Ordinary Americans Growing Wealthier Over the Long-Run

by Don Boudreaux on October 26, 2008

in Data, Myths and Fallacies, Standard of Living, The Hollow Middle

In the September 2008 issue of The Region, Terry Fitzgerald, Senior Economist at the Minneapolis Fed, has another revealing article.  In this one he explains that

after adjusting the Census Bureau data for three key factors — inflation-adjusted median household income for most household types increased by roughly 44 percent to 62 percent from 1976 to 2006. The only household types with substantially lower growth were “working-age male householder without spouse present” and “male householder with children but without spouse,” but these types constitute just 10 percent of all households. Household income inequality increased notably over this period; nonetheless, middle American households had substantial income gains.

Fitzgerald’s analysis is careful and data-rich; it can be found by clicking here, and then clicking on “Where Has All the Income Gone?”  (An earlier, related article by Fitzgerald is discussed here.)

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Martin Brock October 26, 2008 at 6:47 pm

The only household types with substantially lower growth were “working-age male householder without spouse present” and “male householder with children but without spouse,” but these types constitute just 10 percent of all households.

Right. We've been down this road countless times already. These household statistics show that median individual incomes haven't grown much at all. Most of the growth reflects increased income earned by women, and much of this growth is illusory, because we've only monetized value that women were already adding to households, as when one woman goes to work as a housekeeper and pays another women to keep her children, as opposed to both of these women keeping their own houses and children.

This division of labor presumably adds some value to households, but it doesn't add as much value as the increased household income statistics suggest, because earlier income statistics didn't measure the value of the undivided labor, because the labor then didn't earn wages, even though it did provide value to households.

The household statistics don't indicate any increase in the income of individuals over time, i.e. they don't show increased income for the same category of worker working for wages both in the past and today. They don't even show that common lawyers earn more, only that more lawyers are women.

So it's only common men experiencing wage stagnation in recent decades. That's all. And we're entering a period of intense pressure to raise rents on these common men whose wages haven't risen in decades. Why worry about that?

How many revolutions have common women ever started?

At the risk of repeating the same question, how much crime do common women commit?

Crusader October 26, 2008 at 7:48 pm

Martin, tell me about these millions of common men who will rise up in the streets for bloody revolution.

Martin Brock October 26, 2008 at 8:21 pm

I have no idea what millions of common men will do. I assert various facts about the wages of common men and pose two questions. Do dispute any of the facts? Will you answer the questions?

Crusader October 26, 2008 at 8:50 pm

Martin – I dispute all your supposed facts. In the 1930s when times were MUCH worse for the common man, we didn't have a bloody revolution.

Martin Brock October 26, 2008 at 8:59 pm

Simply writing "I dispute" is not a credible disputation. I nowhere assert any bloody revolution.

Crusader October 26, 2008 at 9:43 pm

Martin said:

"How many revolutions have common women ever started?"

Yeah Martin you are alleging a coming revolution.

Sam Grove October 26, 2008 at 10:16 pm

It doesn't matter what is shown about incomes. The question is about the how much pie WILL be available to divide up among the living after you retire.

They are not putting product, especially services, into warehouses that you can draw from when you retire.

There will be rationing.
Medical costs are a prime target.

Martin Brock October 26, 2008 at 10:22 pm

Again, if you want to address my assertions rather than your own straw man, you have that option.

Crusader October 26, 2008 at 10:50 pm

Martin – you asserted that a revolution of the common man is coming due to decreased incomes. Are you denying it?

Sam Grove October 26, 2008 at 11:01 pm

Crusader, Martin is being a little obtuse. See if you can make out his point.

muirgeo October 27, 2008 at 1:43 am

Ordinary Americans Growing Wealthier Over the Long-Run

Don Boudreaux

Wow. This theme seems important here. And yet I have to believe there is a subtext here. What is the point. Are you trying to back up John McCains claim that the fundamentals of the economy are strong? I mean in the long run we are all dead right?

It's obvious to me Cafe Hayek is finding it important to substantiate that the economy is doing good. Or at least good enough such that the middle class should stand down and shut up. Is the economy good because Republicans have been in charge? Is that the subtext? Is it good because we have little regulation? Are you trying to convince us we don't need CHANGE ?

BoscoH October 27, 2008 at 2:00 am

The world is full of evil Republicans when you're wearing Obama colored glasses. Don's point has nothing to do with Republicans. What it has to do with is how much planning and central control are optimal. Less is better.

So here's the thing George… There are a lot of things screwed up with our economy right now. There's plenty of blame to go around, from the GSE's to banks not paying attention to risk. And yet, the dollar is suddenly quite strong again. Explain why other countries that have much more regulation of their markets are not weathering this storm as well as we are. I don't get it.

Martin Brock October 27, 2008 at 6:59 am

Martin – you asserted that a revolution of the common man is coming due to decreased incomes. Are you denying it?

Your assertion of my assertion is false as a matter of fact. My assertions are on the record.

I don't assert decreased incomes. I don't assert a common "bloody revolution" of common men. I assert stagnant incomes of individual, common men over the last several decades, because Don plainly reports this fact in his post. You don't dispute this assertion specifically but claim to dispute "all" of my assertions while disputing an assertion I didn't make.

I also assert increased pressure to raise rents on common men whose wages have hardly risen in decades, and you don't dispute this assertion specifically either.

I then ask how many revolutions common women have started, and you don't address this question. I ask how much crime common women commit, and you don't address this question either.

The record is very clear. You're simply avoiding my assertions by changing the subject your own assertions.

Do you deny that the wages of common men have stagnated over the last several decades? Do you deny that Don reports this fact in his post? Do you deny that pressure to increase rents generally, and on common men specifically, is now increasing (for largely demographic reasons). These are my specific assertions do you deny them?

You're also free to address my questions, which are not assertions, but you haven't done that either.

Randy October 27, 2008 at 8:26 am

Martin,

"Do you deny that the wages of common men have stagnated over the last several decades?"

Deciphering the data takes more energy than I have, so I just rely on personal experience. My father was a mid 20th century technician and I am a late 20th century technician. In common dollars I suspect that he may have made more than I do, and its looking like he had a way better and earlier retirement than I can expect, but I'd still take my life over his. Why? Its just easier. I don't work as hard or as much and I have access to far more luxuries.

Hammer October 27, 2008 at 8:27 am

Martin, while a certain group of people, "the same category of worker" as you put it, such as "truck drivers with 4-8 years of driving experience, have likely not had a general increase in real income dollar wise, I think it is probably worth noting that Hoss he truck driver sees ever increasing wages as he moves through his career. In other words, the individual's income increases as he moves between groups, whether the group's numbers change or not.
I think this is something the statistics often hide, as they look at groups of people over time and make comparisons, ignoring the fact that those are not groups of people in the "It is a group of Amy, Jim, Dave and Tammy" sense, but rather "4 random people who have a similar range of numbers in the variables we are interested in." For instance, I am perfectly fine with the idea (hypothetical) that the bottom 10% of wage earners make the same cash post inflation that the bottom 10% made in 1950, so long as the bottom 10% is made up of highschool kids and College students who didn't get internships over the summer. Those people will be too, when in 3-8 years they get a much better job.

I suspect that is a big part of what keeps the inevitable bloody uprising pushed off, that and the automatic witholding of taxes from one's paycheck. People see themselves making more money as time goes on, even if they get taxed more.

Slocum October 27, 2008 at 8:48 am

Most of the growth reflects increased income earned by women, and much of this growth is illusory…

The increase in female labor force participation is nowhere near large enough to account for a 44-62% increase:

http://www.bls.gov/opub/ted/2001/dec/wk3/art02.htm

This is especially the case because male labor force participation has declined by 4% during that time. It really can't be the case that household incomes have risen mostly because the average household has more members working. In fact, the average household must have fewer workers because of shrinkage in the size of households.

Or did you mean that working women earn more now than in 1976? I'm sure that's true, but how on earth is that an 'illusory' gain?

muirgeo October 27, 2008 at 9:19 am

What it has to do with is how much planning and central control are optimal. Less is better.

Posted by: BoscoH

I know you don't speak for Cafe Hayek but it's good to here some one claim the point. That being that the given time period in question was one of LESS planning. I'd agree. Such a claim in favor of less planning can be backed with the "relatively good growth" of the presented finagled and tweaked numbers. Now on the"BETTER" part…. that's where we disagree. If you want to claim less is better the current situation tends to nullify the pro-ported gains Don likes to site. Particularly damming is the fact that most of those gains occurred under the Clinton years when taxes were slightly higher then they are now.

So if anyone objectively looks at the results of the last 30 years he would be smart to conclude change from the last 8 is a wise idea.

vidyohs October 27, 2008 at 9:39 am

Posted by: Martin Brock | Oct 27, 2008 6:59:34 AM

/You prove your own assertions incorrect without anyone's help. As usual by yourself changing the focus to what you wanted to say and not sticking to the facts./

"Do you deny that the wages of common men have stagnated over the last several decades?"

/Clearly the report did not mention the "common man" because no one knows what that is. The report clearly stated that males without spouses and males without spouse but with children experienced "substantially lower growth" than others. Substantially lower is not stagnation, but that is the interpretation you put on it, Martin. Lower or smaller growth is still growth./

"Do you deny that Don reports this fact in his post?"

/Absolutely, for the reason just presented./

Gary October 27, 2008 at 9:54 am

Hammer,

Don't underestimate truck drivers. I worked in the trucking business for about 10 years through high school and college and thereafter (left in '04 for greener pastures). I knew truck drivers in Albany, NY (not a particularly high cost of living area) that made $80k a year at 30 with good benefits. These were non-union guys who were willing to hustle… Some of the teamsters made even more…

Hammer October 27, 2008 at 10:10 am

Gary, who suggested we underestimate truckers? I know Hoss, which is why I know his salary increases over time.
The point was that without knowing and tracking the individuals, comparing groups over time can be extremely misleading. Hoss is moving from "Arizona truck drivers with 2-3 years experience" to "Arizona truck drivers with 4-5 years experience" and on, making ever more money as he does, while the groups themselves have a completely stagnant wage level.
That is important. If individual's wages become stagnant, it's an issue. If a group based not on individuals but types of inidividuals such as "Arizona truck drivers with 2-3 years experience" remains stagnant, that isn't a problem most likely. Really, even if those wages go down, it is not necessarily a problem, but that is off topic a bit.

Per Kurowski October 27, 2008 at 11:06 am

“working-age male householder without spouse present” and “male householder with children but without spouse,”

Yes, we sort of suspected it all the time. It is a gender issue!

Sam Grove October 27, 2008 at 12:14 pm

So if anyone objectively looks at the results of the last 30 years he would be smart to conclude change from the last 8 is a wise idea.

We don't even have to look at the last thirty, the last eight years is sufficient to inform us that bigger government is bad for us. George has proven it, with a little help from his friends.

Martin Brock October 27, 2008 at 12:30 pm

In common dollars I suspect that he may have made more than I do, and its looking like he had a way better and earlier retirement than I can expect, …

Fair enough. But I'm not sure he actually "made" (or "produced") more than you. He earned greater entitlement to retirement, but that's not the same thing.

… but I'd still take my life over his. Why? Its just easier.

That's fine with me too. I feel the same way, except that my dad was always self-employed and never earned anything like a defined benefit pension. He retired at 65 with Social Security benefits and his savings, and he hasn't earned income much by his labors since. I don't know what I'll have at 65, but I hope to be productive longer.

Martin Brock October 27, 2008 at 12:53 pm

The increase in female labor force participation is nowhere near large enough to account for a 44-62% increase:

Yes, it is. Suppose I'm a housekeeping mother, and you're a housekeeping mother. I decide to specialize in housekeeping while you specialize in child tending. I pay you to tend my child while you pay me to keep your house.

Prior to this division of labor, our combined income is zero. After the division of labor, our combined income is whatever we're paying one another. I suppose the division of labor does add value, but we can't measure the added value simply by measuring the increased household incomes. Both households see a rise in their incomes regardless of any real added value. If these incomes raise household incomes by 50%, that's enough.

In theory, I could pay you to tend your child while you pay me to keep my house. In this scenario, our household incomes still rise 50%, but nothing really changes at all.

In fact, the average household must have fewer workers because of shrinkage in the size of households.

This fact is beside the point, because the single male earner households are precisely the ones that have not seen the substantial increase. Single female earner households have seen an increase, but this fact reflects the increasing presence of women in higher earning professions and doesn't necessarily indicate any rise in the incomes of these professions.

The entry of women into these professions presumably has added value, and I'm all for it, but the jury is still out. We don't really know how much value we've added by dividing the labor of common women and lowering their fertility this way, because the value of their labor previously was measured in monetary terms only after their children grew up. This value was only reflected in the earning of women's children, the investments families made without earning any income. We'll fully discover the value of the second feminist revolution only in the coming decades.

Some incomes certainly have risen, but we're discussing median income households here.

Martin Brock October 27, 2008 at 1:25 pm

… Hoss the truck driver sees ever increasing wages as he moves through his career.

That's true. I haven't denied it.

I am perfectly fine with the idea (hypothetical) that the bottom 10% of wage earners make the same cash post inflation that the bottom 10% made in 1950 …

Well, we're discussing the bottom 50% of wage earners since 1975 or so. My point is that it's a fact. You're fine with whatever you're fine with. That's a fact too.

But productivity has risen since the 70s, and we are consuming a lot more. Some of us consume only a tiny bit more, and some of us consume a whole lot more, and stage of life doesn't account for this difference.

Factors other than expanding women's workforce participation are certainly relevant, but we can't simply interpret these median household income statistics as indicating a rise in real median household consumption. The income statistics just don't imply that as a matter of fact.

Don is playing a political game with figures here, just as he accuses others of doing.

Martin Brock October 27, 2008 at 1:42 pm

/You prove your own assertions incorrect without anyone's help. As usual by yourself changing the focus to what you wanted to say and not sticking to the facts./

I have no idea what you're talking about. What facts specifically?

/Clearly the report did not mention the "common man" because no one knows what that is./

I'll be more precise.

A "common man" belongs to a category that includes a high proportion of men around the central tendency of some statistic, as opposed to a category including a low proportion of men, i.e. the man has a characteristic that is common rather than uncommon, frequent rather than infrequent.

For example, if an "intelligence" measure has a standard deviation of 10 and a roughly Normal distribution, we might say that a person of "common intelligence" has an "intelligence" between 90 and 110, since this range includes roughly 70% of men.

We can also discuss "common penis size". Maybe that would make you happier.

/The report clearly stated that males without spouses and males without spouse but with children experienced "substantially lower growth" than others. Substantially lower is not stagnation, but that is the interpretation you put on it, Martin. Lower or smaller growth is still growth./

O.K. You may call it something else then. I don't want to step on your rhetorical toes.

Crusader October 27, 2008 at 1:48 pm

Martin – maybe some of us should be consumin' less, no?

Sam Grove October 27, 2008 at 1:53 pm

maybe some of us should be consumin' less, no?

Most of us WILL be consumin' less.

Martin Brock October 27, 2008 at 1:54 pm

From the Fitzgerald study:

"Only for male householders with children and for working-age male householders without children did income grow by substantially less. The low growth rate for these two subtypes, which comprise 10 percent of all 2006 households, is consistent with the well-established finding that average male wages increased little over this period." [my emphasis]

So "little increase" in male wages is a "well established" finding, but let's not say "stagnant", because that just wouldn't be fair.

Martin Brock October 27, 2008 at 1:56 pm

Martin – maybe some of us should be consumin' less, no?

That's a value judgment I haven't addressed. You always value things exactly as you value them. So be it.

Crusader October 27, 2008 at 2:05 pm

Martin, objectively speaking if someone is in $20-$30K credit card debt because they bought plasma TVs, stereos, etc… they shouldn't have right? People like that brought down the credit system and caused the need for the bailout. Americans simply consume too much – look at the obesity epidemic.

Martin Brock October 27, 2008 at 2:09 pm

Yes, we sort of suspected it all the time. It is a gender issue!

Men are screwed … but not nearly enough.

Martin Brock October 27, 2008 at 2:24 pm

Martin, objectively speaking if someone is in $20-$30K credit card debt because they bought plasma TVs, stereos, etc… they shouldn't have right?

If you want to lend them the money, it's fine with me. If they don't pay, you lose. That's fine with me too. Aside from home mortgages and maybe cars, I personally oppose any consumption on credit. That's just me.

People like that brought down the credit system and caused the need for the bailout.

No. People who bought multi-million dollar securities and paid too much for them "brought down" the credit system, but there was no need for a bailout. Purchasers of these securities should have lost money, even if that meant a cut in your pension benefits, assuming that you're entitled to pension benefits.

If the "credit freeze" really threatened a broader economic meltdown, because our businesses lack sufficient earnings to finance their own operations, we're in deep shit.

If the businesses lack these earnings because they've sold entitlement to their revenue (by selling bonds) without growing their earnings enough to absorb the finance cost, then we're simply starting down the road toward even more massive taxpayer subsidies for wealthy people, primarily the baby bust retirees.

Americans simply consume too much – look at the obesity epidemic.

I suppose so, but credit is an agreement between a lender and a borrower. Establishing the credit-worthiness of the borrower is the lender's job.

Crusader October 27, 2008 at 2:28 pm

Martin -

Many businesses rely on short-term loans just to make payroll. Why would you deny them those loans(government enforced)? It's all about rents anyways…

Martin Brock October 27, 2008 at 2:53 pm

I don't understand why a fundamentally profitable business can't get a short-term loan to make payroll, and I also don't understand why profitable businesses continually need short-term credit to make payroll.

Government enforcing the obligations of borrowers is fine, unless debts can't reasonably be paid, assuming that factors are free to reorganize.

Suppose you own a company producing widgets.

1) You sell a bond secured by the company's earnings.

2) With the proceeds of this sale, you buy yourself a million dollar vacation on a space station built by slave labor in a Communist Party dictatorship.

So far, so fair, right?

I'm your employee, and I decide that you aren't paying me enough.

3) I and some other employees of your company and others decide to reorganize. We join or form another company producing competitive widgets.

4) This other company has no obligation to repay any bond financing anyone's vacation on Mir, so its costs are lower, and it sells widgets for a lower price.

5) Your sales fall, so you can't make your bond payment.

6) You declare bankruptcy, and your bondholder takes everything you have left in the company, though it's not what you borrowed from him.

That's all fine with me. Every move in the game is fine with me, except maybe the second one. If the game rules out move 3), through "patents" or anything similar, I'm tempted to reorganize into Hugo Chavez's company, because at least he's honest about his fascism. ¿Comprende?

Kevin October 27, 2008 at 3:18 pm

Sorry to do this, but the "Neither the Collective" thread is no longer accepting my posts. My response to Sam's post as of 10/27 1:56:34:

Sam what that tells me is that the individual will invest productively until, and only until, he has enough to fund the state-approved level of consumption for the rest of his life. The problem of incentive is still there at the margin, because he will take risk only until he has enough to retire on, at which point he will stop both working and investing productively because he will have incentive to do neither. I use the words "investing productively" because upon retirement he will still do what's necessary to appear to have made an "investment" and avoid the tax – in reality it would be something with close to zero risk that conforms to the state definition of investment.

It just seems to me that nobody would have any incentive to invest (real investment – not riskless holdings for consumption tax avoidance) once the retirement threshold level of consumption could be funded. In fact, the incentive is actually to take your money out of productive but risky endeavors and funnel it into riskless holdings because you might lose if it were left in a real investment and you could never consume it if it made money. Heads I lose tails the state wins? Not doing that… I'd rather not take any risk and produce zero. This doesn't seem very efficient at all, unless that threshold is so high that it is not operative, and in that case why do it? And this is presuming an agnostic view of the concept of a state-approved level of consumption.

I know Martin suggests this as a means of creating a financially weak government, and I do agree that it would have that effect, but it seems like a very expensive way to do so.

Martin Brock October 27, 2008 at 3:47 pm

Sam what that tells me is that the individual will invest productively until, and only until, he has enough to fund the state-approved level of consumption for the rest of his life.

I just think that's absurd. Is that what Bill Gates did? Do Olympic athletes strive only for consumption? If so, most of them are incredible idiots, because even if they win silver or gold, most will never remotely earn anything like a "profit" on their incredibly laborious training, except insofar as the accomplishment is its own reward.

The victory obviously is its own reward. That a few people earn endorsement contracts and the like is no proof to the contrary. Even athletes who don't win a medal remember for the rest of their lives that they made it to the Olympics.

The idea that investors invest only to defer and to multiply consumption is manifestly false. We invest for all sorts of reasons that have nothing to do with our personal consumption. We want to create and nurture something, as when we raise children. We want to express ourselves. We want to be king (or queen) of the hill, the alpha male (or female). These impulses are natural and precede anything like monetary entitlements to consume by a billion of years.

The people who believe that we invest only to defer and multiply consumption are largely people who never become very wealthy. The wealthiest people know it isn't true.

Kevin October 27, 2008 at 4:00 pm

Hmm. If I make money, the state keeps it all but I get the good feeling of having created and nourished something. If I lose money, it's all for my account and I can't retire. I don't think people would go for this proposition. You do. Whose argument is absurd again?

Olympic athletes don't do it to consume, but there aren't 6.6 billion of them. They're quite uncommon, actually. And I'll agree that for very wealthy people, the victory is its own reward, but the lower their wealth falls, the more consumption matters to them. Anecdotally, I know of very wealthy people for whom victory became less important than ensuring a lifetime of consumption as their wealth declined. The dynamic you seem to be relying on here, in my opinion, doesn't work at all on the way up the wealth ladder (see my first paragraph and call it absurd if you want – I don't agree) and is subject to gambler's ruin on the way down.

Martin Brock October 27, 2008 at 4:10 pm

It just seems to me that nobody would have any incentive to invest (real investment – not riskless holdings for consumption tax avoidance) once the retirement threshold level of consumption could be funded.

Maybe it seems this way to you, so you wouldn't invest further. You probably didn't compete in the Olympics either.

In fact, the incentive is actually to take your money out of productive but risky endeavors and funnel it into riskless holdings because you might lose if it were left in a real investment and you could never consume it if it made money.

Here again, you simply reduce "incentive" to "consumption in retirement" as though no other incentive could possibly exist.

There are no riskless holdings, other than durable commodities like precious metals and entitlements to tax revenue. Entitlements to tax revenue are destructive regardless. Needless to say, we should get rid of those.

Your thinking seems completely backward to me. If I've earn twice what I may consume in retirement, I'll invest more freely, not less so, and not earning so much may be practically unavoidable, because a successful entrepreneur doesn't decide the extent of his own success. The market decides.

Would a successful entrepreneur with a growing business simply divest himself of the business and forgo all of the future wealth his business generates, all of the entitlement to direct the further growth of the business, all of the satisfaction of seeing the business prosper under his stewardship, all of the wealth he might reinvest in some new venture or a charitable foundation or whatever, just to protect a given level of consumption in retirement?

Entrepreneurs can do so now, can't they? Why don't they? They gamble their retirement security for a bit more entitlement to consume? They risk poverty in their old age to gamble on retirement in a private castle? That's your theory?

Maybe some entrepreneurs are so risk averse or so foolhardy, but others aren't, and the others are neither in short supply nor focused exclusively on consumption.

Martin Brock October 27, 2008 at 4:17 pm

Hmm. If I make money, the state keeps it all but I get the good feeling of having created and nourished something.

No. The state keeps nothing you choose to reinvest. Paying a progressive consumption tax at a high marginal rate is completely voluntary, and I don't think many people would choose to pay it. That's the whole point.

If I lose money, it's all for my account and I can't retire.

No. You may accumulate unlimited wealth in the investment account, and you may consume as much of it in retirement as at any other time.

I don't think people would go for this proposition. You do. Whose argument is absurd again?

I don't think people would go for your absurd proposition either. It happens not to be my proposition.

Charlie October 27, 2008 at 4:47 pm

I'd like to thank Martin for the pointer to women's wages and hours. When perusing article Don linked to, I found another article by Fitzgerald (http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4051) that confirms in more detail Martin's point. Fitzgerald breaks down the change in income from the median quintile family with two children and shows of the 44% increase in income only 14% is due to increase in male income. Of that 5% is due to increased hours and 9% is due to increased wages.

I am somewhat astounded by that. That's a growth rate of .03% a year. How can it be that low? Adding non-monetary compensation gets it to just about .05%. How can the increase in marginal product of labor for males be so low? And, if this is how it looks for the middle quintile male, in an age known for skill-based technological change, is it much worse for the lower quintile men?

Charlie

Martin Brock October 27, 2008 at 4:55 pm

Here are the stats on the increase in household income for single male householders over the thirty year period between 1976 and 2006.

with children: 3%

childless householder 15–29: 30%

childless householder aged 30–59: 15%

childless householder aged 60 or over: 74%

For single males with children, median income hasn't increased in 30 years. For "working age" men (???) without children, the increase is half a percent per year. For "young men" (no children yet?), the increase is one percent per year.

Single female household income increased more, but these incomes started from a lower level. Presumably, the single female households, though they saw larger income increases, still have lower incomes than the single male households that increased less. Married couple households grew a lot like the single female households.

Kevin October 27, 2008 at 5:02 pm

Martin you ask why entrepreneurs don't divest now even though they can. You hold up Bill Gates as an example. Nobody can possibly know why they don't, but we do know that there is no state-approved maximum level of consumption involved in their decisions. We also can't know that any of them wouldn't divest if there were such a thing. I think it's reasonable to say that such a thing would give people an incentive to divest.

Ok I'll agree that you didn't propose a system under which the state keeps all the gains. I'll restate the paragraph in a more linguistically precise way since we're doing that.

Hmm. If I make money, the state keeps it all if I ever want to pull it out of my account and consume but I get the good feeling of having created and nourished something. If I lose money, it's all for my account and I can't retire now, which I could do if I didn't make this investment. I don't think people would go for this proposition. You do. Whose argument is absurd again?

You say the state keeps nothing I reinvest, but if I can never consume it I have given it to someone, so it's still as good as gone as far as I'm concerned. And if the investment loses money, it's for my account and I can't fund the consumption I could have if I hadn't made the investment. That sounds a lot like heads [someone other than me] wins tails I lose.

You also point out that there are no riskless holdings other than whatever you said were riskless. If your point is just that nothing is riskless other than what you said was riskless, then fine, but investment would be moved into whatever the lowest risk instruments are. Wow now we've split another hair.

Look, I'll agree that people who have accumulated wealth in excess of what they'd need to retire usually stop trying to consume and start trying to self-actualize. I'll also agree that people, especially entrepreneurs, frequently find themselves in short order far wealthier than they would ever need to be to retire. I'll also agree that those people would invest more freely, not less. I've already agreed that this would result in a financially weak state (which is maybe why you keep pointing out that the state doesn't keep my invested wealth even though I can't consume it). But my observations of human behavior tell me that they seek security first and usually pay top dollar for it. That's why I think that in the system you propose, when a person who has just enough to retire is faced with the decision to invest and expose themselves to good feelings and self-actualization on the upside versus losing the ability to consume and retire on the downside, that person wouldn't make the investment, whether he was on his way up or down the wealth ladder.

Martin Brock October 27, 2008 at 5:13 pm

Charlie,

There are other factors, like an influx of low income immigrants during this period, but these figures do substantiate assertions that real income hasn't risen much for people "in the middle" since the seventies, while real income at higher percentiles has risen a lot.

Dr. Russ (the education peddler) will tell you that it's about the increasing value of specialized education. The people in the middle just don't reflect as much of this growing productivity from specialized education, because they aren't among the more educated. I'm sure this theory explains some of the trend, but I'm skeptical that it explains all or even most of the trend.

Cato has a study, that MesaEconomist linked a while back (if memory serves), showing that the incomes of Federal employees also rose much faster than other incomes in this period. So Federal employees are better educated and more productive or just more entitled? Corporate officers are a lot like Federal employees and not only in terms of their educational credentials.

I say it's entitlement to productivity gains from education of various sorts, but the educated aren't necessarily the entitled.

Martin Brock October 27, 2008 at 6:04 pm

… we do know that there is no state-approved maximum level of consumption involved in their decisions.

True. It's unprecedented. Reforms are like that. A southern economy without lots of slaves was unprecedented once too.

… such a thing would give people an incentive to divest.

Some people would divest more than others, but I don't at all believe that everyone would divest or even that very wealthy people would divest.

I wouldn't divest. I'd invest more. I can use an unlimited, tax deferred savings allowance at this time. The 15% I'm allowed is less than I'll use. I couldn't save as much earlier, because I had three children to support. A childless person, all else equal, could save then and now.

The wealthiest people wouldn't divest, because they like being the wealthiest people. More wealthy people would still consume more than less wealthy people.

I just don't know how would divest, except the very risk averse people you discussed, but I expect these people to divest anyway. Again, if I'm so risk averse, I won't gamble my retirement security on the slim prospect of a more luxurious retirement either.

Hmm. If I make money, the state keeps it all if I ever want to pull it out of my account and consume but I get the good feeling of having created and nourished something.

That's a little closer to the mark, but the state doesn't keep all of it. The state keeps a lot of it only if you pull a whole lot of it out in one year to consume a whole lot in that year. So don't do that.

And if the investment loses money, it's for my account and I can't fund the consumption I could have if I hadn't made the investment.

So hold gold. I don't care. Someone else will invest. I will for example. That's your choice.

That sounds a lot like heads [someone other than me] wins tails I lose.

You "lose" only if you value consumption, the whole consumption and nothing but consumption. Plenty of people value other things.

I'd like to offer my kids opportunity for example. I'd like to offer my sister and friends opportunity too. I'd happily do these things rather than buy a castle. I'd do these things long before buying a castle. I'd feel like shit if I bought a castle instead, unless the castle is a public attraction employing my kids for example.

If you value only consumption, you may behave just as you describe. You'll then become poorer than other people who do choose to invest. That's fine.

You seem to say, "I don't want to give Joe a job, even if he'll add value to my organization and increase my profits, because Joe is a winner in this scenario, and I don't want anyone else winning with my money." Real wealthy people just can't think this way. It's not possible.

You also point out that there are no riskless holdings other than whatever you said were riskless.

Durable commodities and entitlement to tax revenue.

If your point is just that nothing is
riskless other than what you said was riskless, then fine, but investment would be moved into whatever the lowest risk instruments are.

No. It wouldn't. Lots of people just aren't as risk averse or as focused on consumption as you are. I'd employ my children, if they really needed the opportunity, even if I knew that the venture would fail and cost me any hope of retirement. I really would.

I'd just give 'em the money if it came to that, but I'd try to employ them profitably first. Same goes for my sisters and their children, my fiancee and her children, even for some of my friends. Wouldn't you? Seriously?

Look, I'll agree that people who have accumulated wealth in excess of what they'd need to retire usually stop trying to consume and start trying to self-actualize.

Right. But I'd go further. Many people who become wealthy start by trying to self-actualize. They're the luckiest ones and also the ones who'll never divest. I wish I were one of them.

I'll also agree that people, especially entrepreneurs, frequently find themselves in short order far wealthier than they would ever need to be to retire. I'll also agree that those people would invest more freely, not less. I've already agreed that this would result in a financially weak state …

All good so far.

But my observations of human behavior tell me that they seek security first and usually pay top dollar for it.

Some people do. We're paying too much for security, or the illusion of security, now.

On the other hand, I'm a skydiver. How secure do you think I feel when I jump? The walk to the door is terrifying at first. Truly it is. And by "at first", I mean the first fifty times. The thrill of flying around like Superman is unparalleled though.

What prevents me taking great financial risks now is also that I have dependent children, so that's a two edged sword.

… when a person who has just enough to retire is faced with the decision to invest and expose themselves to good feelings and self-actualization on the upside versus losing the ability to consume and retire on the downside, that person wouldn't make the investment, …

O.K. But people accumulating wealth face this dilemma now. So how does the progressive consumption tax change things? People won't be so risk averse if they can risk their secure retirement in a nice, suburban house in Florida on the long shot at retirement in a chateau in Venice?

If what you're saying is true, there are no very rich people, because everyone becoming rich is afraid to become too rich.

Kevin October 27, 2008 at 7:03 pm

A southern economy without lots of slaves was unprecedented once too.

Ok. So was every unprecedented bad reform. No point in arguing this.

I just don't know how [sic] would divest, except the very risk averse people you discussed

You can say such people are very risk averse, but that's obviously a value judgment. I'm pretty sure their population versus the population of people who would like the value of their investments to be consumed by others and not themselves (with their own consumption at risk on the downside) is the whole of our disagreement here. And that is a speculative judgment.

You "lose" only if you value consumption, the whole consumption and nothing but consumption.

I lose if the investment loses money. This is the second time you posted something like that. Heads is if the investment makes money. Tails is if the investment loses money. The losses in my investment account are mine to bear, right?

You then go on to put words in my mouth (granted, you cop to doing it) about giving Joe a job and say that real wealthy people don't think that way. Real wealthy people (not that we're likely to agree on who they are or how they behave) don't make investments to give Joe a job. They make investments to make money for themselves, and no they don't begrudge Joe his job. I wouldn't begrudge Joe his job in a consumption tax world either, but the incentive is for me never to invest in the company to give him the job in the first place. But that's of course because I don't want to risk my retirement to give Joe a job. Sounds like others do.

Some people do. We're paying too much for security, or the illusion of security, now.

Right. That's one reason I'm surprised at your belief that many humans will throw all that out and risk their own security so that others can consume.

The thrill of flying around like Superman is unparalleled though.

Skydiving sounds like fun. Not being sarcastic.

But people accumulating wealth face this dilemma now.

No they don't. They could consume their gains if they wanted to.

So how does the progressive consumption tax change things?

It makes them unable to consume their gains.

If what you're saying is true, there are no very rich people, because everyone becoming rich is afraid to become too rich.

That's a silly non sequitur and I'm pretty sure you know it. Nobody faces this dilemma right now, and we can't know what they would do if they did. You maybe want to speculate about what others would do. You could even make a well educated guess about what you would do, but nobody can know. I've argued the incentive is to reduce risk at the margin and conceded that wealthy people would let the house money ride, but I hold that their investment would be subject to a gambler's ruin if their wealth fell to the point where they could barely retire.

It's nice to have a confined disagreement, and I appreciate your willingness to discuss a challenge to your ideas here without changing the subject. I haven't offered any alternatives or any original thought of my own on this matter. Most people would have argued how bad some straw man is and called me names.

Crusader October 27, 2008 at 9:55 pm

Even if your figures are correct, nothing in there is close to the desperate picture that other countries faced when they had bloody revolutions/civil wars. Just look at Russia c. 1917. They were 100x worse. Do you ever see us having those conditions?

Sam Grove October 27, 2008 at 10:15 pm

Well, so far, leaving out questions about how progressive and what rate, a consumption tax appears to be better than a production tax.

It would encourages investment and savings and deter extravagant consumption, which doesn't affect most of us all that much.

I don't see how giving anyone the power to enact and enforce a consumption tax will relieve us of their desire and ability to tax us more. IOW, the political class will resist strongly any reform that empowers the people to limit the taxes collected bey the mere expedient of deciding to consume less, as will most progressives, who have no problem with the political class extracting our product.

Bill K. October 27, 2008 at 10:33 pm

Martin, earlier you said, "The people who believe that we invest only to defer and multiply consumption are largely people who never become very wealthy. The wealthiest people know it isn't true.
As a point of logic, don't you yourself have to be a member of the "wealthiest people" to make that 2nd statement so assuredly? Aren't both consumption and investment good things in their own ways? One creates demand for products and boosts the need for workers, the other boosts productivity and the ability of companies to organize and hire?

I am new to the concept of a progressive consumption tax, so bear with me. I think I understand your argument to be that a progressive consumption tax is better than a progressive income tax in that the consumption tax encourages investment because it does not tax it till withdrawal. But why is consumption a bad thing to be punished by taxation compared to investment? Why interfere with an individual's freedom to choose what to do with his income? Are you saying that individual consumption imposes negative externalities on the rest of society such that consumption per se needs to be discouraged?

Kevin October 27, 2008 at 10:35 pm

Sam I continue to agree that a consumption tax of almost any sort would weaken the state. That's reason number one why we will never know what any of its other effects would be.

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