Saturday, January 04, 2014

Middle class progress since 1987

Writing his final column for the Wall Street Journal before decamping for the Brookings Institution to direct its Hutchins Center on Fiscal and Monetary Policy, David Wessel uses the piece to bemoan the lack of middle class progress over the last quarter-century:
In a 1998 book, my colleague Bob Davis and I argued the U.S. was on the cusp of an era of broadly shared prosperity that would boost the middle class. We were wrong. We correctly saw the potential of information technology, but we expected the gap between winners and losers to narrow. It didn't. 
Output of goods and services per person has grown by about 45% since 1987. That's substantial, but the percentage increase is only half the 90% increase of the preceding 26 years (1961-1987). 
For folks in the middle, the past quarter century doesn't look so good. The cash income of the median family, the one at the statistical middle, barely kept up with inflation. Add in health insurance and other noncash benefits, and it has risen significantly more. But here's an arresting fact: Adjusted for inflation, the typical man who worked full-time made less in 2012 ($49,398) than his analog did in 1987 ($50,166). Because more women were educated and landed better-paying jobs, they did better: Median earnings rose 16%. 
Where did the money go? Disproportionately to the best off, the best educated, the two-professional couples, the winners on Wall Street and in Silicon Valley. Technology and globalization favored the best-educated. The rise of finance paid some handsomely. Earnings of those at the top of almost every field rose faster than at the middle. 
Different measures show differences in degree, but the trend is clear: The latest Census data show the share of pretax income going to the top 5% of families rose from 15.7% in 1962 to 17.2% in 1987 to 21.3% in 2012. Higher tax rates on the well-off and benefits aimed at the bottom damp the trend, but that wealth redistribution hasn't offset inequality-widening market forces.
While perhaps not exactly grim, the picture painted by Wessel of middle class fortunes certainly suggests little worth celebrating. But how well do these monetary figures reflect the state of the middle class now versus 25 years ago? Wessel throws out income stats as a proxy for well-being, but isn't one's standard of living the real measure? Income, after all, is simply means to an end, which for most people is used to better one's living conditions.

Using this measure, is there any reason to think that standard of living for the middle class has essentially stagnated since 1987? Would anything other than a small minority, when offered a $50,000 inflation-adjusted annual income in either 1987 or 2012 either choose the former or be indifferent to the outcome? Think about just some of the things someone opting for a 1987 life over 2012 would have to deal with:
  • Letters instead of email
  • Calling someone and hoping they were home; no text messages 
  • No free long-distance and Skype/Facetime
  • No Google maps, and certainly no maps/GPS on your phone or car
  • Travel plans a much bigger hassle (no Kayak price alerts, Priceline or Tripadvisor)
  • Meeting with friends a much bigger hassle (forget sending a group text message to see what's up or calling someone to let them know you are running late)
  • No online shopping (closest analog is catalogs, where, among other hassles, price comparison is much more difficult)
  • No Tivo/DVR, or Netflix streaming. Want to watch something? Better be home when it airs and plan your bathroom breaks carefully.
  • Basically, far less efficient use of time (the list of IT/telecom related advancements are too long to list), with more of our day spent doing things we enjoy
  • Thin, cheap, widescreen HDTVs (no small thing when the average American watches 34 hours of television per week)
  • Very unlikely to own a cell phone, and certainly none that fits easily in your pocket
  • VHS/cassette tapes instead of DVD/Bluray and CD/mp3, with the attendant winding of tape to find the right song or scene. Plus, music is now downloadable and no more trips to the video store.
  • More expensive flights with far fewer entertainment options (no DirecTV, personal video entertainment, inflight wifi, Kindle, Angry Birds, iPad or iPod -- last four also applies to road trips)
  • Film instead of ubiquitous digital cameras. Capturing memories on video requires bulky and expensive camcorders.
  • Must forgo all medical advances since 1987
  • No access to all art created since 1987 (e.g. music, movies and television)
  • Less safe, efficient and dependable automobiles
  • Indeed, qualitative improvements all over the place. How many products were superior in 1987 to their 2012 versions?
  • Likely no access to Whole Foods (only had 3-4 stores at the time) and generally less exciting and nutritious food options, including restaurants, than were commonly found 25 years ago (how common, for example, was Thai food in the late 80s vs today?).
How does this not qualify as broadly-shared prosperity? How many items on this by-no-means-comprehensive list are accessible only by the rich or a select few? Let us further remember that much of the inequality Wessel decries and the gains experienced by the top few percent are due to many of the products and services listed.

Take Apple for example, which revolutionized the smartphone, introduced the tablet computer and makes one of the most popular laptop computers. Without Apple consumers would either not have acess to such products or would be using inferior versions of them. On the other hand, Apple has also resulted in the creation of hundreds of millionaires and at least one billionaire, thus contributing to a slight rise in inequality. How many people would like to forgo the products developed by Apple in exchange for a tiny dent in income inequality? Likely almost no one save for a relative handful of far left ideologues.

The same no doubt holds for other products as well. The co-founder of Whole Foods, John Mackey, is worth somewhere in the neighborhood of $100 million, the godfather of online shopping, Jeff Bezos, is a multi-billionaire and Netflix founder Reed Hastings is worth over $250 million. Redistribution of their combined wealth -- about $29.5 billion -- would amount to just under $94 per American. Again, how many people would be willing to trade away access to the products and services they have helped create in exchange for a small slice of their fortune? How many people doubt their existence is anything other than a huge net win for most Americans (and citizens in other countries where their products and services are offered)?

Now, admittedly, there are a few financial downsides to life in 2012 vs. 1987. These include:
  • More expensive health care (although most people are insulated from this via insurance, and have only felt the impact through a greater share of their compensation going to employer-provided insurance than wages. Furthermore, again, the state of medicine in 2012 is superior to that of 1987)
  • Higher college tuition
  • Higher housing costs in many cities and coastal areas (due in large part to government zoning/building restrictions)
On net, however, how much does the picture really change? While it is no doubt true that the middle class could have performed even better over the last 25+ years than it actually did, what actually transpired hardly counts as a sob story, and one can only speculate what further leaps in human progress await over the next quarter century. Perhaps the constant improvements in our standard of living are now regarded as so commonplace and unexceptional that Wessel and others have forgotten how remarkable they truly are.

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