Which Is It?

by Don Boudreaux on November 26, 2007

in Current Affairs, Myths and Fallacies, Standard of Living

In his column appearing in today’s edition of the New York Times, Paul Krugman wonders why Americans in 2007 allegedly are deeply worried about the economy.  This worry, according to Krugman, is largely a result of the growing “inequality” during the presidency of G.W. Bush.  And it’s a worry that Americans of ten years ago didn’t suffer.  Here’s Krugman:

[T]he real explanation for the public’s pessimism is that whatever good economic news there is hasn’t translated into gains for most working Americans.

One way to drive this point home is to compare the situation for workers today with that in the late 1990s, when the country’s economic optimism was almost as remarkable as its pessimism today. For example, in the fall of 1998 almost two-thirds of Americans thought the economy was excellent or good.

The unemployment rate in 1998 was only slightly lower than the unemployment rate today. But for working Americans, everything else was different. Wages were rising, yet inflation was low, so the purchasing power of workers’ take-home pay was steadily improving. So, too, were job benefits, including the availability of health insurance. And homeownership was rising steadily.

It was, in other words, a time when Americans felt they were sharing in the country’s prosperity.

I did a double-take when I read Krugman’s description of the fate of workers during the late 1990s.  (Before I write another word, I acknowledge that I agree fully with Krugman that American workers back then gained quite nicely.)  I recall the late 1990s as a time when what I call “the myth of ’73″ really grabbed hold of the popular mind — or at least of large segments of the punditry.  This myth is the one that says that ordinary American workers (or, depending upon the version of the myth, ordinary American households) are no better off now — or pathetically little better off now — than they were in 1973.  Regular patrons of the Cafe know that Russ and I often challenge this myth.  This “myth of ’73″ continues, and Krugman is one of its most vigorous champions.

I remember also that championing this myth is no new sport for Krugman; he’s been at it for some time.  That is, he has long argued that ordinary workers are getting virtually nothing from the growing prosperity in America.

A quick Google search revealed this October 17, 2005 NYT column of his — “The Big Squeeze” — in which Krugman asserted that “it has been a generation since most American workers could count on sharing in the nation’s economic growth. America is a much richer country than it was 30 years ago, but since the early 1970′s the hourly wage of the typical worker has barely kept up with inflation.”

It is very difficult (although, I concede, not impossible) to square Krugman’s now-rosy memories of the late 1990s with this statement of just two years ago that real wages have been stagnating “since the early 1970s.”

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{ 36 comments }

Bruce November 26, 2007 at 2:27 pm

I wonder how much of the public's pessimism is just self fulfilling media prophecy. Broadcast enough stories about impending economic doom and then take a poll which – surprise – shows the public expecting impending economic doom. One thing that is odd in most of these polls is that while the public's perception of the overall economic picture is pessimistic, they continue to see their own personal financial situation much differently. I recall a poll in which about 68% saw their own financial position as good or excellent but only 33 or 34% rated the overall economy as good or excellent. I can't help but think that the disconnect is primarily due to the fact that their checkbook informs them first hand of their personal position while they must rely on a third party, the media, to inform them of the overall economic picture.

Bruce November 26, 2007 at 2:27 pm

I wonder how much of the public's pessimism is just self fulfilling media prophecy. Broadcast enough stories about impending economic doom and then take a poll which – surprise – shows the public expecting impending economic doom. One thing that is odd in most of these polls is that while the public's perception of the overall economic picture is pessimistic, they continue to see their own personal financial situation much differently. I recall a poll in which about 68% saw their own financial position as good or excellent but only 33 or 34% rated the overall economy as good or excellent. I can't help but think that the disconnect is primarily due to the fact that their checkbook informs them first hand of their personal position while they must rely on a third party, the media, to inform them of the overall economic picture.

wintercow20 November 26, 2007 at 2:39 pm

I wonder if Mr. Krugman questions whether our government ever is squeezed like the typical American? Is the typical government worker worse off today than 10 years ago? How about relative to 1973?

As for this average Joe, I pay roughly $2000 per month in income taxes and payroll taxes, another $500 per month in property taxes, and gosh knows how much more for things due to silly regulations. If even these were halved any issues I might have with higher heating costs, gasoline costs and health care costs vanish overnight. I am not being squeezed, I am being choked. Our government sure is basking in our nation's prosperity.

Paul Zrimsek November 26, 2007 at 2:48 pm

You are doubtless about to be snowed under with tortuous attempts to explain away the contradiction. Will any of their authors pause to wonder why a well-paid newspaper columnist needs a small army of volunteers to explain what he really meant?

tiger November 26, 2007 at 3:28 pm

Good God, why are we still analyzing Krugman? He's a wack job with no credibility in serious economic circles. He's bee saying the sky is falling since he started with the NYT. It's about time we just shunned this psycho and moved on.

Brad November 26, 2007 at 3:37 pm

Unbelievable. One of my friends just upgraded her cell phone to a model that has a 2 megapixel camera, Bluetooth file transfer, and a keyboard so texting is easier. Came out free from Verizon with a contract extension. And the little people aren't noticing things getting better. If Krugman says so.

And then the funniest damned thing I heard all year was a liberal friend telling me I better save up for the coming recession. (A) How is any marginal savings starting today going to make a difference, and (B) if a recession takes 2% off GDP next year, aren't we still better off at the end of the day than we were in 2005? I am soooooo lost.

spencer November 26, 2007 at 4:13 pm

It is very simple to reconcile these if you take two factors into account. One is the growth in the two income family. The second is the growth in consumer debt– including mortgage debt. Once you bring these two factors into the explanation there is no inconsistency.

George November 26, 2007 at 4:29 pm

It doesn't matter what the arguments are. In all my 50 years there has never been a year in which the press and politicians haven't stated that there is too much income inequality or that the rich are getting richer while the poor languish. This is a constant in our society – along with the unfair trading practices of foreign countries.

Some things will never change in the popular mind.

George November 26, 2007 at 4:30 pm

It doesn't matter what the arguments are. In all my 50 years there has never been a year in which the press and politicians haven't stated that there is too much income inequality or that the rich are getting richer while the poor languish. This is a constant in our society – along with the unfair trading practices of foreign countries.

Some things will never change in the popular mind.

The Dirty Mac November 26, 2007 at 4:51 pm

There was a special on punk rock on last night. It began with a description of life in the London projects in the early to mid 1970's. Some of the statements could have been posted on the financial blogs I go on as representative of life in the US in 2007.

RN November 26, 2007 at 5:15 pm

Paul Krugman is a Bates Clark Award winning economist.

You are nothing to no one.

I know who my money's on to be right.

Don Boudreaux November 26, 2007 at 5:26 pm

RN misses the point of my post. I grant that Krugman is right — but WHICH Krugman? The Krugman who says that workers were making real gains during the late 1990s or the Krugman who says that workers have made no real gains since the mid-1970s.

And to Spencer, I don't see that you square Krugman 2005 with Krugman 2007. Krugman 2005 said that workers' wages have been stagnant since the mid-1970s; Krugman 2007 says that during the late 1990s "workers’ take-home pay was steadily improving." How does the recognition of more two-income households and/or the recognition of more consumer debt square these two claims?

Python November 26, 2007 at 5:46 pm

"You are nothing to no one."

Wow. How would RN know this information? Maybe she took a "thought poll". Anyway, someone is trying to join the ranks of the Trollskys with comments like that. Well done RN. You better hurry up and put your money on PK while you still have some left.

James A. Donald November 26, 2007 at 5:53 pm

This Marx's old line about the immiseration of the proletariat. Whether 1990, 1973, or 1873, supposedly the working class is getting worse off, at best no better off. Yet strange to report, after two hundred years of getting steadily worse off, conditions have improved rather strikingly.

Whenever some issues an impressive sounding statistic "since date X the poor have been getting poorer", citing impeccably impressive authority, he needs to be belabored about the ears with two hundred years of similarly impressive statistics, with only the date X changed, starting with Marx's infamous citation of Gladstone.

Randy November 26, 2007 at 6:00 pm

What's amazing to me is that such talk isn't widely recognized as "bait".

Methinks November 26, 2007 at 6:15 pm

In all my 50 years there has never been a year in which the press and politicians haven't stated that there is too much income inequality or that the rich are getting richer while the poor languish.

Oh, I disagree, George. According to the press and almost everybody with access to the media, the rich are getting richer and the poor are getting poorer.

Methinks November 26, 2007 at 6:57 pm

James, didn't good old Marx tell us that the proletariat accounts for all the value creation but gets only a percentage of it in wages while the capitalist creates none of the value but gets a portion anyway. The capitalist is a parasite. And aren't hacks like Krugman and his ilk playing the same tired, discredited note?

Jay November 26, 2007 at 7:08 pm

You have to remember that in Krugman's delusion of economics, one is better off to take a job for $40k a year and personally pay $8k a year in health insurance rather than to take a job for $36k a year that provides you with the same health insurance as above (all other things held equal).

Gil November 26, 2007 at 9:27 pm

Strange I thought there'd be an anti-Krugman type who could point to statistics showing the gains since the 70's? Then again who's to say that there should be gains since the 70's? What if those who complain of income stagnation are simply attached to skills and work that were relatively sought after in the '70s but has decreasing relevance in last few decades? An analogy would be a man who hangs on to blacksmithing skills in the emerging era of automobiles. Whilst other blacksmiths are learning new skills to become car mechanics there are those who stick tenaciously to increasing obsolete skills wondering why their income is going down.

Jay November 26, 2007 at 9:54 pm

Gil: Don't forget one of the long standing mantras of the leftists; as long as someone "works hard", they should receive an ever increasing income.

Brad November 26, 2007 at 10:14 pm

Jay, they also have to "play by the rules".

python November 26, 2007 at 11:46 pm

Gil,

There have been dozens of threads in the past that have shown those statistical improvements that you said were lacking. So suggesting that no one has posted them could be construed as naive.

The problem is that people twist stats and refuse to accept the facts. For example, the median (or average) income stat is commonly used to suggest that incomes are not rising. It is hugely erroneous to use median income to show progress of a group.

The basic reason is that the typical median income stat is "the median of all people over the age of 18". What you get is a collection of people that changes. How can adding or removing people from a group show progress of an individual? The old line "When Shaquille O'Neal walks in the room, the average height goes up, but no one got taller."

A similar problem is when people look at a stat like the poorest 20%, and say something about their income such as "the poor are staying poor". Of course the bottom 20 percentile in 1973 is different people than now, so why compare them. So what if thhe median income of poor people is extremely flat year to year – that has nothing to do with what individual's income looks like. Young people and immigrants frequently collect very low wages.

When you look at individuals, you see that people are clearly making more real money than in the 1970s.

Take a look at http://en.wikipedia.org/wiki/Image:United_States_Income_Distribution_1967-2003.svg

You will see that the 50% percentile is fairly flat. But look at those above 50% percentile. It has been increasing steadily. And this is if you assume that people are staying in the same percentile, which obviously they are not. Most people move up in groups as they age. So, referring to the chart, assuming a person just graduating from high school in 1967. The typical graduate would most likely start near the low end of the percentiles, say 20%. Then, as people age they reach the higher percentiles now until 2007 for example. The average 50 year old is above median income in America. So if you follow a path in 1967 at the 20% percentile to above the 50% percentile in 2007 you will see a big improvement (conservatively, from about $18k to over $40k in inflation adjusted dollars.)

Have a look at the US Census immigration table (SOURCE: U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplement, 2004). Here is the median income of all immigrants by the decade that they arrived (2004 data)

1970 or earlier 40,095
1970-1979 34,474
1980-1989 28,459
1990-1999 24,690
2000-2004 21,762

From this one table you can see that as people age and/or the longer they've been in the country the more they make. The reason this stat is more relevant is that you aren't changing people as frequently. The people here since 1980 are the same people then as now.

To clarify, the median of all immigrants who arrived since 1990 would be around the 25% percentile. But those that arrived before 1980 would be near the 40% percentile. And those that arrived before 1970 would be at the 50% percentile for all Americans!!! You can expect those just making it here this year "on average" can get to Average American status in 30 years. Follow their progress on the income chart above.

Please ask questions.

The Dirty Mac November 27, 2007 at 12:09 am

"Strange I thought there'd be an anti-Krugman type who could point to statistics showing the gains since the 70's?"

I'm typing on one of those "gains" right now. Today I ate prepackaged egg whites, Vietnamese food, and tacos made with a prepackaged seasoning mix. If any of those were available to the masses during the 1970's its news to me. I am listening to a compact disc (and I'm outdated). Today, I accessed numerous news sources and all of it was free. I took my father for a cancer treatment today that was unavailable even in 2005 and the cost of gas was incidental to me (and the car had an FM radio).

Now let me go on Google and find the statistics showing the gains since the 70's. If unsuccessful, I will go to the library and ask for the microfiche.

Income comparisons are meaningless unless considered in the context of the basket of goods and services available for purchase.

The Dirty Mac November 27, 2007 at 12:13 am

Oh, and tomorrow for breakfast I will buy a buttered bagel at one of the many outlets in my town that sell such a thing. If in the mood, I will pick up a cup of Arabica coffee as well…

Objectivist November 27, 2007 at 1:51 am

Several things. One, the media overhyped the euphoria of the late 1990's, and the public believed it, just as they now believe the overhyped pessimisim of the mid 2000's. It's true that, comparing the late 1990's and the mid 2000's, now we are having higher inflation, and somewhat lower growth in GDP, employment, and wages. But thats because things go in cycles, and now we are paying for the bubble of the 1990's, with the strong dollar policy making the dollar artificially higher than it should have been, and with most of the world being depressed keeping commodities and imports cheap. Additionally, there was no housing bubble on which to pile on household debt.

These events in the 1990's were one time deals. Now the world is returning to normal, and as usual the media is complaining about it.

Methinks November 27, 2007 at 4:55 am

One thing I never understood is why U.S. income statistics never include redistributions. It seems that if we only look at gross income statistics, we are grossly overstating the net incomes of the top 20% and grossly understating the net incomes of the bottom 40%.

bruce November 27, 2007 at 8:49 am

Methinks mentions income and I think that brings up a relevent point. The statistics Krugman et al always point to when making their claims refer specifically to wages. Wages are merely one component of an overall financial picture. Krugman conveniently omits things like benefits (which is fine if we assume that providing benefits poses no cost to the employer and no value to the employee), investment income and government transfers. Further,as has been mentioned before, Krugman does not look at standards of living relative to wages. As to Krugman's resume as an economist, I am still waiting for the "inflation bomb" of the 80's (his prediction as to the results of the Reagan tax cuts) to materialize.

Randy November 27, 2007 at 11:22 am

Bruce,

It occurs to me that the issue of the higher value/cost of benefits is double edged. Not only to they ignore the value to the employee and the cost to the employer of said benefits, but they ignore the fact that government intervention on benefits is directly responsible for the effect.

Hudson November 27, 2007 at 12:55 pm

If median real incomes are growing, even before benefits and government transfers are considered, and if the median family has more working members (approaching 2), isn't the median family then SUBSTANTIALLY better off even when you subtract the cost of child-care, etc. associated with 2 working parents?

Also interested in a dissection of the inflation data because there seems to be a lot of subjectivity in the numbers that can be interpreted in different ways. Same with GDP- I mean, when governments build bridges to nowhere or bombs to use abroad, or when people spend increaing amounts on healthcare due to inefficiencies in the system, that all counts towards GDP but does it really improve anyone's quality of life on a dollar-for-dollar basis? That is, does $1 in GDP form Lockheed or Wellpoint impove my life by $1?

John Dewey November 27, 2007 at 1:44 pm

methinks: "One thing I never understood is why U.S. income statistics never include redistributions."

Employers provide the data fot the National Compensation Survey. I don't know about other employers, but I don't have any data to provide about transfers to my employees.

Households provide the data for the Current Population Survey. Households might be able to provide information about wages and transfers, but few know the cost of benefits their employer provides.

Providing comprehensive statistics about wages, benefits, and redistributions would probably be too expensive for a regular report. That's just a guess.

Methinks November 27, 2007 at 6:58 pm

John Dewey,

Thank you for the very helpful information. In fact, our company has long included benefits payments in our compensation breakdown for employees. It boggles the mind that some companies don't bother to do that.

I understand the difficulty of calculating a comprehensive report including redistributions, but that is how income is calculated in Europe. So, I doubt that such calculations are out of reach.

One could start with the value of deductions people get on their tax forms (kids, mortgages, etc.) and then list any public assistance provided to them – participation in Head Start, school lunch programs, medicare and medicaid etc. I should think the sum of those items would provide at least a clearer picture of real income.

John Dewey November 28, 2007 at 5:09 am

Methinks,

Perhaps such a measurement could be required by law, but I'm not so sure the costs to do so would be low.

Many large U.S. employers provide comprehensive statements of benefits to their employers annually or quarterly. But employees are going to remember their salaries and wages they receive each week or month, not that quarterly or annual statement.

The Current Population Survey is conducted by phone interview. IMO, the Census Bureau is doing a great job just getting an accurate estimate of wages.

The U.S. tax system is so complex that most taxpayers rely on third parties or software to determine their tax liability. I doubt that many are aware of the value of tax deductions and adjustments they receive. My guess is that few even know the amount of their earned income tax credit. They just know the amount of their tax refund.

How would those living in subsidized housing know the value of those transfers?

Would an individual know the value of federal loan guarantees?

My guess is that some wage earners will know what transfers they receive and some will not. The worst solution, IMO, would be a measurement that is correct for some wage earners and incorrect for others. Or a measurement system that captured some benefits for everyone but not all such benefits and transfers.

Methinks November 28, 2007 at 8:21 am

John Dewey,

I don't mean that the burden of figuring out the value of transfer payments should fall on the shoulders of the individual. Surely, the government has some idea of how much it's paying to its means-tested recipients. Local as well as federal governments know what income bracket you must be in to qualify and how many are taking advantage of any given program.

Without the inclusion of transfer payments, income data seems meaningless.

John Dewey November 28, 2007 at 11:07 am

Methinks,

I agree that income data without transfer payments does not show the true economic situation of most households. But I still think data about the earned money income of households is helpful. Certainly it can be misused, as I believe liberals have done.

Here's a link to an analysis of how income is different when taxes and social insurance programs are included:

Effect of Taxes and Transfers on Income and Poverty

Methinks November 28, 2007 at 4:53 pm

Thanks, John, I'll have a look at that document.

I'm sorry, I should have been more clear. I didn't mean that it's completely useless. It shows, for example, earning power. If one cuts the data further, one can match income with education level, age, gender, race, etc. What I mean is that it's useless to measure income disparity and I agree that liberals – and some conservatives – have misused it in that way.

John Dewey November 29, 2007 at 8:37 am

Ok, then, Methinks. We agree about how the data should and should not be used.

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