Pethokoukis, Economics, U.S. Economy

Obama’s fact-challenged inequality speech

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During his economic speech at Knox College, President Obama stated, “The link between higher productivity and people’s wages and salaries was severed – the income of the top 1 percent nearly quadrupled from 1979 to 2007, while the typical family’s barely budged.”

In other words, America’s three-decade, pro-market shift helped only the rich. Sorry, middle-class families.

But this is certainly wrong.

1. As I have written, the typical family’s income didn’t “barely budge.” This is a point the Washington Post’s Dylan Matthews also explains:

The CBO finds that, before taking taxes and transfers (like Social Security or the Earned Income Tax Credit) into account, real median household incomes grew 19.9 percent between 1979 and 2007; after taking transfers but not taxes into account, they grew 30 percent; and after taxes, they grew 38.2 percent … real median household incomes in America are growing, and it’s inaccurate of Obama to suggest otherwise.

In addition, economist Richard Burkhauser finds that median income rose 21% from 1979 through 2007 — pre-tax, pre-transfer — and 37% — post-tax, post-transfer, and including health benefits. Then there’s research from the University of Chicago’s Bruce Meyer and Notre Dame’s James Sullivan, who find that “after-tax money income plus non-cash benefits for the median family grew by 54.6% between 1979 and 2007, growing from $31,880 to $49,298.”

Obama seems to have taken his data from the work of economists and inequality gurus Thomas Piketty and Emmanuel Saez, who claim median household income rose just 3% over those three decades. But their narrow market income measure misses a lot — including how to correctly gauge household size — as these other economists and the WaPo point out.

2. There is also a problem with that bit about the “link between higher productivity and people’s wages and salaries” being severed. Left-liberal economist argue that over the past four decades, productivity doubled even as wages stagnated or even dipped.

But AEI’s Stephen Oliner, a former Fed economist, argues that (a) the measure of labor income should include all forms of compensation, not just wages, and (2) the price index used to calculate real earnings should be a broad output price index not the CPI (because businesses make decisions about labor use based on a comparison of labor costs and the revenue they can earn from employing that labor).

When you run the numbers that way, as the Heritage Foundation recently did, you find that productivity rose 100% and compensation rose 56% rather than falling 7%. There’s still a gap, which might at least be explained by an overestimate of productivity growth, but not nearly as huge as left-liberals contend.

There’s more, but I will save the rest for my upcoming National Review column, out on Monday.

15 thoughts on “Obama’s fact-challenged inequality speech

  1. James,

    One clarification about my work on the gap between productivity and compensation. The 56% figure applies when you adjust compensation for inflation using the personal consumption expenditures (PCE) price index. This looks at consumer prices only, not all output, but using a superior methodology than the CPI employs.

    Of course, from the businesses’ perspective their ability to pay depends on the prices they sell their goods for, not the prices of consumer goods their workers purchase. Hence why I also measured compensation using the IPD (which measures the prices of all goods and services in the economy). On that basis compensation has risen 77% since 1973.

    Regards,

    James Sherk, the Heritage Foundation

  2. Measurements of Income almost always blur the lines of reality. When someone says that middleclass incomes have stagnated or dropped, they are talking about a defined group, not a specific group. For instance, middle class may be defined a number of different but usually its an income level within a certain range of the average or median income. However, people move in and out of income groups all the time. I submit that just because a median or mean does not change significantly, that does not mean people are not getting ahead. There was a time when I was in the middle class and then moved into the upper class. The recession has caused my “income level” to fall to the poverty level. Group statistics do not define personal characteristics.

  3. Why is this surprising, Jim?

    I challenge anyone, anywhere to come up with any economic statement uttered by Oblunder which is PARTIALLY true. Doesn’t need to be 100% accurate, only 50%.

    Go on. Find one.

  4. You may want to fix the (a) and (2) in the last paragraph. Funny how a little mistake like that can make a well-reasoned argument appear nonsensical.

  5. Everything about Obama is fact challenged. But if one tries to focus on everything he is most likely to see nothing.

    The original fraud is the birth certificate. It is so uncomplicated that even Obama’s supporters would understand it — if only they were not distracted by his most recent lie.

    • And when you bring this topic up, then this website loses all credibility as do all its readers. When you’ve outed yourself as a birther, that’s the end.

  6. There are lies, damn lies and then statistics.
    The unavoidable point is that this president is a divider. He is not interested in making conditions generally better, just in stoking resentment and pitting one group against another while searching for scapegoats.

  7. When you’re giving a speech to an audience that is already sold on your premise, facts don’t matter. Obama’s strategy is always to create victim groups. Here he tells the middle class that they are victimized, too. By whom and exactly how he doesn’t say, but they are meant to understand that “someone” is robbing them and Obama is their champion. Since 80%+ of the population considers themselves part of the middle class, he can count on the rhetoric resonating. Who can be against the Middle Class? Who can be against 80% of the country? No facts required here.

  8. Here in Seattle the City of SeaTac (which includes the airport) is about to raise the minimum wage to $15. Here’s a telling paragraph from the story:

    Mark Thoma, an economics professor at the University of Oregon, said widespread concerns over income inequality are behind the efforts to increase wages for low- and mid-skilled workers.

    “We’re seeing corporate profits and bank deposits pile up. But at the lower end, we’ve seen stagnant wages for the last 20 or 30 years,” Thoma said. “People are starting to ask, ‘Is there a fair distribution between profits and wages?’ ”

    What this unfortunately shows is that the people Obama speechifies to see economic profit as something that falls from heaven and then gets divided up somehow. No understanding that if someone’s labor isn’t worth $15 to me, I can’t hire them.

    Not surprising that the big gun behind this initiative is the SEIU, who couldn’t care less what happens to the people whose labor is worth less than $15 as long as those who DO have jobs (and pay dues to the SEIU) are more highly compensated.

  9. oBUMa is not concerned with truth or facts. His intention is to instigate chaos. He thrives on chaos. It is the manna of community organizers.

  10. I just read “The Center Holds” by Jonathan Alter and I can assure you that Obama’s lefty audience has no use for either actual fact or charitable interpretation of anything on the right. It is as if the book was written about a different planet in a parallel universe where Obama is a nice guy who is undermined by racist partisans who inexplicably do not like or trust the president. Obama never did anything to call down this calumny: it just appeared out of the rotten hearts of Republican bigots. All Obama wanted was for an honest opposition party with whom he could do business. Instead, he got virulent haters who would not give him credit for his wondrous ‘legislative achievements.’

    The left has no use for facts unless they can be beaten and reshaped in the service of the narrative. They will never understand opposing points of view because it is not a matter of rationality. It is a religious conviction. NOTHING you can say will change their point of view. Only what you DO has any chance of getting through… and a 9mm held to their temple is perhaps the only persuasive method likely to succeed.

  11. “When you run the numbers that way, as the Heritage Foundation recently did, you find that productivity rose 100% and compensation rose 56% rather than falling 7%. There’s still a gap, which might at least be explained by an overestimate of productivity growth, but not nearly as huge as left-liberals contend.”

    How much of this gap can be attributed to improved tools and methods. In construction the efficiency added by new tools and equipment has certainly made a huge difference.
    If you were to look through the tool inventory from 1973 to 2007 you will find a huge outlay of cost for the tools that help make the productivity rise.

    For instance the amount spent on field office equipment 2007 (Laptop-internet-digital cameras) 1973 (Telephone) 2007 (cordless drills-fasteners-concrete drills-bobcat-etc) 1973 (saws-shovels-nails etc.) how is this difference taken into account when these figures are put together?

    I would hazard a guess of 25% increase in productivity for this reason alone.

  12. Perhaps you should point out that Burkhauser’s methodology and conclusions have been challenged by a large number of economists. Taking his work as gospel on this matter is silly, and if you believe it you don’t get out much. I take the truth to be somewhere between what I read in the National Review and the whatever left magazine you read.

  13. You failed to mention that real median income growth of 21% annualized over the 28 years from 1979-2007 is an average growth rate of only 0.69% growth (less than 1%).

    In other words, while an individual making $35,000 is getting a raise of a little more than $200 each year. That’s like a getting an extra 10 cents per hour and being stuck there for a career. Meanwhile, before ObamaCare healthcare inflation rose at 14% and other necessities (energy, food, education) rose at higher rates than inflation.

    To address your point on taxes and transfers, the reason that there is what you call wage growth on taxes and transfers is because hardworking people are falling into the 47% in this country. It is not because the government is growing, but because wealth inequality has pushed them with little money to offer the federal government. Simultaneously, government coffers have been emptied to pay for tax cuts.

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