The fallacy of stagnating middle-class income

The Economist's Free Exchange blog refutes the common proposition claiming that income disparity has grown while middle-class income has not increased over decades. They quote Terry J Fitzgerald, senior economist at the Minneapolis Fed:
Rather than falling by 4 percent over the past 30 years, average hourly earnings have actually risen by 16 percent. Growth in the median hourly wage went from 12 percent to a more respectable 28 percent.
Large gains at the top end of the wage distribution might seem to be accompanied by flat wages at the bottom, but that is not the case. Wage gains at the lower end of the distribution held up fairly well. Wage growth rates at the 10th and 20th percentiles were only slightly below the median growth rates, increasing by 17 percent and 18 percent, respectively. While these data confirm that wage inequality increased since 1975, they also confirm that a broad swath of middle America experienced notable hourly wage gains.
While Russ Roberts says:
In 1970, according to the American Housing Survey (from HUD and the Department of Commerce ,then called the Annual Housing Survey, Table A-1, p. 32), 36% of the 67 million households in America had air conditioning, 11% had central air. This is the earliest data available from this survey.

In 2005, the most recent data from the same survey, (Table 2-4, p. 66) 82% of the 15 million households with income below the poverty line had air conditioning, 52% had central air.
I've long been saying that Americans don't know what "poor" is. The average poor person in the United States - the kind that's on social welfare - has a standard of living comparable to a middle-class person living in Slovenia today.

The difference is, the people in Slovenia feel smug about themselves. Most of them have never been to the States, yet a majority appears to believe the Delo ("Work", "Labor") newspaper as it tells them how "bad" income disparity in the United States is, and how "bad" the poor Americans have it.

This reminds me of an anecdote from Ion Mihai Pacepa's Red Horizons. Romanian dictator Nicolae Ceauşescu visited the U.K., and as part of his visit, he was taken to a department store, perhaps Harrods. He was impressed by all the goods available - but he found it impossible to believe that what he saw was the normal situation in a department store; it was impossible to find a store with shelves so full in Romania. He found it insulting that the authorities must have stuffed Harrods with goods they must have obtained on purpose from all over! How dare they think he would be misled like that!

Not to be outdone, when foreign dignitaries later visited Romania, he had all the paltry shops in Romania stripped of all the goods that could be found, and he had them all put into one store. Then a tour of that store was organized for the foreign dignitaries. See, in communist Romania, we have goods, too!


verbatim said…
I really disagree this time with you :), especially about standard of living. Standard is closely related to how you can redistribute money to maximize personal wealth.

I consider myself being in lower middle income class (i am little bit weird and work for free a lot :) ). I don't know what your experiences with USA are (or you haven't been in Slovenia for a while) but with experiences I have I think I can afford almost the same as an american middle income wage earner. The main aspect people living in west countries keep forgetting is "do-it-yourself" (I was also wondering for a long time what are they doing with their money) thing which represents huge savings in real life (but we trade free time spent in front of television for working).

Let's assume a man working in USA makes 4 times more money as I do for the same job. Middle income people in USA spent money for people cutting grass for them, cleaning house, every little repair and services (this are huge expenses), they don't have gardens, they spent at least 3 times more for real estates than they will spend if they will build this simple houses with their friends etc. On the other hand I raise food for myself on the field, fix almost everything by myself, if I need something to be built i call my friends and we build it together etc. At the end of the year i have the same things as middle income class american (except pool :) and take into account that all consumer goods are much cheaper in the USA and they don't really have furniture). I have the same appliances in the house, still can go to an exotic vacation, i could also lease a good car and change it every 2 years or so (as a lot of the americans do). People in highly industrialized countries (esp. USA, Canada, NZ, UK, Australia) simply aren't rational consumers.

Central air conditioning systems (although they are cool sometimes I must admit) are scientifically completely irrelevant measures (in my opinion need for AC is related to house being badly built). I haven't seen anywhere else such a poor people as in english, eps. USA, speaking countries (compared to a general wealth of the nation). Even when I have visited their homes (a middle income class) I found nothing really different there (and I am obsessed with any new knowledge I can get).

As I don't have a lot of time to write this nicely I hope you understand what I was trying to say :)
denis bider said…
To the extent that you take care of things yourself, your richness depends not on your environment, but on how healthy, intelligent and versatile you are.

By the same token, a person's need to rely on themselves for most of their needs is a measure of the environment's economic ineffectiveness. After all, given enough knowledge and resourcefulness, you could probably go and live in some woods and, depending on your level of skill, you might get along quite well. That doesn't mean that the woods are an efficient economic environment. It might mean that you can make efficient and effective use of your resources, but that's you being smart, not the economy around you.

To the extent that you take care of your own needs, the economy around you doesn't matter.

Now, as long as we're measuring the relative improvement in well-being among America's poor in the last few decades, I think that the fact that most of them now have air conditioning is a pretty strong indicator. It may be that an A/C is something that compensates for the poor design of your house, but I think it's better to have a poorly designed house with A/C than a poorly designed house without A/C.

Also, an air conditioner is one of those things that you simply do not build yourself, and to the extent that people under the poverty line have air conditioning, it means they have economic power. It means that, if they have an air conditioner, they could also have gotten other things that cost the same.

The quality of a person's life is what each person makes it, and it's not necessarily determined by air conditioners or pools or lawns nicely manicured by Latino gardeners at all. But the fact that you can afford an air conditioner, or a pool, or a lawn nicely manicured by a Latino gardener, means that you have economic power. Whether you use it wisely or stupidly is up to you, but if you have that economic power, you aren't poor.

What I am arguing about is the warrior cry of Slovenian socialists, which generally goes: "Look at the inequality in the United States! That's horrid! That's not what Slovenia should be like!"

While doing so, they ignore simultaneously two things - that first and foremost, the USA are not a classically liberal country at all - the taxes in New York are as bad as France; and secondly, that the American poor are not poor by Slovenian standards. The American poor are in fact, by the world's standards, quite well off.

Whether they use their wealth wisely, of course, and invest in a well-designed house rather than a costly air conditioner, is their choice.

But as far as your disposable income and freedom of travel are concerned: would I be correct to deduce that you probably inherited some real estate, or are living in roughly the same house with your parents? Try buying an apartment or a house in a desirable location in Slovenia, and try doing that with an average Slovenian salary. The cost is similar as in New York; the salary, alas, is not.
verbatim said…
Economic power is just making people being irrational and that leads to higher social costs.

But nice arguments. Will try to respond later :)

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