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I have recently become very annoyed by criticism of my post on dorms vs. the CPI. All sorts of people point out that I did not do justice to David Johnston’s work on inequality. Of course that is correct, as my post had nothing to do with David Johnston’s work on inequality. It was about the CPI, nothing more or less. I don’t recall even mentioning the word ‘inequality’ in the post.

For those new to the blogosphere, let me explain how things work here. When I or any other blogger excerpts a paragraph from a book or article, we are under no obligation to give a fair and balanced review to the entire work. Rather, we are free to simply discuss whatever issue catches our fancy.

I don’t know how many times I have read people argue that real incomes haven’t risen since 1973, maybe 100 times. While reading Thoma’s blog I saw another example, and thought it would be a good opportunity to discuss this topic. I had no interest in anything else Johnston said, and I could have picked a similar quotation from a 100 other authors. My blog post did not criticize any aspect of Johnston’s research outside the specific factual claim in that paragraph. Will someone please explain how I treated him unfairly?

Here is a comment left by Johnston in my comment section:

As the author of the words that set off the post above, may I suggest that it pays to read in context and to not take a snippet out of context when drawing conclusions. How curious to read some of the words here when my book PERFECTLY LEGAL says near the start that while wages have been flat many prices have gone down, citing color televisions among other examples. But the Tax Notes column from which this one paragraph was lifted was not about that issue. The column was about the relative changes in incomes and taxes 1961 to 2006. It was about whether our tax system is creating wealth or concentrating it, whether it is undermining our society or building stability. The end point was this: the net worth of the middle third of households whose head is under 50 is a smaller net worth today than in 1983.

Since I have more comments today than I have ever had, I don’t have time to read his Tax Notes paper, nor am I an expert on the issue of income inequality. But since he asked, I decided to at least take another look at the long excerpt provided in Thoma’s blog. And look what I found:

America grew and grew during this era [1961-2006]. GDP, adjusted for inflation and increased population, was up 227 percent. But wages and fringe benefits did not grow with the economy. For most workers, they fell. Wages peaked way back in 1972-1973, were on a mostly flat trajectory for more than two decades, rose briefly in the late 1990s, and then fell sharply in the new century. … Millions are out of work, and the jobs they once held are … not coming back. And even if the Great Recession is coming to an end, we face years of jobs growing more slowly than the working-age population, which could radically transform America’s culture, work ethic, and sense of progress.

Notice the sleight of hand here. I do not specialize in this area, but almost any economist would immediately recognize the attempt to confuse the reader by comparing real GDP and real wages. You are supposed to think “Wow, the size of the pie rose 227%, but the average worker is no better off. All the gains must have gone to the fat cats, or to more people having to work.”

But comparing these two series is comparing apples and oranges. Again, I don’t know precisely how Johnston constructed his data, but since he seems to have used IRS tax data, it appears that the wages may exclude fringe benefits. One reason why wage growth has been so slow is that fringe benefits have become an increasingly large share of total compensation. Furthermore, there is the question of the proper deflator. That paragraph would only be valid if both nominal series were deflated by the same deflator. But let’s suppose nominal wages were deflated by the CPI, and NGDP was deflated by the GDP deflator. In that case real wage growth would appear lower than real GDP growth, even if they were actually the same. Again, I don’t know exactly which techniques he used, but I am certain the gap would not have been that large if comparing apples with apples.

Here’s one reason I don’t like using tax data. Suppose in 2009 a worker reports wage income of $46,000. Also suppose an investor sold stocks that had been bought in 1976 for $1 billion dollars and are now worth $3 billion. For simplicity, assume the price level also tripled during that period. In that case the government statistics would show that the worker earned $46,000 and the investor earned $2 billion. But the worker actually made more in real terms; $46,000 vs. zero for the investor (in constant 2009 dollars.) I’d say that creates a slight bias in government income distribution data.

Let’s continue:

In 2006 families worked on average about 900 more hours than families did in the 1960s and early 1970s. That is a roughly 45 percent increase in hours worked… For many, the reality is that two jobs produce the same or a smaller after-tax income than just one job did three and four decades ago. …

Again, I am not an expert here, but I am pretty sure that people like Fogel would contest this conclusion. Modern jobs are often different from jobs of yesteryear. You can’t compare working 40 hours in a coal mine to 40 hours in an office job were you can occasionally surf the web or take a coffee break. And I recall my mother doing a lot of chores back in the 1960s (like washing diapers and hanging clothes out on the clothes line) that are not done today. So part of that 900 hours is offset by fewer hours worked as homemaker. I really don’t think men work even as hard as they did when I was young. Women probably work a bit harder, but nowhere near as much as those number suggest. And remember that the numbers are skewed as people shift non-market activities into the market. Growth in child care is obviously a huge bias, but also I recall that men did all the outside work when I was young. Now people often hire others to paint houses, move furniture, cut grass, rake leaves, etc. When I was a teenager I did all of these jobs for money:

Newspaper route (3 years)

Helped people move

Painted houses

Raked leaves

Shoveled snow

Cut grass

But none of that labor was reported to the government. Now it’s hard to get teenagers to do this work for you. I am told they are too affluent now, off at summer camp or visiting Europe. Again, I think Fogel has some data on how people actually spend their time. Vacations, TV, internet, softball, etc. And I seem to recall leisure is actually rising. Maybe someone can dig up the study.

Johnston continues . . .

During the 45 years starting in 1961, payroll taxes have gone from a minor levy to almost a sixth of wages for the bottom 90 percent of American households. This $760 in income tax savings that the average taxpayer enjoyed in 2006 was taken back, and more, by the increased tax rates for Social Security and Medicare. Those rates rose from 3 percent withheld from pay in 1961 to 7.65 percent in 2006. Not all income is from wages, of course, but those higher payroll taxes wiped out the seeming reduction in the income tax and more. …

And at the top? Now, that’s a different story. The average income for the top 400 taxpayers rose over the 45 years from $13.7 million to $263.3 million. That is 19.3 times more.

Hmmm. . . The data is from the IRS. In 1961 the top rate was around 90%. So are we supposed to be surprised that in 1961 not a lot of billionaires came up to Uncle Sam and said “Look, I just earned $200 million, please take 90% of it.” When the top rate fell sharply in 1986, the reported income of the rich mysteriously soared the next year. I wonder why?

And it isn’t just people on the left; the right also distorts the numbers. One of my favorite examples involves deception on both sides (here I am no longer discussing Johnston.) The left likes to point to the huge gap in income between the top 20% and the bottom 20%. The right likes to point out that a significant share of people in the bottom 20% at one point in time, make it all the way to the top 20% a couple decades later. No s**t! That happened to me and I think I am a pretty typical upper middle class professional. Between age 18-25 I was in the bottom 20% and in recent years I have rising to the top 20%. It’s called a life cycle. So when someone like Krugman compares incomes in the different quintiles he is often just comparing the same basic type of person at different stages of their life. And when a right-winger talks about all the Horatio Algiers stories of rags to riches, he is often talking about an investment banker who picked up a few bucks in college with a part time job.

The bottom line? Don’t look to government data for answers to complex social issues like inequality. There are no secrets to be revealed. Open your eyes and look around you to see how people live. I dated a girl in college whose dad made $7,000 as a small town janitor, and was raising a family of 6 on only that income. At the same time you might have had a recent college grad working at a Border’s bookstore as a clerk for a year, also making $7,000. What do those people have in common? Nothing.

I have traveled around a lot over my life, and met people from all income classes. I have observed how people live. And it seems obvious to me that the rich are much better off than in 1973. And it also seems obvious that the middle class are singnificantly better off than in 1973. And it seems obvious that the poor are significantly better off than in 1973. Are there people worse off? Sure. Are there job classes that are worse off? Again the answer is yes. If a meatpacking plant broke the union and replaced $20/hour American-born workers with $10/hour recent immigrants from Mexico, then the workers at that plant have a lower living standard than the old workers did. But also remember that the children of those Iowa meatpacking workers often went to college and raised their living standards, and the Mexican workers often have a higher living standard than they did in Mexico. So things are getting better. Sorry for rambling on so long.

PS, I agree with Johnston that low net wealth figures are a problem. Can the left and right come together and support a Singapore-style forced saving plan, perhaps with subsidies for the poor?

PPS. One other point about the dorms. Many people missed my point. When I was at the UW the dorms were full of people from all sorts of backgrounds; my girlfriend might have shared a room with the daughter of a doctor or lawyer. Dorms are the only neighborhoods in America where all classes live together. It’s not perfect, college attendance is slightly skewed to the rich, but with a high percentage of Americans now going to college it is the best indicator we have of what people view as a “normal” lifestyle. I wasn’t joking at all in that post.

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Tags: income inequality

This entry was posted on January 05th, 2010 and is filed under Misc.. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.



