Dean Baker
Truthout, December 22, 2014

The Congressional Budget Office (CBO) recently updated its analysis of changes in before-tax and after-tax family income. In some ways the new analysis showed a brighter picture for middle income families than other work highlighting stagnation. Focusing on the middle quintile of households with children, the new CBO analysis showed a gain in before-tax income of 25.2 percent from 1979. The gain in after-tax, after-transfer income was 46.7 percent. This may not amount to huge gains over a 31-year period, but it is not zero. It is worth looking at these numbers more closely.

Focusing on the before-tax side, the CBO numbers show income for the middle quintile rising from $61,200 in 1979 to $76,600 in 2010 (in 2010 dollars). By far the biggest single chunk of this increase is wages. According to CBO, wage income for this group rose by 14.3 percent over this period, a 0.4 percent annual rate. This is bit better than what we would see looking at the standard wage data. For example, the Economic Policy Institute (EPI) shows the median hourly wage rising by just 5.6 percent over this period.

It turns out that the difference can be explained entirely by differences in price indices used to deflate earnings. (There are also issues about hours worked, the average work year increased somewhat over this period as more women worked full-time jobs, but it would take a more careful analysis to see how hours changed for families in the middle quintile.) CBO used the PCE deflator, the index used to deflate consumption expenditures by households and spending by non-profit organizations. This shows a rate of inflation that averages 0.24 percentage points less than the CPI-URS used by EPI.

There are differences in the expenditures covered by the two indices, and also some minor methodological differences, but the main reason for the gap is that the PCE deflator allows for substitution. If people change their consumption patterns in response to price changes (for example, buying more cell phones and fewer land lines due to a drop in cell phone prices), the PCE deflator will increase its weight on the item people are buying more frequently (cell phones) and reduce the weight on the item people are buying less frequently (land lines). By contrast, the CPI-URS, ignore the change in purchasing patterns over the course of a year and assumes that peoples' purchases of cell phones and land lines is unchanged.

In response to Wednesday’s announcement that the United States would work to restore full diplomatic relations with Cuba, Mexico’s former ambassador to Cuba revealed that his country had pursued a strategy of provoking the Cuban government in order to gain favor with the Bush administration. Ricardo Pascoe, who served as Ambassador from 2000-2002, says that Mexican President Vicente Fox and Foreign Minister Jorge G. Castañeda worked to appease the White House by damaging Mexico’s ties with Cuba, while he fought to maintain the bilateral relationship. Pascoe says his position is now vindicated since Mexico, a natural interlocutor between the U.S. and Cuba, which could have played a large role in the two country’s negotiations, lost out to Canada as host for secret bilateral talks.

“Mexico was in the worst position of all: completely left out,” said Pascoe, also exclaiming: “They didn’t choose Mexican territory for the talks (as would have been natural in other times). But with Fox and Castañeda we lost our historic standing with the island!”

Pascoe explained that the bilateral relationship between Mexico and Cuba could not be repaired under the governments of Felipe Calderón and current President Enrique Peña Nieto. For Pascoe, this not only demonstrates the failure of Mexico’s foreign policy toward Cuba, but more generally the country’s foreign policy toward Latin America.

Alexander MainThe Hill, December 19, 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. 

There is a bizarre cult in Washington policy circles that likes to say that the markets are causing inequality, but the government can reverse the problem. E.J. Dionne treated up to an example of this cult, declaring that New York Senator Charles Schumer is a main ally. The basic story is that technology and trade have displaced large numbers of middle class workers, and thereby redistributed income upward, but government can redress this problem.

Every part of this story is wrong. Let' start with technology. Yes, computers are wonderful. Robots will displace workers. But let me tell folks a little secret. Technology has been displacing workers (i.e. costing jobs) for decades, in fact centuries. This is not new. This is not new. (I repeated that in case any pundit types are reading.) The question is the rate at which workers are being displaced. And here the news is the opposite of what we are being told. Technology is actually having less effect in recent years than in prior years because productivity growth has slowed as shown in this beautiful graph from the good people at the Bureau of Labor Statistics.

Productivity Growth (year over year change)

                                            Source: Bureau of Labor Statistics.

Productivity growth has averaged less than 1.5 percent over the last decade. This compares to more than 2.7 percent in the quarter century from 1947 to 1973. Yes, we all know stories about robots or computers making this or that job obsolete. The point is that if we bothered to look we would know many more such stories about jobs in the 1940, 1950s, and 1960s. The fact that we may not is simply a result of ignorance or laziness. And our ignorance cannot change what is true in the world.

In short, we do not have a technology story, how about a trade story? Yep, we can find low paid manufacturing workers in places like Mexico, Vietnam, and China who are costing jobs for steel workers and auto workers in the United States. The problem is that if you think this is just a natural process, then you have not been doing much thinking.

CEPR turned 15 this year! Fifteen years of speaking the economic truth to power. To celebrate, we’ve compiled a list of some of our top accomplishments over the past 15 years - accomplishments that we couldn’t have achieved without your help. Here are just a few: 

Dean Baker
Truthout, December 15, 2014