Economics, Pethokoukis

Deconstructing the myth of middle-class stagnation

Don Boudreaux and Mark Perry make several great points in arguing against the  theory of multi-decade “middle-class stagnation” in the US:

1. The consumer price index overstates inflation and thus understates wage growth.

2.  The focus on wages ignores the rise in fringe benefits. Indeed, “health benefits, pensions, paid leave and the rest now amount to an average of almost 31% of total compensation for all civilian workers according to the BLS.”

3. While income inequality has grown, the gap between the lifestyle of the middle class and that of the rich has closed. Paris Hilton has an iPad, you have an iPad. Or how about air travel:

Today, air travel for many Americans is as routine as bus travel was during the disco era, thanks to a 50% decline in the real price of airfares since 1980. Bill Gates in his private jet flies with more personal space than does Joe Six-Pack when making a similar trip on a commercial jetliner. But unlike his 1970s counterpart, Joe routinely travels the same great distances in roughly the same time as do the world’s wealthiest tycoons.

Let me also again give a shout out to research by Richard Burkhauser showing that median income overall from 1979-2007 was hardly flat, rising by 30% if properly measured — 37% if you include compensation in the form of health benefits, as this chart shows:

My use of Burkhauser’s research has led to a bit of back-and-forth between Ramesh Ponnuru and myself. Ramesh notes a) the inclusion of healthcare benefits as part of compensation overstates the health of middle-class incomes because it reflects rising healthcare costs; and b) the inclusion of government transfers may give us a better idea of middle-class purchasing power “but If we want to find out whether we have a healthy economy that makes it possible for people to support themselves and their families and get ahead a bit, those payments are better excluded.”

I don’t disagree at all with Ramesh, and I don’t mean for the Burkhauser data or  Boudreaux-Perry points to argue for inaction in pushing for the sort of tax, education, and immigration reform that would hopefully lead to greater private sector-led prosperity for all. But I also don’t want to see a flawed and incomplete middle-class stagnation argument be used to smear the pro-market tax and regulatory polices of the past few decades, policies that reversed decline across the West. And in Washington right now that’s exactly what’s happening.

3 thoughts on “Deconstructing the myth of middle-class stagnation

  1. air travel is an interesting choice of a good to use.

    certainly, the price has come down in real terms but the service has changed as well.

    if we are going to apply positive quality adjustments to goods, we ought to apply negative ones as well.

    it take far more time at the airport now. planes are more frequently late. seats are smaller. you do not get a free meal or a free movie. you pay bag fees.

    i’m not sure how that all nets out, but i do not think we can ignore such things.

    • Morganovich – The point of the original article was that before deregulation “commercial jet travel was a luxury that ordinary Americans seldom enjoyed.” Wait times were never an issue for people who couldn’t afford to fly at all.

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