May 19, 2020
There is an endless market for pieces that tell us that the typical worker is doing quite well, in spite of all the gloom and talk we hear constantly. Michael Strain, who is actually a pretty good economist, took on the job in a column in the NYT yesterday.
The gist of Strain’s piece is that we shouldn’t be upset about inequality because the great fortunes at the top are really helping to make us all richer. He contrasts the 1990s, when inequality grew a lot, with the period from 2007 to 2017, when there was little rise in inequality. Strain notes the much slower income growth in the second period and tells us:
“I would argue that part of the answer must be that inflation-adjusted wages for typical workers grew 44 percent more in the 1990s than in the 10 years beginning in 2007. “
That 44 percent difference sounds like a big deal, but not to folks familiar with the data. According to the Economic Policy Institute, the wage of the typical worker grew roughly 2 percent in the second period. So sure, wage growth of 2.88 percent over the course of a decade is better than 2.0 percent growth over a decade, but I don’t think I would make too much of that difference.
Some of the other tricks in this one include the focus on “post-tax-and-transfer income” which Strain tells us is “the most comprehensive measure of the flow of resources available to households.” I would disagree with this assessment. A very big chunk of post-tax-and-transfer income is government payments for Medicare and Medicaid. While these programs are enormously important, the government’s payments to drug companies, medical equipment suppliers, and doctors are not the same thing as cash in people’s pockets.
With these payments now getting close to $10,000 per person, it is easy to see how they distort calculations when we are looking at median family incomes of close to $60,000 and even more so with low-income families with income less than half this level. It is also worth noting that if we paid drug companies, medical equipment suppliers, and doctors the same amount they get in other wealthy countries, the payments would be roughly half this size and we would see similar outcomes.
The expensive health care story features prominently in this claim:
“From 1990 to 2016, Congressional Budget Office data show that the median household saw inflation-adjusted market income increase by 21 percent, while post-tax-and-transfer income grew by 44 percent. Households in the bottom 20 percent saw that measure of income grow by two-thirds during this period.”
The other trick is that much of the rise in market income for the median household over this period is the increase in two-earner households. This includes the period in which women were entering the labor market in large numbers. We would expect a two-earner household to have a larger income than a one-earner household. It also has increased costs associated with items like child care and transportation.
And then we are told:
“The American dream that our children will do better than ourselves is alive and well. Using the Panel Study of Income Dynamics, a data set that tracks families over time and across generations, I calculate that inflation-adjusted household income for three-quarters of people in their 40s today is higher than their parents’ income when their parents were of similar age. Eighty-six percent of people raised in the bottom 20 percent have higher household incomes than their parents did. Around eight in 10 men in their 40s today who were raised in the bottom 20 percent earn more money in the job market than their fathers did at a similar age.”
Having a higher income than your parents did at the same age is an incredibly low bar. If we go back to the old days 1947 to 1973, when inequality was not increasing, wages and incomes were rising by about 2.0 percent annually. If we assume 25-year generations, the wage of a typical worker would be roughly 64 percent higher than their parents’ pay at the same age. In that story, almost no one would be seeing a lower income than their parents had at the same age.
There clearly were other differences between the 1947 to 1973 Golden Age and the nearly half-century of inequality we have seen in the subsequent period. Perhaps we can’t blame all of our problems on rising inequality, but if Strain is trying to make the case that we are all better off as a result, he has a long way to go.