Stagnant Thinking III: Where to Begin

In my last post I noted that while the real median income for all workers in up more than 30% over the last 35 years, the real median income of White men isn’t much higher than it was in the early 1970s. In describing this phenomenon, I have spoken of wages being “flat” or “stagnant.” This is the common way of speaking about the matter, but it is inaccurate. To say that wages for a given group were “flat” or “stagnant” during a given period implies that they remained largely unchanged throughout that period. But the fact that wages are more or less the same at the end of a given period as at the beginning doesn’t mean that they have remained unchanged throughout that period, anymore than a roller coaster must be flat because you start and stop at the same point.

Indeed, if we take another look at the Census Bureau’s Historical Income Tables, what we find is that wages (even for White men) have been anything but stagnant over the last 35 years. In actuality the real median income for White men fell nearly 10% between 1974 and 1982, only to rise 15% from 1982 to 2007. In addition, real median income for women increased only slightly between 1974 and 1982 and actually fell slightly for blacks during the same period. (If you are wondering why real wage growth was so bad between 1974 and 1982, you might want to check out my review of Robert Samuelson’s The Great Inflation and Its Aftermath).

This is important for two reasons. First, many people who cite the “stagnant” wages figures often attempt to lay the blame for this apparent stagnation at the feet of Ronald Reagan and his conservative heirs. Ronald Reagan, however, did not become president until 1981, and while his policies are open to criticism on a number of grounds, he did not have access to a time machine, and his actions as president can’t be blamed for what happened in the 1970s.

More importantly, if real median wages really were flat throughout the period of 1973/74 to the present, one might want to search for ways to get them growing again. If, on the other hand, real median wages have been growing since the early 1980s, and only appear flat because of real wage decline in the 1970s (due to policies since corrected), then there is less of a reason to go looking for something in current policy that has caused wages to stagnate. To say this, of course, is not to say that there is nothing in current policy that is open to criticism, or that we shouldn’t try to get real wages growing even faster than they have been (if we can). It is only to express a preference for honesty when assessing social problems.

Stagnant Thinking: An Introduction

The recently canceled television series Life on Mars featured a somewhat unusual premise. The show’s protagonist, Sam Tyler, is a cop in present day New York City who, after being hit by a car, finds himself mysteriously transported back to the year 1973. The show was a strange blend of police drama and science fiction, as Tyler sought to undercover how he had ended up in the past, and whether anything that was happening to him was even real.

The premise of the show was, as I said, somewhat odd. But equally odd is that, according to plenty of pundits and commentators across the political spectrum, Tyler may actually have lucked out in being sent back in time. The reason for this, according to these commentators, is that once you account for inflation the material condition (or at least the wages) of the typical American are no better, and may in fact be considerably worse, than in the early in 1970s. The following snippet from a recent Bob Herbert column in the New York Times is typical:

As hard as it may be to believe, the peak income year for the bottom 90 percent of Americans was way back in 1973, when the average income per taxpayer, adjusted for inflation, was $33,000. That was nearly $4,000 higher . . . than in 2005.

Men have done particularly poorly. Men who are now in their 30s — the prime age for raising families — earn less money than members of their fathers’ generation did at the same age.

While the claim that the wages of the typical American have stagnated is most often found on the left, the idea is hardly confined to such quarters. Many libertarians have also been pushing the claim (though whereas those on the left tend to blame Reagan and “neoliberalism” for the supposed stagnation, among libertarians government is the natural culprit). I know that several of my co-bloggers have also made some version of the claim at one point or another.

The Regressive Welfare State

Let’s start with what I would expect is an uncontroversial sounding principle (call it the progressive principle): if the government is going to run a social assistance program, the average income of the people paying for the program should be higher than the average income of the people benefiting from the program.

The justification for this principle is, as I say, common sensical. Most people support the idea of redistribution, but it’s usually redistribution from the rich to the poor that they have in mind. Redistribution from the poor to the rich (or from the poor to the poor) would, I think, strike most people as perverse. Yet the odd thing is that quite a large portion of the modern “social assistance state” violates this very principle. Both Medicare and Social Security, for example, involve redistribution not to the poor, but to the old, who are statistically speaking much wealthier than the average American (here is one analysis of the question regarding Social Security; I’m confident that if you ran the numbers for Medicare you’d get the same result). Not only that, but the funding for Social Security and Medicare comes mainly from taxes that are highly regressive. Similarly, funding for education tends to be only slightly progressive at best, and in many cases (such as funding for higher education) is downright regressive. Much of the funding for public schools comes from property taxes, which means that the people paying for the schooling (either directly or indirectly in the form of increased rents) are the same people getting the benefits from the schools. An increasing proportion of education spending, however, comes from state taxes, which as Ezra Klein notes, tend to be regressive overall. Indeed, a recent trend has been to use revenues from state lotteries (a particularly egregious form of regressive taxation) as a source of education funding. Thus you have a strange situation of states bragging about taking money from the poor to improve the educational experiences of the well to do.

I could go on, but you get the idea.

If we want to reform the social assistance state to bring it in line with the progressive principle, we have two options: we can change the structure of benefits or we can change the structure of how those benefits are funded. For things like Social Security and Medicare, changing the benefits would mean instituting some sort of means testing, to ensure that people aren’t receiving government assistance if they don’t actually need it. The typical argument against means testing is that it will erode public support for the programs. If the wealthy don’t themselves benefit from a program, it is argued, they will agitate for it to be abolished. The problem with this argument is that it has almost no empirical support. We don’t send food stamps to Bill Gates, yet somehow the food stamps program has not been eliminated. Social security remains popular in countries where benefits are means tested (like Australia), and do not seem to be in any danger of being repealed on that account. And if the argument were really true, then it would be hard to see how any attempt to make the funding of these programs more progressive wouldn’t be doomed to failure.

For reasons that I don’t quite fully understand, many people would prefer to keep paying benefits to the rich, while raising their taxes even more to do so. I’m not opposed on principle to the idea of making taxes more progressive, but realistically there are limits to how far one can go with this. States didn’t resort to lotteries because they hate the poor or are just dumb. They did it because there is a wide spread anti-tax sentiment in this country, and that isn’t likely to change soon. Even discounting issues of political viability, it really is the case that higher taxes discourage productivity and growth, and these effects are only going to increase as a global economy makes it easy to move capital from one country to another (one reason, I suspect, that state taxes are so much less progressive than federal taxes is the ease of moving from one state to another). I would therefore submit that if a progressive social assistance state is your goal, it’s going to have to come largely by means testing benefits rather than by raising taxes on the rich.

The White Man’s Burden: Review

In the sixty plus years since the end of WWII, Western governments and aid agencies have dolled out more than $2 trillion dollars in economic assistance to the world’s poorer nations as a means of economic development. The results of all this assistance, to put it mildly, have been far from stunning. Numerous studies have found no positive effect of foreign aid on economic growth, and there is even some evidence that the impact may be negative.

And while some countries have seen spectacular growth in recent years (to the point where the standard of living in these formerly “Third World” countries now exceeds that of many places in the West), this growth has tended to be in countries that have received little in aid.

Confessions of an Economic Hitman: Review

Part memoir, part polemic, Confessions of an Economic Hitman tells the story of John Perkins, a former economic forecaster for the engineering firm of Chas T. Main, Inc. As a forecaster, Perkins’ job was to provide estimates of the effect various infrastructure projects (mainly electrification) would have on economic growth in developing countries. These estimates were then used to justify loans to developing countries from international aid agencies, which would then hire Main to complete the project.

Perkins makes two claims about his work for Main. The first, that he inflated his estimates so Main could get more and bigger contracts, sounds fairly plausible. It’s true, for example, that the actual growth resulting from foreign aid has often fallen far short of projections. I’m inclined to think that this was more often the result of wild eyed optimism than crass cynicism, but I have no doubt that this sort of corruption did occur, and my only objection to Perkins’ remarks on this score would be to the idea that corruption in transfers of money from Western governments and agencies to developing world governments somehow represents an indictment of the free market.

In addition to profit-seeking, however, Perkins claims that he was in reality an agent of the NSA, and that his true mission in getting developing world governments to agree to these loans was to so saddle them with debt so that they could be forced to abide by Western economic and foreign policy interests.

On the Rich Doing Their Own Laundry

Brad DeLong recently quoted the following snippet from an email he received on his blog:

In Agatha Christie’s autobiography, she mentioned how she never thought she would ever be wealthy enough to own a car – nor so poor that she wouldn’t have servants…

Today, having servants is a luxury only open to the rich, whereas owning at least one car is a standard part of middle class life, outside of a few major cities. In Christie’s youth, however, it was just the opposite. Automobiles were the luxury, whereas most middle class families could afford live in servants (the same is true of many developing countries today).

The Christie quote (or paraphrase, rather) reminds me of something a Papal legate wrote about the habits of the Byzantines back in the day: “Their treasuries are overflowing, yet they do their own laundry.”

In both cases there is the same basic phenomenon at work. As a society gets wealthier, the real cost of most things goes down, but the real cost of human labor goes up. To quote John Nye: