On America’s Middle Class

by Don Boudreaux on July 2, 2009

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

In two of his Forbes columns, NYU's Thomas Cooley challenges – with data – the widespread misunderstanding that America's middle-class is disappearing.  Here, and then here.

(HT Greg Mankiw)  The Terry Fitzgerald work that Cooley mentions was mentioned here at the Cafe a while back.

I raise, though, one objection to Cooley's otherwise excellent columns.  In the first one linked to above, he credits technological change for the explosive economic growth of the 1980s and 1990s.  I don't accept technology as an explanation.  A rush of technology has causes; it must be explained.  Technology is not a variable exogenous to economic growth.

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{ 37 comments }

James July 2, 2009 at 5:55 pm

Technology certainly played a part in the explosion of the "upper" class in the last decade. Never before has it been easier to become a millionaire. Certainly much of this newly created wealth has opened up doors for the non-entrepreneur middle class as well.

But, you're right. Look at why nearly every major internet company in the world is American. It's not some happy coincidence. The incentives that Obama and his party are trying so hard to strip away are precisely the reason such amazing wealth creation is possible.

Sam Grove July 2, 2009 at 6:25 pm

With my apologies, there were no active threads appropriate to post this off topic but nonetheless excellent lecture by Terence Kealey on science as a public vs private good.

muirgeo July 2, 2009 at 6:42 pm

I'm sure the middle class will be glad to hear from the Ivory Tower that all is well… they just need to look at the data properly.

Yeah… it's just a coincidence that share of total income trends just happens to correlate with the two major economic crashes. And to boot just an anomaly that our economy hummed along so well in between when the differences in income share was low.

And then he ends his most recent article with this:

"Admittedly, this is a touchy issue to write about at a time when millions of our fellow citizens are out of work and facing dim prospects for the future."

Thomas F. Cooley

I am surprised he's not arguing the unemployment figure data. Apparently the middle class is doing just fine with ~10% unemployment. Incredulous!

This is an example of a man re-interpreting the data to fit his pre-conceived ideology and nothing more.

S Andrews July 2, 2009 at 6:49 pm

bonehead heckler posts again…

Yeah the planners in ivory tower told us that unemployment will cross 8% if the stimulus wasn't passed without giving it much thought. Nothing incredulous about it.

Bill Stepp July 2, 2009 at 7:04 pm

Technology also requires capital and commercialization, neither one of which are explained by technology-as-economic-growth-be-all-and-end-all (sorry).
Intellectual "property" is also sometimes similarly credited for economic growth, but of course a patent in a drawer is useless without an actual business, capital, employees, a business plan, good execution, and sometimes just plain dumb luck.
The majority of patents are economically useless, except if you're a patent lawyer.

S Andrews July 2, 2009 at 7:21 pm

Let's stick to the topic:

Look at why nearly every major internet company in the world is American. It's not some happy coincidence.

Information technology, unlike all the others, is dependent on the language medium. English, being the most popular lingua-franca of the world, has a natural advantage in this area – which is another reason why Hollywood always had advantages over movie industries of other nations. It is a positive feedback loop. The Information Technology may have also helped further the spread of English as an international language of commerce and travel.

Being a programmer, I can tell you that most of the programming languages developed early on have derived their structure from English language itself – which gives native english speakers an edge over other. It is a strong corollary that further development in software technology would be tilted in favor of English speakers. Another country that has taken huge advantage of this situation is India – with it's education still based in English language, and English being the prefered medium of communication of the upper echelons of Indian society.

There are economic reasons of course. The fact that capital was available to investors through out the 1990s helped this fact. I am sure all that Savings from Japan & China might have helped fund it.

Savings in educated human resources from around the world also helped matters – as far as information techonology goes, the primary skill that a programmer brings to the company is his basic logical, programming and math skills – migration of technology workers in large numbers from India and China to the united states must have definitely helped. Economic liberalization in much of far east and relatively liberalized global trade provided ample boost to the innovations in technology per se.

Dr. T July 2, 2009 at 7:48 pm

I disagree with S. Andrews about programming. Some of the top programmers in the world are from Russia and Poland, countries with low prevalences of English speakers. The clinical laboratory information system I used for years was written mostly by Polish programmers (with managers in Florida). This system was among the top five in the world in the late 1990s.

Being an English speaker is an advantage in learning a programming language, but someone with great problem-solving skills, logic, and creativity will out-program most of the Indians who know the computer languages but not the best way to use them.

Ray Gardner July 2, 2009 at 8:46 pm

The instantaneous information that is the result of the computer driven technology boom of the 80s and 90s was of course the main driver of economic growth of that same time period.

I don't believe it is a valid argument to say that we have to look at the cause of the technology mentioned in order to giver proper credit. Following such an idea to its logical end, we would soon be back at the spinning jenny or the cotton gin.

Gil July 2, 2009 at 10:06 pm

Why not technology? Without technological change most of us would be simple peasant farmers using hand tools to feed ourselves.

Cheers July 2, 2009 at 10:24 pm

I would tentatively attribute it to technology, but in an indirect fashion.

High speed and dependable telecommunications networks, effective communications and data transfer applications and the sheer processing power of modern computers have enabled commerce in ways it was not possible 50 years ago. 300 years ago, trade was limited to the ability to move goods on ships based on predetermined contracts. 100 years ago, goods could be shipped, and prices determined at the point of sale from hundreds of miles away. 50 years ago, trade was determined by the speed that brokers could send orders back and then across the world. Now the limits on trade are determined by instantaneous transmission of contracts and money around the world, covered by automated currency hedging.

I'd suggest that it's not that the technology has somehow directly increased the value of the economy, but that it's enabled an increase in trade, freer trade and lower barriers of entry to trade simultaneously around the world.

Brandon July 3, 2009 at 12:11 am

Well, I'm glad there's more data to support the fact that the middle class is NOT shrinking. I mean, come on! 155 million person workforce, and a few million people over the past few decades have lost jobs in small towns do to outsourcing, and all of a sudden, the entire labor force is gonna become 3rd World? Seriously? What nonsense!

I long for a day when these populist jackasses would wake up and realize things are not nearly as gloomy as they claim. Of course, that's probably a little too optimistic.

I love how these butthurt liberals and Democrats react when experts like the economist in the aforementioned article lash out and say "No! It's not true! You're lying to fit your preconceived view", rather than coming to terms with the actual facts. It's so predictable. What's this "Ivory Tower" nonsense that sam grove spouts, anyhow? A person can't disagree with the liberal Democrats' economic agenda without being some kind of stooge for the rich? Come on!

I'm a libertarian, for christ sake! I'm just as anti-big business as anti-government. I care about the individual. The problem is that one party is the party of the rich and the other is the party of the poor. They both put too much emphasis on one class and ignore the other to America's peril.

Brandon July 3, 2009 at 12:16 am

I never believed for a second that America's middle class was shrinking. After all, the people shouting that claim the loudest were demagogues from the Left (and a few from the Right). No one of any clout or intelligence believed it. I mean, think about it: Why would America's corporate leaders run this country down economically? It would KILL their bottom line! If they lay off all their workers or make the entire workforce (or at least a majority) lower class, their profits would dwindle enormously! And their objective is to MAXIMIZE profit.

And consider this, my liberal friends: While you malign CEOs for outsourcing jobs, you forget that if the jobs stayed in America, they would eventually have to go out of business. You know what that means? EVERYONE working for that corporation would lose their jobs! At least with offshoring, some Americans keep jobs.

Cheers July 3, 2009 at 1:17 am

Brandon,

As a close friend of mine once remarked, there is only ONE reason that jobs are outsourced. They are outsourced because the people that work in them can find more ideal pay, conditions or work elsewhere.

If I was willing to work for a dollar less per hour, my job would not be outsourced. But I'm not willing to. I'm not willing to because I believe my time is worth more than that and I can get an equivalent or better job somewhere else. It has nothing to do with need or ultimately minimum wage. A rational human being who needs 20 dollars per hour will take 18 dollars per hour over 0. There are ultimately ways of getting out of contracts, minimum wage, etc. It boils down to one single thing: choice.

Crusader July 3, 2009 at 1:35 am

We know it's bunk because muirduck said so.

James July 3, 2009 at 2:08 am

@S Andrews

Well, why do you think all those programming languages are English based? Because we invented them all!

This only further illustrates my point. We are able to invent a grossly disproportionate amount of the world's great stuff because we let those inventors reap the rewards for their inventions.

The fact that good programmers may be predominately English is really beside the point. The best Barbie makers in the world undoubtedly live in China and speak Chinese, but the products their building are created in the US. The labor isn't the hard part, the imagination and implementation of that labor is.

muirgeo July 3, 2009 at 3:01 am

Great article by Matt Taibbi of Rolling Stones showing how the markets are manipulated by the finance industry ( Goldman Sachs) in particular. This sort of thing goes far in explaining much of this income and wealth inequality as well as the dysfunction of both our economy and our political system.

Dissertation Examples July 3, 2009 at 4:49 am

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Martin Brock July 3, 2009 at 6:28 am

Technological change and returns to high-tech skill are a factor, but despite his claim of scientific integrity, Cooley never supports, with data, his assumption that returns to high-tech skill, rather than renk-seeking, account for the disproportionate income rise at the highest percentiles. He writes that rising executive compensation for example "seems not" to explain most of the change, but writing "seems not" is not actually using data to support the conclusion. It's just the same sort of unsupported generalization that Cooley faults in the partisans asserting middle class stagnation.

Cooley simply ignores data from the Cato Institute that show a very substantial income divergence between public and private sector employees, with public sector income increasing at double the rate of private sector income for decades. Does this divergence reflect higher returns to skill or a persistent willingness of statesmen to tax/borrow/inflate and spend?

Maybe Federal employees have "training" credentials to account for the rising income, but since we don't consume their output in market exchanges, how am I supposed to know that these credentials actually measure any skill with a market value? That Federal employers hire people with credentials and then encourage the employees to collect more credentials to earn higher wages is not evidence of higher return to skill in the market. It's only evidence that a central authority wants people collecting more credentials. If all of these employees have degrees in Sociology or Marxist economic theory, what's the difference?

The same question applies to executive compensation in an increasingly corporatist private sector. Regardless of how a Federal employee busies himself, all Federal employees are essentially "executives", even the TSA employees searching handbags for toothpaste at airports. They execute policies for a living rather than producing and providing goods and services to others. Maybe the greater complexity of high-tech production explains the need for more highly skilled and compensated policy makers and bureaucrats, but I doubt it. Show me.

That much of the tiny "middle class" gain over the last three decades falls in the "fringe benefit" category, primarily health insurance premiums, is hardly encouraging. For most people with employer provided health insurance, these premiums differ little from a tax. They pay the tax and get whatever health care it buys. I have little reason to suppose that a rising insurance premium actually corresponds to a rising living standard or any rising consumption at all. You might as well tell me that my living standard rises every time my taxes go up. After all, I'm paying for something, so I must be better off, right?

Martin Brock July 3, 2009 at 6:47 am

… the markets are manipulated by the finance industry ( Goldman Sachs) in particular.

Taibbi shot back: "Goldman has its alumni pushing its views from the pulpit of the U.S. Treasury, the NYSE, the World Bank, and numerous other important posts; it also has former players fronting major TV shows. They have the ear of the president if they want it."

They have the ear of the President, period. "If they want it" is just a bone thrown to Rolling Stone's Obama worshiping readers.

Why would anyone expect the Federal government to "rescue" them from this corporatist ensemble, when the Federal government is clearly part and parcel of it? No, it's not a "conspiracy". It's just how our increasingly feudalistic/socialistic/fascistic planning apparatus operates.

SheetWise July 3, 2009 at 7:28 am

"Technology is not a variable exogenous to economic growth."

This doesn't sound right. They certainly feed each other, but I don't think they're dependent. There are a lot of technologies I've watched that have taken twenty years or more to be properly applied (adopted) — that's when the economic growth occurs. Technology comes from a dream of economic growth, that growth doesn't necessarily follow.

K Ackermann July 3, 2009 at 9:27 am

"A rush of technology has causes; it must be explained."

In the case of the Internet, it changed everything. It was the cause, and the rush.

A company I contract for still considers itself a manufacturing company, but it's not. It's an e-commerce company that happens to make stuff. Everything it mkes is driven by the net.

They made stuff 20 years ago too. The difference was they didn't need a separate building to house the racks of computers that serve up the public face of the company, the marketing data, and the manufacturing files.

20 years ago, 99% of the population did not need a database. Today, my grandmother has a backup strategy.

Urstoff July 3, 2009 at 9:45 am

Why is there never any discussion of how immigration and the consequent influx of low-skill workers affects median income. What would happen if you excluded immigrants from the story?

colson July 3, 2009 at 12:02 pm

muirgeo – while the basis of the RS article may be a bit off-topic, I do agree with only a small part of the author's assertions: cap and trade will do nothing but pad the pockets of bankers. It is so perfect – take something that can barely be measured in any tangible way, place a price tag on it and charge people to trade it. It is the ultimate derivative – a derivative where the underlying asset is conjured from thin air.
——-

Now, back OT, I would generally equate much of our economic progress over the past 30 years to shifts in public policy in the 1980s that are being unwound right now. Lowering the top tax brackets have permitted the wealthy to keep, invest, and spend more of their money.

The larger problem prior to the 1980's was that a lot of capital was tied up in the government. As top marginal tax rates dropped, it gave rise to the need for people to find ways to invest their monies. These changes re-birthed creativity as new capital came to market. There was suddenly enough money to fund the good, bad, and just plain stupid. And the end result was an explosion in technology and communications.

S Andrews July 3, 2009 at 2:03 pm

Well, why do you think all those programming languages are English based? Because we invented them all!

It is true that the early development in computer technology happened in the United States. But imagine, if the Japanese had come out with a programming language based on Japanese, how popular would it have become in places like the US, Britain, Australia, India, Singapore, Canada, Western Europe etc? English language has an upper hand as a lingua-franca of the world. It's adoption would be more widespread.

Some of the top programmers in the world are from Russia and Poland, countries with low prevalences of English speakers.

I am sure that is the case. I live in Silicon Valley and have worked in Engineering teams in many companies for well over a decade. From my experiece, a typical software company's engineering team comprised of somewhere between 30-70% of the team made up of engineers who are ethnically Indian and any where from 20-40 percent who are ethinically from far east ( mostly chinese ). The hardware companies have a different composition – they tend to be dominated by Chinese Engineers with a substantial Indian presence.

vidyohs July 3, 2009 at 10:25 pm

Brandon,

If you are new to this blog, the poster's name or tag comes at the end of the comment, not the beginning.

Sam Grove did not say anything about Ivory Towers.

The one who made a comment about Ivory Towers was our resident Village Idiot, one muirgeo (alias muirduck) who makes a box of rocks seem brilliant.

muirduck is my little Teacup Chihuahua who usually barks from the porch but occassionally gets confused and winds up in the streets with the big dogs, so he has to be shooed back up the steps. Never let anything muirduck writes cause you anything but mirth.

vidyohs July 3, 2009 at 10:40 pm

I am curious about this vast wealth of the top 20 CEOs on USA corporations in 2008, the last compete year for which data could be obtained.

My curiosity asks, if we combined all the compensation of those top 20 CEOs for the year 2008, would it buy one F22 Raptor? Or, perhaps a better question, how many F22 Raptors would it buy, 1, 2,3, or more?

How many miles of interstate would it build?

Would it build and put one space shuttle in orbit?

In the scheme of things vis-a-vis our nation, WTF does it really matter what they are paid?

Congress regularly and repeatedly authorizes expenditures of money that make the salaries of the top 20 CEOs pale by comparison, and the recipients of that largess seem to go to one or two well connected people……..in the vernacular…..what's sup with that?

Drain the cesspool contained by the D.C. beltway, fill it with radioactive waste, pave over it with crushed radioactive fused rock, and make it unihabitable for all time. Disperse government out into Qounset huts scattered out around the nation, make 'em deliver inter-office and agency communications by carrier pigeon, and give government a budget of one dollar for every man, woman, and child in the nation and penalize them with death by firing squad if the exceed that budget.

Rehumanize America.

Gil July 4, 2009 at 2:36 am

How about this: define 'middle class'. What does that actually mean? It sounds as though it's some sort of a relative term. Of course, there will always be people who aren't defined as 'upper crust' nor 'lower class'. Is like 'the poor'? Some seem to use the poor as to mean the 'bottom quintile'. Hence the 'poverty rate' will always be 20%. It's the same as stating "Did you knnow half the population is below average median intelligence?" Truth being told there is always about 80% of people who be considered 'middle class'. Maybe a peasant farmer in the Middle Ages was 'the middle class' – he had basic access to food and shelter – neither of which the poor had back in those times.

Even if we're talking absolute shift in what the middle class, so what? How do know that the average fat-arse middle-class Westerner losing the purchasing power his father had mean 'something's wrong'? What if the shrinking income merely has to do with outsourcing and globalisation? In other words, Westerners had it good because of trade barriers and puppet governments that forced non-Westerners to be artificially poor? If so, then the lowering of real income for the average Westerner and increase in real income for the average non-Westerner could be reflecting the honest redistribution of forced wealth gain back to the rightful producers?

SheetWise July 4, 2009 at 4:07 am

It's usually late in the day for me when I have comments to make at Cafe Hayek — and I've usually had a few adult beverages. I notice all readers here that my postings should not be taken seriously if I've been drinking. Use your own judgment.

Gil — would you like to make the same disclaimer?

dieter July 4, 2009 at 1:06 pm

Newsflash: Those Hollywood movies are dubbed in most markets. Successful internet sites need to be localized as well. Native language support is a must. And they usually have powerful domestic rivals. The german Otto Versand is moving more merchandise than Amazon in Germany. StudiVZ/Sch├╝lerVZ/MeinVZ is more popular than facebook, GMX more popular than Gmail, etc.

The advantage, american companies have, is economy of scale. Hollywood can afford to blow lots of expensive things up and recoup the cost from the english speaking market alone. Dubbing is a no-brainer once you have the expensive footage. (Aren't most "Hollywood" movies shot in Canada nowadays?)

Btw. most of these internet sites don't make any money and have no viable business plan in sight.

The USA ranks only #40 in exports per capita (mostly soybeans and subsidized cotton, I presume)
So if anything, you could make the case that english as lingua franca is holding you guys back, since it gives the cognitive elites an excuse not to learn foreign languages.

About programming: There is no need to learn english grammar to code. Documentation is the issue. Lots of programmers can't speak or read english, but the ability to read the primary reference documenation is certainly a huge advantage.

vidyohs July 5, 2009 at 10:03 pm

dieter,

LOL, man that is something else!

"The advantage, american companies have, is economy of scale. Hollywood can afford to blow lots of expensive things up and recoup the cost from the english speaking market alone. Dubbing is a no-brainer once you have the expensive footage."

Let's see now, Hollywood puts out a movie and its soundtrack is in English, so it can be heard and understood without subtitles in exactly how many markets? Umm quite a few, really.

Most of your beloved Germany, Europe by exstension, Africa, India, Japan, Australia, most of South America, and of course a substantial portion of central America and Mexico.

Now, a German movie maker produces a movie and markets it to the world, and in exactly ow many markets does it need subtitles?

LOL, damn near all of them outside of the borders of Germany.

But, what the hell, I agree Americans and English speakers in general are to be pitied as losers.

WWI, speakers of German – 0, speakers of English 1.

WWII, speakers of German – 0, speakers of English 1.

Damn wish we could all be Germans.

John Dewey July 6, 2009 at 8:07 am

dieter: "The USA ranks only #40 in exports per capita (mostly soybeans and subsidized cotton, I presume)"

Did it ever occur to you to research your suggestions before throwing them out?

The primary U.S. export for 2008 was capital goods, of which the u.S. exported $469 billion. U.S. capital good exports include medical equipment, aircraft engines, material handling equipment, and telecommunication equipment.

The second largest category of goods exported by the U.S. in 2008 was industrial supplies, coming in at $387 billion.

In addition to the huge amount of goods exported in 2008, the U.S. also exported $552 billion of services. The services category of exports includes business and professional services, financial services, travel and air passenger fares, and transportation.

Before making more silly suggestions about U.S. exports, Dieter, please consider checking out a few facts. It's really easy to do.

John Dewey July 6, 2009 at 9:28 am

er: "The USA ranks only #40 in exports per capita"

By citing such a statistic, I can only assume you favor a national policy of mercantilism. Is that correct? Do you believe the measure of a nation is how much it produces for the people of other nations? that a nation is rich when it toils away producing goods that someone else consumes?

The true measure of economic strength must certainly be GDP per capita. The United States blows away European nations on this measure, of course.

dieter July 8, 2009 at 5:00 am

Let's see now, Hollywood puts out a movie and its soundtrack is in English, so it can be heard and understood without subtitles in exactly how many markets? Umm quite a few, really.

Most of your beloved Germany, Europe by

I am not a German. Good luck in finding a movie theater in Germany or most of continental europe with non-dubbed Hollywood movies anywhere outside a few bohemian quaters. Turn on german TV and it is all dubbed as well. (including Seinfeld, Southpark, etc.)

I would estimate that at least 95% of Germans couldn't follow a Hollywood movie in the original. I am aware of one study that holds the share of Germans with good (not excellent) english skills at 5%.

dieter: "The USA ranks only #40 in exports per capita (mostly soybeans and subsidized cotton, I presume)"

Did it ever occur to you to research your suggestions before throwing them out?

Did it ever occur to you that I was joking?

er: "The USA ranks only #40 in exports per capita"

By citing such a statistic, I can only assume you favor a national policy of mercantilism. Is that correct?

Your assumption is wrong. Some of the commenters claimed that english as lingua franca gives the US an advantage in exports. This theory doesn't hold up.

John Dewey July 8, 2009 at 5:40 am

dieter: "Did it ever occur to you that I was joking?"

No, it did not. When you wrote about the U.S. economy:

"you could make the case that english as lingua franca is holding you guys back"

I certainly did not perceive you to be "joking", but merely displaying ignorance.

"Jokes" such as your implied criticism of the U.S. still deserve to be refuted.

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Anonymous August 10, 2009 at 8:34 pm

The middle class will be paying all of the taxes. This group in Congress now wants one group to pay all of the taxes and the other group to be parasites. There are not enough rich people in this country to pay all of the taxes it will take to support the moronic laws being passed with this stimulus passage.

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