomas Piketty and Emmanuel Saez include tables showing how the wage income of the bottom 90 percent of “tax units” has changed over time. In fact, Johnston’s $59 figure for “the bottom 90 percent of earners” was taken from the Piketty/Saez estimates. However, Johnston failed to use the tables in the Piketty/Saez spreadsheet that were actually restricted to tax units that had wage income. Had Johnston turned to these results, he would have found that from 1966 to 2011, the increase for the bottom 90 percent was $10,500. That is a lot bigger than $59. From 1979 to 2007, the increase (in 2009 dollars this time rather than 2011 dollars to keep comparable to Konczal’s estimate) was $7,400, which is quite a bit bigger than Mike’s $1,728. It’s a 21 percent increase over the period, versus Mike’s 4.5 percent.

CBO and the Census Bureau provide trends in median earnings for workers—the earnings for the worker in the middle of the distribution, which approximates the income of the middle fifth very well. Unfortunately, they don’t provide household or tax unit estimates; dual-earner couples are represented in these estimates separately rather than together as a single unit. According to the CBO data, among all workers between the ages of 25 and 54, the increase in median earnings from 1979 to 2007 was $5,700 in 2009 dollars, an increase of 19 percent. Since many households include two earners, the increase in median household earnings in dollar terms likely was quite a bit higher than $5,700.

The CBO estimates, like those of Piketty and Saez, omit self-employment income. The Census Bureau figures include it but, like the Piketty and Saez estimates, they include low-earning workers not in the prime working years. The Census Bureau median increased by $7,300 from 1979 to 2007 (in 2009 dollars). That’s a gain of 29 percent. Again, the dollar increase at the household level would be expected to be larger.

All three sources exclude people without any earnings. That is the primary reason they better convey how labor markets have performed over time. However, in so doing, they exclude the increasingly large group of working-age men who have dropped out of the labor force, which means they overstate somewhat the increase in earnings. But at the same time they make no adjustment for the downward pull on median earnings caused by rising Hispanic immigration. The Census Bureau figures that are readily available break out non-Hispanic whites separately beginning in 1987. From that year to 2007, the increase in median earnings for all workers regardless of race was 22 percent. But the increase for non-Hispanic whites was 24 percent and for blacks and Asian Americans it was around 35 percent, while for Hispanics it was just 17 percent. In all likelihood, the median earnings among native-born Hispanics rose by an amount more comparable to the other groups. My ongoing analyses show that in practice, the exclusion of non-working men from earnings analyses is less consequential than the failure to account for rising immigration.

A variety of sources suggest, then, that the rise in wage income for middle class households with wages was 20 percent or higher rather than the 4.5 percent Mike cites. The figures in the CBO spreadsheet suggest that adding other labor income (including health insurance and employers’ share of payroll taxes) to wages, the increase would be at least 28 percent. The spreadsheet indicates, though, that government transfers grew more than labor income, leading Mike to suggest that “conservative” claims that middle-class incomes have grown owe much to the growth of government transfers. But he has not only understated the growth of wage and labor income for the working-age population, he has overstated the growth of transfers to them.

The CBO spreadsheet shows that the rising importance of government transfers to “middle-class” incomes is entirely due to Social Security, Medicare, and Medicaid benefits. In other words, the increase in transfers has been about benefits for retired people; it does not indicate that working-age adults and their children have relied on government benefits to prop up their incomes. Consider the most comprehensive measure of income that excludes transfers—market income less federal taxes. For the middle quintile, that measure grew by 23 percent from 1979 to 2007. If we add in all government transfers other than the Big Three to market income less taxes, household incomes for the middle fifth rose by…23 percent. Adding the Big Three, the increase jumps to 34 percent.

Mike needs to treat the working-age population and retirees separately instead of using figures that combine them. What the evidence shows is that both groups have fared well over time—the working-age population because of the labor market, retirees because of employer pensions and senior entitlements. Combining them makes wage growth look smaller than it is and makes the population look more dependent on the safety net than it is. My critique of the Johnston numbers estimated that after-tax household income had risen by $23,100 from 1967 to 2009. Mike suggests that estimates of this sort are large only because of government transfers. But if I adjust the 1979-2009 part of my estimate downward by one third (dividing the 23 percent increase in market income less taxes by the 34 percent increase in comprehensive income and subtracting from one), I still get an increase of over $17,000 between 1967 and 2009.

Mike bemoans that conservatives want to cut government benefits when such spending is “doing serious work to keep median wages from stagnating.” As should be apparent, that construction is wholly unsupported. For that matter, one doesn’t have to identify as a conservative to believe that the left’s negativism is standing in the way of other policy goals. Liberals think the middle class is doing worse over time (or not much better). That necessitates the maintenance or expansion of current benefit levels for entitlements that are heavily focused on the middle class. In reality, the middle class continues to do well over the long run, while the intergenerational mobility of poor kids is stuck at levels we shouldn’t accept. If they could see the picture clearly, liberals would get serious about the impending crisis of senior entitlements—which ensures that there will be no new federal spending for mobility-enhancing interventions—so that they could better address opportunity at the bottom.

Authors

Scott Winship

Publication: National Review Online

Image Source: © Andrew Burton / Reuters

Myths of Inequality and Stagnation

Scott Winship — Wed, 27 Mar 2013 00:00:00 -0400

Much of what I write is an attempt to dispel economic doomsaying on the left. It’s not that I think we have solved every problem of fairness, opportunity, or security; rather, certain problems are real while others are overstated.

Sometimes dramatically so. Last month David Cay Johnston, Pulitzer Prize winner and former New York Times reporter, wrote an essay for the (generally very informative) “taxanalysts” website on income inequality. Johnston tried to make the case that the gains of the rich have come at the expense of everyone else with the eye-raising claim that the income received by “the bottom 90 percent of earners” rose by only $59 in terms of today’s purchasing power between 1966 and 2011.

This is one of those litmus-test claims that in a perfect world would disqualify some people from debate over living standards, inequality, and the state of the middle class. To honestly believe that below the top 10 percent of earners there has been essentially no improvement in 45 years is to declare an extreme disconnection from the real world and a commitment to a negative interpretation of the American economy that is beyond parody.

The claim was dutifully repeated this week by the Center for American Progress’s Think Progress, the Huffington Post, and Salon. It has been tweeted, liked, or emailed by over 10,000 readers of those sites and in turn read by their own followers and friends. They will be more accepting of the next fearful economic claim as a consequence.

This is an egregiously erroneous “finding”, as I’ll explain in a moment. But first, take the test yourself. The median household income is the income of the household that is right in the middle of the distribution—half of all households are richer than it and half are poorer. How much do you think median household income has risen since 1966? (Hint: I’d take the “over” if we’re starting with $59.)

The Census Bureau’s Current Population Survey is the most widely-used source of income data, though it has some flaws. The first year for which household income datais readily available from the CPS is 1967. From 1967 to 1979, median household income grew by $5,500. This understates income growth during this period because it does not incorporate non-cash public transfers like food stamps, Medicaid, and Medicare and does not include fringe benefits or realized capital gains (such as from the sale of a home). From 1979 to 2009, we can use improved estimates from the Congressional Budget Office that combine the CPS data with tax return data to partially fill these gaps. CBO indicates that median household income (before taxes) rose by $14,200. After taxes, median income rose by $17,600.

At a minimum, therefore, median household income rose by $20,000 from 1967 to 2009. The data on which Johnston relies shows a decline of $200.

Despite his claim, the data Johnston uses represents tax returns, not “earners”. A married couple filing jointly is a single tax return. But even if we give Johnston the benefit of the doubt and ask what has happened to the median “earner”, he is way off. Thereadily available CPS data goes back to 1975—the increase in earnings for the median worker was $6,500 from 1975 to 2011, while the tax return data relied on by Johnston suggests a decline of $1,200.

How did Johnston get it so wrong? The most fundamental answer is that he failed to challenge his priors when the data showed an implausible result. But he is not making his numbers up. The problem is that the data he used cannot be used to examine trends in living standards among the non-rich.

Johnston relies on the tax-return-based data of economists Thomas Piketty and Emmanuel Saez—the data that is the basis for the ubiquitously reported (and true) finding that incomes at the top have sky-rocketed. As I have written before, the degree of income inequality we have in the U.S. is truly mind boggling, though that fact tells us nothing about whether inequality is problematic. Clearly it makes a difference if the bottom 90 percent is only $59 richer over 45 years rather than $20,000 richer. Piketty and Saez do show that the income received by the bottom 90 percent of “tax units” rose by just $59. We know because they admirably make mounds of their data available to the public (in this case, see the “Table_Incomegrowth” tab, column J).

Why are their numbers so different from the Census Bureau and CBO figures? The share of household and personal income that is included in the Piketty/Saez measure has declined markedly since 1966. In that year, the total income in the Piketty/Saez data amounts to 109% of the total income in the CPS. That the share is over 100% largely reflects the fact that the CPS does not capture the very richest households and caps the amount of income reported at artificially low levels for confidentiality purposes. By 1979, Piketty/Saez income was just 93% of CPS income, despite the fact the CPS continued to understate income at the top. The decline in share of income accounted for by Piketty/Saez is due to the fact that taxable public transfers are largely excluded from their measure, as are tax-favored employer benefits deducted from paychecks. Both sources of income have grown over time. Their estimates also exclude realized capital gains among the bottom 90 percent, and those were rising over time too.

The share of CPS income accounted for by Piketty/Saez income was largely unchanged in 2009. But this was the period in which income inequality rose. If the CPS could adequately capture top incomes, the increase in CPS income would have been greater than the data indicate, and so the share of CPS income accounted for by Piketty/Saez income would have fallen again. From 1979 to 2009, we can turn to the CBO income estimates, which incorporate public transfers, employer-provided health insurance, full pay (before deductions), capital gains, and top incomes. The share of CBO income accounted for by Piketty/Saez income fell from 89% in 1979 to 77% in 2009.

It is also the case that “tax units”—essentially tax returns, but with a small number of additional “units” added in to account for non-filers—include, for example, teenagers who have summer jobs and college kids on work study who file tax returns and make very little. Changes over time in the size of these groups could also affect the results—not only by pulling the incomes of the bottom 90% down but by pushing the entry point to the top 10% up (more low-income tax returns means the “top 10%” is a richer group). There may also be under-reporting of self-employment and other income in the tax return data, and if that has increased over time, it would also dampen the rise in income in the bottom 90%.

You might think that these problems call into question the basic Piketty/Saez claims about rising income inequality.This is a possibility I’ve considered (and continue to), but evidence from other sources supports the basic conclusion that the incomes of the very rich have skyrocketed. These sources are not without problems themselves (and most rely on the tax return data in some way), but many of the shortcomings of the Piketty/Saez income measure are absent from them.

The Johnston analysis, in the end, is just an extreme case of liberal negativism about living standards. As I discuss in my new essay for National Affairs, “Overstating the Costs of Inequality,” the median household in the U.S. is twice as rich as it was in 1960, at the peak of the supposed “Golden Age” the American middle class. Too many commentators refuse to see that and are all-too-ready to accept the most outlandish claims about living standards. As I’ve argued before, this sort of thing sows economic insecurity and works against continued improvement in our standard of living. And it detracts from real-world problems.

Authors

Scott Winship

Publication: National Review

Image Source: © Frank Polich / Reuters

Overstating the Costs of Inequality

Scott Winship — Mon, 25 Mar 2013 17:16:00 -0400

In recent years, inequality has become the core economic concern of the American left. The gap between the haves and have-nots is understood to be the fatal flaw of our economic system — a fundamental problem that is the source of countless other difficulties. To hear many liberals tell it, increasing inequality is holding back growth, crushing the prospects of the poor and middle class, and even undermining American democracy. Such concerns are prominent in President Obama's rhetoric, and seem also to drive key parts of his policy agenda — especially the relentless pursuit of higher taxes on the wealthy. As the president put it in his second inaugural address in January, he believes "that our country cannot succeed when a shrinking few do very well and a growing many barely make it."

The idea that our economy is held back by inequality is echoed in the claims of some of the nation's most prominent economists. Princeton professor (and Nobel laureate) Paul Krugman and David Card of the University of California, Berkeley, contend that inequality hurts economic mobility. Princeton's Alan Krueger (now chairman of the White House Council of Economic Advisers) and Columbia's Joseph Stiglitz (another Nobelist) think it dampens economic growth. Along with Raghuram Rajan, former chief economist of the International Monetary Fund, Stiglitz also argues that inequality was behind the financial crisis. Cornell economist Robert Frank and former labor secretary Robert Reich are convinced that it fuels the indebtedness of the middle class. The Massachusetts Institute of Technology's Daron Acemoglu believes that inequality enables economic elites to capture the machinery of government and thus ultimately produces national decline.

Read the rest of the article at the National Affairs website or download a fully annotated version of the essay.

Downloads

Overstating the Costs of Inequality (with full annotations)

Authors

Scott Winship

Publication: National Affairs

The Affluent Economy: Our Misleading Obsession with Growth Rates

Scott Winship — Mon, 25 Feb 2013 00:00:00 -0500

For progressives, the economy of the mid-20th century constitutes a kind of paradise lost. Between 1947 and 1973, mean family income doubled, rising as much among the poor as among the rich. By contrast, from 1973 to 2007, income growth was half as great. While growth was less equally distributed than in the earlier “Golden Age,” it slowed across the board, with all but the top 1 percent seeing declines in annual income growth. So profound and demoralizing was the change that Paul Krugman called ours the “age of diminished expectations.”

Concern over the slowdown of economic growth spans the ideological spectrum, even when it is not accompanied by worry over rising inequality. “Typical individuals in earlier generations reaped much greater gains than ours, as their living standards doubled every few decades,” wrote libertarian economist Tyler Cowen in his 2011 book, The Great Stagnation. “Life is better and we have more stuff, but the pace of change has slowed down compared to what people saw two or three generations ago.” Similarly, Northwestern University economist Robert Gordon predicts that “the rapid progress made over the past 250 years could well turn out to be a unique episode in human history.”¹

Indeed, the rate of economic growth has slowed, and the benefits of growth have certainly shifted toward those at the top. But these basic facts have been misinterpreted and divorced from the relevant context to paint a skewed picture of our economic circumstances. Setting aside the enormously important question of how growth is distributed, it is important to appreciate the magnitude of real economic gains that we continue to experience. The current obsession with growth rates prevents us from doing so.²

As nations become wealthier, it is harder for them to sustain high rates of growth. That doesn’t mean that the United States is in decline, or even stagnating. When a nation is as rich as ours, it can realize larger absolute gains than it did in the past and larger gains than other nations even if it has lower growth rates. That’s because a growth rate of, say, 2.5 percent represents a larger increase in absolute wealth the richer an economy becomes. In 1900, a 2.5 percent increase in gross domestic product (GDP) per capita would have translated into about $150 in today’s dollars for every man, woman, and child in the United States. In 2010, it would have been roughly $1,200, reflecting the fact that in the aggregate, we are about eight times wealthier than we were 110 years ago.³ By focusing too much on growth rates and too little on absolute increases in wealth, we have failed to appreciate the magnitude of economic gains in recent decades.

The distinction between absolute gains and relative gains has been roundly ignored in the way that policy makers, analysts, and the media conceptualize economic growth. Comparing ourselves to what might have been if we had experienced higher growth rates, rather than to what our actual income and wealth were in the past, makes us feel that we are doing worse than our predecessors when we are actually better off. This comparison unnecessarily increases worker anxiety and is as likely to inspire selfishness as generosity among voters. Perhaps most troubling, the focus on growth rates misdirects our attention from the minority who are struggling to the broad majority who are doing well, leading progressives to suggest costly universal policies, or mistargeted ones, when more- focused policies aimed at the poor would be more appropriate.

1.
For all the talk about stagnant growth, you’d have a hard time divining it from looking at the material circumstances in which most Americans live. Even after the Great Recession, we live in larger houses and own more cars than previous generations. Our homes are cluttered with all manner of gadgets, electronics, and appliances. Air-conditioning and air travel, once considered luxuries, are now available to virtually all of us.

If our obvious material affluence seems difficult to square with various narratives of economic decline, that’s because it doesn’t. What has declined is the rate of improvement in our lives. From 1947 to 1979, average family income grew by 2.4 percent per year, while it grew by half that from 1979 to 2007. But the lower growth rate since 1979 masks impressive absolute gains. The annual increase in average family income was $860 in today’s dollars, not all that much less than the $970 annual increase from 1947 to 1979, despite the lower rates. And even this comparison understates the gains that we can expect in the future because we are at the point where we will soon be rich enough as a society that annual gains will be permanently higher than they have ever been, even if growth rates remain low.

Source: GDP per-capita estimates are from Louis Johnston and Samuel H. Williamson, “What Was the U.S. GDP Then?” MeasuringWorth.org. Nominal figures are adjusted for inflation using the implicit price deflator for GDP. Prior to 1948, GDP per-hour estimates are based on real gross private domestic product per hour, while 1948–2007 GDP per-hour estimates are based on real GDP per hour for the total economy. Estimates for 1900–1947 are from the Historical Statistics of the United States, Millennial Edition Online, Table Cg265-272. Estimates from 1948–2007 are from National Income and Product Accounts real GDP estimates, Table 1.1.6, and unpublished annualized quarterly hours are from the Bureau of Labor Statistics Office of Productivity and Technology, courtesy of Robert Gordon, Northwestern University. I averaged the quarterly hours for each year.

Prior to the Great Recession, annual absolute gains were actually stronger than ever — and rising. By some measures of growth, gains today have rebounded in the wake of the recession and are higher than they were during the Golden Age. Consider productivity, which is simply GDP divided by the total hours worked by Americans and is a key measure of our long-term capacity to produce wealth. The chart below shows, for any given point, annual productivity growth averaged over the nine-year window centered on that point. Absolute and relative growth figures are scaled so that the 1959–69 average equals 1.0; the 1978 value of 0.35 for relative change indicates that the nine- year average growth rate centered on 1978 was 0.35 times the 1959–69 average (or 65 percent lower).⁴

Points in the chart are nine-year averages centered on each year shown. Source: Author’s computations from National Income and Product Accounts real GDP estimates, Table 1.1.6, and unpublished annualized quarterly hours from the Bureau of Labor Statistics Office of Productivity and Technology, courtesy of Robert Gordon, Northwestern University. I averaged the quarterly hours for each year.

When annual productivity growth is measured in terms of percentage changes, rates fall and never achieve the early 1960s level again. But when year-to-year growth is measured in absolute terms — the inflation-adjusted dollar change — productivity growth has been at historic highs since the mid-1990s. At its peak around 2000, it was nearly 80 percent higher than productivity growth in the 1960s.⁵

Comparisons of per-capita and per-worker GDP growth to past levels tell a similar story. Absolute growth exceeded early 1960s growth starting in the mid-1990s and dipped below those levels again during the recession. Absolute per-worker growth is exceeding early 1960s growth once more, even though absolute per-capita growth has not fully recovered. In contrast, as with productivity growth rates, neither per-capita nor per-worker growth rates have returned to their early 1960s levels.⁶ Once the economy fully recovers, absolute growth measured per hour, per worker, or per capita and averaged over several years can be expected to permanently exceed the annual growth experienced during the Golden Age of the postwar American economy. (That is, the “Absolute Change” line in the chart above is unlikely to dip below the 1959–69 level ever again.) Mathematically, that is what will happen as our wealth increases, barring the highly unlikely onset of, say, a decade of negative growth.⁷

While some have referred to the aughts as a “lost decade,” absolute growth was higher from 2000 to 2007 than from 1959 to 1969, an apples-to-apples comparison because both periods are between business cycle peaks. Even though GDP per capita rose by only 1.4 percent per year between 2000 and 2007, less than half the 3 percent per year from 1959 to 1969, annual absolute gains were $650 per person compared to $600 in the 1960s.

To fixate on the diminished rate of growth is to jealously compare ourselves not to Americans in the 1960s, who were poorer than we are and whose living standards improved less than ours did, but to Americans living today in some parallel universe, where growth rates did not decline.⁸

Consider what would have been required to have maintained 1960s growth rates. If we start with actual 1969 GDP per capita and begin applying annual growth rates of 3.0 percent, the absolute increase per person in 1970 would have been $700. In 1990, after cumulating annual 3 percent gains, the per-person increase would have been $1,264. By 2010, a 3.0 percent increase in per-capita GDP would have amounted to $2,283 — more than three times the actual 1970 increase.

That certainly would have been nice — much better than the $922 gain we actually saw — but it is asking a lot from the economy to produce ever-bigger absolute gains from ever-higher initial levels. It is an unreasonable expectation — it demands bigger absolute gains year after year not because prices have increased (inflation adjustment takes that into account) and not because we work harder (estimates of productivity growth control for hours worked). Just ... because.

As another example of the importance of wealth levels and absolute growth, consider that the mean hourly compensation of workers in the nonfarm business sector grew at an annual rate of 3.2 percent during the 1950s (from 1948 to 1959, which were business cycle peaks). From 1959 to 2010, growth slowed to 1.7 percent per year.⁹ Had mean compensation continued to grow at the 1950s rate, it would have stood at $75 an hour in 2010 rather than $36 an hour. Obviously, our lives would be enormously better if growth rates had not slowed. On the other hand, the 3.8 percent raise that workers got in 1952 was worth about 44 cents in today’s dollars, while the 1.2 percent raise that workers got in 2005 was worth almost as much — 41 cents. Because we are richer today, we get the same absolute benefit from a smaller percentage change in growth.¹⁰

To believe that compensation growth should have remained at an annual rate of 3.2 percent after the 1950s is to believe that today’s workers should be twice as rich as they actually are. Further, it is to believe that they should then get a raise next year over five times larger in constant purchasing power terms than the raise received by workers in 1952. It is one thing to expect annual absolute income increases and quite another to expect annual increases that grow ever more generous, forever.

Focusing on absolute changes in wealth also provides needed context for assessing our economy’s performance relative to that of other industrialized nations. During the heyday of America’s midcentury industrial economy, annual per-capita GDP growth rates were actually higher in Europe, averaging 4.3 percent from 1948 to 1969 across 12 western European countries, versus 2.5 percent here.¹¹ But Europe was playing catch-up. GDP per capita was twice as high in the United States at the beginning of this period as in those same 12 countries (for comparison, today our per-capita GDP is twice that of Portugal). As a consequence, the absolute growth in per-capita GDP from 1948 to 1969 was essentially the same in Europe and the United States, despite the lower relative growth here. Conversely, the United States and Europe experienced roughly the same economic growth rates from 1969 to 2009, but because the United States started with higher wealth, our absolute growth was 35 to 40 percent greater.¹²

2.
That we will continue to experience large absolute gains in income and wealth despite lower rates of economic growth should be cause for great optimism. As growth rates translate into bigger and bigger absolute gains, we should expect marked changes in living standards that ought to temper concerns about inequality and global competition.¹³ Of course, if growth continues to be unequally distributed, these ever-growing absolute gains might not trickle down to the middle class and poor. But while inequality is unlikely to decline, there is reason to believe that rates of growth in male earnings will soon begin to track productivity growth rates again.¹⁴

As living standards rise, workers might choose to continue putting in the same amount of work and reaping higher incomes, but more likely they will choose to cut back their work hours. Doing so would be consistent with the steady increase in leisure time enjoyed by American workers over the last century. Nobel laureate Robert Fogel projects that the decline in hours worked in the 45 years from 1995 to 2040 will exceed in percentage terms the decline over the 115 years from 1880 to 1995.¹⁵ Based on historical patterns, he projects a 30-hour workweek in 2040 and continued declines in the typical retirement age. Writing in 2000, he noted that the fraction of American men aged 60 to 64 that were in the labor force had declined from close to 100 percent in 1880 to 50 percent.

Unlike men, women have increased their paid work hours dramatically, but because their unpaid time doing housework has declined more, their leisure time, too, has risen. Growing demand for leisure and family time, as evidenced by increasingly widespread concerns over work-family balance, suggests that work hours might be on the verge of declining among men and women alike.
Of course, not every worker cuts back his or her hours voluntarily, and the slow recovery of labor markets since the Great Recession has heightened long-standing fears that technological change might throw increasingly large numbers of people out of work. This is the theme of the recent book Race Against the Machine, by economists Erik Brynjolfsson and Andrew McAfee. Fears of mass technological unemployment, as Brynjolfsson and McAfee acknowledge, have existed alongside technological development since at least the time of John Maynard Keynes, but they have not materialized. However, even if technological unemployment were to substantially increase the jobless ranks, as Brynjolfsson and McAfee fear, the economy might increasingly be rich enough that we can easily afford expanded safety nets. Arguably, that is what we are already seeing in the rising number of working-age men receiving federal disability payments. We may have reached a point where living standards are high enough that disability benefits, which are tied to earnings levels, can afford less-skilled men a comfortable (if not luxurious) lifestyle, at least when combined with other income sources.

A rich society with an underclass of financially comfortable unemployables supported by an overclass of highly skilled analysts and a resentful middle class is an unattractive future. But there is no reason that even this worst-case scenario must come to pass. Work-sharing arrangements used by European nations and a number of US states during the recession show how the cost of falling demand for labor can be distributed broadly in the form of reduced hours for multiple workers, rather than landing entirely on the worker who would be laid off. Growing affluence might eventually facilitate a costless version of work sharing, allowing even part-time work to sustain less-skilled workers comfortably.

3.
We should, of course, pursue a best-case scenario that raises the skill levels of workers and increases demand for the less-skilled workers who remain. The most effective way to raise skill levels is to improve our educational systems. Practically, this means that progressives must compromise with conservatives by pairing greater spending on the one hand with stronger accountability, more choice for parents and students, and greater flexibility for principals and school districts on the other. Taking advantage of new technologies to promote distance learning in higher education could bring down the cost of postsecondary education dramatically, opening it up to more young adults.

The best way to boost demand for less-skilled workers is to have sustainable strong economic growth. Higher growth rates are still better than lower ones, after all, and we should be striving for the rates of the Golden Age. However, it is not clear that we know how to attain them. Republicans have blamed the growth slowdown on the expansion of government, high tax rates, excessive regulation, and a safety net that has sapped initiative. Democrats have blamed changes in the global economy that have been abetted by laissez-faire policies, weak national industrial policy, thin safety nets that dissuade risk taking, and insufficient federal efforts to counter rising inequality.

Clearly, we should identify more ways to promote entrepreneurship and innovation. And if we do not tame our federal budget deficits, it seems likely that economic growth rates will eventually be affected. But because growth rates have slowed even more in Europe than in the United States over the past few decades, explanations for our slowdown that center on American policies or features of our economic or political system are of limited use in figuring out how to boost growth rates. Whatever we are doing wrong similarly afflicts other developed countries.¹⁶

To be sure, steadily rising absolute growth will not solve all our economic problems. Perhaps most important, there is no reason that rising affluence must expand opportunity defined in terms of relative mobility. We can expect a continuation of the current pattern whereby the strong majority of children end up better off than their parents in absolute terms. Such absolute upward mobility was experienced by four in five of today’s 40-year-olds.¹⁷

But even if everyone ends up better off than their parents, that does not mean that those starting at the bottom of the ladder must end up any higher, relative to their peers, than their parents were. Among today’s 40-year-olds, two in five who started out in the bottom fifth of incomes as children remain in the bottom.

If today’s most disadvantaged children in 25 years have more money than their parents did, work less, but remain equally unlikely to “be whatever they want when they grow up,” then in an important sense, we would remain a nation with limited opportunity. Here is where progressives would be wise to prioritize their policy goals.

4.
The United States is an affluent nation — richer than any comparable society the world has ever seen — even as our affluence has grown at a diminishing rate. Yet to hear many progressives tell it, one would think most Americans were losing ground.
For too long, progressives have attempted to convince the broad middle class that its fate was tied to the prospects of the poor. They have understated improvement in living standards and overstated the extent of economic insecurity. They have dwelled too much on the rise in inequality without considering whether the gains at the top have come at the expense of everyone else.¹⁸ Income growth for those at the middle and the bottom has slowed but remains impressive, with median income higher by at least 35 percent today than it was when Reagan took office.¹⁹

Some progressives argue that a pessimistic economic narrative will create a sense of “shared experience” or a kind of “class solidarity” between the middle class and the poor.²⁰ But scaring middle-class Americans is unlikely to make them more generous. The renowned economist Benjamin Friedman has argued that egalitarian appeals are most likely to succeed when people feel secure enough to share. Indeed, as early as 1952, public opinion analyst Samuel Lubell noted that traditional New Deal themes were resonating less with increasingly affluent Americans, conjecturing that “[t]he inner dynamics of the Roosevelt coalition have shifted from those of getting to those of keeping. The dominant concern of most of the Roosevelt elements today is not to get more but to preserve their post-depression gains.”²¹

By 1968, Richard Nixon had succeeded in splintering the New Deal coalition by running on the theme of law and order. Lubell’s prophecy proved correct — it was no coincidence that cultural and foreign policy issues trumped pocketbook concerns. Median family income had increased by 68 percent over the 1952 level that was already, according to Lubell, a comfortable standard of living. Today, the family in the middle of the income distribution is over 130 percent richer than its midcentury counterpart.²²

By focusing on disappointing economic growth rates, we have missed the fact that today, low growth rates produce absolute growth that surpasses that seen in the Golden Age of the mid-20th century. Obsessed with comparing ourselves to doppelgängers in some world where unusually high growth rates prevailed, flying around in jet packs and teleporting to the moon, we have been dissatisfied with continued gains and even with annual improvements that surpass the previous high-water marks.

Politics is about prioritizing. The more time, energy, and dollars we spend on the overstated economic problems of the middle class, the less we can devote to the poor. The poor are certainly better off than in past decades, but one in five American household heads still reported that sometime in 2010 they worried about whether their food budget would fall short before the month ended.²³ Only 13 percent of children starting in the bottom fifth will end up in the top two-fifths in adulthood (compared with 63 percent of children who start out in the top two-fifths).

It is time to shift our focus to all that we have rather than that which we do not. It is time to renew our commitment to the American Dream of upward mobility — to help those facing long odds of occupying the most desirable positions — even as we recognize that the broad majority of us have never had it so good. /

1. See his 2012 National Bureau of Economic Research Working Paper, “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds.”

2. I am working on a companion piece that will argue that the “stagnation” of earnings and income for middle class families represents a historical correction and return to the long-run trajectory of growth that productivity gains would predict. Wage growth outpaced productivity growth in the middle of the twentieth century, and recent decades have restored wage levels to historical patterns by allowing productivity to catch up. The historic shift of married women into the workforce also produced invaluable benefits to women that are not captured in measures of GDP, income, and earnings.

3. GDP per capita estimates are from Louis Johnston and Samuel H. Williamson, "What Was the U.S. GDP Then?" MeasuringWorth.org. Nominal figures are adjusted for inflation using the implicit price deflator for GDP. All dollar amounts in this essay are in 2010 dollars.

4. Presenting rolling averages allows the longer-term patterns to emerge from noisier year-to-year changes and ensures that the results are not sensitive to the starting and ending years chosen. The scaling allows the trends in the relative and absolute rates to be compared easily. I chose to use 1959-69 as the benchmark because it represents a period that started and ended with a business cycle peak and was followed by a period of slower growth.

5. Some researchers believe that the increasingly common practice of offshoring production to low-wage countries has overstated economic growth over the past fifteen years. Government economists within the Bureau of Economic Analysis acknowledge the methodological issue but believe it to be relatively minor, constituting at most 0.1 to 0.2 percentage points of annual real GDP or productivity growth (and likely less due to offsetting biases). See here and here. At worst, this issue would marginally change the quantitative figures presented in this essay without affecting the broader point that a focus on absolute growth should change our evaluation of trends in living standards.

6. Per worker estimates use the same GDP figures as the per capita and per hour estimates. Estimated number of workers prior to 2001 are from the Historical Statistics of the United States, Millennial Edition Online, Table Ba478-486. From 2001 to 2010, they are from http://www.census.gov/statab/hist/02HS0029.xls and the 2010, 2011, and 2012 editions of the Statistical Abstract of the United States. Charts for per capita and per worker growth available from the author on request.

7. Keep in mind, all of these absolute growth figures are in real, inflation-adjusted terms. So it is not that we have more growth but a dollar today is worth less than a dollar in the past. They are also in “per capita,” “per worker,” or “per hour” terms, so increases in population, employment, or hours worked do not affect these estimates. The different growth measures have different trends because of changes in the share of the population that works (e.g., due to shifting retirement or schooling patterns, to rising labor force participation among wives, or unemployment) and changes in the number of hours worked per worker (e.g., due to greater frequency of voluntary or involuntary part-time work).

8. Again, there remains the question of how this growth was distributed, but even here the picture is more complicated than progressives believe, as my companion piece to this essay will show.

9. Total compensation of employees in domestic industries is from National Income and Product Accounts, Table 6.2, and hours worked by full-time and part-time employees is from Table 6.9. Estimates are adjusted for inflation using the Personal Consumption Expenditures deflator from the National Income and Product Accounts Table 1.1.4.

10. Actually, this characterization understates the importance of levels of wealth and absolute growth. Holding constant changes in the age profile of the workforce and other population dynamics, what a 41-cent increase in pay really means is that, for example, 39-year-olds in 2004 received 41 cents more in 2005 than 2004’s 40-year-olds did. In the absence of growth, the 2004 39-year-olds would have received pay raises that left them in 2005 with the same average pay as the 2004 40-year-olds. If all else is equal—that is what zero growth means—the 2005 40-year-olds would make no more than the 2004 40-year-olds did. But they would still have made more than they had in 2004 as 39-year-olds. For sake of illustration, assume that workers of a given age in both 1951 and 2004 would have received raises of one percent even in the absence of growth, purely as a consequence of becoming more experienced or skilled. In that case, the increase in pay experienced in 1952—as a result of aging and economic growth combined—would have been 4.8 percent, while the increase experienced in 2005 would have been just 2.2 percent. But because pay was so much higher in 2004 than in 1951, the absolute increase for a worker with average pay would have been $0.74 an hour in 2005 rather than the $0.56-an-hour increase in 1952.

11. Angus Maddison, The World Economy, Volume 2: Historical Statistics, Tables 1c and 2c (Organization for Economic Co-operation and Development, 2006). The twelve European countries are Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Sweden, Switzerland, and the United Kingdom.

12. I computed these rates using 1969-2001 estimates from Maddison and 2001-2009 rates from OECD.StatExtracts. All cross-national comparisons I cite use figures adjusted for differences in purchasing power across countries and over time.

13. Note that I am not heralding the so-called “Singularity,” where technological advances lead to an almost impossibly accelerating rate of improvement in our wellbeing. My argument is not that rates of growth will increase any time soon (though they may). I am simply noting that even the diminished growth rates of the past few decades imply large absolute gains in our material conditions.

14. So I will argue in a future complementary essay to this one on the distribution of growth. Male wage growth has lagged productivity growth because productivity levels have had to catch up to the over-heated union-driven wage growth of an earlier era. Once productivity has caught up, the two should move in tandem in the future.

15. Robert W. Fogel (2000), The Fourth Great Awakening and the Future of Egalitarianism (Chicago: University of Chicago Press). See Chapter 5.

16. Indeed, simple demographics appear to be a big part of the story. Changes in the composition of the workforce—due to baby booms, the rise in immigration, and the increased labor force participation of married women—may have lowered experience and skill levels. Changes in schooling and retirement—and increases in longevity—have altered the ratio of workers to non-workers.

17. Pew Economic Mobility Project (2012), “Pursuing the American Dream: Economic Mobility Across Generations.” See also Julia B. Isaacs (2008), “Economic Mobility of Families Across Generations,” in Isaacs, Isabel V. Sawhill, and Ron Haskins, Getting Ahead or Losing Ground (Pew Economic Mobility Project).

18. See my recent essay, “Bogeyman Economics,” in National Affairs (Winter, 2012), as well as my recent piece on the New Republic website, “Stop Feeling Sorry For the Middle Class! They’re Doing Just Fine."

19. See Bruce D. Meyer and James X. Sullivan (2011), “The Material Well-Being of the Poor and the Middle Class Since 1980,” American Enterprise Institute Working Paper #2011-04, and Richard V. Burkhauser, Jeff Larrimore, and Kosali I. Simon (2011), “A ‘Second Opinion’ on the Health of the American Middle Class,” National Bureau of Economic Research Working Paper 17164.

20. See Mark Schmitt (2012), “If Liberals Want to Help the Poor, They Should Focus on the Middle Class,” The New Republic online.

21. Samuel Lubell (1952), The Future of American Politics (New York: Harper).

22. These computations are based on median family income estimates found here, adjusted for inflation using the Personal Consumption Expenditures deflator. The figures indicate a 128 percent increase from 1952 to 2010, but adding the value of health insurance would push this significantly above 130 percent.

23. From the U.S. Department of Agriculture’s Economic Research Service.

Authors

Scott Winship

Publication: Breakthrough Journal

Image Source: © Norbert von der Groeben / Reuters

A Cheerful Welcome to the Robots, Our Future Work Overlords

Scott Winship — Mon, 18 Feb 2013 00:00:00 -0500

A surprising number of people seem to be freaking out about an imminent takeover by robots. It’s true that only at the fringe is anyone suggesting a Matrix-style dystopia where the machines rise up and enslave us. But the commonly-expressed conviction that technological innovation will immiserate broad segments of society is only somewhat less irrational.

A number of major news outlets and commentators have raised the specter of a doom-like “rise of the robots.” These alarmist speculations allege that technology will leave behind a large portion of the U.S. labor force. One recent piece goes so far to insist that taking on the robots “now poses the central economic dilemma of the Obama era.” The central economic dilemma? Does not compute.

There are two blind spots at work among the neo-Luddites. The first is the tendency to see economic stagnation or decline everywhere, which, it is said, will only worsen. The amount of economic insecurity—and the extent of its increase—have been greatly overstated, as I have argued in the pages of National Affairs. Median income has fallen notably since the onset of the financial crisis, but it was increasing before the recession, and it has been rising again for several months.

It is true that in recent decades, the rate of income growth has been much slower even in good times than in the Golden Age following World War II. However, CBO data indicate that during the expansion of the last decade median income growth rates were no worse than in the 1990s and better than in the 1980s. And as I argue in the latest issue of Breakthrough Journal, we get absolute economic gains today comparable to those of the 1950s and 1960s despite having lower growth rates, because we are so much richer than in the past.

Even if growth rates never return to their glory days, we are on the verge of realizing absolute annual gains that will be permanently larger than in the Golden Age. How those gains are distributed is an important consideration, but the situation is less dire than many believe. Median income has risen by at least one-third since 1979, and the evidence that the labor market is polarizing has been, in the words of Urban Institute and Georgetown economist Harry Holzer, “overblown.”

The second blind spot among the neo-Luddites is their failure to consider the gains we will receive as consumers from technological advances even as they misunderstand the reduced demand for labor technology may create. Technology makes us more productive—it allows us to produce the same stuff, but more cheaply. Too many people hear “producing the same stuff more cheaply” as “producing the same stuff with fewer workers” and see mass unemployment as our fate. Rising productivity actually means “producing the same stuff with fewer hours worked.” That can be achieved by having fewer workers do the same amount of work, but it is also consistent with the same number of workers all scaling back their hours.

It hardly seems worth arguing that most Americans would work less per week and for less of their lifetimes if they could. One hundred years ago essentially all men in their early 60s worked; today just six in ten do, and the typical retirement age has steadily declined (while life expectancy has increased). During their working years, men now have more leisure time than in the past. Work has increased markedly for women, but consistent with their rising education levels, longer delays in marriage and childbearing, and reduced fertility, this is mainly reflective of greater opportunities to balance work and family. Unpaid time doing housework has declined more among women than work has increased, meaning that they too have more leisure time than in the past.

Of course, people will only choose to work less if they can afford to. But technological advance will radically increase productivity—reducing demand for labor—only insofar as it also radically reduces the prices of what we buy. Ignoring this connection leads to absurd fears about the future. Some, apparently, believe we may have a robot economy down the road where machines produce everything, but few humans can afford the output.

Technological development will surely eliminate some specific jobs. But there is little reason to think that the future will look any different from the past in this regard. Productivity gains in manufacturing and other sectors will lower the cost of goods and produce more discretionary income, which people will use to pay other people to do things for them, creating new jobs. Mass leisure will also create other kinds of jobs, such as those devoted to entertaining and informing each other. To the extent that the least-skilled need help, we will be in a much better position to afford safety nets, and our main concern will be the age-old one of discouraging dependency. To the extent that technology increases inequality much of it will be to reward innovators for finding ways to drive our workweek and retirement age down or to induce some to keep working 40-hour weeks.

I, for one, welcome our future robot overlords.

Authors

Scott Winship

Publication: Forbes

The Exaggerated Death of the Middle Class

Ron Haskins and Scott Winship — Tue, 11 Dec 2012 00:00:00 -0500

Mark Twain, upon reading his obituary in the New York Journal, famously quipped that the reports of his death were greatly exaggerated. The same could be said today of reports from the scholarly world, the media and even the White House about the shrinking of the middle class. Here’s why.

The most easily obtained income figures are not the most appropriate ones for assessing changes in living standards; those are also the figures that are often used to reach unwarranted conclusions about “middle class decline.” For example, analysts and pundits often rely on data that do not include all sources of income. Consider data on comprehensive income assembled by Cornell University economist Richard Burkhauser and his colleagues for the period between 1979—the year it supposedly all went wrong for working Americans—and 2007, before the Great Recession.

When Burkhauser looked at market income as reported to the Internal Revenue Service (IRS), the basis for the top 1 percent inequality figures that inspired Occupy Wall Street, he found that incomes for the bottom 60 percent of tax filers stagnated or declined over the nearly three-decade period. Incomes in the middle fifth of tax returns grew by only 2 percent on average, and those in the bottom fifth declined by 33 percent.

Things appeared somewhat better when Burkhauser looked at the definition of income favored by the Census Bureau which, unlike IRS figures, includes government cash payments from programs like Social Security and welfare, and looks at households rather than tax returns.

Still, the income of the middle fifth only rose by 15 percent over the entire three decades, much less than 1 percent per year. The Census Bureau reports that from 2000 to 2010, the income of the middle fifth actually fell by 8 percent. With numbers like these, it’s understandable why so many people think the American middle class is under threat and in decline.

But there are three reasons why even the Census Bureau figures are deceiving. The size of U.S. households, which has been declining, is not taken into account. The figures ignore the net impact on income of government taxes and non-cash transfers like food stamps and health insurance, which benefit the poor and middle class much more than richer households, and the value of health insurance provided by employers is also left out.

Burkhauser and his colleagues show that if these factors are taken into account, the incomes of the bottom fifth of households actually increased by 26 percent, rather than declining by 33 percent. Those of the middle fifth increased by 37 percent, rather than by only 2 percent. There is no disappearing middle class in these data; nor can household income, even at the bottom, be characterized as stagnant, let alone declining. Even after 2000, estimates from the Congressional Budget Office (CBO) show the bottom 60 percent of households got 10 percent richer by 2009, the most recent year available.

Making sense of income trends

Aside from the brighter picture presented by the Burkhauser and CBO analyses, there is a more complicated trend emerging in the United States. Four factors, both inside and outside the market, explain those trends.

The first market factor affecting middle-class income is a longtime trend of low literacy and math achievement in U.S. schools, which partially explains why conventional analyses of income show stagnation and decline. Young Americans entering the job market need skills valuable in a modern economy if they expect to earn a decent wage. Education and technical training are key to acquiring these skills. Yet the achievement test scores of children in literacy and math have been stagnant for more than two decades and are consistently far down the list in international comparisons.

It is true that African American and Hispanic students have closed part of the gap between themselves and Caucasian and Asian students; but the gap between students from economically advantaged families and students from disadvantaged ones has widened substantially—by 30 to 40 percent over the past 25 years.¹

In a nation committed to educational equality and economic mobility, the income gap in achievement test scores is deeply problematic. Far from increasing educational equality as an important route to boosting economic opportunity, the American educational system reinforces the advantages that students from middle-class families bring with them to the classroom. Thus, the nation has two education problems that are limiting the income of workers at both the bottom and middle of the distribution: the average student is not learning enough, compared with students from other nations, and students from poor families are falling further and further behind.

It is difficult to see how students with a poor quality of education will be able to support a family comfortably in our technologically advanced economy if they rely exclusively on their earnings.

The second market factor is the increasing share of our economy devoted to health care. According to the Kaiser Foundation, employer-sponsored health insurance premiums for families increased 113 percent between 2001 and 2011. Most economists would say that this money comes directly out of worker wages. In other words, if it weren’t for the remarkable increase in the cost of health care, workers’ wages would be higher. When the portion of market compensation received in the form of health insurance is ignored in conventional analyses, income gains over time are understated.

Turning to non-market factors, marriage and childbearing increasingly distinguish the haves and have-nots.

Families have fewer children, and more U.S. adults are living alone today than in the past. As a result, households on average are better off since there are fewer mouths to feed, regardless of income. At the same time, single parenthood has grown more common, thereby increasing inequality between the poor and the middle class. Female-headed families are more than four times as likely to be in poverty, and children from these families are more likely to have trouble in school as compared with children in married-couple families. The increasing tendency of similarly educated men and women to marry each other also contributes to rising inequality.

The most important non-market factor is the net impact of government taxes and transfer payments on household income. The budget of the U.S. government for 2012 is $3.6 trillion. About 65 percent of that amount is spent on transfer payments to individuals. The biggest transfer payments are: $770 billion for Social Security, $560 billion for Medicare, $262 billion for Medicaid, and nearly $100 billion for nutrition programs. In addition to these federal expenditures, state governments also spend tens of billions of dollars on programs for low-income households. Almost all of the over $1 trillion in state and federal spending on means-tested programs (those that provide benefits only to people below some income cutoff) goes to low-income households.

Thus, taking into account the progressive nature of Social Security and Medicare benefits, the effect of government expenditures is to greatly increase household income at the bottom and reduce economic inequality.

Similarly, federal taxation—and to a lesser extent state taxation—is progressive. Americans in the bottom 40 percent of the income distribution pay negative federal income taxes because the Earned Income Tax Credit and the Child Tax Credit actually pay cash to millions of low-income families with children.

IRS data on incomes incorporate only the small fraction of transfer income that is taxable. Census data includes all cash transfer payments but leaves out non-cash transfers—among which Medicaid and Medicare benefits are the most important—and taxes.

The bottom line is that market income has grown, and government programs have greatly increased the well-being of low-income and middle-class households. The middle class is not shrinking or becoming impoverished. Rather, changes in workers’ skills and employers’ demand for them, along with changes in families’ size and makeup, have caused the incomes of the well-off to climb much faster than the incomes of most Americans.

Rising inequality can occur even as everyone experiences improvement in living standards.

Even so, unless the nation’s education system improves, especially for children from poor families, millions of working Americans will continue to rely on government transfer payments. This signals a real problem. Millions of individuals and families at the bottom and in the middle of the income distribution are dependent on government to enjoy a decent or rising standard of living. While the U.S. middle class may not be shrinking, the trends outlined above make clear why this is no reason for complacency. Today’s form of widespread dependency on government benefits has helped stem a decline in income, but far better would be to have more people earning all or nearly all their income through work. Getting there, though, will require deeper reforms in the structure of the U.S. education system.

1 Sean F. Reardon, Wither Opportunity? Rising Inequality and the Uncertain Life Chances of Low-Income Children (New York: Russel Sage Foundation Press, 2001).

Authors

Publication: Americas Quarterly

Image Source: © Norbert von der Groeben / Reuters

Kick the Cliff Down the Road, Then Start Negotiating

Scott Winship — Tue, 27 Nov 2012 11:55:00 -0500

With the election and Thanksgiving out of the way, the rest of the year is shaping up to be an epic showdown between Democrats and Republicans over tax policy and how to avoid going over the fiscal cliff. At this point there appears to be little room for optimism that either side will give enough ground to avert the spending cuts and tax hikes that will otherwise go into effect within weeks. How markets—and voters—will react to the resulting contractionary pressure will likely depend on the extent to which the "cliff" is recognized to be potentially no more than a slope and on the actions Democrats and Republicans take to make the downward slide a gentle one.

One thing is clear at this point, however: Democrats have won the game to frame the debate. Ostensibly, the 2011 budget deal that brought us to this point was about the proper size of government and about calibrating spending and revenues in order to stabilize long-term federal finances. However, the positions staked out by both sides have effectively narrowed the debate considerably. One side wants continued low taxes for the vast majority of Americans and higher taxes on top earners. The other prioritizes continued low taxes for rich and poor alike. Democrats want higher revenues and see little upside to propose spending cuts. Republicans want lower revenues and lower spending but would rather hold the line on taxes than emphasize the spending cuts laid out in their recent House budgets.

With spending levels an afterthought, and with consensus around continued low rates below the top two income tax brackets, the entire debate is now about whether or not to continue the tax rates that the highest-earning Americans pay on the income they receive above $200,000 to $250,000. If that seems arcane, it is, which is why Republicans are losing the more pithily-put debate over "whether the rich should pay higher taxes." This disadvantageous framing, in turn, explains why Republicans appear increasingly willing to give ground on their basic position that federal revenues should not increase.

The bipartisan focus on the top tax rates is strange given the long-term fiscal challenges we face as a nation. For starters, the long-term budget development that dominates other expected changes in the next 50 years is an increase in spending. In particular, Medicare and other health care spending will nearly double in the next 35 years as a share of the economy, approaching the amount we currently spend on everything else outside of Social Security. Taxes as a share of the economy will have to rise to a level never before seen in the U.S. in order to pay for that increased spending. It can't be paid for by tax hikes on the rich (especially relatively small ones of the sort we are currently debating). Indeed, even if we go over the fiscal cliff and stay put in the ravine, we can only afford projected federal spending if we don't cut any taxes in the future and if the unrealistic provider cuts and other provisions of the Affordable Care Act are faithfully implemented.

Another reason that the focus on top tax rates is inordinate is that federal taxes in America are already more progressive than in our peer countries, as economist Veronique de Rugy has shown. Indeed, according to research by inequality experts Thomas Piketty and Emmanuel Saez, in 2004 the top one percent of "tax units" (essentially, the top one percent of returns) received 20 percent of income but paid 26 percent of federal taxes (including payroll and corporate taxes). The top tenth of the top one percent received 9 percent of income and paid 12 percent of taxes. For the top one percent of the top one percent, the figures were 3 percent and 5 percent.

The richest Americans have received a greater share of income over time, but their share of the federal tax bill has gone up accordingly. Congressional Budget Office data show that the top one percent of households received 9 percent of income in 1979 and paid 14 percent of federal taxes (including payroll, corporate, and excise taxes). In the peak year of 2007, they took home 19 percent of income and paid 27 percent of taxes. Their taxes went down over this period from a 35 percent average rate in 1979 to a 28 percent rate in 2007, but they went down by even more among the middle class and poor.

Viewed through this recent history, the problem with our long-term budget is not that the rich do not pay enough taxes; it is that as a nation, what we want will cost a lot more in the future, more than what we want to pay. This conversation will be a difficult one under the best of circumstances. For now, we should extend the tax and spending provisions about to expire, push the sequester off, and kick the cliff down the road a year in order to give the long-term issues the attention they deserve.

Authors

Scott Winship

Publication: Real Clear Markets

Image Source: © Joshua Roberts / Reuters

Inequality Is Not What We Imagine

Scott Winship — Fri, 19 Oct 2012 10:50:00 -0400

Rising inequality in America, according to a number of economists and many more pundits and political actors, has hurt economic growth. By reducing economic mobility, it is said to have inefficiently allocated talent. Similarly, outsize salaries in the financial sector are said to distort career decisions of college graduates. Inequality, others say, reduces worker motivation and happiness and social trust, which affect productivity. It lowers aggregate demand because the rich consume a lower percentage of their income and in ways that do not promote future growth. It reduces entrepreneurship by saddling college graduates with student debt.

These contentions make intuitive sense and are eminently plausible. The problem with most analyses of rising inequality is that they do not take the all-important step of actually examining the evidence. Such ad hoc hypotheses about inequality’s effects on growth are easy to spin. From the right, Edward Conard and others have just as plausibly argued that rising inequality gives people the incentives to take risks and work hard — elements crucial for robust economic growth; if it would induce more people to pursue Steve Jobs levels of innovation, maybe we need higher inequality still!

What does the evidence show? The liberal Center for American Progress recently released a report purporting to show how inequality hurts the economy. If the research on the link between inequality and growth persuasively showed a strong connection, you can be sure that the center would have trumpeted it. Here is what the authors, Heather Boushey and Adam S. Hersh, instead wrote:

"There is, of course, a rich literature on the relationship between inequality and growth. Although there are many conflicting views, there is ample evidence that inequality can, in fact, hurt growth under many circumstances. But this literature focuses mostly on the experience of developing countries, and its applicability to the challenges currently facing the United States is not entirely clear."

Widely cited research by I.M.F. economists — embraced by the chairman of the Council of Economic Advisors, Alan Krueger, in a speech in January and highlighted by Annie Lowrey in The New York Times this week — has this very problem of focusing primarily on developing countries. Inequality in dictatorships and oligarchies with mass poverty is a very different matter than inequality in rich democracies.

Indeed, research by Christopher Jencks of Harvard University looking at the experience of 12 developed countries over the past century indicates no relationship across those countries between the share of income received by the top 1 percent and economic growth rates. Since 1960, however, countries with higher inequality have experienced more growth. Boushey and Hersh do not cite Jencks’s study but nevertheless conclude that, “Ultimately, data and methodological issues mean that analyses are too imprecise to deliver definitive answers to this old and central question in economics research.”

Studies that look at some of the specific hypotheses mentioned above also are inconclusive or refute the idea that inequality is harmful to growth. Inequality does not appear to lead to financial crises. Its link to opportunity is highly questionable. The evidence that it distorts political outcomes is similarly thin and again based largely on developing countries.

It is not enough to construct arguments about why inequality might matter; in the end this is a question we can subject to empirical testing. The evidence does not give much reason to worry that inequality saps growth, or much reason to think that it increases it.

Authors

Scott Winship

Publication: New York Times

Image Source: © Lucas Jackson / Reuters

Has Rising Inequality Actually Hurt Anyone?

Scott Winship — Thu, 18 Oct 2012 10:27:00 -0400

The incomes of the top 1 percent — and especially of the top one-half of the top 1 percent — have skyrocketed over the past 30 years. The latest estimates from the Congressional Budget Office show that the inflation-adjusted average income of the top 1 percent of households was $340,000 in 1979 but $1.4 million in 2007, quadrupling over less than three decades. Popular discussion of the top 1 percent tends to highlight how different, say, Mitt Romney and Facebook founder Mark Zuckerberg are from typical Americans. In reality there is as great a disparity between Zuckerberg’s and Romney’s income as between Romney’s and yours. Disparities in income are so dramatic it is difficult to comprehend them.

Not that there’s anything wrong with that! Or rather, it’s not necessarily the case that there’s anything wrong with inequality levels. Whether American-style inequality’s costs outweigh its benefits remains an open question. Too many accounts of inequality today simply assume that it must be bad — that gains at the top have come at the expense of the middle class and bottom, that high inequality has diminished opportunity, that it has stunted economic growth or led to financial instability, or that it has turned our democratic system into a “plutocracy.” But there is scant evidence for each of these propositions.

Note, first, that the CBO data indicates that median household income — the income of the person in the middle of all households — rose by 46 percent from 1979 to 2007, and the income of the average household in the bottom fifth has risen by a similar amount. To be sure, that’s a smaller increase than Americans saw in the 1950s and 1960s and a much smaller increase than the top has seen. But it’s not the case that the middle class and poor have been doing worse over time. (Male earnings have not increased much over recent decades, reflecting the competing away of the union-based advantages that in earlier decades sent pay levels above what productivity gains would have dictated, but analyzed correctly, the data shows they have not fallen either. Female earnings have risen smartly.)

The poor and middle class are doing far better today than their counterparts in Pittsburgh during the Gilded Age, evoked by Freeland, and far better than their counterparts in most of the rest of the world. That may seem like an irrelevant comparison, but it is not. The reason that offshoring, for example, is profitable for companies despite all the costs incurred in employing workers thousands of miles away is that those workers are so much more productive relative to the pay they demand. This is not an indictment of the work ethic of the American worker — our standards have quite reasonably risen as we have become wealthier.

We are unwilling to sleep in company barracks, work on dangerous assembly lines unceasingly for 14-hour days, labor for Third World wages, accept environmental degradation, forgo weekends and holidays, or send our children into the workforce. We don’t have to — we can not only maintain but continue to improve our nearly peerless living standards with the high pay and benefits, strong worker and environmental protections, generous tax-payer-funded safety nets, tame work hours, and long retirements that we have.

Cross-national comparisons are tricky, but the evidence we have (from the Luxembourg Income Study) suggests that if you could line people up from richest to poorest in the United States, in Europe and in other English-speaking nations, Americans at every point in the richest 80 percent of households are better off than their counterparts occupying the same place in line in nearly every peer nation. Among the poorest fifth of households, this pattern breaks down, but it is hardly obvious that our inequality levels are to blame.

For one, inequality between, say, the poor and the middle to upper-middle class has not increased meaningfully since the 1980s. Second, to the extent inequality between the bottom and middle rose during the 1970s and 1980s, increasing single parenthood and rising out-of-wedlock births were a big part of the story. Third, it’s unclear that intergenerational mobility has declined over time — there is at least as much evidence that it has been unchanged as there is that it has fallen.

There are plenty of reasons to worry about inequality of opportunity — socioeconomic gaps in college-going are on the rise, and test-score gaps between rich and poor kids have similarly increased, to name just two examples. But the evidence that these problems would diminish if we could limit the top 1 percent’s incomes to those seen in other countries is nonexistent. (Incidentally, the incomes of the top 1 percent have been on the rise in our peer nations too, and middle-class income growth has slowed in those countries as well.) Studies on whether inequality hurts economic growth typically focus on developing countries, and research by, for instance, Christopher Jencks suggests that inequality across rich countries does not go hand in hand with lower growth. The latest research on whether inequality leads to financial crises concludes that it does not — rising inequality tends to co-occur with expansions in credit, but it is the latter that appears to lead to crises.

Similarly, the influential research of economists Daron Acemoglu and James Robinson argues that inequality leads to less democracy and reinforces itself through politics, but it too is based on developing countries. There has been hardly any research that rigorously tests whether economic inequality in the United States is associated with worse political or policy outcomes for the nonrich. In fact, policy preferences do not line up very neatly with the purported “class interests” of voters. The United States is simply not a banana republic.

I would like to see social policy do more to help the poor and to promote opportunity. But I don’t see much evidence that the gains among the top 1 percent have done anything to increase poverty or reduce opportunity. From 2007 to 2009, the average income of the top 1 percent fell by 37 percent while the median household income fell by 2 percent and the average income of the poorest fifth may have increasedslightly. If that reduction in inequality — the extent to which the “plutocrats” were taken down a peg — helped the middle class and the poor, it is not obvious. We should question, then, whether the earlier gains at the top hurt everyone else.

Authors

Scott Winship

Publication: Reuters

Image Source: © Eduardo Munoz / Reuters

What "Lost Decade"? On the Supposed Decline of the American Middle Class

Scott Winship — Mon, 01 Oct 2012 00:00:00 -0400

Editor's note: An earlier version of this essay appears in the October 1, 2012 issue of National Review.

Pop quiz: Which of the following is true? (a) Over the past 40 years, the middle class has shrunk; (b) Over the past 40 years, the middle class has grown poorer; (c) The middle class just suffered through a “lost decade”; (d) All of the above.

You could be forgiven for answering (d), given the angst-producing state of discourse on the economy, but the truth is that none of these claims about middle-class decline are supported by the best evidence. A recent report by the Pew Research Center (PRC), “The Lost Decade of the Middle Class,” is the latest entry in the doom-and-gloom genre, but like other analyses before it the report badly misrepresents the economic standing of the middle class. Pew generally does very good work, and I am a fan particularly of its Economic Mobility Project, the research portfolio of which I managed for three years. But “declinist” analyses are both wrong and insidious, and since PRC’s work is especially influential, its errors deserve a careful examination.

The PRC report is cheerily subtitled “Fewer, Poorer, Gloomier.” Let’s take those claims up one by one.

PRC argues that the middle class has been shrinking over the near and the long term. The near-term claim relies in part on comparing the class designations Americans chose for themselves in surveys from early 2008 and again this past July. The share of Americans self-identifying as “middle class” declined from 53 percent to 49 percent over the four years.

It isn’t clear why we should care whether the middle class, so defined, shrinks. It could shrink despite an increase in the number of people who choose “middle class” rather than “lower middle class” or “lower class” if the number who choose “upper middle class” or “upper class” grows even more. What is important is whether the share choosing “lower middle class” or “lower class” grows.

PRC reports that it has done so, rising from 25 percent in 2008 to 32 percent this past July. Other pollsters asked this self-identification question in 1976, 1984, 1987, and 2004, and like PRC in 2008 they all found the lower-than-middle share to be between 24 percent and 27 percent. The question has been asked six times since 2010 (five times by PRC), and the share ranged from 29 percent to 40 percent in those surveys. The venerable General Social Survey has asked people to self-identify as lower, working, middle, or upper class since 1972, and it also found that the share of Americans self-identifying as lower than middle class was relatively high in 2008 and 2010, although the 2008 percentage (53) was lower than the one in 1972, and the 2010 percentage (55) was lower than the one in 1982. The share fell between 1996 and 2004, with the 2004 percentage (48) matching the General Social Survey’s 1989 low.

In short, historical data suggest that the Great Recession has increased the share of the population that considers itself lower than middle class but offers no evidence of a long-term increase or even a steady rise over the “lost decade.” The same conclusion holds if we stick to the narrow question of whether the middle class has shrunk.

The PRC’s second set of analyses, purporting to show that the middle class has shrunk over the long run, are based on the Census Bureau’s Current Population Survey. PRC defines “middle income” in relation to the median income (the income of the household smack in the middle). A household is middle income, according to PRC, if its income is at least two-thirds of, but no more than twice, the median. By this definition, and adjusting incomes for inflation and differences in household size, middle-income households fell steadily from 61 percent of the total in 1970 to 51 percent in 2010.

When Alan Krueger, chairman of the White House Council of Economic Advisors, presented similar figures in January, he too asserted that the middle class had shrunk, claiming a decline from 50 percent to 42 percent between 1970 and 2010. But, as I argued in these pages (“The President’s Depressing Statistics,” February 6), the reason the middle class “shrank” was almost entirely that Americans grew richer over time. There was no statistically discernible increase in the share of Americans poorer than middle class.

The PRC study, by contrast, did find an increase in the number of households below the middle-income boundary. In 1970, 25 percent of adults were lower income, compared with 29 percent in 2010. This finding was not particularly robust, however, when I replicated it. When I compared 1969 to 2007 — business-cycle peaks, both — the increase in the poorer-than-middle-class share was just three percentage points, and when I excluded Hispanics from the 2007 data (to control for the large influx of immigrants from Mexico over the period) the increase was just one point — not statistically meaningful. Nor is it clear that choosing different but still plausible boundaries for the middle class — say, half to 1.5 times the median, which is the definition that Krueger used — would result in the same conclusions. (PRC appears to have chosen its definition because it matches the share of adults who self-identified as middle class in July.)

But the biggest shortcoming of the PRC analysis is that, like the Krueger figures that preceded it, it conceives the middle class in relative terms: meaning that, as Americans become wealthier, the price of admission to the middle class increases over and above the increase in the cost of living. If inflation-adjusted median household income rises by 20 percent, then the entry point to the middle class does too. In the PRC study, it took $9,500 more in income — after adjusting for increases in the cost of living — for a family of three to make it into the middle-income group in 2010 than it did in 1970. In 100 years, Americans will likely be much richer than they are today. Yet the share of the population calling itself middle class will probably remain large, because people will define themselves relative to their peers. If the share of Americans who consider themselves lower or lower middle class ends up somewhat higher than it is today but everyone is much better off in absolute terms, will that be a problem?

It is possible to defend PRC’s definition of the middle class by noting that relative status matters to people — one wants to “keep up with the Joneses.” Economist Robert Frank has catalogued studies showing that people’s happiness depends not just on their absolute level of material well-being but also on their standing compared with others. But it is far from clear that relative inequality matters as much to people as their absolute level of income, and in any case PRC makes no effort to defend its definition.

The definition had the odd consequence that “middle-income” adults became scarcer, and “lower-income” adults more prevalent, even though the median income within each group rose by around 30 percent over the 40-year study period. When I reran the PRC analyses but kept the lower boundary of the middle class at its inflation-adjusted 1970 level, I found that the share of adults poorer than “middle income” declined from 25 percent in 1970 to 18 percent in 2007. That is, even as the fraction of American households making less than two-thirds of the current-year median held steady or rose, the share making less than two-thirds of the 1970 median fell significantly.

So much for “fewer.” Is the middle class “poorer”? The PRC report uses the Current Population Survey to examine trends in median income. By viewing the past 60 years as a collection of six decades, PRC is able to describe the 2000s as a “lost decade.” According to PRC, from 2000 to 2010, incomes fell among rich and poor alike for the first time since World War II. Median income in 2010 was at its 1997 level. Over a longer period, the report finds that income growth was strongest in the 1950s and 1960s, with the 1990s looking better than the 1970s and 1980s, and the Aughts bringing up the rear. There are three problems with these analyses.

First, the bulk of the evidence suggests that our measures of inflation overstate growth in the cost of living, which means that real-income growth is understated.

Second, the Current Population Survey (CPS) understates median-income growth relative to data sources that measure income more comprehensively. In the PRC analyses, median household income rose 22 percent from 1979 to 2007 (business-cycle peaks), but the CPS figures do not take into account non-cash transfers such as food stamps, Medicaid, and Medicare; employer-provided health insurance; or changes in taxes. Congressional Budget Office estimates, which remedy those omissions and use a different cost-of-living index, find a 46 percent increase in the median over the same period. That’s right: The typical household in 2007 was half-again richer than the typical household in 1979.

The third problem with the PRC analyses is the assumption that decades are appropriate periods by which to assess economic conditions. When rigorous economists consider income trends, they compare years that represent similar points in the business cycle: They do not compare a recession year to a boom year, for instance. As it turns out, the 1950s, 1960s, 1970s, 1980s, and 1990s can be roughly represented by comparing business-cycle peaks in 1948, 1960, 1969, 1979, 1989, and 2000. Looking at trends between 2000 and 2010, on the other hand, compares a boom year with a bust year; the proper comparison would be of 2000 and 2007.

Viewed this way, peak to peak, and using Congressional Budget Office (CBO) income figures, the 2000–07 period saw faster annual median-income growth than the 1990s (1989–2000) or the 1980s (1979–89). CBO data do not go back farther than 1979, but census data show that the 1970s (1969–79) had slower household-income growth than the 1980s — so the period from 2000 to 2007 actually featured the fastest income growth since the 1960s. The Aughts were not a lost decade when measured this way. Rather, a period of solid gains was followed by a crash. And even so, the CBO figures indicate that median income was 12 percent higher in 2009 than in 2000. Figures for 2010 are unavailable, but if they track the 2009-to-2010 trend in the CPS, the decade will show an increase of 10 percent in median income rather than the 7 percent decline PRC reports. So the middle class did not get “poorer.”

To all of this, PRC researchers might suggest I’m asking people to believe me (to believe the CBO, actually) over their own lying eyes. After all, PRC’s survey respondents overwhelmingly agreed that “compared with ten years ago” it is harder for “middle-class people to maintain their standard of living.” Fully 85 percent endorsed the view that 2002 was better than 2012 in this regard. We have arrived at “gloomier.”

Historical patterns show, however, that this widespread view does not reflect an objectively correct assessment of post–Great Recession American life so much as a persistently too-negative guess at how badly others are doing. In early 2008 — prior to the financial crisis — 79 percent of those surveyed by PRC believed that things had gotten tougher since 2003. So the damage done by the Great Recession has little to do with the consensus that things are getting tougher for Americans; they were gloomy barely into it, well before the crisis. And before concluding that the strong majority taking a dim view was objectively correct in early 2008, consider that 65 percent of respondents to an NBC/Wall Street Journal poll in 1986 said things had gotten tougher for the middle class over the preceding five years. That belief was almost surely not true, since the economy had double-dipped into a deep recession in 1981. The implication of these polls is that there is a general tendency for strong majorities of respondents to endorse the view that things are getting tougher, whether or not they actually are.

These figures, which PRC includes toward the back of its report, do suggest that the extent of economic pessimism increased between 1986 and 2008. But other polling evidence contradicts that conclusion. For more than 20 years, surveys have asked whether it has grown harder or easier over the past generation to attain “the American Dream.” According to polls by the Roper Center for Public Opinion Research, six in ten Americans thought it had grown harder in 1990, as did six in ten Americans in 1995. A 2010 Xavier University poll using a slightly different version of the question found this belief to be held by . . . six in ten. A Xavier poll a year later, in 2011, saw the figure jump to seven in ten. That result was comparable, however, to what Roper found in 1992, another year in which the nation was recovering from recession.

More important, longstanding majority belief that it is getting harder to keep up should be considered along with another longstanding result of opinion polling on the economy: When asked about their own economic circumstances, Americans give much more optimistic responses than they do when asked about Americans in general. People’s impressions of how others are doing are more pessimistic than what they say about their own lives.

As an example, when I was at Pew, the Economic Mobility Project sponsored a poll independently of PRC in early 2009 asking about a host of mobility-related topics. We found that 73 percent of Americans rated “economic conditions in this country today” as “poor.” In contrast, just 25 percent rated their “personal economic situation today” as “poor” when given the same response options. Three in four people said they were “very much” or “somewhat” in control of their personal economic situation, but only 43 percent thought the same about “people in this country.” Three in five parents thought their children would have a higher standard of living than they had, but just two in five non-parents thought the same would be true of “kids today.”

This sort of result is pervasive in public-opinion research related to the economy. People feel good about their own situation but guess incorrectly that others must feel bad about theirs. Indeed, this “I’m okay, they’re not” syndrome — a phenomenon identified by the writer David Whitman — extends to non-economic matters as well. Parents like their kids’ schools but think schools in general are awful; voters like their representatives but think Congress is the pits.

PRC emphasizes that 42 percent of the middle class say they are “less financially secure” than ten years ago. Forty-two percent is obviously a large minority, but on the other hand this figure doesn’t tell us how many people feel significantly less secure. I feel less secure than ten years ago, and I have some anxiety as a relatively new parent with a wife who is due to graduate into the labor force soon. But I can’t say that economic anxiety is anything like a central feature of my day-to-day existence.

The same is likely to be true of many other people who feel less secure than they did in 2002. Don’t take my word for it: According to PRC’s poll, 80 percent of self-identified middle-class adults are “pretty” or “very” happy with their life, as are 77 percent of all adults. Only 37 percent of middle-class adults “frequently” experience stress (much of it presumably related to non-economic issues), and only 42 percent of all adults. That is basically the same as in 1994, 2001, and 2002. Seventy-two percent of the middle class and 64 percent of all adults are “somewhat” or “very” satisfied with their personal financial situation. The corresponding satisfaction levels for respondents’ “present housing situation” are 90 percent for the middle class and 86 percent for everyone. In 1996, 87 percent of adults were that satisfied. “Gloomier?” Sure — but we are barely clear of the worst recession in 70 years. “Gloomy?” Hard to see it.

Indeed, perhaps the biggest rejoinder to the PRC report’s “fewer, poorer, gloomier” conclusion is its own finding that, despite the Great Recession and molasses recovery, 57 percent of all adults say their living standards exceed those of their parents at the same age, while just 17 percent say they are worse off. The conventional wisdom is that they shouldn’t trust their lying eyes, and it’s true that in the aggregate the respondents’ assessment does not match the facts. In actuality, as Pew’s Economic Mobility Project has shown using 40 years of data on actual parents and children, 84 percent of today’s adults are better off than their parents were at the same age.

Note: this version corrects a mistake in the original article, in which the author mistakenly attributes to PRC the claim that the middle class has grown poorer over the past 40 years. The author apologizes for the error.

Authors

Scott Winship

Publication: National Review

Current System Turns Makers Into Takers

Scott Winship — Tue, 25 Sep 2012 00:00:00 -0400

Editor's Note: The following is Scott Winship's contribution to a U.S. News & World Report Debate Club discussion titled "Is the United States a Nation of 'Makers and Takers?'"

Former Gov. Mitt Romney's remarks about the "47 percent" and the resulting controversy are a distraction from the big issue the presidential race should have been about. Entitlement spending will cannibalize the rest of the federal budget in the not-too-distant future absent wholesale reforms. It turns out that we—all of us—are the "takers" as well as the "makers".

Here's how it works. Step One: We makers go out and earn a paycheck. Step Two: Uncle Sam takes part of that paycheck and then makes us into takers. The vast majority of us will get Social Security and Medicare someday, and in a couple of years, even solidly middle class families will receive subsidies to purchase health insurance on Obamacare's exchanges. Because we feel entitled to these benefits, because life expectancy rises, because new innovations in healthcare proliferate, and because neither we nor our doctors have much incentive to be frugal, we end up taking more than our making finances.

But there's no reason we or our government need to be takers here. Rather than inefficiently taking from makers and making them into takers, the federal government could simply sponsor voluntary "citizen benefits" in the same way that employers offer benefits to their workers and let people pick and pay for the menu of benefits they want. It could allow workers and their employers to contribute to personal retirement accounts that it would sponsor, run by private investment funds. Social Security would eventually become a true safety net program rather than an inefficient transfer system from makers to themselves as takers.

The government could also sponsor voluntary health insurance exchanges without individual or employer mandates but with incentives for healthy people to participate. Unlike the system envisioned by Obamacare, the focus would be on coverage for catastrophic expenses, not on routine care that is easily anticipated. And the exchanges could also support the sort of premium support model for Medicare that Romney and his running mate—but also several leading Democrats—have proposed. That would give seniors incentives to choose the least-costly insurance options. Finally, citizen benefits might include an income-loss insurance offering that could improve on and replace the current unemployment insurance system.

Citizen benefits would promote fiscal responsibility and personal responsibility at the same time it expands choices. Any takers?

Authors

Scott Winship

Publication: U.S. News & World Report Debate Club

Image Source: Jim Young / Reuters

Pathways to the Middle Class: Balancing Personal and Public Responsibilities

Isabel V. Sawhill, Scott Winship and Kerry Searle Grannis — Thu, 20 Sep 2012 10:16:00 -0400

INTRODUCTION

The defining narrative of the United States of America is that of a nation where everyone has an opportunity to achieve a better life. Americans believe that everyone should have the opportunity to succeed through talent, creativity, intelligence, and hard work, regardless of the circumstances of their birth. Our leaders share this support for opportunity. In a speech last fall, President Obama said that Americans should make sure that “everyone in America gets a fair shot at success.” Mitt Romney has repeatedly spoken about an opportunity society, where people can “engage in hard work, and pursue the passion of their ideas and dreams. If they succeed, they merit the rewards they are able to enjoy.”

Americans have an unusually strong belief in meritocracy. In other nations, circumstances at birth, family connections, and luck are considered more important factors in economic success than they are in the U.S. This meritocratic philosophy is one reason why Americans have had relatively little objection to high levels of inequality—as long as those at the bottom have a fair chance to work their way up the ladder. Similarly, Americans are more comfortable with the idea of increasing opportunities for success than with reducing inequality. When the American public is asked questions about the importance of tackling each, a far higher proportion is in favor of doing something about ensuring that more people have a shot at climbing the economic ladder than is in favor of reducing poverty or inequality.

One way of thinking about opportunity is in terms of generational improvement in living standards. Among today’s middle-aged Americans, four in five households have higher incomes than their parents had at the same age, and three in five men have higher earnings than their fathers. The extent to which this will be true for today’s children remains to be seen. More importantly, if everyone grows richer over time, but the economic fates of Americans are bound up in their family origins, then in an important sense opportunities are still limited. If a poor child has little reason to believe she can “grow up to be whatever she wants,” it may be of little comfort to her that she will likely make more than her similarly constrained parents. A better-off security guard may still have wanted to be a lawyer.

The reality is that economic success in America is not purely meritocratic. We don’t have as much equality of opportunity as we’d like to believe, and we have less mobility than some other developed countries. Although cross-national comparisons are not always reliable, the available data suggest that the U.S. compares unfavorably to Canada, the Nordic countries, and some other advanced countries. A recent study shows the U.S. ranking 27th out of 31 developed countries in measures of equal opportunity.

People do move up and down the ladder, both over their careers and between generations, but it helps if you have the right parents. Children born into middle-income families have a roughly equal chance of moving up or down once they become adults, but those born into rich or poor families have a high probability of remaining rich or poor as adults. The chance that a child born into a family in the top income quintile will end up in one of the top three quintiles by the time they are in their forties is 82 percent, while the chance for a child born into a family in the bottom quintile is only 30 percent. In short, a rich child in the U.S. is more than twice as likely as a poor child to end up in the middle class or above.

Why do some children do so much better than others? And what will it take to create more opportunity? The remainder of this paper addresses these two questions.

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Pathways to the Middle Class: Balancing Personal and Public Responsibilities

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Isabel V. Sawhill
Scott Winship
Kerry Searle Grannis

Pathways to the Middle Class: Balancing Personal and Public Responsibilities

Thu, 20 Sep 2012 10:00:00 -0400

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September 20, 2012
10:00 AM - 12:00 PM EDT

Saul/Zilkha Rooms
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

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Debate focusing on the American Dream has been ubiquitous of late, with some arguing that effort and talent are the primary causes of success and others arguing that government can help open greater opportunities for those with modest beginnings. But who actually achieves the dream and joins the middle class? How much are children's chances of achieving success affected by the circumstances of their birth, by race and gender, and by how well they do at each life stage from birth to age 40? And how can we help more children navigate the path to a successful adulthood?

On September 20, the Social Genome Project at Brookings presented new research on how many of today's children are likely to succeed, who they are, how success at one stage affects success in subsequent stages of life, and what might help keep more children on track. Keynote speaker Sen. Michael Bennet of Colorado and a panel of experts reacted to these findings.

You can follow the conversation on this event on Twitter using the hashtag #PathToSuccess.

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Making Sense of Income Inequality

Scott Winship — Fri, 03 Aug 2012 00:00:00 -0400

Not long ago, a former colleague asked me to recommend the best accessible reference on income inequality. I immediately suggested Timothy Noah’s 2010 series of essays, “The Great Divergence,” written for his then-employer, Slate. Why, then, do I find Noah’s new book of the same name — an expansion of the award-winning series — so frustrating?

The book largely follows the outline of the series, with its clearly presented statistics on the rise in inequality and Noah’s impressive explication of what social scientists have found regarding its causes. The frustrations come, in part, from the additional space a book provides for Noah to wade into the perilous business of dot-connecting. But even the original series was irksome in the way it (faithfully) conveyed the conventional wisdom about the supposed connections between inequality, economic mobility, and living standards. Both the original series and the new book are fantastic distillations not only of a messy literature on inequality and its causes, but also of a seriously flawed conventional story about their consequences.

Noah is an engaging and informative writer, and the first chapter of the book shows off his skills (even as it reveals the ideological commitments the reader will have to be wary of). It provides an improbably captivating overview of what we know about inequality trends and how we have come to this knowledge. He intertwines this history with a broad account of how living standards and economic security have changed, and it is here that he falls into the traps of convention.

The “Golden Age” of the 1950s and 1960s followed a steep decline in inequality and preceded our modern period of rising inequality. In Noah’s view, “there probably was no better time to hold membership in America’s middle class.” This widely held — but wrong — view reveals the extent to which inequality has come to dominate the evaluative standards by which liberals judge the economy. In fact, the median American family is twice as rich today as it was in 1960, if one takes into account changes in family size, government and employer benefits, and rising immigration. That much of this improvement came before 1979 — even 1973 — hardly negates this central fact. Congressional Budget Office statistics indicate that the median household was 35 percent richer in 2007 than in 1979. The bottom fifth of households was about 20 percent richer.

Noah and other liberals have a series of standard (but flawed) arguments that minimize the extent of this improvement: A huge share of gains since 1980 went to the top 1 percent. Family-income growth hasn’t kept up with productivity increases. Income growth is due solely to wives’ supplementing their families’ incomes. Each of these claims is supported by naïve interpretations of readily available data, but a more careful examination belies them.

Let’s begin with the share-of-gains estimates. Noah plays up a finding that 80 percent of the increase in income from 1980 to 2005 went to the top 1 percent. This is a figure derived from the work of Thomas Piketty and Emmanuel Saez. But their updates in recent years have used a more appropriate adjustment for inflation, and their more recent estimate is not 80 percent but 58 percent.

Also, for a number of reasons, the share-of-gains figure is not as straightforward as it would seem. For example, this figure looks at income gains after adjusting the 1980 numbers to reflect 2005 purchasing power. But if we ask what share of income gains went to the top before taking account of the fact that 2005 incomes bought less for rich and poor alike because of inflation, the answer is that the top received just 28 percent of income gains.

Piketty and Saez garnered quite a bit of attention in their latest update, when they found that 93 percent of the gains from 2009 to 2010 went to the top 1 percent. But the computation they use also found that 49 percent of the gains from 2007 to 2009 went to the top, which is interesting, because the total income received by the top 1 percent fell over those two years — by, on average, half a million dollars. It is a strange statistic that indicates that a group commanded half of all income gains when the data on which it is based shows the group losing income.

As for the income-versus-productivity comparison, that one should be shelved for good, because researchers on both left and right have shown that, when properly analyzed, median family income actually tracks productivity very well. Noah cites a 2005 paper co-authored by economist Robert Gordon to back up his claim, but in 2009 Gordon wrote a widely cited paper showing that median income and productivity actually aligned closely from 1979 to 2007, with the former increasing by 1.50 percent annually and the latter by 1.66 percent. On the other hand, male earnings have lagged behind productivity growth over the past few decades. The simple explanation is that in earlier decades (during the peak union years), male-earnings growth outpaced productivity increases, and the past few decades have seen men’s earnings fall back to earth. (Women’s-earnings growth, meanwhile, has far exceeded productivity increases.)

The recent stagnation of male earnings has led many analysts to argue that middle-class families have stayed economically afloat only because wives increasingly bail out the boat. Noah cites the work of lawyer (and U.S. Senate candidate) Elizabeth Warren. There are three problems with the theory that families’ gains have come from the employment of economically pressured wives. First, all signs are that the embrace of work among wives is part of a longer-term story in which women get to lead more fulfilling lives. In developed countries around the world, birth rates have declined, marriage and parenthood have been pushed off to increasingly older ages, and women have had more educational opportunities. A June 2000 NBC News/Wall Street Journal poll found that just one-fifth of married parents had a wife who worked “to make ends meet” but preferred staying home. Second, husbands’ earnings are likely lower than they would have been because some of them have reduced the hours that they work and changed the type of jobs they take in response to the money their wives now bring in. Finally, husbands’ earnings would be higher today if not for the increased competition from working wives.

Reflecting his misguided view that it’s been downhill for the last 50 years, Noah titles his first chapter “Paradise Lost.” He writes that the political economy of the Golden Age “represents a path that would be abandoned in the late 1970s,” suggesting that paradise was not so much lost as thrown away. But he never provides a convincing case that things might have evolved differently. Economic growth slowed throughout Europe after the 1960s, and median-income growth since 1980 has been no better in Canada, France, Germany, or Sweden than in the U.S.

Noah says we should worry about rising inequality, but he evades the central questions: Do gains at the top really come at the expense of the incomes of the middle and bottom? If they do not, do the gains worsen inequality of opportunity in the next generation? Noah’s discussion hardly even attempts to make the case that inequality matters. Instead, he counters various arguments that inequality does not matter, which he invariably describes as “conservative.” He spends a single paragraph shrugging off the view that absolute living standards are more important to people than equality.

On the question of income mobility, Noah casually dismisses the possibility that having a higher absolute standard of living than one’s parents is more important to Americans than ending up at a higher rank than one’s parents when assessed against peers. But if “absolute mobility” is what really matters to Americans, and if the U.S. looks more impressive than other countries in this regard, then the American Dream doesn’t look quite so delusional, nor ambivalence about inequality quite so misguided. These are empirical questions that have not been answered, but Noah cannot even imagine a story in which Americans’ conceptions of their opportunities are consistent with reality.

Noah closes the book with the obligatory policy-recommendation chapter that so often proves unsatisfactory even when written by genuine policy experts. Noah wants to “soak the rich,” create a public-jobs program, “impose price controls” on colleges, “revive the labor movement,” and “elect Democratic Presidents.” This last recommendation derives from research by Princeton political scientist Larry Bartels claiming to show that the middle class and poor do better when a Democrat is in the White House — research debunked, separately, by National Review contributor Jim Manzi and political scientist James Campbell as dependent on fragile methodological specifications.

In the course of the book, Noah deftly explains the relative roles of discrimination, rising economic returns to education, increased trade and immigration, declining unionization, and public policies in contributing to rising inequality. Where the topics are narrower and more clear-cut, Noah is on firm ground in his presentation of the evidence and his conclusions about where it points. Where they involve broad questions of economic and political power, his ideological presuppositions tend to bring back one’s frustration, even as his writing remains engaging. I learned a lot from Noah’s thoughtful mini-history of the labor movement, even as I marveled at his refusal to concede that there is any legitimacy in corporate concerns about the fairness of the regime that New Deal policy created. His chapter focusing on the unique factors behind the divergence of the top 1 percent from everyone else is particularly well done, but readers who are not inclined to view the top 1 percent as the “stinking rich” will have to get past Noah’s demagogic chapter title.

It is probably too much to ask of an inequality primer that it be engaging and simultaneously transcend the ideological commitments that taint so much treatment of the topic. Inequality, after all, is an issue that inspires even Nobel laureates to make sweeping arguments that academic research does not support. At least Noah writes well. But I do hope that in five years I can refer interested parties to a second inequality primer against which The Great Divergence can be balanced.

Authors

Scott Winship

Publication: The National Review

Image Source: Jim Young / Reuters

Middle Class Wealth: It's Not as Bad as It Looks

Scott Winship — Thu, 05 Jul 2012 16:24:00 -0400

Last month, the Census Bureau released its latest data on wealth, updating earlier figures from 2005 to 2010. The numbers confirm findings from a Federal Reserve Board survey showing unprecedented declines in the net worth of the typical American household. The Census figures indicate a drop of 35 percent between 2005 and 2010 in median wealth-the wealth of the household right in the middle-from $103,000 to $67,000. The estimates from the Federal Reserve show a decline of 28 percent between 2004 and 2010. From 2007 to 2010, median net worth declined by an astonishing 39 percent in three years.

This loss of wealth surely hurt many people counting on these funds to pay for retirement, children's schooling, and other needs. Others counted on being able to sell their homes to take advantage of opportunities in other parts of the country but are now underwater on their mortgage and stuck in place. Viewed in context, however, the wealth levels of middle-class Americans are in better shape than these dramatic figures would suggest, though they have not improved markedly over several decades.

In some sense the recent drop in wealth is a mirage, because it reflects the reversal of wealth increases that themselves were illusory. For the vast majority of families, "wealth" essentially means, "home equity". And the relatively high wealth levels of the mid-2000s reflected the inflation of the housing bubble. The bursting of the bubble exposed the wealth gains as having been unreal and produced the sizable declines in net worth revealed in the government data.

How illusory were the earlier wealth gains? In 1998, home prices were right in line with the cost of rental housing by historical standards. By early 2006, they had increased 70 to 90 percent more than rents had. Correspondingly, median non-financial assets increased 41 percent from 1998 to 2007, while median financial assets rose just 1 percent. Only now are home prices approaching the historical norm again relative to rents.

The survey data allows us to compare 2010 to 1998 to evaluate what has happened to net worth if we ignore the inflation and deflation of the housing bubble. Median wealth fell by 19 percent over this period according to the Federal Reserve Board numbers, but was essentially unchanged if the Census Bureau figures are to be believed. Indeed, the Census Bureau estimates suggest that median wealth was roughly the same in 2010 and 1998 as in 1988 and 1984. The Fed survey also indicates that 2010 wealth levels were the same as in 1989.

Obviously it is disappointing that the wealth of the typical household is no higher today than it was a quarter-century ago. Still, median wealth is probably higher today than it was forty years ago. Estimates from the Fed's earlier surveys from 1962 and 1983 are not comparable to the surveys since 1989, but the increase in wealth between the two years was about as robust for the median household as for the average. That fact is useful because macroeconomic data compiled by the Fed can tell us what happened to average wealth over the long run. From 1970 to 1984, it rose by about 15 percent in inflation-adjusted terms. If median wealth rose by the same amount and then remained the same in 2010 as in 1984, then median net worth today remains 15 percent higher than its 1970 level.

It is worth not losing sight of the fact that we are wealthier today, in the wake of a catastrophic collapse in housing markets, than at the height of the "golden years" of post-war economic growth. The magnitude of short-term declines cannot be the sole criteria by which we judge how we are doing. The typical household in the top ten percent of wealth saw its net worth decline by $450,000 between 2007 and 2009, while the typical household in the bottom quarter saw no decline in wealth. We don't worry much about the massive wealth decline of the top ten percent because the median household in that rarified club was still worth well over a million dollars in 2009; conversely, we worry about the bottom quarter despite the recession not affecting its wealth because the median there was under $2,000 even in 2007. In an important sense, it is the levels of wealth that matter, at least as much as whether wealth has fallen or increased.

With this in mind, another consideration that ought to affect how we view wealth levels is the fact that none of the figures above include public and private commitments that most Americans can count on to meet their needs in old age. Research by Federal Reserve Board economists suggests that if the present value of Social Security benefits were included in the definition of wealth, median net worth for adults under age 65 in 2010 would be at least four times higher than indicated by the standard definitions of net worth used by the Census Bureau and the Fed. And this adjustment would still exclude the value that future Medicare benefits will have for most retirees, as well as the value of traditional pensions and retiree health benefits provided by employers.

Finally, it is also worth noting that changes in the median household's wealth do not necessarily reflect the median change in wealth experienced by households. That's because the median household—the one in the middle—is not the same in any two years. From 2007 to 2009, while median wealth declined by 39 percent, the median change in wealth experienced by households followed over the two years was a decline of 18 percent. Over a longer stretch such as 1984 to 2010, even if median wealth is stagnant, most people will experience wealth gains as they age.

None of this context suggests that the last few years—or the last couple of decades—have seen sizable improvements in the wealth levels of the middle class. But over the long run, things are not getting worse. Evaluating whether the similarity of wealth levels over several decades is problematic and would require a better understanding of changes in saving patterns and their causes. What matters is whether middle-class Americans are no better positioned to save today than in the past or whether they increasingly choose to consume goods and services rather than save.

Authors

Scott Winship

Image Source: CHRIS KEANE / Reuters

Inequality in America and the Incomes of the Super Rich

Scott Winship — Tue, 10 Apr 2012 11:13:00 -0400

Months since Occupy Wall Street stopped preoccupying Main Street, income concentration at the top continues to feature prominently in the news and politics. The extent to which the incomes of the super-rich dwarf those of the rest of us in "the 99 percent" is difficult to convey. Even the striking statistics on the share of income received by the top fail to provide a useful visualization of what inequality looks like in contemporary America.

Imagine that income corresponds to altitude and that we put the top one percent's poorest household on the top floor of Dubai's Burj Khalifa-the world's tallest building. Its occupation of the 160th floor, 1,900 feet up, would correspond with a pre-tax income of $600,000 in 2010.

Question: where would the richest household in the bottom 98 percent-the one at the "98th percentile"-end up? With $350,000, it only would be on the 93rd floor-three-fifths of the way up the building, and 67 floors below the household at the 99th percentile. The household at the 90th percentile would only be on the 35th floor, and the median household-the one right in the middle of the income distribution-would be on Floor 13. In other words, the gap between the median household, which had about $50,000 in 2010, and the 98th percentile is not dramatically greater than the gap between the 98th percentile and the 99th percentile. Maybe Occupiers should have organized around the banner of "the 98 percent."

But this illustration just hints at the extent of high-end inequality. Let's start over and put the household at the 99.99th percentile on the top floor. This is the household on the cusp of making the top one percent of the top one percent, which received around $10 million in 2010. Scaling things in this way, the 99th percentile drops from the top floor down to the tenth! We are the 99 percent! Even though the poorest household in the top one percent had 12 times the income of the typical American household, the poorest household in the top one percent of the top one percent had nearly 17 times that household's income. The entire bottom half of households is now crammed into the first floor.

We're just getting started though. If we put Mitt Romney's household on the top floor (2010 income: $22 million) and rescale our income ladder, the 99.99th percentile falls to floor 73-less than halfway up the building! The household at the 99th percentile is now slumming it on the fourth floor. The first floor is bursting with the entire bottom 90 percent.

The richest American in 2010 was Oracle founder and CEO Larry Ellison, who received an astonishing $550 million. If we put him on the top floor, Mitt Romney plummets out of the Burj Khalifa like Tom Cruise in the recent Mission Impossible movie-all the way to the sixth floor! The 99.99th percentile now sits on the third floor and the entire bottom 99 percent-and then some-mill around the lobby. We are the 99.99 percent?

But the remarkable conclusion to the exercise is what happens if we put Mark Zuckerberg, co-founder and CEO of Facebook on the Burj Khalifa's top floor with his likely 2012 income. Analysts estimate that this year, Zuckerberg stands to make $5 billion exercising stock options with Facebook's initial public offering. With Zuckerberg enjoying the view of the Persian Gulf from the 160th floor, poor Larry Ellison falls to floor 18-just a tenth of the way up the building. Mitt Romney has now ingloriously joined the rest of us in the lobby.

What to make of the mind-blowing extent to which incomes reach stratospheric heights in America? Conservatives often respond that high-end inequality is not as dramatic as the figures for a single year make it out to be. Economic mobility means that those who are super-rich this year are not next year. There is some merit to this point. Zuckerberg made much less than Romney last year and had less money than you did not too long ago. Romney's income will dramatically fall if he is hired for the job he is pursuing.

But the evidence suggests that the rich and the super-rich do not move around that much. According to the best study, fully 75 percent of those initially in the top one percent were still in the top five percent after nine years. Among those starting out in the top one percent of the top one percent, 82 percent stayed in the top one percent of all filers and 58 percent stayed in the top ten percent of the top one percent. In terms of the first thought experiment above, where the poorest member of the top one percent was on the top floor of the Burj Khalifa, most mobility among the very rich happens 1,750 feet above floor thirteen, where the median household sits, 150 feet off the ground. When the sky is the limit, there's lots of room to move up and down without coming near the world's tallest skyscraper.

Liberals, on the other hand, look at the picture I have sketched with revulsion. But there is little compelling or consistent evidence showing that such extreme inequality-as against, say, European levels or the lower American levels of the 1960s-actually harms the middle class or poor. This is not to say that extreme inequality benefits Americans; it may, but it could simply be tangential to the lives of most people. Will Americans be better off in 2013 if Zuckerberg does not exercise any more stock options? Did the rest of us benefit from 2007 to 2009 when the share of income received by the rich fell? If not, how do we know that we were hurt when the share they received was rising?

When the numbers are correctly measured, compensation paid to average workers has kept up with increases in the value of what they produce. The very rich receive much of their bounty in the form of capital gains, dividends, and stock options that depend on the rise and fall in the value of investments, as determined by a global economy of savers. These windfalls reflect one part financial market exuberance (irrational or not, hardly a conspiracy among the rich to take from the rest of us) and one part gains from deferred receipt of income-the cost of getting people to loan out their money when there's a risk it won't come back.

In the end, we may think these incomes are simply too high-like knowing pornography when we see it. That's a normative judgment; liberals who want to make an empirical case actually have to do so.

Authors

Scott Winship

Publication: Real Clear Markets

Assessing Income Inequality, Mobility and Opportunity

Scott Winship — Thu, 09 Feb 2012 00:00:00 -0500

Editor's note: The below is Scott Winship's testmony for the Senate Budget Committee's hearing on inequality, mobility, and opportunity. Video of Winship's testimony is available at the Senate Budget Committee website, starting at the 62:15 mark in the full hearing video.

Thank you for the opportunity to testify today on the important issues of inequality, mobility, and opportunity. I want to note at the outset that while I am a Fellow at the Brookings Institution, my testimony today is solely on my own behalf. Brookings does not normally take policy positions as an institution.

The facts of income inequality and mobility are nonpartisan. They are incomplete and subject to revision. But in order to guide policy, facts must be as accurately understood and conveyed as possible. Doing so is often difficult not only because the world is complicated, but because new evidence routinely appears to muddy the picture we previously managed to discern.

The facts also leave room for interpretation as to how problematic they are, but often times neutral facts are asserted as problems. Other facts are wrongly thought to be problematic only if they exhibit deterioration. But for something to be a problem, it does not have to be getting worse. On the other hand, just because something claimed to be a problem is growing more common over time does not demonstrate that it is really a problem. With these considerations in mind, let me briefly summarize the facts around income mobility and inequality in the United Sates.

Broadly speaking, there are three ways to think about intergenerational income mobility.^[1] We can ask whether members of one generation end up ranked similarly to the way their parents' income ranked them. If parents are in the bottom fifth of households, ranked by income, how likely is it that their children will also be in the bottom fifth when they are the same age? Note that the "bottom fifth" might be a better-off group in the future than it is today. Another way to assess mobility is to see whether children tend to end up better off than their parents in absolute terms-whether they have higher incomes than their parents (after taking into account increases in the cost of living), regardless of where they or their parents ranked against their peers. Households can experience upward mobility in this sense even if their rank is no higher than that of their parents. Finally, we can consider the extent of mobility by asking how far apart children end up given how far apart their parents were. If one parent has twice the income of another, by what factor will their children's incomes differ? This last way to approach the question of mobility combines concerns about rank and absolute income gains.

The extent of mobility-in any of these senses-may be assessed in three different ways. First, we can ask whether things have gotten worse. The Administration and others on the political left have argued that income mobility has diminished over time.^[2] However, the evidence points to very small changes since the mid-twentieth century-small enough that we do not have the technical requisites to detect them confidently or consistently.^[3] My own estimates suggest that upward mobility from poverty to the middle class among today's late twentysomethings is about what it was for the previous generation. Roughly 50 to 55 percent of those who started out poor reached the middle class by age twenty-seven.^[4] The exception to this pattern of minimal change in mobility is that upward mobility in the absolute sense of being better off than one's parents has risen. For instance, I estimate that 47 percent of late twentysomethings today have already outpaced the incomes their parents had when the kids were 15 years old. In the previous generation, just 41 percent did. In short, if the benchmark against which we judge our mobility is past levels, we do not appear to have much of a problem.

A second way to assess our current mobility levels is to compare ourselves with other nations. In the sense of how much parental income gaps translate into future child gaps, the U.S. tends to have less mobility than most European countries and other English-speaking nations. A comparison to Canada is illustrative. Consider a man who earns twice what his neighbor earns. In Canada, that man's son can be expected to earn 25 percent more than the neighbor's son. In the U.S., the figure is 60 percent.^[5]

However, evidence on earnings mobility in the sense of where parents and children rank suggests that our uniqueness lies in how ineffective we are at lifting up men who were poor as children. In other words, we have no more downward mobility from the middle than other nations, no less upward mobility from the middle, and no less downward mobility from the top. Nor do we have less upward mobility from the bottom among women. Only in terms of low upward mobility from the bottom among men does the U.S. stand out.^[6] This distinctive pattern presents complications for accounts that explain American immobility by pointing to our policies or our economic system. Further muddying the picture is the complete lack of evidence on cross-national differences in the extent to which children outpace parents in absolute terms.

As a third way of assessing the extent of mobility in America, we can use the criterion of former Supreme Court Justice Potter Stewart, who said of a very different sort of problem, "I know it when I see it." That is, apart from the question of whether things are getting worse or how we compare to other countries, we may just believe that there is not enough mobility. That is a difficult case to make if the question is one of sufficient absolute mobility; eighty percent of forty-year-olds before the recession were better off than their parents were at the same age.^[7]

However, the picture, I would argue, changes if we consider the sufficiency of upward mobility in terms of where one ranks. Research conducted by my Brookings colleagues, Julia Isaacs, Isabel Sawhill, and Ron Haskins for my former colleagues at the Pew Economic Mobility Project shows that a child starting out in the bottom fifth of incomes has only a one-in-three chance of being solidly middle class (escaping the bottom two-fifths) as an adult.^[8] She has only a 17 percent chance of ending up in the upper middle class (the top two fifths). To be sure, even failure to reach the "middle" so defined may still translate into higher living standards than the middle enjoyed in the past if there is sufficient absolute mobility. But poor children face long odds and limited opportunity if they want to be able to "grow up to be whatever they want," to use an expressed aspiration many of us, I suspect, heard from our parents.

What about income inequality? Many on the political left, including the president's Council of Economic Advisors chair, have argued that rising inequality has hurt the middle class and poor.^[9] The evidence of such an impact is exceedingly thin.^[10] In part, that is because only one kind of inequality has risen markedly. Within "the 99 percent", inequality has grown only modestly, if at all. According to research by Richard Burkhauser and his colleagues, after taking into account the value of employer-sponsored and federally provided health insurance, the person at the 90th percentile (richer than 90 percent of Americans) has about six times the household income of the person at the 10th percentile (poorer than 90 percent of Americans).^[11] In concrete terms, it is roughly the difference between having $80,000 and having $12,000 to $15,000. The six-to-one ratio held in the early 1990s, and it was probably not much lower in the mid-1980s. It is almost certainly the case that in the late 1960s the ratio was no lower than four, and it was probably closer to five.^[12] Furthermore, these figures do not attempt to make adjustments for the research finding that the cost of living has risen less for the poor and middle class than for upper-income households, which would make the increase in "90/10" inequality even smaller.^[13]

Unlike inequality within the 99 percent, inequality between the 99 percent and the top 1 percent has risen a lot (though not just in the United States).^[14] The top 1 percent received 24 percent of all income in 2007 compared with 10 percent in 1980. But there is very little evidence to suggest that the gains at the top have come at the expense of other Americans. Income concentration at the top fell quite a bit between 2007 and 2009, dropping down to 18 percent of all income received, but that hardly translated into gains for everyone else.^[15] Why should increases in income concentration necessarily translate into losses for everyone else? The size of the economic pie can grow in such a way that everyone gets a bigger slice despite the top getting a bigger share of the pie.

Consider that Mark Zuckerberg, founder of Facebook, stands to make five billion dollars cashing out stock options this year.^[16] How would the typical American end up better off if the Facebook IPO were to fall through so that Zuckerberg could not exercise his options? Or if the IPO does go through, will the typical worker be better off in 2013, because Zuckerberg will not realize the windfall he did in 2012?

American inequality levels are viscerally bracing, but one still has to make the case that they are undesirable. Consider two men, one of whom makes over 200 times the other. Should we be concerned about the poorer man? What if I told you that the two men in this example are Zuckerberg and poor Mitt Romney (who made just $22 million in 2010)?^[17] Romney made over 400 times the typical American household in 2010.^[18] Should we be concerned about that household?

What really matters is how the poor and middle class are doing and how much opportunity they have. Income growth has slowed, but research by Burkhauser and his colleagues and by Bruce Meyer and James Sullivan has shown that median household income still rose by as much as 35 or even 55 percent over the last 30 years.^[19] There were even small gains during the "lost decade" of the 2000s, prior to the Great Recession. While the gains since 2000 have more or less evaporated, that the typical household is-at worst-at the same level as in the boom years of the late 1990s is disappointing but hardly alarming. Meyer and Sullivan's research also shows that incomes at the bottom have increased robustly over the past 30 years, contrary to what official income trends show. By 2009, the household income at the 10th percentile-the household poorer than 90 percent of the others-was only about a third lower than that of the median household in 1980, after adjusting for inflation.

Just because living standards have improved does not mean that the lives of the poor are comfortable. Meyer and Sullivan find (roughly) that the household at the 10th percentile gets by on $20,000 a year, or under $1,700 a month. That is hardly luxurious. For a good working definition of "insecurity," consider the one in five household heads who reported that sometime in 2010 they worried about whether they would run out of food before they could afford to buy more.^[20] But if the circumstances of the poor are problematic that is because of poverty, not because of inequality.

The problem with most discussions of income mobility and inequality is that they do not distinguish between good and bad mobility or between good and bad inequality. A world of perfect mobility, as the researcher/writer Reihan Salam has noted, is "one in which no matter how hard you work to provide your children with every advantage in life, they're just as likely to sink to the bottom of the heap as to rise to the top."^[21] No one should find that ideal attractive; some immobility reflects behaviors we want to encourage or discourage. Similarly, in a world of perfect equality, there would be no rewards for hard work or risk. That would cripple economic growth and hurt everyone.

The issue of economic growth points to the central importance of absolute mobility-of ensuring that children do at least as well as their parents, and ideally much better. Economic growth is the best antipoverty policy we have and the best path to a prosperous middle class, as evidenced by the broad gains of the postwar boom years, to say nothing of the late 1990s. High-end inequality was flat during the former period but rising during the latter.

In the short run, the hard reality is that American consumers are wary of spending, banks wary of lending, and businesses wary of hiring. With the bursting of the housing bubble, a significant minority of the population is in the red, and their weak position is inhibiting the national confidence we need to return to pre-recession growth levels. If we had weathered a normal recession, fiscal stimulus in the form of spending or tax cuts might have been sufficient to dig out of our hole. But recessions preceded by financial crises are different. The amount of stimulus it would take to swiftly restore growth is inconceivable given the historically high deficits we face.

Thankfully, we appear to be turning a corner, so the question increasingly appears to be how to speed up the recovery rather than how to avoid a double-dip recession. The way to do so, in my view, is to facilitate private efforts to put overleveraged homeowners back in the black. That would restore consumer demand, detoxify the problematic mortgage-backed assets lingering on the books of banks, and rejuvenate lending. Importantly, it could be done in a way that did not undermine personal responsibility on the part of borrowers.

A second easy way to promote short-term growth is not to talk down the economy. Political scientist Dan Wood and his colleagues found that the degree of optimism or pessimism in presidential speeches between 1978 and 2002 had a detectable effect on consumers' sentiment about the economy and unemployment, which in turn affected economic growth.^[22] I worry that the interest from one side in framing this year's presidential and senate campaigns around overdrawn themes of inequality and diminished opportunity for the middle class will affect perceptions of the economy's strength.

In the longer term, economic growth will require that we get projected deficits under control. That means containing the growth of entitlement spending, through policies like the Wyden-Ryan Medicare reform proposal. It also means policies to promote innovation, entrepreneurship, and international competitiveness.

For some, it may be tempting to focus policy solely on economic growth to the exclusion of addressing limited upward mobility in terms of rank. But keep in mind all those kids who are unlikely to grow up to be whatever they want. Economic growth alone cannot be expected to increase upward mobility out of the bottom, which Indiana governor Mitch Daniels has called, "the crux of the American promise." Many children face challenging barriers to mobility. Two thirds of African American children experience neighborhood poverty rates the level of which only six percent of white children see.^[23] It is certainly true that many parents do a poor job promoting opportunity for their children, but children do not choose their parents. As children age, they must increasingly take responsibility for decisions that limit their future opportunities. Yet who among us remembers our adolescent years as a period of peak rationality?

Policies to promote upward mobility from the bottom could take the form of investments in education, coupled with reforms to school governance and incentives to promote accountability. They might include reforms to safety net programs to encourage independence, work, marriage, and savings. More ambitiously, child savings accounts could be seeded and family contributions matched on condition that any federal contribution must be used for higher education or a wedding, available only to young adults who avoid run-ins with the law and teen parenthood, or else forfeited back to the Treasury. Senator Sessions has supported a version of child savings accounts in the past; I believe that done well, the strategy could transform the expectations and aspirations of poor children and their parents, easily paying for itself over the long run.

Once again, thank you for the opportunity to testify this morning. I look forward to answering any questions you may have.

Footnotes

[1] For an earlier summary of economic mobility in America, see my essay, "Mobility Impaired," National Review, November 14, 2011.
[2] See, for instance, President Obama's December 6, 2011 speech in Osawatomie, Kansas.
[3] I summarize the evidence in my critique of the president's speech-see "The President's Suspect Statistics," National Review Online, January 2, 2012.
[4] The estimate depends on whether people who report household incomes less than or equal to $0 are included. "Poor" in these analyses means being in the bottom tenth of incomes; "middle class" means an income of at least half the median. Parental income is assessed at age 14 to 16, and the incomes of adult children are assessed twelve years later, at ages 26 to 28.
[5] See Miles Corak (2010), "Chasing the Same Dream, Climbing Different Ladders," Pew Economic Mobility Project (PDF).
[6] See Markus Jantti et al. (2006), "American Exceptionalism in a New Light," Institute for the Study of Labor (IZA) Discussion Paper No. 1938 (PDF).
[7] See Julia Isaacs, Isabel Sawhill, and Ron Haskins (2008), "Getting Ahead or Losing Ground," Brookings Institution for the Pew Economic Mobility Project (PDF)
[8] Ibid.
[9] See Alan Krueger's January 12, 2012 speech at the Center for American Progress (PDF).
[10] See my critique of Krueger's claims-"Closing Arguments in the Great Gatsby Curve Wonk Fight of 2012," originally published at Reihan Salam's blog, The Agenda, on National Review Online's website.
[11] These conclusions are based on two papers coauthored by Burkhauser, one with Kosali Simon (2010), "Measuring the Impact of Health Insurance on Levels and Trends in Inequality," National Bureau of Economic Research Working Paper 15811 and one with Shuaizang Feng and Stephen P. Jenkins (2009), "Using the P90/P10 Index to Measure U.S. Inequality Trends With Current Population Survey Data," Review of Income and Wealth 55(1): 166-185.
[12] Ibid and Jencks et al. (2010), "How Has Rising Economic Inequality Affected Children's Educational Outcomes?" Working Paper.
[13] Christian Broda and John Romalis (2009), "The Welfare Implications of Rising Price Dispersion," Working Paper.
[14] See the World Top Incomes Database.
[15] See the data compiled by Stephen Kaplan, building on the work of Thomas Piketty and Emmanuel Saez.
[16] Richard Waters, "Facebook chief faces tax bill of $1.5bn," Financial Times, February 3, 2012.
[17] Richard Rubin and Jesse Drucker, "Romney's 13.9% Tax Rate Shows Power of Investment Tax Preference," Bloomberg, January 25, 2012.
[18] Median household income in 2010 was $49,445. See http://www.census.gov/newsroom/releases/archives/income_wealth/cb11-157.html.
[19] Burkhauser, Larrimore, and Simon (2011), "A 'Second Opinion' on the Health of the American Middle Class," National Bureau of Economic Research Working Paper 17164 and Meyer and Sullivan (2011), "The Material Well-Being of the Poor and the Middle Class Since 1980," AEI Working Paper 2011-04 (PDF).
[20] Coleman-Jensen et al. (2011), "Statistical Supplement to Household Food Security in the United States in 2010," United States Department of Agriculture Economic Research Service.
[21] Reihan Salam, "Going Nowhere," The Daily, November 29, 2011.
[22] B. Dan Wood, Chris T. Owens, and Brandy M. Durham (2005), "Presidential Rhetoric and the Economy," Journal of Politics 67(3): 627-645.
[23] Patrick Sharkey (2009), "Neighborhoods and the Black-White Mobility Gap," Pew Economic Mobility Project.

Authors

Scott Winship

Publication: Senate Budget Committee

Stop Feeling Sorry for the Middle Class—They’re Doing Just Fine

Scott Winship — Tue, 07 Feb 2012 10:24:00 -0500

Commentators were right to point out that Mitt Romney committed a flagrant gaffe last week. Unfortunately, they were only half-correct in identifying the offense. Yes, Romney was impressively inartful in announcing that he was “not concerned about the very poor” because “we have a safety net there,” managing to upset both liberals (for his apparent insensitivity) and conservatives (for his apparent satisfaction with a welfare state they believe promotes dependency). But another objectionable part of Romney’s statement went mostly unremarked upon—namely, his declaration that his paramount concern was the economic circumstances of the middle class.

The idea that 90 or 95 percent of Americans are struggling may have achieved the status of conventional wisdom, but that doesn’t mean it’s correct. Indeed, it ultimately functions as a distraction: The attention we insist on paying to the overstated problems of the middle class come at the expense of the more critical challenges facing the poor.

Certainly a great number of Americans are in the throes of economic hardship and anxiety, and we should not be cavalier about the real crises they face: Things are significantly worse than they were before the Great Recession. But conventional accounts of how the broad middle is doing systematically overstate economic insecurity. For example, over 40 percent of those who were unemployed at the end of 2011 had been jobless for 27 weeks or more, a fraction unseen between the Great Depression and the Great Recession. But this figure is based on a statistical snapshot taken during one week. The long-term unemployed are captured in these snapshots month after month, the equivalent to churchgoers who never miss service.

In contrast, those with brief spells of joblessness cycle into and out of unemployment. They constitute a relatively small share of the unemployed at any point in time but a large share of all of those experiencing unemployment over longer periods. The briefly jobless are like occasional churchgoers who might attend a wedding here or a funeral there or who faithfully show up at Christmas and Easter. On any given Sunday, committed churchgoers dominate, but considering everyone who attended service during some year, they may be swamped by infrequent attendees. Reflecting these dynamics, over the past four years, no more than one in ten workers has experienced a spell of unemployment lasting 27 weeks. Similar claims about middle class families struggling with retirement security, debt problems, and other economic troubles are also overstated, as I’ve described in National Affairs.

Accounts of income stagnation or decline are likewise flawed. Income growth has slowed, but research by Richard Burkhauser and his colleagues and by Bruce Meyer and James Sullivan has shown that median household income still rose by as much as 35 or even 55 percent over the last 30 years. There were even small gains during the “lost decade” of the 2000s, prior to the Great Recession. While the gains since 2000 have more or less evaporated, that the typical household is—at worst—at the same level as in the boom years of the late 1990s is disappointing but hardly alarming. Accordingly, statistics show that middle class anxiety, contrary to many press reports, has been relatively muted: In mid-2010, half of Americans said their financial situation was better or no worse than before the recession, while just 16 percent said they were in “much worse shape”. These are not numbers to inspire cheers, but they do not paint a picture of a drowning middle class. Instead, they suggest focusing on a small minority who could use some help.

Meyer and Sullivan’s research also shows that incomes at the bottom have increased robustly over the past 30 years, contrary to what official income trends show. By 2009, the household income at the 10th percentile—the household poorer than 90 percent of the others—was only about a third lower than that of the median household in 1980, after adjusting for inflation. The increase was due to expanded generosity of federal cash and noncash benefits—the safety net that Romney trumpeted. Burkhauser’s research, too, shows that the federal safety net has effectively raised the living standards of the poor over time.

But there are two good reasons for focusing on the economic problems of the poor. First, just because living standards have improved does not mean that the lives of the poor are comfortable. Meyer and Sullivan find (roughly) that the household at the 10th percentile gets by on $20,000 a year, or under $1,700 a month. That is hardly luxurious. If you want a working definition of “struggle” or “insecurity,” consider for a moment the one in five household heads who reported that sometime in 2010 they worried about whether they would run out of food before they could afford to buy more.

A second reason for worrying about the poor is the restricted opportunities of low-income children. As I have argued in the pages of National Review, the U.S. is singularly ineffective at lifting poor children into the middle class as adults (poor boys, actually—we are as effective as other nations at lifting up poor girls). If you are reading this, chances are good that you are in the top two-fifths of the income distribution or can expect to be there at age forty. Just 17 percent of kids raised in the bottom fifth will make it there. Based on historical patterns, your own kids will have a 60 percent chance of doing so if they start out in the top two fifths.

Here the concern of conservatives about complacent satisfaction with the safety net—Romney’s included—is relevant. Our safety nets might simultaneously lift the poor out of destitution yet discourage the upward mobility of poor children. They may provide a floor but impose a ceiling, through inefficient incentives related to work, marriage, and saving. Furthermore, much of the left does not want to confront the important issues of family instability, criminality, and personal responsibility in limiting life chances.

At the same time, much of the right is reluctant to acknowledge the role of luck in determining one’s economic fate. Many conservatives are too ready to accept inequalities in adulthood that reflect decisions kids’ parents made and the decisions of kids themselves during the notorious period of irrationality that we call “adolescence.” We need more conservatives willing to experiment—using federal dollars—to figure out how to get more poor kids the greater skills that are prerequisites to economic independence and comfort in today’s economy.

Whether politicians ignore the poor and pander to the middle class or scare the middle class into thinking they are as bad off as the poor, the result is likely to be the same. Most of our policies will continue to be mis-targeted, as analyses by the Pew Economic Mobility Project and CFED have demonstrated. In turn, they will explode the deficit, leaving less money to promote upward mobility among the poor. And those policies that take the form of tax breaks for investing in savings or education will further price the poor out of markets for mobility-promoting assets—whether higher education or homes—by subsidizing investment the non-poor would have made even without tax incentives. Think “mortgage interest deduction”.

In fact, complacency about how well the poor are doing and scare-mongering targeted at the middle class both have the potential to reduce support for policies that would disproportionately help the poor, which would be a tragic irony for liberals who think they are promoting class solidarity by playing up the woes of middle-income Americans. Let us hope that 2012 might feature a real debate—and not only among the presidential candidates—over which economic problems merit the most attention in a nation that cannot afford to help everyone.

Authors

Scott Winship

Publication: The New Republic