How's The Middle Class Doing?

Greg Mankiw believes that the Middle Class is doing better than it's perceived to be:

"Tuesday, November 18, 2008

How is the middle class doing?

Better than many people think.

HT: MR.

Now, it turns out to be a link to the same research of this earlier post of mine on Oct. 30th:

Steven Chapman on Reason has a post about what I've called median wage stagnation. He says it isn't so:

"Terry Fitzgerald, a senior economist at the Federal Reserve Bank of Minneapolis, says the answer is simple. Far from declining, he writes, "the economic compensation for work for middle Americans has risen significantly over the past 30 years."

The mistake made by the School of Gloom is looking only at wages, narrowly defined. According to the Bureau of Labor Statistics, average hourly earnings of production and nonsupervisory workers, adjusted for inflation, fell by 4 percent between 1975 and 2005. But those figures deceive because they omit fringe benefits like health insurance, pensions and paid leave, which make up a bigger share of total compensation than before. The numbers also rely on a mismeasure of inflation.

When those flaws are corrected, a very different trend leaps off the page. Median wages, says Fitzgerald, rose 28 percent between 1975 and 2005. Nor were the gains restricted to Bill Gates and Hannah Montana: Significant gains occurred in the middle as well.

The same pattern holds for households. The figures that suggest families are struggling to stay even overlook some types of income, and they don't account for the fact that households have gotten smaller on average. After accounting for such things, Fitzgerald found that "inflation-adjusted median household income for most household types increased by roughly 44 percent to 62 percent from 1976 to 2006."

So I found the study:

"Conclusion

The claim that the standard of living of middle Americans has stagnated over the past generation is common. An accompanying assertion is that virtually all income growth over the past three decades bypassed middle America and accrued almost entirely to the rich.

The findings reported here—and summarized in Chart 8—refute those claims. Careful analysis shows that the incomes of most types of middle American households have increased substantially over the past three decades. These results are consistent with recent research showing that the largest income increases occurred at the top end of the income distribution. But the outsized gains of the rich do not mean that middle America stagnated.

Why does the debate about middle America matter? Because an accurate assessment of the economic progress of middle America is a crucial input in formulating good public policy. Claims of long-term middle America stagnation—such as those quoted at the beginning of this article—are often part of a broader argument about the adverse impact of globalization, outsourcing and free trade. And middle class stagnation is used as motivation for a specific set of policies. But if middle America has not stagnated—as this analysis has shown—then this motivation for those policies is without merit.

Furthermore, if it is understood that middle America has indeed experienced substantial gains, policy priorities may change. For example, more emphasis might be placed on policies that promote continued economic growth or that target deeply rooted poverty rather than middle class stagnation. But regardless of the specific policy, policymakers and the public should base their decisions on an accurate assessment of how the economy has impacted and continues to impact people’s lives."

I agree with the idea that we should focus government on the needy, and really help them, and not on the middle class. However, we have to have a middle class that feels itself to middle class and not hovering above destitution.

I see a few debatable points in the study:

1) Overstated inflation ( I don't know, take your pick, but don't pick because you like the results )

2) There are fewer persons per household, so more for each person ( This cuts both ways. If households are smaller, it could be because people don't feel as wealthy as they used to and are having less children )

3) Expenses paid by employer, etc. ( This could actually cancel out a bit, if these expenses used to be cheaper and were paid by the employee )

It's a good paper, and Fitzgerald has more on the same subject.

Again, I agree with his emphasis, but not necessarily his conclusion, in the following sense: An emphasis that he and I both want needs to be based on how people actually see their situation. I'm not convinced studies like this can do that, however well argued.

I agree with Chapman about this:

"Thanks to American capitalism, ordinary workers and families are better off today than they were a decade or a generation ago. In the midst of scary economic times, that's a heartening fact to keep in mind. Even if certain Democrats would rather you didn't."

But not for the same reasons. It is still possible that median wage stagnation has occurred. Perhaps a libertarian can never be wrong about things always getting better.

Here's an opposing post from Oct.28th.

Another one here from Oct. 9th.

Here's one from Oct.2nd on Income Inequality:

"Via David Friedman, an article on income inequality in the U.S. by Arnold Kling and Nick Schulz. Here's the conclusion:

"Given the other forces driving inequality, there may be less that government can do than one might hope. Research from Heckman suggests that education is a relatively feeble remedy for the effects of family background (although Heckman believes that early intervention, in preschool or even before, shows promise).

In order to make a dramatic impact on inequality, government would have to do something about the fundamental causes: technology and marriage patterns. However, putting a brake on technological progress seems hardly feasible or desirable. And forcing people to select mates at random rather than on the basis of similar backgrounds and tastes seems similarly unlikely. As much as inequality may be a problem, no real solution is in sight."

This is terrible news for my vision of how we can have government take a much smaller role in our lives. My plan envisages our confining our social net to the truly needy, and then decreasing the number of truly needy through a growing economy. However, my plan necessitates that we have fewer poor people and that the middle class comes to be and feel truly middle class. My fear is that income inequality such as that described in the article will make it much harder to develop a middle class that truly feels middle class, as opposed to feeling just above being truly needy."

This is still my bottom line. If we don't have a Middle Class that feels middle class, then we will never have a substantially smaller government. This is my conclusion based on Politics and Political Economy.