Friday, July 31, 2015

The Middle Class is Doing Just Fine

So says my favorite Keynesian economist, Martin Feldstein:

[T]he political debate is distorted by misleading statistics that grossly understate these gains.

For example, it is frequently said that the average household income has risen only slightly, or not at all, for the past few decades. Some U.S. Census figures seem to support that conclusion. But more accurate government statistics imply that the real incomes of those at the middle of the income distribution have increased about 50% since 1980. And a more appropriate adjustment for changes in the cost of living implies a substantially greater gain.

The Census Bureau estimates the money income that households receive from all sources and identifies the income level that divides the top and bottom halves of the distribution. This is the median household income. To compare median household incomes over time, the authorities divide these annual dollar values by the consumer price index to create annual real median household incomes.

The resulting numbers imply that the cumulative increase from 1984 through 2013 was less than 10%, equivalent to less than 0.3% per year.

Any adult who was alive in the U.S. during these three decades realizes that this number grossly understates the gains of the typical household. One indication that something is wrong with this figure is that the government also estimates that real hourly compensation of employees in the non-farm business sector rose 39% from 1985 to 2015.

The official Census estimate suffers from three important problems. For starters, it fails to recognize the changing composition of the population; the household of today is quite different from the household of 30 years ago.

Moreover, the Census Bureau’s estimate of income is too narrow, given that middle-income families have received increasing government transfers while benefiting from lower income-tax rates. Finally, the price index used by the Census Bureau fails to capture the important contributions of new products and product improvements to Americans’ standard of living.

Consider first the changing nature of households. From 1980 to 2010, the share of “households” that consisted of just a single man or woman rose from 26% to 33%, while the share that contained married couples declined from 60% to 50%.

When the nonpartisan Congressional Budget Office (CBO) conducted a detailed study of changes in household incomes from 1979 to 2011, it expanded the definition of income to include near-cash benefits like food stamps and in-kind benefits like health care. It also subtracted federal taxes, which fell from 19% of pretax income for middle-income households in 1980 to just 11.5% in 2010.

To convert annual incomes to real incomes, the CBO used the price deflator for consumer expenditures, which many believe is better for this purpose than the consumer price index. The CBO also presented a separate analysis that adjusted for household size.

With the traditional definition of money income, the CBO found that real median household income rose by just 15% from 1980 to 2010, similar to the Census Bureau’s estimate. But when they expanded the definition of income to include benefits and subtracted taxes, they found that the median household’s real income rose by 45%. Adjusting for household size boosted this gain to 53%.

And, again, even this more substantial rise probably represents a substantial underestimate of the increase in the real standard of living. The authorities arrive at their estimates by converting dollar incomes into a measure of real income by using a price index that reflects the changes in the prices of existing goods and services. But that price index does not reflect new products or improvements to existing goods and services.

Thus, if everyone’s money incomes rose by 2% from one year to the next, while the prices of all goods and services also rose by 2%, the official calculation would show no change in real incomes, even if new products and important quality improvements contributed to our well-being.

Indeed, the U.S. government does not count the value created by Internet services like Google and Facebook as income at all, because these services are not purchased.

No one knows how much such product innovations and improvements have added to our well-being. But if the gains have been worth just 1% a year, over the past 30 years that would cumulate to a gain of 35%. And combining that with the CBO estimate of a gain of about 50% would imply that the real income of the median household is up nearly 2.5% a year over the past 30 years.

So the middle class has been doing much better than the statistical pessimists assert.


  1. but....

    Debt Slaves: 7 Out Of 10 Americans Believe That Debt "Is A Necessity In Their Lives"

    Smallest quarterly wage gain on record.

    Most Americans, particularly the elderly, are paying the price for that insanity as our wages fail to keep pace with the rising cost of living, the interest income on our savings remains nil, and we are forced to liquidate principal to pay the bills. Thus the U.S. middle class standard of living perpetually erodes.
    As long as the Fed uses phony inflation data to buttress its insistence on maintaining ZIRP, these negative trends will persist, and will ultimately end badly for everybody, including stockholders."
    .. it's financial repression.
    - Lee Adler

    your favorite economist is a douche bag ala aig board member before derivative collapse...he's so prescient??

  2. The only accurate statement Feldstein makes in this essay is: "No one knows how much such product innovations and improvements have added to our well-being." To which I would add government transfers. In addition he seems to be confusing cause and effect when he talks about changing demographics, although once again no one can know.

  3. I lost internet... this may be a repeat. Oh well.

    Maybe the middle-class IS doing fine. The problem is, there aren't any of them left!

  4. I've read this post a few times. He seems to be saying the middle class is doing fine because the government borrows money to provide cash-like benefits (benefits > taxes), two people are working per household, sometimes multiple jobs per person, borrowing costs are low, manufacturing relocated to overseas for low cost imports, and lastly the natural improvements in productivity. Now only the last one is actually a good thing. All the rest are not good things for the long term and are not sustainable.