Archive for the Category inequality


America’s “middle class” shrinks, as many move into the upper middle class

The Financial Times has a diagram showing that less than 50% of Americans are now viewed as “middle income”. Elsewhere I’ve pointed out that almost 90% of Americans self-identify as middle class, so these stories are highly misleading.  Here I’d like to point to another problem with the analysis:

Screen Shot 2016-04-12 at 8.20.55 PMDo you see the problem?  The main reason that the middle income group has shrunk is that more and more Americans have incomes above the (arbitrary) cut-off point, and fewer and fewer are either “middle income” or poor.

The middle class is shrinking because we are becoming better off.

Let me head off some comments by acknowledging that there are certain areas that are worse off than in 1971, such as Detroit. But overall, the country is more prosperous than ever.  (Also note that these are inflation-adjusted incomes.)

Then why is Trump doing so well?  For the same reason the Polish version of Trump did well in the recent election, despite per capita incomes in Poland doubling since 2004.  What is that reason?  I have no idea, but it obviously wasn’t stagnant incomes in Poland, or in Massachusetts for that matter (where Trump got 49%.)

I do see more people at the very bottom ($0 to $5000) of the graph, and don’t know the reason why. It could be due to expansion of the welfare state, the break-up of the traditional family, or perhaps growth in the underground economy. Nonetheless, it is cause for concern.  But it has nothing to do with the mythical decline in the “middle class.”

Speaking of the FT, Martin Wolf has an excellent piece on Trump.

There’s nothing wrong with neoliberalism (a rant)

I am seeing more and more articles, even at respectable outlets such as the Economist and the Financial Times, suggesting that the rise of right-wing and left-wing populism shows that something is wrong with the neoliberal model. Nothing could be further from the truth. The past two decades have been by far the best two decades in human history, and that’s what really matters.

Naysayers will sometimes acknowledge that hundreds of millions of people have recently risen out of poverty, but then claim that living standards have stagnated in America. That’s also nonsense, as I explained in this post. The next fallback position is that while real incomes in America have risen, the gains of gone to corporations, not workers. That’s also nonsense, as I explained in this post. The share of national income going to workers today is the same as it was 50 years ago, the supposed heyday of the working class.

The next fallback position is that while wages have done fine, even in real terms, wage income is becoming less equal. Bingo! Finally we get to an accurate statement. Fifty years ago, blue-collar workers at General Motors often made more than college professors. People with short attention spans sometimes act like this period was “normal”, ignoring 10,000 years of human history. They seem to suggest that our most pressing problem is that young men who don’t study in school and just shoot rubber bands across classroom should be able to earn an income that (in relative terms) was never possible in any period of world history before the 1950s and has never been possible in any period of world history after the 1970s. It reminds me of when farmers used to set the “parity” of farm prices with other goods prices based on the relatively high levels of 1909-14, treating that ratio as normal for purposes of farm subsidies.

Don’t get me wrong;  I have nothing against blue-collar workers. I’m relatively intellectual, and even I found the public schools to be mind-numbingly boring. I could hardly stay awake. I can’t even imagine how students less interested in ideas than I am could’ve gotten through the day. Nor am I one of those conservatives that will trash low-income whites for their lifestyle choices. As far as blue-collar workers are concerned, I wish them well. But I wish everyone well (except Trump), and the unfortunate truth is that the set of economic policies that is best for the world right now is probably not optimal for a subset of American blue-collar workers.

When I point out that the most important factor in trade policy is the impact on the poor in developing countries, some of my commenters tell me that the US shouldn’t have to import from China or India, they have lots of other countries to sell to. As Marie Antoinette might’ve said “let them sell to Canada.” That’s right, progressives ease their conscience by claiming that other developed countries won’t follow the same evil trade policies that progressives like Sanders want the US to follow, so things won’t actually be that bad for poor people in Bangladesh.  More often, they entirely ignore the issue.

I know that progressives like to think of themselves as the good guys, but the honest truth is that on trade they are increasingly becoming the evil ones, right along with Trump.

And here’s what else people don’t get. Not all the problems in the world are caused by neoliberal economic theories, for the simple reason that not all economic policies reflect neoliberal economic theories. Even if everything people say about inequality quality is true, there’s nothing wrong with the neoliberal model, which allows for the EITC, progressive consumption taxes, and sensible reforms of intellectual property rights, occupational licensing, and zoning laws.

I can’t help it if Democratic politicians oppose reforms of intellectual property rights. I can’t help it if progressives that once favored progressive consumption taxes now oppose progressive consumption taxes. I can’t help it if Democrats voted to repeal the luxury tax on yachts soon after having enacted a luxury tax on yachts. I can’t help it if progressives suddenly feel that a $15 an hour minimum wage is not a loony idea.

The simple truth is that neoliberal economic policies work, as we’ve seen in Denmark and Switzerland and Singapore, and socialism doesn’t work, as we’ve seen in Venezuela. So I’m asking all those wavering neoliberals in the respectable press (Thatcher called them “wets“) to stop your handwringing and get out there and boldly defend the neoliberal model. It’s not just the best model; in the long run it’s the only model that really works.

PS.  And don’t anyone insult my intelligence by telling me that Sanders favors the Danish model.

PPS.  And don’t tell me the GOP is just as bad—I know that.  But right now they aren’t the biggest critics of neoliberalism (except for Trump, obviously).

PPPS.  The Huffington Post thinks Kasich will be the nominee.  In other words, they think the GOP is a non-insane political party.  Meanwhile the betting markets currently assign a 5.3% probability to the GOP being a non-insane political party.  (BTW, I don’t like Kasich; I want Ryan.)

Meanwhile, Drudge has linked to a copy of next year’s Boston Globe:

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90% of Americans are middle class

[I slightly misread the table initially, and wrongly suggested 91%]

One constantly sees articles about America’s shrinking middle class.  Don’t believe them.  The term “middle class” is obviously subjective, and in my view the only interesting fact is the share of Americans who consider themselves middle class, which is 90%.  So how do other news articles come up with much smaller numbers?  They divide up the middle class into three groups, lower middle class, middle middle class and upper middle class.  And then for some strange reason they only consider the middle middle class to be “middle class”.  Weird.  Obviously if you keep slicing the pie into narrower and narrower categories, you’ll get smaller shares in each slice.

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When I was young, the common definition of middle class was people who had a decent house or apartment. (I.e. not a shack with an outhouse.)  You needed the basic home appliances (stove, fridge, washing machine, telephone, TV, etc.) and a car.  Maybe in Manhattan you didn’t need a car.  But that was the basic middle class lifestyle, and it still seems a reasonable metric.  Obviously if you used India’s definition of “middle class” then almost everyone in America except the homeless would be considered (at least) middle class, indeed even many of the “homeless” (who actually often do have homes, BTW.) And if you used “the middle third” as your definition, then 33.33333% of Americans would be middle class.

Being middle class is a state of mind.  From age 18 to 25 I had a really low income, low enough to qualified for food stamps if I had applied.  And yet I would have answered “middle class” if a pollster had asked me, and that’s because I think in terms of life cycle. The NYT reports that roughly 73% of Americans spend at least part of their lives in the top 20% of the income distribution.  That’s why even though America’s official poverty rate is 15%; only 7% of Americans are a hard core that views themselves as lower class.  Many are like the younger version of me.

The upper class is only 2%.  And that’s because lots of families have incomes that seem very high in percentile terms, but in a social sense are considered middle class.  Think of a Boston cop married to a nurse, with a family income of $230,000. That’s a pretty high in percentile terms, but culturally they are obviously “middle class.”  I’d guess that most doctors self-identify as upper middle class.

So don’t worry about the naysayers, America is a 90% middle class country and it’s going to stay that way.

PS.  Tyler Cowen has a more pessimistic post on the middle class.

PPS.  I have a new post at Econlog, discussing scurvy and the Phillips Curve.

Does the porn industry point the way to a more equal America?

Unfortunately, the post itself will disappoint—just a test to see if I could bait people in with that headline.  Here is Wired magazine:

In the popular imagination, the eternal trope is that the porn industry drives the adoption of new technology; that it accounts for some astronomically large portion of all Internet traffic; and, yes, that it generates equally enormous sums of money for all the faceless people who run its operations. We picture these people as sleazy Southern Californians wearing pinkie rings and polyester.  .  .  .

But it isn’t like that at all.

Some of it may have been true in years past. But no longer.  .  .  . With the rise of mobile devices and platforms from the likes of Apple and Google, not to mention the proliferation of free videos on YouTube-like porn sites, the adult industry is in a bind. Money is hard to come by, and as the industry struggles to find new revenue streams, it’s facing extra competition from mainstream social media. Its very identity is being stolen as the world evolves both technologically and culturally.

.  .  .

O’Connell, Adams, and McEwen pull in yearly salaries somewhere in the low six figures, after paying “competitive” wages to a handful of coders in Seattle and Eastern Europe. “None of us own a yacht,” O’Connell says. Or as McEwen puts it: “You can’t understand the obstacles that are in our way.”

‘The Perfect Storm’

She doesn’t mean obstacles of morality or law. Yes, many people frown on porn, calling it exploitative and debasing. But many others just see it as a part of life—a big part of life. There’s an enormous audience for porn, and whatever it signifies, whatever emotions it stirs in critics, this audience isn’t going away. McEwen means economic obstacles, business obstacles, technical obstacles.

It wasn’t always this way. In the early aughts, online porn was ridiculously lucrative. Colin Rowntree, a porn producer, director, distributor, and member of the Adult Video News Hall of Fame, was a just mid-level player, and in those days, he and his wife, Angie, earned millions each year. But at the end of the decade, just about everything changed. Apple introduced the iPhone, which moved so much of our digital lives onto mobile devices while officially banning pornography in its App Store. Google pushed porn to the fringes of its search engine. And as The Economist and Buzzfeed have described, an army of “Tube sites”—essentially Youtube knockoffs with names like Youporn and Pornhub—began offering a smorgasbord of online porn for free, much of it pirated, making it far more difficult for pornographers and distributors to make money. All this happened as the worldwide economy tanked.

.  .  .

The porn biz can issue DMCA takedown notices and threaten legal action like anyone else, but it doesn’t have the clout to enforce the notices on a wide scale—or make anyone care that it’s being ripped off.

“The adult industry isn’t able to enforce its intellectual property protection,” says Kate Darling, a researcher at the MIT Media Lab who explored the economics of the adult industry in the 2013 study What Drives IP without IP? A Study of the Online Adult Entertainment Industry. “It’s not that much different from others industries—except that policy makers don’t really look at the adult industry and aren’t interested in helping the adult industry.” [Emphasis added]

So when the government stops offering copyright protection (and other barriers to entry), it becomes far more difficult to amass large profits.  Incomes fall close to the free market competitive rate of return.

Paul Krugman talks about how the growing inequality of incomes reflects the increasing power of the elites.  This example suggests to me that it’s not so much market power that is key, but rather political power.  Some industries have it, and the porn industry does not.  Too bad America can’t make all its industries look more like the porn industry (in terms of political power, obviously.)

PS.  Wired also explodes some other misconceptions about the industry:

Meanwhile, with the rise of Netflix and YouTube and so many other mainstream video services—including Facebook and Twitter—porn is no longer the dominant form of online video. It’s hard to tell how much porn streams across the ‘net—no reliable operation tracks this, including Sandvine, the primary source for internet traffic research—but it doesn’t account for 37 percent of all traffic. It’s not even close. Mikandi declines to discuss its traffic. But a better barometer is the Pornhub Network, which now spans several of the major Tube sites. Pornhub says its network receives about 100 million visits a day, and at least on part of the network, the average visit lasts about nine minutes.

(Thank God it’s not “more than 4 hours”!)

If you extrapolate, that’s somewhere in the range of 450 million hours of viewing a month. Meanwhile, Netflix serves 60 million subscribers, and these subscribers watch over 3.3 billion hours of programming a month (10 billion a quarter). Youtube claims hundreds of millions of hours of viewing daily.

So we are a bunch of disgusting hypocrites, but not quite as disgusting as we had previously assumed.

PPS.  The term ‘porn’ has become an overused metaphor, as in food porn or architectural porn. But if we are going down that road, why aren’t we calling a certain type of GOP campaign “political porn”?  I can’t precisely define it, but I know it when I see it.  The version aimed at downscale voters can be called “political porn”, and then when other candidates espouse a more sophisticated version of the same hot button views it can be called “political erotica.”

Varieties of inequality

[I wrote this months ago, was dissatisfied, and decided not to post it.  But now with all the reports about America’s poor, poor, pitiful 99%, it’d didn’t seem quite as silly.]

I’d like to make some observations about inequality.  First as a person, then as an economist.  These are based on 56 years of observing all kinds of people, in all sorts of different situations.  The various inequalities are not meant to be equally important; indeed I’ve purposely added a few trivial ones for perspective.  But they are all assumed to affect utility (although I don’t know that they all do.)  Then I’ll return to this issue as an economist, and draw some conclusions.

1.  Inequality of disability.  Some people are blind, paralyzed, etc.

2.  Inequality of talent.  Some people are blessed with the ability of a Michael Jordon, or a Brad Pitt.

3.  Inequality if liberty.  I know one Chinese person who used to listen to Russian classical music very quietly, least the neighbors overheard.  It was viewed as counter-revolutionary, and she could have gotten in a lot of trouble.  Least we think America doesn’t have these problems, think of the many 100,000s of people in prison for using drugs.

4.  Inequality of money (i.e. income/wealth/consumption.)

5.  Inequality of personality.  I know one part time instructor who always looks happy.  He always whistles while he walks, and greets people with enthusiasm.  He’s about 85.  And I know lots of grouchy professors making 5 times more money.

6.  Inequality of mental health–actually just a more extreme version of point 5–but a big driver of utility.

7.  Inequality of access to health care.  Often assumed to overlap with money inequality, but the Medicaid program suggests it’s more complex.

8.  Inequality of power.  My Marxist friends would say I have a blind spot for this one.  I think I do.

9.  Inequality of location.  Were you born in sad Moldova, or happy Denmark?

10.  Inequality of luck.  Of course if there’s no free will, then it’s all luck.

11.  Inequality of family situation.  Are you living with an extremely difficult family member (an abusive spouse, an elderly person with Alzheimer’s, or a troubled teen.)  This has a big effect on utility.

12.  Inequality of disease.  Do you have AIDS, or cancer?

13.  Inequality of preferences.  I am cursed with expensive taste.  If I walk into a rug store, my eyes are immediately attracted to the most expensive oriental carpet.  My daughter just bought a teal shag carpet from Target that she likes.  Lucky her.

14.  Inequality of pain.  A hugely underrated factor in utility.  And let’s not forget the poor hypochondriacs.  There is no statement more stupid in the entire English language than “it’s all in your head.”  Everything is all in your head, including pain.  See the studies of phantom limbs.  Pain is pain.

15.  Inequality in social setting.  Do you live in a neighborhood terrorized by crime.  Again, only partially correlated with income.

16.  Racial/ethnic/gender/sexual preference inequality

17. Inequality of nerdiness/awkwardness.  A huge driver of utility for teenagers.  (Would a poor but “cool” and popular teen trade places with a middle class nerdy teen?)

18.  Inequality of job desirability

19. Inequality of appearance (beauty, obesity, etc.)  Michel Houellebecq says this is the greatest source of inequality in rich countries

And I’m sure there are many more that I overlooked.

Now let’s look at the same list as drawn up by economists (including me, with my economist hat on.)

1.  Inequality of money.

2. Inequality of access to health care

You might have noticed that the second list was a bit shorter.  Some non-economists suggest that economists care too much about maximizing utility, and don’t care enough about income inequality.  Of course exactly the opposite is true.  We pay little attention to utility, and focus way too much on income inequality.  BTW, this criticism could also apply to me, as I have done posts discussing ways of reducing consumption inequality.

I probably care less about income inequality than the average progressive.  I think that’s partly because I’ve known lots of lower income people, and I’ve almost never found it to be the case that their income was the central problem in their lives.  (Although it certainly is a problem–which is why I favor some income redistribution.)  On the other hand, the sample I’ve known is very biased, and unrepresentative of all poor people.  I’ve never known a migrant farm worker.  Another reason I put less weight on income inequality is that money has always mattered less to me than to the average person, even when I had very little (age 18-26).  Again, my view is slightly biased, as being poor and young is quite different from being poor and middle-aged.

But I do think I care as much about human suffering as the average progressive.  Almost every day I wonder where the outrage is over 400,000 drug users in jail.  By comparison, over the past 5 years I’ve read dozens of stories about the 400 terror suspects at Guantanamo.  Yes, the issues are different in many respects, but I still see a lack of proportion.  The drug war may be our greatest unnecessary loss of utility, showing up big not just in lost liberty, but also unnecessary pain from diseases, and more crime and violence.

As far as money problems, there is also a huge gap between America and the rest of the world.  I recently heard a progressive criticize Obama.  He started his comments by saying something like “If progressivism stands for anything, it stands for helping the middle class.”  What?!?!  Those sentiments are truly disgusting, repulsive.  The focus should be on hunger in America.  I hate to sound like an aging baby boomer, but at least in the 1960s the middle class was perceived by progressives as the enemy, unwilling to share their money and perks with poor black people.  That’s not entirely accurate either, but at least it’s not morally repulsive.

Here’s a quotation from one of Peter Hessler’s excellent books on China.  He’s conversing with a 33 year old professor in a God-forsaken college in western China during the year 1997:

But even amid these [traumatic modernizing] changes, Teacher Kong is not particularly worried . . . he is calm for the same reason that so many other Chinese are strangely placid in the midst of changes that seem overwhelming to outsider.  Quite simply, he has seen far worse.

“When I was a boy we didn’t have enough to eat,” say Teacher Kong.  “Especially in 1972 and 1973–those were very bad years.  Part of it was that we lived in a remote place where the land wasn’t very good, but also there were some problems associated with the Cultural Revolution–problems with production and agricultural methods.   It was a little better later in the 1970s, but still it wasn’t too good.  We never ate meat; I was always hungry.  Every day we ate rice gruel, and we only had a little bit of that.   Rarely did we have salt.  We ate weeds, wildflowers, pine needles–I’ve eaten all those things.

“My mother died when I was five, after she gave birth to my sister.  Of course, we didn’t have milk or anything like that to help the baby, who died as well.  I don’t remember that.  But at the age of ten my father died, which I do remember.  He got sick suddenly, a very bad cold, and in three days he was dead.

“After that things were even worse.  My grandfather wasn’t strong enough to work, and I was too young to do much, so my uncle had to support all of us.  At that time the Production Team in that village was very bad, and they weren’t of any help.  Later, things improved and they were able to assist us, but for many years it was terrible.”

All of Kong Ming’s early life took place in the mountains outside Fengdu [Sichuan], a town that nowadays has about 30,000 residents.  From his childhood home it took an hour by foot to reach the nearest road, which was three hours by rough bus ride from Fengdu, and as a result Kong Ming never saw the town until he was fourteen years old.

[As an aside, I won’t defend the Chinese view of Tibet, which is that they are bringing modernization to a backward people.  But does the previous quotation help you understand why the Han people  might have a slightly different perspective on the relative merits of modernization and traditional culture, as compared to the average American or European?]

Now let’s start down through Dante’s seven circles of Hell:

1.  The US is much richer than Mexico.  So much so that millions of Mexicans will risk the horrors of human trafficking into the US to get crummy jobs picking tomatoes all day in the hot sun.

2.  China in 2011 is still considerably poorer than Mexico.  The Chinese take much greater risks to get here.

3.  China today is so much richer than China in 1997 that it’s like a different planet.  The changes (even in rural areas) are massive.

4.  The China of 1997 seemed like paradise compared to the China of the 1970s.  Throughout Hessler’s book, people keep talking about how horrible things were during that decade and how prosperous they are now (1997 in Sichuan!)

5.  The China of the 1970s was nowhere near as bad as during 1959-61, when 30 million starved to death.

It’s fine to worry about income inequality in the US.  I also worry about this issue.  But it’s important to keep in mind that there is much more to life than income inequality, and much more to the world than the US.  In the grand scheme of things, tinkering with government programs to help the poor, pitiful, beleaguered American middle class isn’t likely to make much difference, at least from a utilitarian perspective.  We need to broaden our outlook.

Unfortunately, Bryan Caplan’s open door policy is politically infeasible, but doing even 1/10th of what he asks for would be a huge boom to human welfare.  Where is the conservative belief in “liberty?”  (Insert Samuel Johnson quotation.)

And let’s not hear any more talk from progressives like Paul Krugman about trade barriers against Chinese workers.

PS.  I just noticed this interesting data on how our poor compare to the world’s poor.

PPS.  Peter Hessler’s MacArthur Award was very well-deserved.