We are looking at an economy in which
the rich get richer and the poor get poorer. Middle class is declining. That trend doesn’t seem
to be slowing down. America’s middle class is getting hollowed out and opportunity for too many of our young people is shrinking. A lot of people think the middle class is dead, dying, hollowed out. And that’s a view that’s held now increasingly by not just the left where it was common 10, 20 years ago, but by conservatives, Republicans, economists across the spectrum. Russ Roberts is an economist, author and research fellow at Stanford University’s Hoover institution. I think it’s just a misreading of the data, at least an incomplete reading of the data, it’s ignoring the pieces of the story that that I think tell a much fuller story of opportunity and progress. Robert says that the findings of several of the leading studies are determined in part by the index that the authors use to adjust for rising prices over time. Turns out the measure inflation you choose makes a big difference. In one study, they found that one measure of progress for the middle class went down 7% over a 30, 40 year period. Wow, that’s a terrible thing because the economy as a whole group grew quite a bit, but if researchers had used a more comprehensive measure of inflation published by the Bureau of Economic Analysis, they would have found a 17% improvement. But Roberts points out that even that 17% growth doesn’t accurately portray the extent to which the middle-class standard of living has improved since the 1970s. What’s not captured by either index is the dramatic improvement in the quality of consumer goods. In the 1970s for example, TV’s were heavy boxes with 12 inch screens, rabbit ears, attenae, and a fuzzy picture. Today for the same dollar amount as in 1977 you can buy a computer with about one and a half million times the hard drive space and about 2 million times the RAM. The quality of groceries, healthcare, and cars, are incomparable to what was sold in the 1970s. And the list goes on and on. Yet because technological advances are difficult to quantify, they’re generally ignored. Lets take the following thought experiment. I’m gonna give you your income today and
I’m gonna let you shop at 1973 prices, but you can only buy goods available and services available in 1973, so they’re going to be really cheap. You’re going to have a ton of money
to spend. Is that a good deal? So most of us would say, I don’t want to live in that 1970s world. Not only am I not five times better off, I might be actually worse off. Which tells you that the ways we correct for inflation are really flawed. A 2017 study by Thomas Piketty, Emmanuel Saez, and Gabriel Zucman contained a widely cited chart that was written up in the New York Times, Vox, and other news outlets. It allegedly showed that the real incomes of the bottom 50% stagnated between 1979 and 2014. Roberts points out that by taking a snapshot of the income levels at one point in the past and comparing it to a snapshot of income levels in 2014, studies of this sort make a common methodological error. What this approach misses is that these are not the same people. Nothing in the data says that those who made up the middle class in the 70s weren’t doing significantly better in 2014. It’s misleading to use the kinds of data found in this study to support the claim that all the gains from economic growth go to the rich. A lot of the people are getting those gains today or getting those high salaries or people who are poor or, or in the middle 10, 20, 30 years ago but have entered the top. And the top is higher today than it used to be. So it’s gonna look like the rich got richer, but it isn’t true if they’re not the same people. So how do you correct for that? Well, there’s a handful of studies that look at the same people over time. So instead of saying, let’s see what’s happening, people in 1975 and let’s see what’s happening, people in say 2015. Let’s instead take people in 1975 and let’s follow them through time and let’s see how they did. And did the rich get all the gains or, was it the poor? You find out that the people at the bottom have the largest percentage gains and often the largest absolute gains over time. Now, what are the people who are pessimistic? What do they do with that, those, those studies, how do they interpret those studies? They typically ignore them. This fuller picture shows that the American middle-class hasn’t done as poorly as politicians and journalists would have us believe, but there’s still room for improvement. And there are many things I don’t like about economic policy in the United States. There’s a lot of cronyism we should get rid of. There are a lot of barriers for the poor. We give them a horrible, the poor, a horrible education through the public school system. So there’s a lot of things to fix. It’s not like everything’s, you know, great. But we don’t want to say, oh well the whole system’s rigged cause it’s not. The average person can make a lot of progress and has, and to ignore that? We shouldn’t romanticize stuff. It doesn’t make us gloriously happier. But we also don’t want to conclude that the system is rigged simply because the measurements we have of economic progress are flawed.