Woe is us?

by Russ Roberts on February 15, 2006

in The Hollow Middle

We’re starting a new category at Cafe Hayek—The Hollow Middle.  This category will include posts about the despair some invoke about America being hollowed out or the vanishing middle class or the have and have-not society we’re allegedly moving towards. 

Harold Meyerson’s column in today’s Washington Post kicks off the category.  His piece looks at the workers at a Ford auto plant that’s being shut down.  They are highly skilled and the main reason for the plant’s demise is partly due to Ford’s failure to update the Lincoln, assembled at the plant.  The workers actually feel pretty good about themselves and the future, refusing to see themselves as victims, but Meyersohn sings a different tune:

"It’s not, ‘Woe is us,’ " says Burkie Morris, speaking for his defiant,
reeling buddies. Maybe not for you, Burkie, but speaking for your
countrymen, who are seeing American manufacturing dismantled and the
middle torn from our economy: Woe is us.

As I pointed out earlier this week, American manufacturing is not being dismantled.  I’d like to see the evidence that the middle is being "torn from our economy."  Actually, I have no idea what it means.  But it sure sounds sinister.  It’s a code-phrase really, that supposed to remind the reader of all the horrible things allegedly happening to the American economy, the hollowing out, the death of the middle class, the rich getting richer and the poor getting poorer.  I think those horrible things are usually distortions of the data masquerading as facts.

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{ 12 comments }

Richard Gadsden February 15, 2006 at 5:25 pm

Isn't class strange?

I'm a Brit. A factory worker is working class. Indeed they're the industrial proletariat, pretty much the definitive working class. No way would they describe themselves as middle class, nor be described as such in any British publication. weird.

Oh, and the economics? You're right, obviously.

liberty February 15, 2006 at 5:59 pm

What is so strange to me is that most people who talk about a vanishing middle class can't define for you "middle class". I spoke to a friend about this and I asked her what she meant: the middle quintile? The people between half the median income and twice the median income? The people earning more than the absolute poverty line but less than 5x the absolute poverty line? Or do you mean that those who made what used to be the median income are now all earning the 4th quintile income but that its worthless in real terms and the median has fallen? What is the measure?

– in other words, when you ask whether the middle class is vanishing, when you research this, are you asking about an abolute income level or are you saying that the relative incomes are so disparate as to make the quintiles farther apart?

Do you mean that the well off people of a few decades ago had jobs that no longer exist and so now the same kind of people are poor? That would be the former, an absolute level. If this is the argument then you must ask whether incomes have really gone down and factory jobs (yes its funny that we – since Henry Ford I guess – have called factory jobs a middle class job) have not been replaced by other well paying jobs. In fact, all evidence indicates that median incomes are higher, so that clearly the jobs must have have replaced – all quintiles have higher absolute incomes at the median level.

If you think that income inequality is so great that there is obviously no middle class – only poor and rich – then you must also ask about medians of each quintile. Income quintiles defined by the division of households into 5 equally numbered sections of 20% of households each can tell us whether the majority of people are either rich or poor. If it was all rich and poor then the poorest folk in the bottom quintiles would earn very little each and have a very low median income, all the bottom quintiles would be very close to each other and low in absolute income – lower, presumably than European countries who still have a middle class – while the top quintile may even have a lower median and just a high mean income once you include those few very rich. Or if there is a large upper-class then they could have a high median, but still the lower quintiles would be very income-poor. Of course in reality, even our second quintile is higher than any other country and our bottom quintile is above the UK, Australia and depending on the given year or the purchasing power conversion, some other European states. And all quintiles are higher each year in absolute terms and the bottom three are not getting closer together so far as I know.

I have not seen any economic evidence that there is a smaller middle class, only that the rich are richer and the rest of are richer as well. In absolute terms, our middle class is larger than ever as the "poor" are better off and there are more people earning much more than the poverty line, even as the poverty line keeps going up in absolute real terms.

Matt McIntosh February 15, 2006 at 6:49 pm

Hmmm, this reminds me of something…

CART MASTER: Bring out your dead!
CUSTOMER: Here's one.
CART MASTER: Ninepence.
DEAD PERSON: I'm not dead!
CART MASTER: What?
CUSTOMER: Nothing. Here's your ninepence.
DEAD PERSON: I'm not dead!
CART MASTER: 'Ere. He says he's not dead!
CUSTOMER: Yes, he is.
DEAD PERSON: I'm not!
CART MASTER: He isn't?
CUSTOMER: Well, he will be soon. He's very ill.
DEAD PERSON: I'm getting better!
CUSTOMER: No, you're not. You'll be stone dead in a moment.
CART MASTER: Oh, I can't take him like that. It's against regulations.
DEAD PERSON: I don't want to go on the cart!
CUSTOMER: Oh, don't be such a baby.
CART MASTER: I can't take him.
DEAD PERSON: I feel fine!
CUSTOMER: Well, do us a favour.
CART MASTER: I can't.
CUSTOMER: Well, can you hang around a couple of minutes? He won't be long.
CART MASTER: No, I've got to go to the Robinsons'. They've lost nine today.
CUSTOMER: Well, when's your next round?
CART MASTER: Thursday.
DEAD PERSON: I think I'll go for a walk.
CUSTOMER: You're not fooling anyone, you know. Look. Isn't there something you can do?
DEAD PERSON: [singing] I feel happy. I feel happy.
[whomp]
CUSTOMER: Ah, thanks very much.
CART MASTER: Not at all. See you on Thursday.

(Sorry, any excuse to work in a Python reference.)

James February 16, 2006 at 12:04 am

Richard Gadsden:
"What is so strange to me is that most people who talk about a vanishing middle class can't define for you "middle class"."

Dear Richard:
In your brilliance, please define 'upper class' and 'lower class'. You will then have circumscribed the middle class, the definition of which can easily be proven to be that which does not fall under 'upper class' and 'lower class'.

Nathan February 16, 2006 at 3:30 am

James, in your brilliance, how about your put forth YOUR definition of upper and lower class? I'm particularly interested in how you define lower class.

Ivan Kirigin February 16, 2006 at 9:31 am

James,
liberty said that comment, not Richard Gadsden. I think he is right: relative definitions lack meaning, and absolute definitions are hard. I would define lower class as anyone who does not have enough to live: food, shelter, and basic medical care.

In that sense, there has been a very, very small lower class for quite some time.

Most government programs for the poor imply, in their justification, that without them, people would suffer horribly or die. If you have food, shelter, and basic medical care, then that just isn't true.

You can add in education I suppose, but education in America is, for the most part, ubiquitous, public, and bad: a whole other can of worms.

I would maintain that regardless of the divisions between middle and upper class, facilitating the optimal number of people moving from "middle" to "upper" requires policies which tend to be seen as favoring the upper class: low marginal tax rates (preferably a flat rate), low regulation on small businesses, corporate taxes only through income taxes on profit/dividends per shareholder, zero capital gains taxes.

The first means people have a higher incentive to earn more. The second means more businesses can start and flourish: good for everyone. The third is there for fun :) . The last means everyone in their right might mind will try to join the investor class, which is nothing but good.

spencer February 16, 2006 at 9:37 am

Part of the problem is using current income to define class. I would argue that what you should use is wealth or assets. If you have enough assets to be able to tell your employeer to shove it, you are in the upper class. If you have enough assets that you and your children will never have to work a day of their lives if they don't want to then you are "wealthy" But if you are dependent on you employment for your living then you are middle class.

Because the distribution of wealth or assets is much more concentrated or skewed then income, using income rather then wealth to discuss the things that our host wants to discuss makes the entire discussion misleading.

But to go back to the original debate. I was taught and believe that income inequality was a good thing becasue it was needed to generate savings and investment that led to higher standards of living. In this sense there is an "optimal" level of income inequality. For example, one of the major problem in Latin America and the reason it is not fully participating in the benefits of capitalism is that is has too much income inequality. On the other hand Japan had created institutions where they have much higher savings and invesments with an income distribution that is massively more equal then in the US.

To me the critical question is why has the sharp increase in income inquality we have experienced over the last quarter of a century not been accompanied by larger savings and investments. We have had a large increase in inequality without getting the benefits of inequality.
Why?? That is the critical issue.
Everything else is a side issue of secondary importance.

Mcwop February 16, 2006 at 9:57 am

Good post on wealth Spencer. Regarding Latin America the less wealthy classes are essentially shut out through regulation. For example, the capital requirements to start a small business are ridiculously high, say compared to more developed countries. Source: "Doing Business in 2004" published by the World Bank.

Anyhow, if one wants to define class by income here is one place to start:

http://www.taxfoundation.org/publications/show/1120.html

John Dewey February 16, 2006 at 10:08 am

Spencer,

You make some interesting arguments.

For most of us, isn't wealth simply a matter of choices we make? I have a relative who earns and spends much more than my family does. He certainly seems wealthier than me right now. But I'm fairly certain that my net worth exceeds his. So which one of us is upper class? Am I, simply because I deferred my rewards and he didn't? He's the one with the prestigious country club membership and the million dollar house (and mortgage).

About the idea of an optimal level of income inequality: Isn't the equality of opportunity much more important then the relative or absolute level of income inequality? I've read that the problem with most underdeveloped economies is the lack of property rights. Lower class are not motivated to lift themselves up because their efforts to do so will just be confiscated.

spencer February 16, 2006 at 11:16 am

John Dewey — you are right that equality of opportunity is very important. But, in turn equality of opportunity is a function of the factors determining income inequality. They are interrelated.

Yes, you are right that lack of land title hurts in Latin America. but go back one more step and ask why they have these bad laws. It clearly is not because they have capitalism as we understand it in the US.

liberty February 16, 2006 at 3:53 pm

>For example, one of the major problem in Latin America and the reason it is not fully participating in the benefits of capitalism is that is has too much income inequality.

I have yet to hear a convincing argument that income inequality causes anything, rather than simply being a result of things. As others pointed out, the problem in those countries is lack of property rights, lack of market forces, lack of opportunity, etc. (that *cause* income inequality along with poverty, low growth etc) not that income inequality is itself causing anything.

Regulations, taxation, property rights issues etc are holding down the poor. Income inquality is a result not a cause. In prosperous countries with strong market forces, the poor are much better off (perhaps 30-50 times beter off than in some impoverished nations) but the rich are also much better off and inequality may be nearly as large. But the reason for inequality in prosperous nations with market forces is that when people do well they may do very very well – and those rich may have been among the poor just a year earlier – something that is never true in the non-market countries. So both the cause and the nature of income inequality are totally different in the two types of countries.

Spencer, I don't understand your last post, are you, like me, distinguishing beteen the fact that they are not market countries and we are?

David February 16, 2006 at 7:10 pm

There was an interesting article in the LA Times about a week ago about a guy who was trained by IBM as an electric typewriter repairman in the'70's, opened his own repair shop later, and has managed to stay in business by continually figuring out new office machines to repair (faxes, computers etc.). He didn't have a college degree and didn't seem inclined to curse the fates for making IBM Selectrics obsolete in the prime of his working years. And he still repairs ~30 electric typewriters a week!

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