The economics blogosphere has been abuzz the last few days over a controversial op-ed, recently published in the Wall Street Journal, that attempts to expose the “progressive trope” of middle-class decline as a statistical illusion constructed by redistributionists and pessimists. The article's authors, economists Donald Boudreaux and Mark Perry, make several related claims: first, that the consumer price index (CPI) overestimates inflation by “underestimating the value of improvements in product quality and variety”; second, that stagnant wage growth does not take into account the rising value of employer-sponsored benefits such as health insurance; and third, that the average hourly wage has been held down by the entry of women and immigrants into the workforce. In fact, Boudreaux and Perry argue, American life expectancy has increased by five years since 1980, and household spending on “basics” such as housing, food, cars, and clothing consumes less than a third of disposable income, down from 44 percent in 1970 and 53 percent in 1950.
There are several problems here. First, as Jim Tankersley at Wonkblog correctly points out, the percentage of disposable income spent on “basics” is very much dependent on the definition of “basic.” While food, cars, computers and clothing are cheaper and of a higher quality than ever before, the cost of other essential middle class goods like housing, gasoline, health care and education have risen significantly. Using consumer spending data from the Bureau of Economic Analysis, Tankersley found that while the share of consumer spending on Boudreaux and Perry's “basics” did indeed fall by about fifteen percentage points between 1970 and 2011, the cost of a more comprehensive basket of goods—expanded to include gas, health care, health insurance, medical prescriptions, and education—was more or less unchanged over the last forty years.
Paul Krugman piles on, noting an even bigger bait and switch:
Nobody questions the fact that America has grown richer over the past several decades. The question is whether that growing wealth has trickled down to ordinary families, or gone mainly to a small elite. Yet when Boudreaux and Perry invoke consumer data, it’s data for all households—in effect, mixing the top quintile (and the top 1 percent) with the middle class.
Does this make a difference? I’ve done a quick and dirty cut at the Consumer Expenditure Survey data, which unfortunately run only back to 1984, but which do give us spending patterns by income quintile. If you define “basics” as food, shelter, clothing, and transportation, it turns out that these basics accounted for 70.9 percent of overall spending in 1984, but fell to 67.0 percent in 2011—suggesting some progress. But what’s driving that decline is the top quintile, whose spending on basics fell from 67.5 percent to 62.2 percent. The middle quintile’s spending share on basics was basically unchanged, going from 69.7 percent to 69.8 percent.
There are three additional points that I think are missing from this story. First, while Boudreaux and Perry are correct that stagnant wage figures ignore the rising value of employer-sponsored health insurance, it is unclear that real compensation has therefore improved in any meaningful way. Although medical technology and health outcomes are indeed better today than in 1980, the disproportionate increase in U.S. health insurance premiums has consumed a significant share of any potential wage growth that workers might otherwise have experienced. As the graph below from the Washington Post illustrates, the anemic 9 percent growth in workers' average earnings between 1999 and 2012 cannot be separated from the fact that health insurance premiums nearly doubled within the same period.
Workers' retirement security has also eroded. Data from the U.S. Department of Labor and the Employee Benefit Research Institute show that even as rising health care costs have consumed an ever-greater portion of workers' compensation, employers have eliminated defined benefit pension plans, pushing workers to invest their own money in higher-risk 401(k) plans. As a result, fewer Americans expect to have enough money to live comfortably in retirement, and anticipate retiring at an ever-older age.
But perhaps the single most important factor hidden within the statistics on stagnant middle class wages is household debt. As income inequality rose in the decades leading up to the Great Recession, lower and middle class families sought to maintain their relative standard of living by going deeper into debt. The rich compounded this problem by buying bonds and securitized mortgages, driving down interest rates and effectively financing the debt required to sustain traditional patterns of middle class consumption.
This unvirtuous cycle, which research indicates was a contributing factor in the 2007–08 financial crisis, is actually a reversal from historical norms:
In 1983, the top 5 percent had 80 cents of debt for every dollar of income, while the remaining 95 percent had 60 cents for every dollar. By 2007, after decades in which an increasing share of income flowed to the top, the situation had reversed. The top 5 percent had 65 cents of debt for every dollar of income, while the remaining 95 percent had $1.40 in debt for every dollar. The situation remains skewed today.
As a result, an increasing share of middle class income has gone to debt service payments—decreasing the overall savings rate and contributing to the widening wealth gap between rich and poor.
Although many families made considerable progress in paying down mortgage and credit card debt in the wake of the recession, recent economic data show household borrowing is once again on the rise. This is good news in the short term; improving consumer confidence and higher levels of consumption will do much to bolster the economic recovery.
But the normalization of elevated debt levels is a worrisome trend in the long term. While Boudreaux and Perry laud the ability of “every middle-class teenager” to afford iPhones, iPads and laptop computers, it is critical that we address the real economic harm that this keeping-up-with-the-Joneses entails. Recent history is unambiguous: without commensurate wage growth, the American middle class cannot sustain traditional standards of living without serious financial consequence.
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