December 18, 2014
While the Washington Post might generally be sympathetic to the idea of giving a few bread crumbs to the hungry and having shelters for the homeless, it hates the idea that middle class people should be able to enjoy a decent standard of living and share in the gains of economic growth. This explains its never ending quest to cut Social Security and Medicare along with the pensions of public sector workers. This stems from a basic philosophical principle that a dollar that is in the pocket of a middle class person is a dollar that could be in the pocket of the rich.
In keeping with this theme the Post decided to highlight a new paper by Steve Rose. (Note: Steve is a friend and a decent person, who just happens to be wrong.) Steve’s paper shows that middle income families made substantial gains in income over the last 40 years, contrary to what so many of us have been saying. To get this result, Steve includes the value of government benefits, like Social Security and Medicare, at the price the government pays. He also ignores the sharp rise in the number of workers per family and uses a different price deflator than is generally used.
To take these in turn, the typical retiree’s Social Security benefit has risen somewhat relative to the typical worker’s wages over this period because the payback structure is progressive. This means that as the typical worker’s pay has fallen relative to the average, their benefit has risen relative to their wage. To take an extreme case, a worker with lifetime average earnings of $10,000 will receive a benefit equal to roughly 90 percent of this amount, or $9,000 a year. By contrast, a worker retiring today at age 66 with average earnings of $47,800, would receive a benefit equal to 41.7 percent of their earnings or $19,500. As we get more people who look like the person earning $10,000 a year than the person with average earnings of $47,800, the typical worker’s Social Security benefit will rise relative to their lifetime earnings. (Offsetting this trend is the increase in the normal retirement age to 66 and the further increase by 2022 to 67.)
The second point is that if we count what the government pays for health care costs, every time Pfizer raises the price it charges Medicare or Medicaid for drugs, or doctors secure a rise in payments, we end up saying that beneficiaries are richer. There is no perfect way to count medical expenses, but if we paid the same amount per person for our care as other wealthy countries (less than half current levels on average), it would make people look much poorer.
Finally, we are far more likely to see two-earner families today than we did forty years ago. Ordinarily people expect to have more income from more work. Two-earner families also have additional expenses in the form of transportation, child care, and other costs associated with additional work. Rose makes no effort to account for these expenses.
There is a simple way around these problems. We can just look directly at wages. We know that middle income working age families generally are not getting Social Security or Medicare or other government benefits. (Some will now get subsidies under the Affordable Care Act.) They also don’t own any substantial amount of stock or income generating property. This means that their income is their wage.
On this measure there is no ambiguity, wages have gone nowhere since the early 1970s. (Here‘s the story for men and here‘s the story for women.) You can possibly buy yourself 0.2-0.3 percentage points annually by playing with different price indices, but you can’t escape the picture of stagnating incomes that is widely told and reflected in public attitudes.
One last point, Rose sees a picture of growing prosperity as being more consistent “with smartphones and shopping malls.” China has one quarter of the per capita income as the United States, yet it has plenty of smartphones and shopping malls. The Rose methodology would apparently find China to be a wealthy country also.
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