Sunday, August 23, 2009

I Have to Admit It's Getting Gotten Better

. Sunday, August 23, 2009

The increase in income inequality has led some to fret about the shrinking middle class in America. See, e.g., this piece by Krugman from a few years back. And the data actually do show that the middle class is shrinking, at least if measured by static income groups. But not because of rising income inequality:

The middle classes fell too, though by less. The sum total across the $35K to $75K categories fell by 5.4 percentage points. In other words: the net movement of households was an 11.5 percentage point gain in households above $75K and a net reduction of 11.5 percentage points in houses below $75K. So the percentage above $75K rose from 18.9% to 30.4%. That is, it increased by over 50%.

Let me repeat that: over 30% of US households in 2006 earned above $75K compared to under 20% in 1980. Over the same period, the percentage of US households earning under $35K fell from 42.8% to 36.7%. Fewer households are poor, fewer are middle class, and a hunk more are above $75K. (And in case you were wondering, those general trends hold for black and hispanic households too - with the percentage of black households under $35K falling by 10.9 percentage points and the number above $75K increasing by 8.9 percentage points, for example.)

Yes, those numbers are adjusted for inflation (2006 dollars) but they are not adjusted for the decline in household size or the real improvement of much of what we buy (i.e. a $1,000 computer in 1995 is much worse than a $1,000 computer in 2009 even though they show up as the same thing in the data). These would both understate the improvements in life quality, perhaps by quite a lot.

This gets at the eternal "absolute vs. relative gains" debate: in absolute terms, America has done very well in the past 30 years. We have more wealthy people and fewer poor and middle-income people. On the whole, the rising tide has lifted all boats. But it has lifted some boats much faster than others. Normative political economy is largely determined by which of the two is deemed more important.


Emmanuel said...

??? The data referred to by the blog you link to clearly indicates that median income fell between 2000 and 2006 for households of each and every ethnicity.

OTOH, using average income would show a rise over this period. However, this result is boosted by the presence of top earners.

Bottom line: there is no reconciling "getting better" in America with changes in median income.

Kindred Winecoff said...

Right. That's why it's important to look more closely what is happening. As the OP notes, a smaller percentage of households earn less than $75k and $35k. Meanwhile, you note that median income has gone down. How could this be?

For one thing, he's looking at a 26-year period while you're looking at a 6-year period. Median incomes across all groups increased from 1980-2006. And the greatest growth was gained by black and Hispanic households: the median for black Americans increased by about 25% in 26 years; the median for Hispanics increased by about 20%.

Also look at the column second from left: number of households. The total number increased by nearly 40% over the 26-year period. A disproportionate amount of that growth has been in the black and Hispanic segments of the population. These groups have lower incomes overall, so the demographic changes pulled the overall median down. But within-income-group comparisons -- whether in aggregate or separated by ethnicity -- show a clear and consistent upward trend. No one is poorer, everyone is richer.

That's good news.

Now, the 1980-2000 period was clearly better than the 2000-2006 period. Maybe the trend has changed and we should be less optimistic about the future. I guess time will tell.

Kindred Winecoff said...

So I modified the title of the post to reflect my last paragraph. Better?

Emmanuel said...

LOL, KW, there is no need to change anything on my behalf. My time frame is from 2000 onwards since I am more interested in recent changes in income and its distribution.

I suppose economists are more interested in the long-term picture, but in politics the time frame is shorter. Moreover, I am certain that median income has not improved in the 2000-2009 time frame.

Let's see if Obama can do better in the next few years since he's staked his political career on "are you better off now than you were x years ago?"-style rhetoric. I wish him well but let's just say I have my doubts.

randomvariable said...

I don't think it's just normative political economy that is concerned with absolute vs. relative. This misses out the contributions of Richard Wilkinson and Michael Marmot, who show that relative gains are important in determining the health of societies.

I Have to Admit It's <strike>Getting</strike> Gotten Better




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