Russ Roberts

Bruce Meyer on the Middle Class, Poverty, and Inequality

EconTalk Episode with Bruce Meyer
Hosted by Russ Roberts
PRINT
Rosenberg on the Nature of Eco... Frank Rose on Storytelling and...

Bruce Meyer of the University of Chicago talks with EconTalk host Russ Roberts about the middle class, poverty, and inequality. Many economists and pundits argue that the middle class has made little or no economic progress over the last 30 years, that poverty rates are stagnant or rising, and that inequality has increased dramatically. Meyer, drawing on his research over the last ten years, argues that these conclusions are either false or misleading. He argues that standard measures of economic progress and inequality are based on faulty inflation data or a misplaced focus on pre-tax income instead of post-tax income or consumption.

Size: 27.5 MB
Right-click or Option-click, and select "Save Link/Target As MP3.

Readings and Links related to this podcast

Podcast Readings
HIDE READINGS
About this week's guest: About ideas and people mentioned in this podcast:

Highlights

Time
Podcast Highlights
HIDE HIGHLIGHTS
0:36Intro. [Recording date: September 27, 2011.] Inequality and the standard of living of the average American. You hear a lot, in books, in the blogosphere, among pundits that the middle class is being hollowed out, the incomes for all but the top 1% or maybe the top 20% are stagnating; that the gap between rich and poor has grown inexorably; that the American dream is dead; that America is no longer the land of opportunity. Particularly alarming is the claim that these changes have occurred at a time--until recently--of great growth in national income: very healthy grown in the United States in per capita income between the early 1980s and the mid-2000s. Yet the claim is made that the rising tide did not lift all boats. Rather, it only lifted the big, rich yachts. The dinghies of the poor and the middle class did not share in that tide of improvement, share in that wellbeing. What are your thoughts on these claims? They are basically wrong. And that's what 10 years of research by myself and James Sullivan at Notre Dame has shown. If you measure incomes better, accounting properly for inflation, median incomes have gone up by about 50% since 1980. And if you look at consumption, it's gone up by a similar amount over that whole period--though exactly when it went up is slightly different from the income pattern. And you are going to argue that that is just a correction for a mistaken measure of inflation? Let's stick with the income side; we'll come to consumption later. Inflation is probably the most important reason, but also the picture looks much better if you look at what people are actually able to spend, which is the income that's left after taxes. So, taxes also matter quite a bit at the median. Particularly in the 2000s, if you account for taxes, the median has gone up much more than if you don't. And that is because of...? Cuts in income taxes in 2001 and 2003. But, Bruce: The Bush tax cuts all went to the rich! We all know that. No, they were pretty evenly spread across the distribution in percentage terms. In percent. A little secret that doesn't get talked about very much. I just thought that I'd just mention that. So, what I want to start with: There are of course other measures of despair that pessimists--I'll call them the pessimists, the people that think that the rich are getting everything and the average person is getting nothing or less, 25 years. So, if you look at hourly wages, corrected for inflation, they look pretty flat since about 1978. You hear the claim that median income is basically unchanged since 1973. Is your basic claim--I want to push you on what you said a minute ago--let's start with the correcting for inflation. What's wrong with those statements? They seem pretty powerful. They are corrected for inflation, of course. They are not nominal income. So if you look at hourly wages reported by the Bureau of Labor Statistics (BLS) and median income reported by some folks, I assume taken from the Bureau of the Census, it looks pretty dismal. Why is your story better? Well, back in 1996, the Boskin Commission concluded that our main rate of inflation, the CPI-U, overstates inflation by 1.1 percentage points per year at that time; and then historically they said it overstated inflation even more. And over time, we've made some corrections to how we've measured inflation, but the Commission members, when polled more recently, concluded that still the bias was about .7 to about .9 percentage points per year. Now, why do we not measure inflation well? Well, it's very hard to keep track of new goods and to adjust for the improvements in the quality of goods. Take, for example, cars. The car you drive you drive, that most people drive now, is nothing the car of 20 years ago. Anti-lock breaks, power windows, power steering, power breaks. More cup-holders. Everything's better. Everything is so much better. Braking, acceleration.
6:19But doesn't the Bureau of Labor Statistics (BLS) try to correct for that using hedonic price indices? Or do they not? They do, but they don't do it adequately; and it's a very hard thing to do. And the problem is even more difficult when you think about new goods. If you think about DVD players, cell phones--it took the BLS 15 years to include cell phones after they were introduced. What do you mean? They weren't part of the Consumer Price Index (CPI) for a very long time. We should back up for a little bit. So, what the BLS does is it goes out regularly and it tries to measure the prices of a basket of goods where the weights on the basket are proportional to the spending that people do on these different goods. And when a new good comes along, it can't be in the basket the first day, obviously, because they haven't gone out and surveyed the price of that. But you are saying it took 15 years from the introduction of cell phones till where they were even in the basket? Exactly. And that's been historically true, that it's been very long before goods have been included. Most, historically, the vast majority of people had electric refrigerators before they were included. Used cars weren't included till, I think it was the 1940s or 1950s. Of course, in the beginning, very few people are buying these goods. But in recent times, the beginning doesn't last very long. So, leaving out cell phones for 15 years, you miss a big component of something that is actually falling in price rather dramatically, when it's 15 years, I assume. Absolutely. Now, the other issue they struggle with, which you mentioned, is quality. So, you have an iPod, which when I think it was introduced--I think it was around $500--the iPod that now sells for less than that in actually nominal terms holds more songs; the battery life is better; it's better, it's smaller, etc. Do they correct for that at all in the car example you mention? You said they did it poorly. Did they do it for a good like an iPod? I know they do it for big items; they try to. You know, I'm actually not sure about iPods. But in general, they are reluctant to do hedonic corrections because it's a lot of work and there's certainly some judgment involved. The preference is to accurately measure what's not quite the right thing.
9:10So, we might use the word hedonic. The idea of that is--I think it comes from work by Zvi Griliches originally--where the idea was to say, well, if it's better, some of the price is it's for the better good; to compare it to the old good, you have to take into account or somehow add a dollar figure for the improvement in quality. There are statistical techniques that help you try to do that. But as you point out earlier, it's very difficult to do. So, given all those changes; there's also been criticism of the BLS because they've often not surveyed some retailers such as Wal-Mart or super-Walmarts that were driving down prices and their baskets were not measured correctly. That's all true. I'm very sympathetic to that argument. What I'm less sympathetic to is how you mechanically go about logistically correcting the actual numbers. So, you said members of the actual Commission were surveyed; and they are an illustrious group of folks immersed in some very dull and dreary stuff, to be honest. And bless them for their diligence. But surveying them and saying, well, we think it's about .7 or .9--that's kind of just a guess, for most of the time. There are people like Mark Bils at the U. of Rochester who has done extremely careful work on manufactured goods showing an actual careful work on the bias on one small portion, an important portion, of goods. It's quite significant, and he's tried to correct for these quality changes. But how do you do that in a systematic way without just saying: Well, we know that real wages have grown more than the data show? So, there are two ways. You can put together a lot of careful studies like the Bils study for particular groups of goods over particular time periods and try and extrapolate from that. And that's basically what the Boskin Commission did in coming up with their numbers. Another way is to look at what you would have to adjust incomes by so that spending patterns over time at a given level of adjusted income stayed the same. Okay? Now that's a little bit harder to picture. You want to try that again? Sure. The idea is that: Think that if people's true incomes were at the same level over time, they would spend about the same share of their income on food, clothing, and leisure activities. So, you look for what level you would have to adjust income by so that spending patterns stay the same over time. And several people have done that--Dora Costa, Bruce Hamilton--and they come up with biases to the CPI that aren't that different from what the Boskin Commission concluded. The thing I find remarkable about this--and I just have to get this in because it's so extraordinary--one of my reasons for being skeptical of the mainstream, standard view now the average person has made no progress now for the last 30 years is I look around. Now looking around is dangerous. It can lead to very bad misperceptions. I live in the Washington, D.C. area; Washington, D.C. thrives through most recessions and it's thriving through this one. So, if I say: Well, the recession's not so bad; I went to the mall the other day and everybody was in there and it was packed and stuff was selling out the door. So, that's a stupid claim, to say because I looked around and things looked pretty good that this whole recession thing is exaggerated. But when I look back to 1973, when I was alive and perceptive, meaning conscious and aware of stuff, I was 19 years old--when I look around at how much the world has changed since 1973 and I see how much the car of the average person drives has changed, the house of the average person lives in, the health care that's available to so many more people at unbelievably higher quality; the innovation, the revolution in technology, the innovation; and you tell me that the average person is not any better off? I start to think maybe there really is something wrong with the data. And the thing that I find so remarkable is the pace of the improvement of daily life is what makes it hard to measure and gives you the impression--incorrectly--that the average person is falling behind. People say: Well, the 1950s and 1960s were more fair. Well, the 1950s and 1960s were pretty dull and pretty stagnant. And there wasn't a lot of innovation. Your car looked kind of similar at the end of those decades as it had at the beginning. And your refrigerator was kind of similar. Now, 10 years go by and everything's better. And so I think it's incredible that because of that people are led to the false conclusion that people aren't catching up, because they are mismeasuring these things such as inflation.
14:55I want to absolutely agree with what you just said. And I think that I need to go back a bit and emphasize that you were getting at something right when you said it's hard to measure how much we overstate inflation in our official price indices. I don't think people would universally agree that the Boskin Commission got it exactly right. There is a lot of uncertainty about what the exact bias in the CPI is. And it probably has varied over time. No doubt. But the way I can also point out that the price indices have to be overstating inflation is to look at the type of things you just mentioned. You can look at the types of houses, say the bottom 20% live in. The official measures say that the bottom 20% are worse off now than they were 30 years ago. The poverty rate now is quite a bit higher; and even two years ago it was quite a bit higher than the official poverty rate of 1980. But if you look at the bottom 20% of the income distribution, in terms of the house they live in, the car they drive, they are completely different. They have a dishwasher often, they have a washing machine; they have things that even an average person didn't have in 1980. In 1980--let me grab the numbers--27% of those who were in the bottom 20% of the distribution had central air. Whereas in 2009, it was 67%--almost three times the share. So, things have dramatically changed. And if you look at numbers for ownership of a dishwasher, a washer and dryer, those numbers have gone up similarly. The counter to that is: you are cherry picking a few toys, a few electronics; those have gotten cheaper but a lot of important things--housing, healthcare, education--crucial things--food's gotten cheaper, undeniably, but those big items which are hugely important have gotten a lot more expensive. So, just to point out that the poor have more goodies, that's an illusion about their improvement. Well, housing is really important. Housing is about 40% of consumption. For the poor, for the middle class, for people at high incomes. And the size of housing units that people live in has gone up dramatically. The other things we mentioned--air conditioning--that's gone up. You can look at lack of problems like leaks in the roof or in plumbing, and those have almost disappeared. And what about the education and health care argument? Healthcare is complicated. We try and stay away from it actually in our research because there is less agreement in the profession about how to handle health care. The quality changes there have been tremendous. Unlike education, where it's pretty much the same. The key issue is how to deal with quality. And if you look at some things like the access of children to a doctor, that has clearly increased over the last 30 years. So the share of children that have at least an annual checkup has gotten better. But if you look at other measures like the share of people at the median income who have insurance, that has gone down over time. Of course, insurance isn't all you care about. You care about health care. If a homeless person has a heart attack on the street in 1980, versus 2011, the medical care he is going to get in the emergency room--which is required by law, this is not a market phenomenon, though it could be if the law didn't require it; we don't know--the drugs, the treatment, the technology that that person is going to have access to is much, much better today. That's to me the fundamental question: what's your access to health care? The median--that's a little bit depressing. If the median person has less access to all technology--artificial knees, better treatment for cholesterol that reduces your chance of a heart attack--that would be alarming. Of course, it's gotten a lot more expensive per unit for a bunch of reasons, many of them driven by bad policy in my opinion; but that is something that would offset some of these gains we are talking about. That's something that we cannot speak to as much as we'd like. So, I'm going to have to leave that for another guest on your program to talk about--access of the average person to various treatments. Which I think would be a terrific topic. I'd like to do that. On the education point--my story is that the reason education has gotten a lot more expensive is that a lot more people have access to it and they've pushed up the price of something that has a relatively inelastic supply, where supply doesn't respond very much, so an increase in demand pushes up price a lot relative to quantity. So we have a lot more people going to college, to community college, to graduate school; so of course it's gotten a lot more expensive; but it's not like the average person can't afford it. It's expensive because they can afford it and they've pushed up the price. The counter to that is the only reason they can afford it is debt. Maybe we'll come to that in a little bit.
21:40Let's go to the issue you brought up at the beginning about post-tax and pre-tax income. When we look at most of the charts that the Census Bureau puts out, or that are typically in newspapers, they are looking at pre-tax income, not post-tax income. They are certainly not looking at transfers that people receive in the form of welfare or other things. When we talk about the poverty rate, we are talking about the rate that people are in poverty based on their own earnings, not on what their standard of living is after they've received transfers from the government. How important are those factors in your conclusion that the average person's wellbeing has increased by 50%? How much of that roughly is an inflation correction and how much is the fact that we really want to look at post-tax income and consumption? Most of it is the inflation adjustment. But it is certainly true at the median that a substantial part of the increase, particularly in the 2000s, is due to tax cuts rather than just inflation. Now, if you look at those in the bottom 10% or 20%, taxes matter a lot more. Transfers, I assume. Oh, if you go back, because many of them got taken off the rolls. Because if you go back to the 1960s, we often were taxing people at a 15% marginal rate even at very low incomes. We've raised the exemption; we've added the earned income tax credit, which transfers a huge amount of money to people at the bottom. So the combination of tax cuts and expansions of the earned income tax credit have dramatically increased the after-tax incomes of the poor relative to the pre-tax incomes. Now, one other issue that comes up in these conversations that drives me crazy, and I don't know whether you've dealt with it in your work: When people compare the median in, say, 1973, to today or the bottom 20% or the top 1%, first thing is they are not the same people. People move in and out. There's a big debate in economics about how much movement there is. But when people talk about how much the top 1% get, they make it sound like somehow it's an exclusive club that somehow has found a way to extract money from the rest of us. Which some part of it is, in the form of subsidies to farmers and financial institution executives. But putting that to the side, they are not the same people in 1973 as today. People die; there's immigration; people are born and come into the workforce. But the most important thing that I feel is neglected is that starting in the 1970s--and it's not a coincidence when this stagnation starts--there's a big increase in the divorce rate. So, when you are doing household analysis which I know some of your work is based on and you are talking about the bottom quintile or the middle quintile, people in the 40-60% range of the income distribution, you are talking about radically different groups of people. In other words, who the median is can change radically if you add a whole bunch of new households due to divorce; and that median can go down dramatically even if the person who was the median before is doing better. This statistical paradox is usually ignored by people with an axe to grind who want to sell this story that there's been a lot of stagnation. Do you correct for any of that? We do worry about that quite a bit. What we do is we look at different types of households--married parent households, single parent households, single families without kids, married couples without kids, households that are headed by someone 65 or older. We also split up the population by race and whether or not the household head is employed or by education. And we look within each of those groups and see if the distribution has changed within those groups. And then we add up all those changes across the different types of families. And you get a different answer when you do it that way versus just lumping everyone together when you are doing this kind of quintiles stuff? The changes in the types of families that are in the United States over time don't play a big part in the changes in median incomes or poverty over time though you can see an effect of increased education, particularly if you look at measures of consumption because consumption seems to be a little more closely associated with improved education than income is. I'm surprised to hear you say that because on the poverty side at least because that's something I know just a little about explicitly. A study was done--it came out in the last few years, I've forgotten the authors--they looked at poverty rates by family structure, as you just said. They looked at what's the poverty rate for married people with both people are working, what's the poverty rate for when one person is working, for a couple with no children, for single man, single woman, with and without children. And what they found, and this is a paradox that people have trouble wrapping their heads around: every single demographic group a dramatic reductions in poverty over a long period of time, say I think it was through the 1970s through recently and yet the overall poverty rate went up. Every demographic group the poverty rate fell sometimes dramatically but the overall rate went up. Why? Because the group with the largest proportion with the highest poverty rate, which is single women with children, that group got bigger. So when you compare the modern poverty rate to the past the rate went up even though every single type of family had had a reduction. So I find it surprising you don't find a bigger effect. Well, the share of families headed by single mothers hasn't gone up that much in the last 10 years. Most of the change was before. 1970s and 1980s. So what you're describing could be true more historically. What we do see is that there are groups that have had their poverty decline much faster than others, so those households that are headed by someone 65 and older have had their poverty decline much faster. That's also true for single-mother-headed households. On the other hand, married couples with children, their poverty rate hasn't declined as fast as other groups. And that's even more true if you look at their spending patterns, at what they are consuming rather than their income. Over what time period is that, roughly? That's since 1980. Interesting. I have to dig deeper into your work on that. I'm looking forward to it. I would also like to take a careful look at the studies you have in mind.
30:19Let's talk about consumption. The first punchline of your story is that when you correct for inflation, if you do it correctly, even when you are looking at different people over time rather than panel data where you are following people over time, the middle class stagnation that we hear about is not real. There's quite a bit of improvement. Why do you also look at consumption and what does that tell you? What are you looking for there and what are some of the findings? There are two reasons to look at consumption. There's the standard economic argument that one year's income is not really a good measure of a family's wellbeing because families save for a rainy day and they may have a period where their income is low but they are able to consume because they have saved. If you think about older Americans that idea becomes particularly important because the retired households will often have very little new income but maybe consuming out of their past savings. They may also own a house, a car; in fact, more than 80% of households headed by someone 65 and older own their own house, own at least one car. Some of them probably shouldn't be driving that car. Fair enough. My Dad's 81; he still drives. I'm glad. A little scary, though. Leaving that issue aside, which is real: It's clear that the incomes of those who are retired is not a good measure of their wellbeing because of the ability to draw on savings; because they get a flow of resources from assets they own like homes and cars. Now, that's the standard reason for looking at consumption, but when you are looking at people at the bottom, which we do in quite a few of our studies, there incomes are very complicated. There's a wonderful study of single mothers by Eden and Lane that talks about their various sources of income; there's formal work, informal work, money that is given to them from family, friends, boyfriends, fathers of children that may no longer be boyfriends. And in addition money from government transfers. With all those sources, it's much harder to respond in a survey to what your income is. On the other hand, these same people do a pretty good job of reporting what their rent is, what they are spending in a given week on food. So that looking at consumption can give you a better idea of what people at the bottom are able to do in terms of their living standard. There also is the issue that our surveys have to try and get people to give out information that they are not always so eager to give out. When you ask people about their income, they often won't respond to the survey if they know they are going to be asked about income questions; when you get to income questions, they are less willing to answer those questions. And they often don't give you a very accurate answer. I've spent a fair amount of time looking at the accuracy of the responses in the main survey that we use to collect information on income and inequality, which is called the population survey. And if you match the data from this survey to the government reports of how much they've paid out in food stamps, for example, the survey only captures about half of what's paid out. Interesting. It's not that people necessarily are ashamed of the fact that they receive food stamps. It's just that it makes it a lot quicker to respond to the survey if you just don't start to talk about all of the benefits you receive from the government and how much you received and what months you received them. So, our surveys are doing a poor job of capturing some of the government transfers that people at the bottom receive. So, you try to correct for that, and what's the implication? What do you find that might be easy to summarize? That if you look at trends in consumption over the last 10 years at the bottom, the rate of poverty indicated by what people are consuming has gone down a lot faster than a rate based on income. In fact, the official income measure says that poverty has gone up over the last 10 years. Now, admittedly the last 3 years have just been awful and we would expect poverty to have gone up. But over the longer term looking at other measures like the types of housing people live in, the types of cars they drive, it suggests that people at the bottom have seen an improvement in their living standard over the long term.
37:04What is the role of debt? It's one of the things, a meme that's circulating that's common now: the reason that we had such a bad set of times over the last ten years is that people saw their income stagnating and they had to borrow to live better. Usually that's not a very good strategy. It's hard to get people to lend you money. The last 10-15 years the U.S. government has tried to make it as easy as possible to borrow money to buy a house; and that I think was a disastrous public policy we've talked about many times on the program. But when we think about consumers going into debt to raise their standard of living--how common a phenomenon is that, and how would that distort attempts to use consumption as a measure of material wellbeing? I think that's a real issue, particularly when you are talking about median incomes. When you look at people near the poverty line, they are not doing a lot of borrowing. So, debt is not a big part of the increase in consumption at the bottom. For the median I think that's more of a real issue. You can see that in the last couple of years consumption has gone down, as people have had to pay back debts. They've also been worried about the state of the economy, and their incomes have fallen. So, you see a decline in the last few years. My take on this is: You could look at income, you could look at consumption; but consumption shows you what people were consuming in the good times. And it's in the bad times they have to repay debts; if they are worried about the future then they are not going to be consuming. And you also want to look at that. We've been talking about the average level of how people are doing, whether they are above or below poverty, how well has the median done over time. I want to turn to inequality, but before we do I just want to mention that the study we've been talking about on poverty is by Hoynes, Page, and Stevens, in the Journal of Economic Perspectives. What they found that was so remarkable is that every single demographic group, their poverty rate fell by double digits in percentage terms; and other than single men, it fell by 20% or more. But the overall poverty rate fell by about 4%, and that's because the group with the highest poverty rate, single women, had grown. This is 1967-2003, which is capturing this era of alleged stagnation. For me, the crucial question is, does a rising tide lift all boats? Between 1967 and 2003, GDP per capita, any measure of our economy, grew dramatically. The idea that it wouldn't reduce poverty would be very depressing about the state of the American economy. I think it's somewhat distorted by the demographic changes--dramatically distorted, actually--that happened over that time period.
40:44But let's turn to inequality, which is the other issue you hear about, that the gap between the top and the bottom is growing. Your claim is that the argument that the top got all the gains of the last 30 years, which you hear all the time--that between 1980 and the present or 1990 and the present, the average person got none of the gains; they all went to the rich; the rich's share grew--your claim is that those statements are wrong because mis-measured inflation and a focus perhaps on pre-tax income. But what about the inequality ratio between the top 90% and the bottom 10% or the top 1%'s share of income? What has your work been on that? We've focused on the difference between the 90th percentile and the median, and the median and the 10% percentile. We haven't looked at the top 1%, so I can't speak to that. What we find is that in the last 30 years, there was this period in the 1980s where there was a very big increase in inequality no matter how you measure it. Whether you look at income, consumption, pre-tax or after-tax income, the late 1970s and early 1980s were bad for inequality. But since then, the picture, when you measure things better, when you look at after-tax income or better yet when you look at consumption, things aren't that bad for bulk of the population. So, the difference between the 90th percentile and the 10th has grown a little bit over time since the late 1980s but not a lot. And if you look at the bottom half of the distribution, the 10th percentile relative to the 50th, the 10th has grown relative to the 50th over that period of time. When you say grown, you mean their standard of living has gotten closer to the median. Yes. And that's particularly true in the last ten years. So, there has been an improvement in the living standards of the 10th percentile relative to the 50th. Now, there has still been some slight worsening of the median relative to the 90th percentile in recent years, but it's been slow. My claim is that the average person has no idea unless they look at the data unless they look at the data where they are exactly and whether they should be depressed or whether it went up a percentage point or two. What I found striking about your papers is how small the changes are compared to what you hear, and I think it would be useful for people to check those out and see what those magnitudes are, because they are relatively small. A big part of that, at the bottom, as I mentioned earlier: our tax system has moved toward not taxing people with very low incomes who work, but instead providing them a work subsidy through the earned income tax credit. And that has meant a big increase in the 10th percentile. Now, that's true--the income tax--but they do pay a healthy amount of payroll tax as a percentage of their income, because it's a flat tax; and those rates have risen over time. So, you take that into account? We do. We take into account Federal and state income taxes and payroll taxes.
45:01Now, you said that the late 1970s and 1980s there was a relatively large change in income and an increase in income inequality. Do you want to speculate about why that is? Most people just talk about inequality as if it is some inexorable fact of life, but the level of inequality emerges from a complex process. Some of the reasons it emerges are good: example of Sergey Brin and Larry Page--they founded Google and they make our lives better and vaulted from being graduate students and unemployed to being in the top 1%. More power to 'em, I say--well, not power but more wellbeing to them--because they've made my life and others' much better off. They've captured nearly all of it. And then there is the not-so-good, which is, to me, bailouts of Wall Street or rich farmers. There's other things going on at the same time. Any thoughts on those large trends? There's been some work on the increase in inequality, and a fair amount of it has been attributed to changes in the demand for high-skilled labor and the failure of us to supply enough high-skilled labor at the times when demand for it was increasing. There are also other stories. Around that time there was little increase in the minimum wage, which can decrease inequality in certain circumstances. If you don't measure unemployed people as 0s, which we don't in the data, it can be a little bit misleading. If you are looking at income then you are capturing that, so there is some evidence to suggest that even though minimum wage will have disemployment effects and other negative consequences, they are associated with some improvement in inequality in some circumstances. Fair enough. And at that time we also had very high inflation. The early 1980s, some people have suggested that that could be part of the story. I don't think we fully know what seems to be behind the inequality, that seems to be so focused on those years. A couple of things I could mention. The other part is globalization. You mention a change in relative demand for high-skill versus low-skill. One of the reasons that low-skill had been in less demand in the United States is that many of the things they had produced were being produced overseas. They now are competing with workers who are cheaper than they are and that puts downward pressure on their wages. There is also technological change, which has made low-skilled workers--they are in competition with machines. And so, when people talk about loss of manufacturing jobs, they often forget that a lot of that comes from productivity increases. We don't need as many people to make stuff any more. Which is a good thing; as is globalization--both the same thing, both forms of productivity. But our school system is so mediocre, our K-12, it's perhaps not surprising in the face of that tremendous change, globalization, it hasn't responded very vigorously in how it's responded to people who go on to college. If anything, it's done a worse job for them. So, that's part of the problem. Over most of this period, we don't see much of an increase in inequality. I don't think that globalization or immigration are the threats to our standard of living that some people have claimed. And you are saying that because during this time of increased globalization, immigration--it's the earlier data. Yes. It's the late 1970s, early 1980s where there was a sharp increase in inequality, not in the last 20 years certainly. When the pace of globalization and immigration have gotten more intense. That's interesting, very interesting point.
50:30You said you don't look at lot at the top 1%. We are not going to look at why they are in the news, but we are in a time in September of 2011 when people are talking about raising taxes on the top 1% because they earn so much money. And they do. For good reasons sometimes, and sometimes for not so good reasons. But haven't focused on the 90-50, the comparison of the 90th percentile to the median, you are arguing that these standard stories that there has been this big gap in wellbeing between the average person and the people at the upper end has been exaggerated. Is that a fair summary? It is absolutely fair. So, what are those other studies doing wrong? If you look at the 90-50, for one, and if you look at earnings even in the last 20 years, you don't see that big an increase in inequality. You see compression in the bottom half of the distribution. So, the 10th percentile is rising a bit relative to the 50th. So part of it is that people are focusing on the top 1%. Another things is that people are focusing on the earlier years, the 1980s. It's true that if you look after tax, things look better, but still even pre-tax the increase in inequality is not that sharp in the last 20 years, leaving aside the top 1% which I'm not going to really be able to speak to. The top 1%--a lot of them are entertainers, movie stars, sports figures--people who have been able to leverage their skills in dramatic ways because of improvements in technology and they are more valuable than they used to be; which is just fine with me. It includes people who are great entrepreneurs. It includes people who earn money because they are being subsidized. Our industry, education, is highly subsidized in direct and indirect ways. When I get depressed about Wall Street, I am slightly consoled by the fact that the subsidies to borrowing and lending on Wall Street by large financial institutions increase the demand for academic economists; and you and I are probably the beneficiaries of that. I'm not proud of it, but it helps me sleep better at night. The top 1%, there's a lot of drama there inevitably. But your point is when you take a more sober look at the non-rarified air, the glass is half full. I encourage people to look at the diagrams on the web. It's hard to describe. The chart is better than 1000 words. But, do you want to try to give a feel for what the magnitudes are when you say it hasn't increased very much or it's very flat. If you look at after-tax income inequality, say the 90-10 ratio, it's about the same now, well, in 2009, as it was in 1993. That's surprising. It did go down a little bit in the 1990s and then came up a little bit in the recession of 2001-2002, but it's almost the same level as it was in the early 1990s. Which I think would surprise many people. And that's accounting for taxes. The significant part of that is that the 10th percentile when you account for taxes has done quite well. The top half of the distribution, that ratio of the 90th to the 50th, that still has gone up over the last 20 years. By how much? The ratio of the 90th to the 50th stood at around 2.5 around 1990 and it's now more like 2.75. I call that a relatively small increase. Yes. Not what I think the average person would say, given what they hear all the time. It's very different from what you hear about the top 1% or the top tenth of 1%. Or the CEOs of the Fortune 500 companies. They run much larger organizations than they used to.
56:44We've talked a lot about numbers. You want to talk about what you think might be done to make America a more healthy place to seek opportunity--which is what I care about? The numbers are important, in debate all the time, they matter. But what I care about ultimately is whether my children and your children and grandchildren and somebody who is not doing as well as we are, their children and grandchildren, whether they are going to get ahead or not? Whether they have a chance to dream and achieve. What policies or issues might be relevant? I think we want to focus on the fact that long-term growth has been pretty widely distributed, and that we should keep our eye on the ball on what will continue to keep economic growth high. And we want to distinguish between policies that may be appropriate for a recession and policies that are focused on long-term growth. Because those may be different policies, and we don't want to justify certain things because of false claims that the growth rate over the last 30 years in incomes has been small. Incomes have risen when properly measured, a lot over the last 30 years; and we shouldn't use false claims of stagnation to justify things like closing the borders to goods and immigrants.

Comments and Sharing



TWITTER: Follow Russ Roberts @EconTalker

COMMENTS (58 to date)
Greg Gilman writes:

Interesting podcast but I was disappointed that he said they "haven't looked at the top 1%." That is what this controversy is really about. Looking at the 90th percentile obscures that. People do care very much about relative inequality whether or not economists think they should. And they vastly underestimate how much inequality there really is when asked. How about a podcast on that?

Russ Roberts writes:

After the podcast, Bruce emailed me about the differences between his work on poverty and the findings of Hoynes, Page, and Stevens (link in the Readings above). He pointed out that most of the changes in poverty by household status occur between 1960 and 1980--there is very little change after 1980 which is the period that Bruce examines. That explains the differences in their findings.

Russ Roberts writes:

Gary Gilman,

I would like to have someone on the program to discuss the top 1%. But as I think I said in the podcast, there are both good reasons for the top 1% to be further away from the rest of us when the overall economy is doing well. And that doesn't bother me because it means that a handful of people are entertaining millions of others or developing new products that millions of others can enjoy. What does bother me is preferential treatment via political cronyism such as is enjoyed by the financial and agricultural sectors.

Then there is the question of the standard of living of the middle class over time. Numerous people have come to believe as a fact that the economy has grown dramatically over the last 40 years but that the average American has enjoyed little or none of that growth. I don't think that's a fact. If it is, we should radically change our economic system. That's very important and I think we'll be hearing a lot more about this disagreement as we get closer to November 2012. It strikes me as a very important issue to understand clearly.

Aaron writes:

And that doesn't bother me because it means that a handful of people are entertaining millions of others or developing new products that millions of others can enjoy.

Forgive me if I'm being dense, but why does it mean that? You say that you're concerned about political cromyism, but your statement seems to presuppose that the only way for the wealthy to become more wealthy is to provide value to others. Well, if that's the case, then what difference does political cronyism (or rent-seeking, for that matter) make?

Numerous people have come to believe as a fact that the economy has grown dramatically over the last 40 years but that the average American has enjoyed little or none of that growth. I don't think that's a fact.

This deserves a podcast, I think. I understand your contention that we have all shared in improvements to health and lifespan (but I cannot sell those, and if I can't afford the medical care to access them, they do me little good in any event). But It's not enough to point to a big-screen television and say that people should be happy with that.

My (limited) understanding of history tells me that once upon a time, being middle class meant being able to afford having domestic help even with only a single wage earner in the family. In the modern mind, that qualifies you as wealthy. So I think that part of what we're seeing is a constant redifinition of "middle class" based on a middle-ground between rich and poor, rather than any set level of income or lifestyle.

In any event, Elizabeth Warren (someone I suspect you'd find much to disagree with on), did a detailed analysis of factors working on the middle class through the seventies into the nineties, and showed why she felt that the middle class was losing ground. I think that a similar analysis from your POV would be just as enlightening, and allow for an apples to apples comparison.

Thanks for your time.

Bruce Meyer writes:

I want to emphasize two things.

First, the Hoynes et al. paper finds exactly what
we do. If you examine the trend in poverty since 1980, changes in the demographics of the population explain essentially none of the overall change in poverty. Their finding that the composition of the population matters is only for the 1960s and 1970s.

Second, to properly examine the top one percent of the population, you need to worry about the shifting of income between taxed and untaxed sources, between the corporate and noncorporate sectors, as tax rates have changed over time which requires different data and methods than are appropriate for the vast bulk of the population. For the bulk of the population subchapter C corporations and stock options are not a major source of income.

Filip writes:

Very fascinating discussion. Along with Greg, I would also be interested in further talks about the whole 99% vs 1% controversy.

I have one tangential question: since the federal poverty level (that our government uses in eligibility determination for things like Medicaid) is widely considered to be an obsolete measure in truly determining poverty, is there a better measure out there that takes the true cost of living into account (and maybe even regional differences)?

Russ Roberts writes:

Aaron,

I messed up my earlier comment in editing it. Here is what I meant to say:

But as I think I said in the podcast, there are both good and bad reasons for the top 1% to be further away from the rest of us when the overall economy is doing well. It doesn't bother me when a handful of people are entertaining millions of others or developing new products that millions of others can enjoy. That's the good kind of inequality. What does bother me is preferential treatment via political cronyism such as is enjoyed by the financial and agricultural sectors. That's the bad kind.

Having servants is a strange way to define the middle class being wealthy. As living standards have risen, wages have risen and servants have become a lot more expensive relative to other things. Instead, we have mechanical servants that reduce the pain of cleanliness and food prep--even most people in America defined as poor can afford washing machines, dryers, vacuum cleaners, and dishwashers.

A reference to the work of Elizabeth Warren's that you mention would be much appreciated.

William B writes:

As members of society, I think we should rightfully be able to expect a sort of "default" increase in the standard of living due to improvements in technology. The use of hedonics is deceitful and masks inflation.

I actually dispute the guests claim that you get much more with cars today than a decade or more ago. According to Wikipedia, power door locks became common in 1956, and power windows in 1941, yet I still have to pay extra for these features on American-made cars. If that situation could be adjusted to the sort of "default" increase in the standard of living I mentioned above, it would be easy to see that you are getting less for your money in a car today than you were 20, 30, or 40 years ago.

Sometimes these figures discussed by economists just defy common sense and the generally increasing feeling of hopelessness the middle-class has been experiencing for many years now. The fact is, inflation has been killing the middle class since Nixon took us off the remnants of the Gold Standard.

murigeo writes:

Great interview but this was more a lesson on confirmation bias than anything else.

Bullets points;

- health care is excluded ? that's huge exclusion
- inflation numbers appear to be selected
- housing cost are up
- day care cost are up
-transportation cost are up ( most households need 2 cars)
- more households need 2 income earners to get to the median
- higher education cost are up
- two big causes of bankruptcy ( college debt with no jobs and health care cost)
- during the relevant time frame public debt increased by some $10 trillion
- household get to income is way up
- household net worth is down
-

The big ticket items are more expensive. and we are 2-3 more years out and things have not improved.


It's very sad to see mainstream economist not recognize the problem because they will also fail to provide solutions.


It's clear that basic logic of sending 58,000 factories overseas to low wage markets HAD to have a big impact on wages along with other structural policy changes.

Russ you work with wealthy college kids n a part of the country that has much wealth from the rent seeking that comes to the DC area.


Out here where I work with families of all income levels I can assure you they are not doing better and it is not as Phil Gramm says a mental recession.

If I missed symptoms and a diagnosis by this much my job and lots of money would be on the line...

It's often said that a tax increase could result in a higher pre-tax wage because peoples salary would be "bid up". I wonder about the converse: is it possible that tax-cuts end up depressing wages? In the sense that wages get "bid down"? And if yes, then can some of the changes in wage growth be attributed to tax policy changes?

Mark Allen writes:

I found Econtalk a few weeks ago via a link to The Fight of the Century. I've listened to dozens of your podcasts over the last month or so, and I can't thank you and your collaborators enough for your efforts. It's been incredibly eye opening and educational.

Regarding the earlier comment on Warren's work, this video is dated but speaks to some of the issues raised in this podcast:

I agree that your perspective on these issues would be very interesting, although I would argue that Warren's apparent political aspirations and recent outbursts are putting the final nail in the coffin of her credibility.

On the other hand, the perspective that she represents is becoming more and more prevalent, and I agree that now is the time to try to achieve as much clarity as possible. The narrow perspective that an entire "class" is dying is apparently not based on any real evidence, does not advance the dialogue in any way, and has disconcerting implications for policy discussions.

Put simply, my view is that times are tough, but they have been much, much tougher for everybody. I believe that if more people understood and appreciated this as the fact that it is, we'd have far less hand-wringing and distracting polemic, and (optimistically) a more reasonable basis for policy discussion.

Having said that, it should be apparent that I am in agreement with Roberts' point of view. However, this particular episode didn't provide the clarity I crave, and I finished it more confused than I started (the first time I can say that about Econtalk).

Specifically, the open questions about debt (especially debt incurred for education) and medical/insurance expenses seem extremely relevant to me. I believe that personal bankruptcy has a place in the conversation, and didn't hear it mentioned. I'm not as interested in the top 1% as others seem to be, but the alternative strata presented here were very confusing to me. The numbers in general overwhelmed the conversation in a way that was not helpful (this is usually a strong suit of the podcast...Roberts' ability to clarify statistics of varying complexity).

I suspect that I might benefit from a review of some of the back catalog of Econtalk, and as always I am up for hearing more of the Roberts perspective. I guess I'll just chalk this up as my least favorite episode.

I really do appreciate the podcast. As a tech professional, I would be remiss if I didn't add that the production values of the podcast (both the sound quality and the website) are really top notch and much appreciated.

loveactuary writes:

Just an FYI for the listeners, the paradox mentioned throughout the podcast is Simpson's paradox, and it has bugged me ever since I started seeing it in my work with data.

One reflection I have on the paradox is that even though it is counterintuitive, I think that both the sub-group results (e.g. trending positively) as well as the overall group result (e.g. trending negatively) are both meaningful. If we say, for instance, that although all subgroups experience a rise in their own standard of living, but there are more folks swelling into the least fortunate of the groups, then this is still a problem.

I don't think we can look to the positive trends of each subgroup and declare victory.

For instance, in health care studies, it may be that each of 5 categories of service are experiencing a reduction in cost trends, but if more of the population is using the more expensive service over time, then the cost to the overall group can still increase, and the increase is very real (just ask your insurer who is paying the bill).

Listening to this podcast now and enjoying it (as usual).

This "inequality" meme is one I hear often and it's a bit frustrating.

For example, just today I saw that the people at Mother Jones posted these:

"Study: Income Inequality Kills Economic Growth:
http://mojo.ly/pAt71s
http://motherjones.com/politics/2011/02/income-inequality-in-america-chart-graph
"

I would love to see Dr. Roberts confront these specific points head-on in a Cafe Hayek post line by line sometime.

muirgeo writes:

Share of income of the top 0.1%


Isn't this in effect taking 6% of GDP out of the economy of the other 99.9%? The puzzle pieces just seem to fit together for me. You can't have this much inequality and expect the economy to keep humming along.

Fix the trade deficit ; improve middle class incomes and then you will see things get better. Ignore this data and do nothing but push austerity and we will putter along. I guess we have to repeat history one more time... it's a shame.

Russ Roberts writes:

loveactuary,

You are absolutely right that the fact that the large reductions in the poverty rate within demographic groups and the fact that the overall rate is relatively stagnant because the groups with the highest poverty rates are getting larger does not mean that everything is now fine. Great point. But the key is that understanding the demographic changes tells you something about the underlying causal relationships. The relatively constant poverty rate does not imply that a rising tide no longer lifts all boats. That is still true, I think. But it may not hold true when there is a dramatic cultural change--the increase in divorce.

As you point out, there are still a lot of poor families, particularly those headed by single women. But the cause isn't that the economy no longer works very well. The cultural/demographic change is the underlying cause and that will heal over time as women getting married now have different expectations (for all kinds of reasons) about their future expected work patterns are going to be.

Also very happy to discover that this paradox has a name. I'll check out the link.

Aaron writes:

Sorry for the slow turnaround, Professor Roberts. Here is a link to Ms. Warren's talk, The Coming Collapse of the Middle Class.

As refers to servants (and perhaps I should have just skipped that part), my point was that it seems that the definition of "middle class" is not static across time and culture - what was middle class at one point in time might not be considered now. Just like the idea of poverty varies - there are places where the idea of an overwieght poor person is oxymoronic, and what is poor now would be living like a king to someone from 100 years ago.

So I guess part of the question is how much is the concern over the middle-class due to an apples-to-oranges comparison to a different time period, where the definirion was different?

Seth writes:

"Isn't this in effect taking 6% of GDP out of the economy of the other 99.9%?"

Not if they earned their wealth by making the other 99.9% of folks better off by 6.01% or more.

nick writes:

debt is not generally an issue at the poverty line?! woaaah wait a minute here.

how are we defining debt , if you mean a bank loan for a house or a car or maybe a credit card i agree. if you include things like buy-here-pay-here auto loans, appliances and furniture on payments (or rent-to-own), payday and auto title loans, tax refund loans...a different picture emerges. These are all debts in the grey area of financial services which cater almost exclusively to people at the poverty line.

Frank Howland writes:

Interesting podcast. Some comments:
(1) Taking an after-tax perspective is problematic when the end of the period under consideration saw large tax decreases accompanied by large deficits. This makes people look better off in 2011 than they actually are because they will have to pay higher taxes in the future. Unless you believe in Ricardian equivalence at all income levels this applies to consumption as well as income.
(2) You very quickly discussed debt and housing. However the boom in housing consumption was fueled by debt. I wonder how this affects the results Meyer presents. Does Meyer have a handle on how much consumption of housing services has declined? How is rent imputed for houses--if the price goes up a lot does that make imputed rent higher and vice versa? (I'll look at his papers to try to get the answers.)
(3) The Wall Street Journal (remember "lucky duckies") and many Republicans decry the combination of tax cuts to poor people and the Earned Income Tax Credit. They would like to reverse these developments and make things worse for folks at the lower end of the income distribution.
(4) I haven't made my way through the entire podcast (perhaps the comments above indicate this), but I am pleased you linked to the Tyler Cowen podcast because the subject Meyer discusses is a piece in the very interesting Great Stagnation debate that Tyler and others are engaged in. I agree that the quality of many goods has increased a great deal in the last 40 years (approximately the amount of time I've been paying attention to quality).

B writes:

I looked for some data to backup the Russ Roberts' claim that education cost has increased due to increasing pursuit of education and there was a relatively inelastic supply of education. I was skeptical of the claim, but couldn't find any data on this. One thing I would point out, though, is that education levels increased dramatically from the 1900s to 1990s, yet the cost of education has increased significantly since then. My question is this: if education supply really is inelastic, then why was it elastic before the 1990s? The pre-1990 experience should count as evidence against the "education supply is inelastic" argument, since we seemed to do a good job getting more educators back then. (Feel free to provide an argument against this line of reasoning, or provide data that pursuit of education has risen so dramatically in the past 20 year that it explains the increased cost.)

I also want to point out another thing: Russ Roberts takes on the claim that the income of the lower 90% of Americans has not improved over the past 30 years. His explanation is that incomes have improved once you take account of inaccurate inflation data, tax cuts, and improved quality of goods. Two points on that issue:

At times, Russ Roberts would reference 1967 as a starting point. Here's a quote: "This is 1967-2003, which is capturing this era of alleged stagnation. For me, the crucial question is, does a rising tide lift all boats? Between 1967 and 2003, GDP per capita, any measure of our economy, grew dramatically." The timespan in question is 1981 to 2011, not 1967-2003. This is important because it's possible that the 1967-1981 had growth, but 1981-2003 didn't. So, talking about the 1967-2003 period might not be relevant to the 1981-2011 period, even if they overlap.

I also want to point out that I've seen numbers showing huge increases in the wealth of the top 1%. Between 1979 and 2011, the top 1% saw their income increase by 130%. The top 20% saw their income increase by 25-30%, and the bottom 80% saw their incomes decrease 10-30%. (http://motherjones.com/politics/2011/02/income-inequality-in-america-chart-graph) Now, okay, let's accept that the numbers are artificially low for everyone, so we should revise all the numbers upward. Let's say that they should be 30% higher in 2011. However, there's still an amazing gap in income change over the period. There's slow growth for the bottom 80% and the growth of the top 1% is 130-160% higher than the bottom 90%. However you slice it, you can still say that the bulk of the gains over the past 30 years went to the rich (even if you can't make the statement that "the rich made ALL the gains, the bottom 80% saw NO increases"). There were times where it felt like Russ Roberts didn't like to admit that the majority of gains went to the rich, but he can't argue against it directly, so he argued against the idea that the rich made ALL the gains and the poor made NO gains in the past 30 years.

Russ Roberts writes:

Frank Howland,

I did not have time to get Meyer's take on Cowen and in a way he had already given his take so I ended up just linking to the Cowen podcast. In this post at Cafe Hayek, I outline the problems I see with Cowen's claims as well as linking to a recent defense by Cowen of the stagnation thesis.

Russ Roberts writes:

B,

One point I did not emphasize enough is that "the" rich or "the" top 1% in particular are not the same people. When the top 1% have large gains over a 20 or 30 or 40 year period, it is not a select group getting richer and richer. It's LeBron James growing up, working incredibly hard with his gifts and entering the top 1%. It is Sergey Brin and Larry Page doing the same thing with Google. What the numbers tell me is that the US economy over the last few decades has many opportunities for incredible wealth creation. That is often or maybe even mostly good.

On the education point, my point was that it is often lamented that the high and rising cost of eduction means that it is hard to afford college. My point is that causation runs in the other direction--more and more people are going to college so it cannot be that the high price is making college a more exclusive activity. It is a dramatically less exclusive activity.

On the cherry-picking of dates--I brought up 1967-2003 because that was the time period of the study done by Hoynes, Page, and Stevens. Yes, different things can be going on in that time period. And evidently 1980 to the present time has different trends than 1967-1980. I would not be surprised by that--the 1970s saw the biggest explosion in households relative to population. That was the time when the divorce rate spiked and then began to decline. So I would expect demographic effects to be strongest in that decade masking what was going on in the economy for households of a particular type.

The economy also grow dramatically between 1980 and the present, by the way. Many claim that none or few of the benefits from that growth went to the middle class or the top. I don't know about the precise proportion--and as I mention above--it is hard to interpret those numbers because they are not the same people. When you look at data that follows the same people over time rather than taking snapshots of the population at different points of time (which leads to distortion because of the demographic effects I mentioned), you get a very very different picture--the largest gains go to the poorest groups. Look at these data for example.

Having said all that, there are many things that make inequality larger or that hold back the middle class or poor people that are identifiable and fixable. Two examples I would mention: crony capitalism that benefits the financial sector artificially (that is part of the top 1%'s gains that is destructive rather than productive) and our mediocre public school system.

I hope to do more with the top 1% in a coming EconTalk.

Russ Roberts writes:

I would like to make the point about the top 1% not being the same people a little more clearly.

Magic Johnson came into the NBA in the late 1970's. His highest salary was around $3 million per year. LeBron James came into the NBA in the early 2000s. His peak salary so far is $15 million. Take account of inflation and it is still a big increase. This does not include endorsement deals which make the difference between the two even bigger. Both players went from very little income to being in the top 1% in terms of income and probably wealth. But the bigger share going to the top 1% between 1980 and the present is not a sign that Magic Johnson got all the gains. He didn't. The NBA players in the top 1% simply got paid a lot more than they had been paid earlier.

Why did that happen? Unlike the gains to the top 1% on Wall Street that came from policies such as creditor bailouts that made leverage easier, the gains to NBA players (and singers and actors and other entertainiers) in the top 1% came from a change in the market--technology made basketball more accessible in the US and especially outside the US. We became a richer country which increased the demand for sports. All of these are good things. The fact that NBA players make more now than they did 25 years ago is a good thing not a bad thing. They are creating more benefit and pleasure around the world, gains that are not measured by our incomes or theirs.

But of course athletes, singers, and entertainers are only a portion of the top 1%. Again, I hope to do more on this soon on EconTalk.

paul writes:

Thanks so much for one more great podcast! One of my favorite points made is this week is that people are becoming more well off and may not realize it. People often romanticize the past and do not see all of the ways that our standard of living, in many areas, has improved even for the poor. I see this as a fault in accurately accessing the way the world is. Our brains have not developed to have a rational and/or accurate understanding of many modern day situations we have to evaluate. Heuristics and cognitive bias are necessary for navigation the world we live in but do not always give us useful information in all circumstances, especially as the world changes.

I bring this up as it seams to be a main point in understanding why people do not believe that our standard of living has gone up. it is also a point that should be made when evaluating the ability for individuals to make rational decisions in a free market. Some people do really feel we are worse off now because more people are in "poverty". Many of the current people in poverty have more access to better healthcare, information, food and other things we care about than 90% of the people did 200 years ago.

In the free market some people believe that buying a sports car, getting a new diamond ring or living in a gigantic house is an efficient use of resources even if they are really looking for prestige, security, love or something else.

my main point is that when evaluating our perception of the world we need to take into consideration our limitations in understanding both our current state of well being and our limitations in our ability to figure out what is truly important in a free market economy.

when a person says we are worse off in more ways now then we were 200 years ago i will disagree. when a strict free market economist says people make rational decisions about things that matter to them i also disagree.

as was discussed in the podcast, not all economists agree but they are still better than the plumber at evaluation these complex economic situations. The same can be said about individuals making rational decisions about there own well-being. People that understand how our brains think about the future, risk, desires, decision making, relationships and so on can often make better decisions about us as individuals than we can. That said i am not sure how an when to implement this :)

paul corrado writes:

here are some of my opinions on the cost of education as this was brought up in the podcast too.

We now have access to more and different forms of information and have the ability to share with and learn from people all over the planet at speeds unheard of just a decade ago. (facebook, google, apple, twitter, wikipedia, apple, craigslist) With this new technology giving us unprecedented access to information we are now able to accomplish many of the things we look for in a traditional higher education at fraction of the cost. Instead of lectures given to a class of 30 students the best educators can pass on knowledge to an unlimited numbers of individuals all over the globe with barley any extra effort. (see academic earth, itunes u, mit, youtube) Educational Information is no longer a scarce resource only found at libraries and universities. In fact we have more data available a few clicks away than any educational institution had access to just 15 years ago.

By using this new technoligy we can more efectivly and effinetly educate some people. Not all students, courses, subjects or fields can currently be taught as effectively using this new philosophy and the new resource but many others can be and are currently perfect for this type of educational experience.

Certification is an important aspect for many people in education and difficult to implement and regulate but it can still be done at a fraction of the cost of many other options. With the new resources we have access to and a new philosophy on education we can help many students gain more of what they want out of an education at a fraction of the cost we spend today saveing students thousands of dollars in tuition fees and student loans as well as allow many more individuals the chance to get an education.

David writes:

I would be wary of attributing the increase in sports salaries to increased demand. The teams are able to pay such salaries increasingly on the back of the taxpayer who subsidizes the team for a promise of economic development.

I have seen a few studies that have shown that the massive subsidies to the sports teams don't show a net benefit to the city. Another case of people who really don't earn their millions but influence government policy in order to funnel tax dollars to special interests.

David writes:

You also mention singers and entertainers as well. Assuming we are talking about the ones who are very wealthy, they earn their money through government granted monopolies. These people would most likely not earn the sums that they do without government policy.

You rightly have a distaste for overreaching government. I wholeheartedly agree. However, I also have a distaste for those who use the system but then take all of the credit like they did all of the work.

B writes:

Regarding the claim that the top 1% were composed of people like sport players and technology moguls: while they certainly are part of the top 1%, I do wonder to what extent their salaries are the reason for the increase in wealth among the top 1% (it no doubt has an influence, but does their influence account for 10% of the increase or 100% of it?) The top 1% means 1 out of every 100 people, which includes an awful lot of people besides famous sports players and technology moguls (again, it could be that it's the top 0.01% that are driving up the apparent increase of the top 1%). As I recall, a typical professional baseball player earns around $300,000, so being a professional athlete still doesn't mean you're in the top 1% (as I recall, the top 1% starts somewhere around the upper $300k).

We've also seen big increases in executive pay, which seems excessive. The top five executives at Lehman brothers took home over $1 billion in compensation. While some say that's warranted, and claim that they run larger organizations now than they did in the past, it seems hard to believe that executive pay is growing in proportion to the size of their organization. When contrasted against historical CEO pay or CEO pay in other countries, the pay of US CEOs looks very excessive. We suspect it has more to do with crony capitalism, stacking the board of directors, fighting government regulation or oversight, etc. We're suspicious when people who caused the collapse of Wall Street walked away with hundreds of millions of dollars and golden parachutes. I think there are a lot of suspicious things going on with the valuation of CEOs. Economists might say "they earned it", but there's a few issues with that. First, when it's the CEOs and their buddies on the board of directors setting the pay, there's a conflict of interest (and my suspicion is that their worth is overinflated). Second, why do we say that a CEOs is "worth" a certain amount to a company, but when we talk about worker pay, we talk about how little we can pay them in order to do the work? Example: if a teacher is worth $50,000, but will work for $30,000 a year then we pay them $30,000. But, if a CEO is "worth" $30 million but will work for $500,000, then we're supposed to "pay them what they're worth". It's a double standard that serves to legitimize huge pay for CEOs.

B writes:

"Look at these data for example."

I took a look at the chart, and I have to admit that something seems suspicious about it. It says that the median family income for white parents is $61k and white children is $79k. The median income of white children in the lowest quintile is $56k. Isn't the national median still around $44k? I realize, of course, that there are other races other than white in the US, but these numbers surprise me by how much higher they are than the national median.

Plus, there's other information that says this: "In 2009, the median of the earnings for young adults with a bachelor's degree was $45,000, while the median was $21,000 for those without a high school diploma or its equivalent, $30,000 for those with a high school diploma or its equivalent, and $36,000 for those with an associate's degree."
http://nces.ed.gov/fastfacts/display.asp?id=77

How can these numbers be right? Your chart suggests that the median earnings of white children in the LOWEST quintile is $56k, even though the median income with a bachelor's degree is only $45k, and I'm pretty sure the lowest quintile of white children tend to have less than a bachelor's degree.

It makes me suspect that the data is just plain wrong.

Russ Roberts writes:

B,

It's family income, not individual income. The "children" in the sample are going to be youngish adults which makes it non-comparable to national averages. The purpose of the analysis is to look at economic mobility. The chart looks at intergenerational mobility and it is surprising how much better off children are as adults than their parents. It is not the truth. But it is capturing something important that is going on in the economy.

The data source is the Panel Study of Income Dynamics. It is a survey that is widely used. It is of course not perfect. The analysis I cite is from the Pew Economic Mobility Project done by capable economists who have no bias that I know of toward finding growth among the poor.

Cowboy Prof writes:

Great topic and interview as usual. But it gave me one of these "Byers' Blind Spot" moments, to recall an early podcast, wherein you think deeply about a concepts and it becomes more mysterious.

If inflation is a strictly monetary phenomenon as Milton Friedman says, why are we going about measuring it with a "basket of goods," picked by who knows who and who knows why? That basket at best might just reflect relative prices shifts in the goods in the basket with goods outside the basket (holding quality issues aside). Those 8-track tapes of REO Speedwagon aren't selling like they used to!

Why don't we have an inflation measure that is directly tied to the amount of money in circulation? I'm sure I learned this in one of my econ classes, but it just doesn't make sense to me know.

Also, I would really like to hear a podcast on the informal economy -- how people in the bottom 5 or 10% of the income ladder engage in barter and other forms of "underground" trade. This was hinted at in part in the latter part of the podcast, but is a topic worthy of an entire hour.

B writes:

More on Russ Roberts' claim that the cost of education has increased because it is inelastic:

I did find an article (http://www.businessinsider.com/a-college-education-of-diminishing-returns-2010-9) showing the percentage of 25-29 year-olds with a bachelor's degree. The chart shows that, from the late 1970s until the mid 2000s, the percentage of 25-29 year-olds with a bachelor's degree increased only slightly. Judging from the chart, it has increased from around 23% to around 29%, or around a 25% increase. (Note: Older people might've also returned to college, so this is not a comprehensive accounting of the number of people in college.)

The same article also includes a chart of the college tuition CPI over a similar period. The cost of tuition has increased nearly 10x over the same period. Also, the cost increased 2-3x between the late 1970s to mid-1990s, when there was virtually no increase in college attendance.

This suggests that Roberts' explanation of college-cost increases being a result of an inelastic supply of higher education is wrong. Perhaps what's going on is that colleges realize that a college education is valuable and have increased their prices to "eat-up" the value. To put it another way: if colleges are giving students an education for $30,000, but those students earn $200,000 as a result of their education, then it makes financial sense for colleges to increase their cost to $100,000 or $150,000. Essentially, they can raise their prices until they consume nearly all the benefit that a college education provides, and people will continue to pay for it. (Of course, it means a college degree is not as valuable to students, and it's increasingly the colleges themselves who gain the value of people pursuing a degree.)

Aaron writes:

"But you are saying it took 15 years from the introduction of cell phones till where they were even in the basket?"

"Exactly. And that's been historically true, that it's been very long before goods have been included."

It's worth noting that 15 years after cell phones had been introduced (so this would be 1998, as the first commertial phone was in 1983), penetration in the developed world had reached 25 subcribers per 100 people, up from 18 a year earlier.

It would have been nice to know at about what level of market penetration that items were added to the basket of goods - and what is counted. Now that cell phones are in the basket, is the full MSRP counted or the actual "street price?" It seems that if you're going into stores, then that price is often 0 - with a two-year contract, anyway. Direct subsidies like that would surely throw off the numbers. And if you're tracking the cost of cell-phone service, then you have a number of apples to oranges comparisons to make across carriers.

So while I understand the point that was being made in the podast, it seemed designed to lead us to a conclusion that it didn't fully explore or lay out the facts to support.

Russ Roberts writes:

B,

There are three important trends going on in the education market.

Government policy subsidizes demand via subsidized loans and artificially low tuition. That increases the real cost. It has nothing to do with whether supply is elastic or inelastic as long as it is not perfectly elastic That is, it increases the cost as long as supply is upward-sloping.

The returns to college are increasing. That also encourages demand which pushes up price. It has nothing to do with whether supply is elastic or inelastic.

People who can teach at universities, are scarce. Their supply is relatively inelastic compared to some other skills. So expanding attendance increases the demand for highly-educated folks which in turn raises their salaries.

BTW, 25% is not a small increase in my book.

David writes:

As others have suggested. Take a look at the Two-Income trap by Elizabeth Warren. The videos explaining the basics are available on YouTube or you can take time to read the book.

Taking a look at household income without recognizing the monumental shift of the earners and costs within the household is missing a massive part of the last half century.

http://www.youtube.com/watch?v=akVL7QY0S8A

B writes:

No response on why college costs increased so much during the late-1970s to mid 1990s when there was seemingly no increase in students?

> "BTW, 25% is not a small increase in my book."
25% increase over 30 years isn't that significant. Besides, from the 1940s to the late 1970s saw a very large increase in college attendance (from 5% to 23%*) - that was a much larger increase than the 1970s-2000s (from 23% to 29%), and roughly over the same duration of time (about 30 years).

* What I mean is that, in the 1940s, only 5% of 25-29 year-olds had a bachelor's degree.

B writes:

> People who can teach at universities, are scarce. Their supply is relatively inelastic compared to some other skills. So expanding attendance increases the demand for highly-educated folks which in turn raises their salaries.

Given the cost increases of college tuition over the past 30 years, what percentage of that went to increasing college professor's salaries, as opposed to say, building large beautiful buildings on campus or paying college presidents?

"According to The Chronicle of Higher Education’s most recent survey of executive compensation, salaries for presidents of private institutions has increased 200 percent over the last five years, with 81 presidents making more than $500,000 a year. Eight out of the 182 public institutions surveyed now pay salaries of at least $700,000"
http://studentloansblog.nextstudent.com/2007/11/20/college-presidents-salaries-not-so-slowly-sliding-up-the-pay-scale/

How many professors at private colleges do you think had their salaries triple in the last five years, like the college presidents have?

Michael writes:

I hope this hasn't been asked or previously discussed, but I wondered if there could be a podcast about U.S. infrastructure. It seems all I ever hear is about how bridges are collapsing, schools are falling apart, roads are decaying, etc. Is this accurate?

I love the podcast, thanks Russ.

Rohit writes:

Wonderful podcast. It does raise some serious questions on the debate about the rate at which people have been brought above the poverty line. Being a non-economist, however, I still wonder whether the poverty line in itself makes sense. I mean how is the poverty line defined in the first place in the United States? Also, would do agree with the thought that Bush tax cuts have proven to be disastrous for the economy while benefiting a few? I mean we have good examples of Scandinavian countries where tax rates are high, and yet there are very few poor people in terms of percentages.

john thurow writes:

Since the federal government has been intruding more and more into the private sector since 1913 it seams to me that any comparisons or studies conclusions are hard to sort out through government noise and distortions. Is there any way to do the same study (studies) going back before 1913? If so, it would be interesting to see without federal government largess how equal/unequal people were before 1913.

Also, I don't really understand why income inequality is necessarily bad if people feel like they can move upward through hard work, luck or innovation. The French Revolution is a bad model to project on the U.S.. That is, unless the Government keeps preventing people from becoming upward mobile through deliberate policy such as the french aristocracy put in place in 1700's France.

It would also be interesting to know why Public Companies tend to have CEO pay that is higher then private companies.

As far as stagnation, I do believe we have reached asymptotic relationships between a lot of the sciences where the amount of gains given a change are smaller and smaller and within some of the sciences all there is left is trade offs ,without some new revelation or break through. For example, the automobile gas engine and gas mileage. You can increase the gas mileage by making the car lighter but the laws of physics get in the way of making the gas engine more efficient. However, I do also know that I have no idea what discoveries lie in the future so I think getting back to freedom is important and nothing that ails the U.S. economy now can't be cured by a good dose of freedom. But alas 1913 was a long time ago...

B writes:

> Is there any way to do the same study (studies) going back before 1913? If so, it would be interesting to see without federal government largess how equal/unequal people were before 1913. Also, I don't really understand why income inequality is necessarily bad if people feel like they can move upward through hard work, luck or innovation.

Income inequality can be especially bad if it results in child labor. Those children end up with jobs to help ends meet, rather than education, which affects their upward mobility. You list "hard work, luck or innovation" as methods to move up, but education is a major factor. (I thought it was odd that you omitted it.) It's really hard to get a good job or more up in the world if you don't have a high school education (or worse: if you're illiterate).

paul writes:

"People who can teach at universities, are scarce. Their supply is relatively inelastic compared to some other skills. So expanding attendance increases the demand for highly-educated folks which in turn raises their salaries."

this may be true but as we figure out how to make this scarce resource more efficient (academic earth, itunes U, and of course econtalk) and effective this will hopefully not be an issue. The ability for individuals to have access to information is no longer a scarce recourse (it was 15 years ago). That said many other things a teacher at a university provides or a student at a university receives are not as easy to duplicate.

DarrylC writes:

Russ -

It would be great to hear you chat a bit with Saez. Several years ago some of my friends and I were discussing the inequality issue and we sent him an email asking him a question regarding his work and inflation. I was surprised when he gave a nice reply.

Alan McCrindle writes:

I had to try hard with this podcast. It really seemed like a careful selection of statistics to justify a specific perspective.

How can we even pretend to have a discussion about inequality with the top one percent left out of the analysis? This is a definition of insanity.

If you want to understand how people finance consumption when incomes are falling - here is how. There is an increase in dual incomes, governments reduce taxes, governments increase welfare, people reduce savings, people borrow (and often against the imaginary paper profits from house price increases). All these stats are out there to measure (as opposed to "memes")

Someone really has to have been living on a different planet not to get the whole marketing push to change peoples perspective on going into debt. As we know there was a huge demand for debt from investors - banks had found a way to convert debt that would never be paid back into AAA.

People who could not afford houses were sold them on the basis that prices always go up and that they could always refinance when they couldn't make their repayments. Next they were told that the apparent increase in equity in their houses was being "lazy" if left in the house or actually "income from their hard working house". So equity withdrawal was recast as simply claiming income as opposed to increasing debt.

Moreover in the USA, for the most part, you can walk away from your house if you can't make the repayments

Without equity withdrawals the US economy would have been in recession for most of the 2000's.

And a quick one on redefining CPI using the logic that our cars, houses and fridges are better than now they were in the 60's. If we are going down this path or redefining based on observable trends then lets add a few more variables that reflect changes since the 60's the work in the opposite direction - such as quality has dropped, things don't last as long and have to be replaced more often. The extra processed food and lack of exercise thanks to better cars and TVS etc. is making people sick (obesity, diabetes, heart disease)

keatssycamore writes:

"And a quick one on redefining CPI using the logic that our cars, houses and fridges are better than now they were in the 60's. If we are going down this path or redefining based on observable trends then lets add a few more variables that reflect changes since the 60's the work in the opposite direction - such as quality has dropped, things don't last as long and have to be replaced more often. The extra processed food and lack of exercise thanks to better cars and TVS etc. is making people sick (obesity, diabetes, heart disease)."

I'm with Alan on this podcast and particularly liked the above paragraph (though not breaking out the top 1% was the give-away that this would be one of those bias confirming sessions that EconTalk sometimes has).

I know I was scratching my head the entire time these two were back-patting each other and claiming, "Everything is better". No Russ & Bruce, everything is not better. Everything is cheaper & more disposable. That's not the same thing.

And even the stuff that isn't meant to be disposable is crap. For instance, I had REPEATED problems with a brand new 2008 John Deere planter. Problems I never had before all the pieces were manufactured in the Third World. And it wasn't just me. Search any ag message boards and you'll see farmers telling tales of buying the latest John Deere model planter & having so many problems with it that they go back to a White from the '80s or a Kinzie from the '90s (which is what I went with to get through that season from hell).

There's also the "for instance" of the brand new 2010 Mini Cooper my wife bought which had to go back to the Mini dealer 9 times as they vainly attempted to fix noise emanating from the steering column (likely a result of all the cheap plastic parts surrounding it and connected to it).

Now I realize that anecdote is not data, but I think these examples help demonstrate that, at the very least, Alan has a valid point when he asks that if you're going to be "redefining" you at least try to "redefine" from both directions. I also think maybe you should just take a look around at the things you use everyday and ask yourself one last time whether you and Bruce should really be claiming, "Everything's better."

Thanks for the podcast. I do really appreciate all the time & effort you folks put into this free educational resource. I love that when I want to think, I can turn on the podcast and do some critical listening. Along those lines, would you ever have any interest in having an ag economist on the show? There are a bunch of exciting things you could discuss since we are right in the midst of a huge land bubble (as well as an equipment bubble due to expensing up-front/rolling-over debt, John Deere's finance arm is the GMAC of the twenty-teens).

Cause I feel like it would be nice if folks discussed the various facets of these bubbles WHILE we were still in the bubble, not after the inevitable crash. Regardless, thanks again to Roberts and crew.

Jim Kelley writes:

All our medical talks now begin with a financial disclaimer. This podcast,more than most, might need such a disclaimer. Google notes his work for the Dept of Labor. He seems to say" if I assume a lower inflation rate things are not bad." Then,in part returns to a committee charged with lowering the inflation rate to justify a low inflation rate.
There is a need for a more physics-based analysis. The modern car is not necessarily better even with the cup holders. For instance,the final word on the Prius is still pending. The embedded energy in the battery may turn out to make the Prius a net drain on the economy. It will depend on the recycling potential,still unknown. The life cycle physics of tract mansions is similarly suspect. Shadowstats may be too extreme but some average between shadowstats and the CPI seem reasonable. The economy as a whole,like any engine has a net loss, decreasing resources and inflating dollars at some rate higher than three percent.

Russ Roberts writes:

Alan McCrindle,

The top 1% is one aspect of inequality. It is not the only one. It is the one in the news right now. For me, much more important than the trends in inequality or the absolute amount is whether a person can get ahead or not. Or is the average person stuck with little hope of making economic progress? A lot of people use data to show that the average person has made no gains since 1975 or so and that all the gains in the economy (and they are enormous) since then, have all gone to the top x%. Sometimes it's the top 20% or 10%. I think that work is poorly done and ignores a lot of important factors to make a political point. And yes, I have my own biases. When I interview someone like Meyer, I try to ask him tough questions knowing that I am sympathetic.

What Meyer's work looks at is the absolute progress of the middle and the changes in inequality using different measures such as the 90th percentile to the 50th or the 10th. This is important to look at. He may not do it well. But it's important.

xian writes:

this sounds a bit like the "false consciousness" position of marxists:

middle class isnt stagnating, they just think they are cuz theyre being manipulated/fooled.

also, leaving out the top 1% and 0.1% misses a lot of the discussion.

further, the gini coefficient is a standard and widely accepted measure of inequality and this was not discussed/addressed either. is this measure no longer relevant?

also, the problems in household-based measures of income due to divorces can b avoided by looking at per capita based measures.

and finally, if the gap between the bottom 10% and the middle 50% has shrunk, then is there a way to know if it's cuz the middle 50% is losing ground faster than the bottom 10%?

thanks econtalk...great show.

Trent Whitney writes:

Russ,

Thanks for interviewing another of my former economics professors from my undergraduate days at Northwestern (I took his Labor Economics class) - continues to make me appreciate the quality of the program more and more. Enjoyed the dicussion very much.

Following up on previous posts, the statistical anamoly you referenced is indeed Simpson's Paradox. As best I recall, it rose to prominence at Cal-Berekley a few decades ago, when they were trying to increase the percentage of female graduate students at the university. Each department was strongly encouraged to increase their percentages of female graduate students, and the end results was something like what you describe in the poverty demographics: Despite each department increasing their invidivual percentages, the overall percentage of female graduate students at Cal-Berekley actually decreased.

It's not all that complicated to see why this happens - as you pointed out, the numbers in each poverty demographic changed, and that will skew the total...basically it's akin to shifting a weighted average. I actually think it's a good illustration of your point that it's almost impossible in economics to measure one effect accurately because so many other factors are always changing, not to mention there are other factors that we don't know about.

B writes:

> Russ Roberts:
> "Many claim that none or few of the benefits from that growth went to the middle class or the top. I don't know about the precise proportion--and as I mention above--it is hard to interpret those numbers because they are not the same people."

It's worth pointing out that the United States has some of the lowest social mobility of developed countries, so, for example, it's much more likely that the bottom quintile in 1980s are the same people in the bottom quintile in the 2000s than in other countries. See Figure 2:
http://www.economicmobility.org/assets/pdfs/EMP_InternationalComparisons_ChapterIII.pdf

We like to think that the US is highly socially mobile, much more than other countries, but the opposite seems to be true. (This myth could also play into the hands of people who want low taxes. By putting the focus on "just work hard and you'll get ahead" and "rags to riches" stories, it downplays the role of education - which is often partially taxpayer funded and getting more expensive.)

Yoav Freund writes:

I would like to second the the request to talk about the gini index and take the top 1% and the top 0.1% etc into account.

One thing that is being missed by the focus on "consumer goods" is that the common basket (food, cars, lodging, cell phones) down-emphasizes goods that are available only to the upper few percent of American society: Quality Education and access to political power.

In these regards I feel pretty sure that power is increasingly concentrated in the hands of the very rich.

Yoav Freund writes:

According to wikipedia, giving pointers to various publications, the gini index has increased about 20% from 1967 will 2006. I would be surprised if it did not increase between 2006 and 2012.

http://en.wikipedia.org/wiki/Income_inequality_in_the_United_States#Gini_index

Ess writes:

[Comment removed for supplying false email address. Email the webmaster@econlib.org to request restoring this comment. A valid email address is required to post comments on EconLog and EconTalk.--Econlib Ed.]

Tom writes:


Are there studies showing, for example, how age (and therefore time-spent saving, increased specialization, skill attaintment, debt repayment, etc) impact inequality studies?

As a thought experiment, if everyone moved up 3% over the course of their working years, the static snapshot data would show the same inequality, but it would be meaningless.

ric caselli writes:

any good Jacksonian would say that inflation data must be off... LOL!!

wellbasically writes:

[Comment removed for supplying false email address. Email the webmaster@econlib.org to request restoring this comment. A valid email address is required to post comments on EconLog and EconTalk.--Econlib Ed.]

Luke Avedon writes:

Fantastic show!

How come this is never mentioned...

Wouldn't we expect measured inequality to always increase?

i.e. If someone making 100K gets a 10% raise, and someone making 10K also increases their income by 10% wouldn't measured inequality have just increased?

Am I missing something obvious?



xian writes:

@luke:

that's not the situation. the current and past situation is one where incomes at the top rise faster than incomes at the bottom, with some evidence that middle and lower incomes havent risen at all.

these arent small differences, like say a 10% rise in income versus a 20% rise.

CBO just released a study that finds incomes at the top 1% rising 275% while middle incomes rose 60% over a 30yr period.

after a while, people start believing this is unfair and feel shafted, so they begin to consider quitting/upending the game all together- like monkeys.

""It looks like this behavior is evolved … it is not simply a cultural construct. There's some good evolutionary reason why we don't like being treated unfairly," said Sarah Brosnan, lead author of the study to be published in tomorrow's issue of the science journal Nature."

more at link that describes the experiment,
http://news.nationalgeographic.com/news/2003/09/0917_030917_monkeyfairness.html

this result is not unique. the value of perceived fairness in social animals has been observed many times in various situations.

Comments for this podcast episode have been closed
Return to top