Factoid Moment on the Death of the American Middle Class.

Update:  I don’t feel a particularly upset stomach, but I regret that my calculator at least must have gastritis.  As commenter TheF79 points out, I’ve double counted here:  the inflation numbers reflected in the CPI are contained in the constant dollar calculation below, and so real incomes measured in purchasing power have in fact risen significantly since the 1950s — which of course we all know.

For all the events going on around us, this is a vastly more wealthy country by most measures than it was in the immediate aftermath of the Second World War — and my leap into picking one statistic or another was performed in haste and without that momentary reality check:  but does this make sense.

I believe the technical term for my lapse is brain bubbles; and the lesson is, as always, blog in haste, repent at (not much) leisure.

I’ve just got off the phone with one of my economist colleagues here at MIT, both glumly to confirm what I already knew, that this correction is necessary, and to try to find a simple way to frame the fact that despite that growth in purchasing power correctly identified by TheF79, daily life seems much harder to many of us than it did in those days.  And broadly, as I understand it, the issue lies in consumption patterns, in part, and in part due to our exposure to costs that were either a minimal part of a household budget or hidden from it.  Medical care is the obvious one there, and for a snapshot of the impact of changes in what we do with our money, consider the cost of college education, now pursued by more (for good reasons in the job market) and priced ahead of inflation at many institutions — or the changes in the amount of housing we consume.

The impact of income inequality is another big issue — but here I’m not going to venture to say anything just yet, because the complicating factors of the tax code and transfer payments make the issue easy to misdescribe, and I’d like to make only one embarrassing public confession today.

Just to provide the simplest-minded frame for the thread prompted by Cintibud’s email describing the trajectory of middle-class life over the last fifty years, here are two bird’s-eye view numbers:

Personal income in the US, 1950 vs. 2004 (in constant 2004 dollars):

1950:  $17,076 (male); $6,333 (female)

2004:  $30,513 (male); $17,629 (female)

The Consumer Price Index, 1950-2004

12/1950: 25

12/2004: 190.3

(August 1983=100.2)

Which is to say that consumer prices rose about 7. 6 times over the period in which wages fell short of doubling for men and short of tripling (from a much lower base, obviously) for women. Real incomes have in fact risen substantially.  Consumption patterns have changed as well.

Now, these are the broadest brush numbers you can have, very crude measures of experience. And there’s nothing new in this post; these stats have hardly been crammed to the bottom of that Social Security lockbox I keep hearing about.

But still, it’s worth trotting them out from time to time just to provide some broad context for all the stories many of us can tell about the social or family life we experienced as children.  These figures suggest that from the national-historical point of view,  if it feels like the broad middle of American society is living poorer than its/our parents and grandparents did* — well here we see that in aggregate, income (i.e. for most people, wage) growth has lagged well behind the increase in the cost of living over the last half century and more. Nope, see above

I.e. — yup, it’s getting ever tougher out there.  Yes — but for reasons having to do with consumption, income inequality, and rapid price increases and or exposure to the cost of medical care and some other goods, not because we are in absolute terms poorer than our grandparents.  See, e.g. the shift in the size of the average home — up about 60% between 1970 and 2004.

 

Of course there are all kinds of confounding details — changes in house size, e.g., or the differing basket of goods that underpins the CPI over time being two obvious ones.  I said this was a crude measure.

Feel free to use the comment thread to build up a richer set of numbers to drive the point home.

(I believe that’s what’s classically called a bleg.  Have at it.)

*And/or must work much harder to stay level — which is same thing, if one regards leisure time as a good sacrificed to preserve other goods) See the difference between price changes and consumption changes mentioned above.

Image:  Theo van Doesburg, Beggar, 1914.

103 replies
  1. 1
    gmknobl says:

    My favorite saying of the year:

    MAKE THE RICH PAY! MAKE BIG CORPORATIONS PAY!

    We need to do this as a nation to take back the country from the oligarchs and (I can’t believe I’m saying this) bring us back to the 20th century!

    Pass it on.

  2. 2
  3. 3
    Tom Levenson says:

    @Clown Shoes: Hadn’t seen that one before. Priceless.

    It reminds me of a blog post I have to do on a paper by Poterba et al. on the impact of values — i.e. pre-existing political beliefs — on the policy advice economists give when presented with the same data. Fun stuff, despite my description of it.

  4. 4
    TheF79 says:

    Doesn’t the fact that the 1950 incomes are denoted in constant 2004 dollars mean that CPI is already included in the 1950 income numbers? That’s usually the reason we report incomes in constant dollars, to adjust for inflation. Or is there some subtler point I’m missing?

  5. 5
    Shadow's Mom says:

    These folks are promoting a move make the oligarchs pay their fair share

    http://usuncut.org/

    I’m all for a return to pre-Reagan tax levels, at the bare minimum.

    I remember living quite adequately on an combined gross income of 184.00 a wee (144 net) back in 1976-1979. This included rent (utilities included), food, phone, public transit to/from work, a $5 a week book budget (new paperbacks, not the thrift store cast-offs I usually by now). I don’t think we saved much, but we managed well enough and we were young.

  6. 6
    Martin says:

    @TheF79: Not really. The income is just inflation adjusted. CPI tracks inflation to a slight degree, but inflation is influenced by much more than just ‘consumer prices’.

  7. 7
    Caveman says:

    But but… you have a huge plasma TV… and indoor plumbing.. Cavemen didn’t have those things.

  8. 8

    Right off the bat, let’s eliminate inflation as the cause of the gap between price rise over that period and wage rise. Inflation, taken as a whole, meaning a growth in the nominal money supply that exceeds the growth of actual wealth, should cause wages and prices to rise together. The question, phrased in terms of inflation, is “What caused price inflation and wage inflation to grow at such disparate rates?”

  9. 9
    R-Jud says:

    @Shadow’s Mom:

    I’m all for a return to pre-Reagan tax levels, at the bare minimum.

    Yes. Let them pay Reagan Rates. If it was good enough for the Gipper, it’s good enough for these guys.

  10. 10
    TheF79 says:

    Here’s the BLS’ CPI Inflation calculator:

    http://data.bls.gov/cgi-bin/cp.....year2=2004

    $2,200 income in 1950 is equivalent to about $17,000 in constant 2004 dollars. Income has risen 15 times in 54 years, while prices have risen by 7.5 times. So the average male earns twice as much in 2004 as they did in 1950, price adjusted.

  11. 11
    p.a. says:

    Makin MeCurdle would say I’m better off because I have an iPod.

    Another easy graph is to look at wages v. productivity over the last generation. The $$$ from all that increasing productivity had to go somewhere, but not to wages.

  12. 12
    agrippa says:

    I am thinking of a comfortable middle class job. What it was paid in 1950, and what it pays now. Then, compare the ‘goodies’ (physical ‘stuff’) that indicated a compfortable middle class life in 1950 with the ‘goodies’ that indicate a comfortable middle class life in 2010. I think that comparison would show that 2010 ‘requires’ a lot more stuff than 1950. People ‘need’ to spend a lot more money in 2010. I am not sure what this means; but, just a something to take in.

    Pay for this comfortable middle class job has been flat or slowly falling for years. If it has not been outsourced or dropped.

    There does seem to be this feeling that matters have just not worked out. There is something wrong and people are just not sure what it is. Nor, is there any one really sure whose fault it is. Some people are working very hard to find that someone to blame.

    And, no one knows how all this will work out; but, however the working out goes, the future looks more than a little omninous.

  13. 13
    Doug Hill says:

    You should just list everything in real dollars, either 1970 or 2004. This is confusing the way it is presented.

  14. 14
    TheF79 says:

    Note, I’m not saying whether that rise is a good thing or a bad thing, it’s just important to not pull a McBargle and bone the math/interpretation of the math. It seems like the more relevant comparison would be 1950 vs 2004 in constant 2004 dollars for the average (or median) versus 1950 vs 2004 in constant 2004 dollars for, say the top 1% or top 0.1%. That would get at p.a.’s point about where the value of that increased productivity has gone.

  15. 15
    Bnad says:

    @Martin: I’m with theF79. The constant 2004 dollars note means that incomes have gone up in real terms. There isn’t one type of inflation reflected in the constant 2004 dollar adjustment and a different type of inflation reflected in the CPI.
    This thread is kind of embarrassing for its lack of awareness of that.

  16. 16
    ThatLeftTurnInABQ says:

    @joe from Lowell:

    Right off the bat, let’s eliminate inflation as the cause of the gap between price rise over that period and wage rise. Inflation, taken as a whole, meaning a growth in the nominal money supply that exceeds the growth of actual wealth, should cause wages and prices to rise together. The question, phrased in terms of inflation, is “What caused price inflation and wage inflation to grow at such disparate rates?”

    This. This. This. This. This. This.

    For the love of God, can we please not start this great crusade to take back America for the middle class using an emotionally toxic word which the GOP fashioned into a club with which to beat Dems ever since 1979? A word which instantly conjurs up images of Jimmy Carter and the misery index?

    Please?

    Pretty please with ponies on top?

    Because if that is the flag we are going to wave as we go into battle, quick frankly I’d rather just slit my wrists now and get it over with quickly.

  17. 17
    Bob Ewing says:

    It could be that my math is wrong (although I don’t think so), but going back to the sources cited by Levenson for the historical Personal Income and Consumer Price Index numbers (i.e., Wikipedia and the RateInflation websites, it seems that incomes have been closer to keeping pace with the change in CPI in the period starting with 1980 (St. Ronnie you know) and ending in 2004, than was the case in the period between 1950 and 1980. To be honest, that is contrary to what I would have believed was the case.
    Just by way of a test, using the PI figures for men, in constant 2004 dollars, it appears that PI went up approximately 1.6 times in the 1950-1980 period, and approximately 1.2 times in the 1980 period while the respective changes in the CPI were approx. 3.4 times in 1950-1980 and approx. 2.3 times in the 1980-2004 period.

  18. 18

    OK, I admit it. I’m confused.

    There might or might not be something screwy going on with the numbers. I don’t know enough to know.

  19. 19
    Fargus says:

    TheF79 is exactly right. Whatever measure the Wikipedia article is using for bringing earnings into 2004 dollars isn’t exactly CPI (as you can tell by using the BLS’s CPI adjustment calculator provided by TheF79 upthread), but it’s close. What’s more, it seems that it’s not just close, but whatever measure is used to adjust for inflation shows that CPI has gone up LESS during that time than whatever measure is being used to adjust for inflation.

    The more relevant measure would likely be to compare the real median income from 1950-2004 to the real per capita GDP from 1950 to 2004, something like that.

  20. 20
    Decay says:

    Tom,

    For all your criticism of Megan McArdle’s mathematical abilities, this is in incredibly stupid and bone-headed post.

    The WHOLE point of calculating constant dollars is to enable price and income comparisons across time periods.

    Your best bet at remedying this as an abject apology without any of the passive aggressiveness of your favorite fisking target.

  21. 21
    liberal says:

    @Fargus:
    Agreed.

  22. 22
    Paul in KY says:

    @Clown Shoes: Read the article. Thanks for giving me murderous thoughts about a ‘St Louis Economist’ (who I’m sure is paid quite nicely, compared to all us slovenly proles).

  23. 23
    Blue Carolinian says:

    Huh…Thats….actually much better than = expected as far as personal income goes, especially since women have essentially doubled the supply of labor and increasing immigration has suppressed wages on the low end.

  24. 24
    Paul in KY says:

    @R-Jud: How about this slogan:

    ‘If it was Good Enough for the Gipper, it’s Good Enough for Goldman Sachs’.

    I used Goldman Sachs for the ‘G’. Any asshole company starting with a ‘G’ will work just as well.

  25. 25
    liberal says:

    @Shadow’s Mom:

    I’m all for a return to pre-Reagan tax levels, at the bare minimum.

    As I get tired of repeating, marginal rates alone aren’t all that meaningful unless accompanied by a (rough) characterization of taxable income.

  26. 26
    jl says:

    Average personal income does misses some or the issues.

    For one thing, it combines compensation rates per hour and amount of time spent working.

    I don’t have time today to look into it, but if I did, would start at the Bureau of Labor Statistics page that has data on hourly wages and compensation.

    (www.bls.gov/data/#wages)

    I think you need to calculate disposable income by income quintiles, and calculate proportion of disposable income that goes to fixed cost items (like housing expenditure, and insurance).

    Elizabeth Warren has done empirical work on the changes in economic status of different income groups, so look for some of her presentations, which I have seen online.

    I do have time for a quick search on that.

  27. 27
    ThatLeftTurnInABQ says:

    Regarding the change since 1950, however you label it, here’s a thought: up until quite recently this change has been slowly creeping up on people as a result of three factors.

    First, the conversion of single income household to dual income housholds. Second, the Walmart-ization of consumer goods (i.e. globalization and the movement of manufacturing to low wage nations) kept prices down. Third, expanding consumer credit allowed people to (for a short while) live middle class lives on working class incomes.

    All three of these are exhausted in terms of their potential to help, non-repeatable (unless we repeal the child labor laws in the case of the 1st factor, a thought that some on the right are already talking about) and provide no path for growth in the future. Worst of all, now that the credit bubble has collapsed leaving households deep in debt, it contributes negative growth. That is why the middle class (so-called) today feels like it is collapsing so suddenly.

  28. 28
    liberal says:

    @Blue Carolinian:
    Not necessarily. The real question as #18 suggests is what fraction of GDP is going to workers.

  29. 29
    liberal says:

    @jl:

    For one thing, it combines compensation rates per hour and amount of time spent working.

    I don’t know about now versus, say, the mid-1980s, but I’m pretty sure the average worker (if not the avg household) labors for fewer hours than in the mid-20th century.

  30. 30
    bourbaki says:

    Is 1950 a good place to start? I mean the

    1) There was a (mild) recession in 1949
    2) The great depression/war economy weren’t that far in the past and it is likely wages were still depressed
    3) The real “golden age” would be the 50s and 60s

    Wouldn’t it be better to start somewhere in the mid 60s or early 70s?

    In fact if you go to the wikipedia page you can see that the median income (adjusted in whatever manner they are using) basically flatlines from the 70s to 04

  31. 31
    Keith says:

    @TheF79: Actually, I’d say you have a fair point, but only for items used in establishing the CPI – dividing nominal income by CPI in that year would tell you how many CPI units that paycheck might buy.

    So,
    nominal 1950 Income – $2,570 – CPI 25 … ratio ~ 100

    nominal 2004 Income – $30,513 – CPI 190 … ratio ~ 161

    (or, if you will nominal wages increased 11.6 times, while CPI increased only by 7.6 times in the 1950 — 2004 period).

    This might lead one to conclude (incorrectly) that the cost of living had declined, significantly, overtime.

    Yet, all historical trends run counter to such a conclusion. Household income in 2004 was larger yet than even the cited individual income (two-earner households being more frequently encountered) – thus we should all be living in a gilded age for typical wage earners. Such is clearly not the case. People are struggling, have insufficient savings and need to go into hock to get themselves or their children through college.

    I’d conclude that much is being missed by CPI, that it is providing a measure of the changes in price for a set of items, but not for all important items which impact a households saveable or disposable income.

    Housing cost, for one, is not explicitly part of CPI, except in the form of less volatile rents. Given the majority of households are owned not rented, that intuitively seems like a significant gap in data.

  32. 32
    Loneoak says:

    Here’s a delightful line from the Kochsucker himself in the DailyGalt:

    Even though it affects our business, as a matter of principle our company has been outspoken in defense of economic freedom. This country would be much better off if every company would do the same. Instead, we see far too many businesses that paint their tails white and run with the antelope.

    Sooo, he’s the predator and all the non-overlord looters are antelope, i.e., prey? Is that really what this metaphor means?

  33. 33
    GeneJockey says:

    Two things about this post bother me:

    First, I think TheF79 is right that you’re accounting for inflation twice by using constant dollars in the median income figures.

    Second, and more importantly relative to Cintibud’s email is that the problem with looking at only two points is that they tell you nothing about the shape of the curve in between. 1950 was close to the beginning of the rise of the Middle Class. He and I, born in the mid-50s, grew up watching our parents’ REAL incomes grow, because pretty much everyone’s real incomes grew, from 1945 till about 1980.

    Tom’s point is still correct – it feels like we’re ‘living poorer’ than our parents, because we ARE – but the figures he used don’t show that. Further, they would suggest that the problem is inflation, rather than increasingly unequal distribution of income and wealth. IMO, the best way to show that is a simple graph of median real income for each quintile from 1945 to present, graphed as a percentage of the initial value. This eliminates the inherent problem of graphing vastly different values on the same Y axis.

    What you see is that from 1945 till about 1980, the lines all rise at the same rate. Then each quintile in turn, from the lowest to the 4th, arc over to flat, and begin to decline. The slope for the top quintile, by contrast, begins to rise FASTER, and the slope keeps increasing.

  34. 34
    jl says:

    Video of Elizabeth Warren on expenditure patterns and cost of living for middle class.

    add h t t p stuff to the front (I am having problems posting comments with URLs)

    (blog.ideatransplant.com/2008/12/coming-end-of-middle-class.html)

    Edit: the video frame doesn’t show up consistently in the page, but in Mozilla Firefox I can see the play button, and if you click the play button the video runs OK and I can see it.

  35. 35
    WyldPirate says:

    @Fargus:

    What’s more, it seems that it’s not just close, but whatever measure is used to adjust for inflation shows that CPI has gone up LESS during that time than whatever measure is being used to adjust for inflation.

    Could the problem be with a discrepancy between how the CPI was calculated from different sources and at different times?

    Just a guess–and I’m too lazy to look at the sources and think about it right now–but there has been a lot of dickering around with the derivation of the CPI.

  36. 36
    Tonal Crow says:

    @Bnad: Yep. Constant dollars are, by definition, inflation-adjusted. You can, of course, question which inflation figures were used to make the adjustment, and whether they realistically measure inflation over the period in question.

    But this blog entry’s premise is just incorrect.

  37. 37
    Bulworth says:

    Using the January CPI numbers from here (you could use the annual numbers, too)

    ftp://ftp.bls.gov/pub/special....../cpiai.txt

    and the national average wage index from here

    http://www.socialsecurity.gov/.....tml#Series

    I get an average wage increase of 4.75% compared to a CPI growth of 4.36%.

    The gap is a little wider if only 1951-1979 is examined. The average wage growth over that time was 5.2% and the CPI 3.7%.

    So it’s fair to say that the wage advantage that once existed has narrowed considerably.

  38. 38

    Our states are currently having a race to the bottom in regards to labor standards. It’s a race to see who can undercut each other to steal their business.

    VA is just as guilty as the other states.

  39. 39
    someguy says:

    More on the corporate/Republican marriage: 3M Prez threatens to go Galt. If I was the king, that crook would be looking at a full IRS audit.

  40. 40
    TheF79 says:

    @Keith:

    Yeah, I’m not arguing that CPI is the end-all-be-all methodology for measuring relative purchasing power or strain on middle-class incomes, and I generally agree with your concerns about what it misses.

    I’m just saying Tom is making a fundamental error of interpretation in saying that incomes have only doubled while prices have risen 7.6 times. The effect of price increases is already (roughly) included when we denote income in “constant 2004 dollars” (the chart on the wiki page has 1950 incomes in nominal terms, and it’s $2,500 or so). I’d have to flunk him in my class for this interpretation.

  41. 41
    jl says:

    Working paper containing Elizabeth’s Warren’s testimony to Congress

    The New Economics of the Middle Class: Why Making Ends Meet Has Gotten Harder

    (www.hks.harvard.edu/inequality/Seminar/Papers/Warren081.pdf)

    Edit: If some one can get some time series graphs, I think good breakpoints for ‘eras’ are: at 1981 (that is the end of OPEC oil price shocks and beginning of the Reagan era, 1991 (roughly beginning of Clinton), and 2001 (beginning of Bush II)

  42. 42
    Tom Levenson says:

    @TheF79: You are correct and should see the update appended above.

  43. 43
    Martin says:

    @joe from Lowell: Right. This is precisely what need to be examined. What we also need to understand from the CPI and other measures of ‘increasing costs’, such as when we talk about healthcare is how much of those increased costs are necessity and how much are voluntary.

    We could have a big debate about how income in the US has been plummeting at a terrible rate relative to the cost of pet care, which has been skyrocketing for 20 years, but pet care is entirely voluntary. Who gives a fuck if income holds pace with a luxury index? Healthcare has a component of that as well. We talk about how much healthcare spending has increased as a % of GDP, but there’s a lot of elective surgery and care in there – way the hell more than there was 20 years ago. You need to subtract that out to determine the true ‘cost’ to consumers buying power. This isn’t an easy thing to do. What’s voluntary? Consider that in the context of housing? I could argue that owning a home with more than 3 bedrooms is excessive for any size household. So long as you have a bedroom to pack in boys and one to pack in girls, you’re good to go. That would have been a perfectly reasonable definition in 1950. It’s not today. Is it reasonable that the definition has changed? Should we factor in that change in social expectations as an expectation in wage growth? Just because most people feel that 1800 sq ft is an appropriate middle-class home, do we need to declare that wages that only provide for a 1400 sq ft home are inadequate – particularly when comparing to that 1950 wage where a 700 sq ft home was considered appropriately middle-class?

    That’s a tough question. The GOP looks out and says ‘You can buy everything today on a median income that your grandfather could buy in 1950 with a median income’, and they’re pretty much correct until you hit certain categories of healthcare. And so they’ll say ‘shut up, you have what you need, work harder for more’.

    The Dems look out and say ‘But you can’t buy what is today considered average on a median income in the same way that my grandfather could.’ And they’re also pretty much correct. The amount of discretionary income above the median is significantly higher than it was in 1950, and so societal expectations have changed significantly. And the Dems will say ‘This growing societal gap is a problem that will only further destroy income mobility in the US, so that no matter how hard you work, you have insufficient capital to actually convert into meaningful gains’.

  44. 44

    […] Levenson of Balloon Juice just added himself with this post. Personal income in the US, 1950 vs. 2004 (in constant 2004 […]

  45. 45
    DlewOnRoids says:

    The big question I have about the CPI is whether it measures the price of real estate. If you want your kids to go to the same school every year with the same group of kids, you want to make sure you own a home instead of renting. Here’s what the BLS says CPI measures in housing:

    HOUSING (rent of primary residence, owners’ equivalent rent, fuel oil, bedroom furniture)

    It sounds like BLS assumes that rent and real estate converge and it uses market rents to establish housing costs. And in the long run, the probably have to converge–after all, landlords will need to cover taxes, upkeep, and the opportunity cost of the invested capital. But these have diverged widely in the past 15 years. Heck, I own a single-family home in NC that couldn’t get more than 60% of the costs of ownership in maintenance.

    When most people own their homes, that extra cost isn’t reflected in the CPI, but it can be a BIG chuck of disposable income.

  46. 46
    Martin says:

    @WyldPirate:

    Could the problem be with a discrepancy between how the CPI was calculated from different sources and at different times?

    Just a guess—and I’m too lazy to look at the sources and think about it right now—but there has been a lot of dickering around with the derivation of the CPI.

    Well, to a large extent CPI hasn’t kept up with what people actually do. The main problem is differentiating between ‘what do people need’ vs ‘what do people spend’ as they are wholly different things. And you can’t really compare CPIs across time in other respects. On healthcare, do you consider it ‘inflation’ if you include the cost of MRIs in 2010, something that didn’t even exist in 1950? You can’t exclude them, because in most cases nobody would consider them ‘luxury’ items – they’re real expenses. But I just checked the numbers – the median home size today is 2,330 sq ft. In 1970 it was 1440. In 1950 it was just over 700. Are those extra square feet necessities? Should they be factored into the CPI? (They are, BTW.)

  47. 47
    les says:

    Well, f the intertubes for eating my insightful comment; but a more detailed view of where the money went (to the wealthy), compared to where the costs went (to all of us), check LGM.

  48. 48
    jl says:

    Been listening to Warren’s talk, and it directly addresses question of this post, so I will try to post a link people can click.

    http://blog.ideatransplant.com.....class.html

  49. 49
    freelancer says:

    In the “what changed?” thread, Grand Panjandrum linked to this lecture by Elizabeth Warren about what’s different between now and then, and she forecasts the unsustainability of these shifts and their inevitable collapse. The lecture was posted on January 31, 2008.

    I definitely recommend viewing it.

  50. 50
    Fargus says:

    @WyldPirate:
    It could be that there’s a discrepancy in CPI methodology, though it’d be nice if the Wikipedia editor had cited where he/she (probably he) was getting the figures in the table.

    Does the CPI capture stuff like the rising cost of health care, the rising cost of housing, the rising cost of education, and the rising cost of transportation? I’m really not quite sure off the top of my head if it does, so any help I could get here would be really appreciated.

    What’s more, the CPI only measures the cost level of things, not the relative amount that households spend on those things. Does anybody know if there’s a measure of that sort of thing? Bah, I’m not even sure if I know exactly what I’m saying.

  51. 51
    wengler says:

    Average income dictates that the average between someone making zero dollars and someone making 500 million is 250 million. We’re all rich!

    Using a median estimation or breaking it down by quintile would be far more explanatory. The country’s overall wealth is much larger than in 1950, but like most things, it is where it is going and what is being done with it.

  52. 52
    Alwhite says:

    @mikefromArlington:

    This is particularly painful to watch in Minnesota. We used to have outstanding schools, great public services, great jobs the works.

    Now we have joined the race to the bottom. Taxes must be cut, worker safety and rights have to be sacrificed wages must be left unprotected. Its “the only way we can compete”. Just as soon as we all accept third world wages everything will be better.

  53. 53
    slag says:

    @jl: Thanks for the link. I’ll be checking out Warren’s presentation. And that blog looks pretty groovy too.

  54. 54
    David in NY says:

    I want to say that I’m confused as well. And I think that the post is really misrepresenting things by comparing real dollars (for wages) and nominal dollars (for consumer prices). This is apples and oranges.

    If we look at nominal dollars for both cases, wages (white males) have increased from about 2500 to 30,000, or 12-fold. Prices have risen from 25 to 190, or about 7.5-fold. Wages are substantially ahead of dollars by a factor of about 1.7 or so.

    But comparing the nominal rise in the price of goods (25 to 190) with the real increase wages (17,000 to 30,000), which is what the post does, is just plain fallacious. If you took the 2004 value of the cpi, 190, and figured out what its real equivalent in 1950 would have been, well, surprise, it would be 190. Because, well, that’s what inflation means.

    Or am I missing something?

  55. 55
    jl says:

    @freelancer: That is the same lecture I posted, but easier to view on youtube than my link.

    The videos seem to be versions of her congressional testimony. The pdf has the figures shown in the lecture video.

    WP is letting me post links today so here is clickable route to Warren’s congressional testimony, with the figures.

    http://www.hks.harvard.edu/ine.....ren081.pdf

  56. 56
    Shinobi says:

    @Blue Carolinian: Actually only about 2 thirds of women are working now, compared with a third in 1950. That’s double the number of women, but I’m not sure it actually doubles the total number of workers.

    It would be interesting to compare the growth of the workforce over time with population and GDP growth. Perhaps when I’m done doing my real work I will do that.

  57. 57
    Tom Levenson says:

    @David in NY: Sadly you are not. Check out hte correction above.

  58. 58
    TheF79 says:

    Tom – thanks, given your proclivity for demolishing McMegan’s calculator errors, I didn’t want to see you make a similiar one. You also have my sympahty, because when I fuck up I have the luxury of being disparaged in comments on a working paper or in a seminar by a few dozen people, rather than the entire blogosphere. This is also why I don’t blog :)

  59. 59
    WyldPirate says:

    @GeneJockey:

    What you see is that from 1945 till about 1980, the lines all rise at the same rate. Then each quintile in turn, from the lowest to the 4th, arc over to flat, and begin to decline. The slope for the top quintile, by contrast, begins to rise FASTER, and the slope keeps increasing.

    This is exactly right. The slope of the lines of each quintile tell the story. this is illustrate from 1980-to present in second graph down–“winners take all”–at this link.

  60. 60
    David in NY says:

    I want to say that I’m confused as well. And I think that the post is really misrepresenting things by comparing real dollars (for wages) and nominal dollars (for consumer prices). This is apples and oranges.

    If we look at nominal dollars for both cases, wages (white males) have increased from about 2500 to 30,000, or 12-fold. Prices have risen from 25 to 190, or about 7.5-fold. Wages are substantially ahead of dollars by a factor of about 1.7 or so.

    But comparing the nominal rise in the price of goods (25 to 190) with the real increase wages (17,000 to 30,000), which is what the post does, is just plain fallacious. If you took the 2004 value of the cpi, 190, and figured out what its real equivalent in 1950 would have been, well, surprise, it would be 190. Because, well, that’s what inflation means.

    Or am I missing something?

    Update:
    I think I’m not. Though the crow-eating update in the post doesn’t directly address the problem it does concede what the figures show, that we are indeed wealthier than we were in 1950, in terms of how much the median person can buy with his or her income.

  61. 61
    Fargus says:

    OK, here’s a link:

    http://www.unc.edu/~jbhill/Macro_Plots.pdf

    From what I can tell (because I don’t feel like going and plotting the stuff out myself), it looks like real GDP per capita has a little more than tripled between 1950 and 2004, whereas real median income has probably doubled or so during the same period.

    I’d agree, though, that the more relevant period would probably be the post 1970s period, where real median income pretty much flatlined.

  62. 62
    les says:

    From Lawyers Guns and Money:

    Where then has all this almost unimaginable increase in national wealth (ed.: “real GDP actually tripled between 1970 and 2009, while per capita GDP more than doubled”) gone? Consider that while in 1965 the 95th percentile of family income was approximately $105,000 — i.e., a little more than double the median — by 2010 it was $180,000. But the relative good fortune of the upper middle (or perhaps more realistically lower upper) class pales to nothing in comparison to what has happened in the economic stratosphere. Between 1979 and 2007, average after-tax incomes for the top 1 percent of households rose by 281 percent after adjusting for inflation — an increase of nearly one million dollars per household. Yet even this increase is trivial when placed against the bounty that has rained down on the true Lords of Capital. In 1980, the richest 0.01% of American households — roughly the 10,000 richest families — had an average annual income of $5.4 million (in 2006 dollars). A quarter century later, that figure had grown, in real, inflation-adjusted terms, by a factor of nearly six: to $29.6 million per year.

    Roughly 10,000 times roughly $24MM income increase is roughly $240 billion in income growth sticking at the top .01%. Need to find $100 billion in deficit reduction? I gotta idea.

  63. 63
    Tom Levenson says:

    @David in NY: I rather thought I ate all my crow, thank you very much. I believe that the phrase “double counting” meant what you would want it to: that the inflation figures in the CPI were reflected in the calculation of constant dollars.

    If that wasn’t clear, I’m sorry — but as you note, the presumption with which the original post was written was simply wrong, in an obvious way that on most days would have been obvious to me too.

    Alas.

    More coffee is required, I think.

  64. 64
    David in NY says:

    What happened with the edit, request deletion feature? Wouldn’t work for me. I didn’t mean to rub it in by posting again, but that’s what happened.

    Anyway, on the merits of the economic case presented, stuff happens, life is complicated, etc. Clearly something is going on here economically, but it’s not as easy as it looked at first. Is it just that income inequality has increased so greatly? Or is it that the wage-earner is falling behind, which is what it feels like.

  65. 65
    David in NY says:

    Yeah, Tom. Sorry. I just spent all that time trying to explain it clearly and went to the top to look, and you’d gone about recanting. Which made me ill-tempered and need some coffee, too. And really, I didn’t mean to post twice, really.

  66. 66
    Bill Arnold says:

    Front page doesn’t have the update for me, just the comment page.

  67. 67
    PurpleGirl says:

    I’m watching a PBS American Experience show on the Triangle Shirtwaist Factory Fire. It is very affecting. If you can, watch it.

  68. 68
    Tom Levenson says:

    @David in NY: No worries.

    Looking around: several things seem to be at play here. Some very important goods whose prices have risen well ahead of the CPI — think housing, college, and medicine affect the issue. The cost of what the Warren lecture linked to in the thread describes as buying schools is part of what drives that cost equation especially for the middle/upper middle classes. Income inequality, complicated as the issue is, may play a big role in a couple of ways — by concealing in “average” figures a stagnation or decline in incomes in the middle and/or by the aspirational effect that makes being no richer than one is feel poor when compared with visible conspicuous consumption.

    The growing insecurity of retirement is another one. Our parents retired at the peak of security provided by an unquestioned Social Security system and defined benefit private pensions. Now, many of us feel, I believe, that Social Security is at risk (and/or won’t keep pace with the costs of old age, even to the level of benefits our parents received) and the risk of private pensions has been shifted onto the pensioner and away from employers. Given how jittery events like 2008 make anyone trying to save for retirement feel, even if the long term trend is to wealthier old age, it sure feels more tenuous, and that puts pressure in obvious ways on incomes now.

    That’s enough figure-less speculation to be going with now, don’t you think? And what do you think about this?

  69. 69
    Tom Levenson says:

    @Bill Arnold: ?

    Just check. Works on my end. Do you have the “www” in front of Balloon-Juice? Sometimes when I omit that I get a prior iteration of the site, for reasons only the gods of HTML can divine.

  70. 70
    liberal says:

    @Martin:

    Consider that in the context of housing? I could argue that owning a home with more than 3 bedrooms is excessive for any size household. So long as you have a bedroom to pack in boys and one to pack in girls, you’re good to go. That would have been a perfectly reasonable definition in 1950. It’s not today.

    A much more important factor than the size of the house, IMHO, is the value of the land the house sits on, especially in more urban areas.

    While home sizes have increased, I’ll bet good money that construction is far more productive than it was in the 1950s. Land, OTOH, they aren’t making any more of it.

  71. 71
    Jager says:

    In 1975 I lived in a house, in new nieghborhood west of Boston. I paid 39,900 for the house (3 bedrooms, 2 baths, 1/2 acre lot, 2 car garage and a finished family room)I put 10% down and the PITI was $323 a month. I had two kids, a stay at home wife. The area was filled with couples in their late 20′ to mid 30’s, young middle manager types, a few engineers, etc. Everyone had two new or newer cars, we all went out to eat every week, went to concerts and took nice vacations. I made (with a bonus plan) $27,000 in ’75, my health insurance was fully paid plus dental and I owned a 26 foot sailboat with a buddy of mine. And we saved a little money every year. I’m guessing to live our lifestyle from ’75 a young couple would have to make well north of 200k today. I was in Boston last fall, ran into one of my old nieghbors, he told me my old house sold for $649 in 2007. I think things for young couples life wes much better in the 70’s than today…

  72. 72
    freelancer says:

    @jl:

    Great minds and all that. I’m 46 minutes in, listening to it while I work. I’m under 30, and this just makes me want to open a vein. This isn’t just my story. It’s every single one of my peers. Those with bachelors degrees are working shit jobs unrelated to their major, those without are doing the same. My friends that have graduate degrees are all in similar situations in that they are either recent graduates who can’t find employment even with their titles and international experience, or working a decent paying corporate gig but still buried under a mountain of credit card debt, not to mention she just sold her house after being on the market for over a year. This is all too common.

    I have brilliant cousins that have hard degrees in science and mathmatics. One now works in a relative’s bakery, and the other joined the Air Force after getting an officer’s commission. This is how my generation is making it work. We aren’t doing what we trained to do, what we’re good at. We’re doing what is out there to do to get by, and it’s so goddamned frustrating on the level of morale. To know that our grandfather raised 8 kids, (Eight of them Bob!) on a Postal Worker’s salary; but we can’t even set aside enough, paycheck to paycheck, to address the debts we owe or meaningfully save anything for “retirement” (whatever the hell that is).

  73. 73
    David in NY says:

    @Tom Levenson: As an almost really older person, I think job security means a lot, and job insecurity may be a big part of the problem. Looks to me like a lot of people can make that median income, and more, for about 20 to 30 years, but then get dropped for a younger, cheaper worker, and their income drops by about 1/2 to 1/3 if they even manage to get another job. This produces enormous economic dislocation for the middle class. This was harder to manage when a bigger portion of the work force was unionized, but now it’s the normal course of business.

  74. 74
    Keith says:

    @TheF79: Agreed with this and with TheF79’s earlier posts.
    Plus to give Tom appropriate credit, he did, unlike a certain unnamed elsewhere, both rapidly and correctly acknowledge specific errant assumptions.

  75. 75
    ThatLeftTurnInABQ says:

    @Martin:

    Should we factor in that change in social expectations as an expectation in wage growth? Just because most people feel that 1800 sq ft is an appropriate middle-class home, do we need to declare that wages that only provide for a 1400 sq ft home are inadequate – particularly when comparing to that 1950 wage where a 700 sq ft home was considered appropriately middle-class?
     
    That’s a tough question. The GOP looks out and says ‘You can buy everything today on a median income that your grandfather could buy in 1950 with a median income’, and they’re pretty much correct until you hit certain categories of healthcare. And so they’ll say ‘shut up, you have what you need, work harder for more’.
     
    The Dems look out and say ‘But you can’t buy what is today considered average on a median income in the same way that my grandfather could.’ And they’re also pretty much correct. The amount of discretionary income above the median is significantly higher than it was in 1950, and so societal expectations have changed significantly. And the Dems will say ‘This growing societal gap is a problem that will only further destroy income mobility in the US, so that no matter how hard you work, you have insufficient capital to actually convert into meaningful gains’.

    What I taking away here (and please correct me if I’m wrong) is that because of growing income inequality the income median and the income mean have diverged. The latter has risen faster than the former, thanks to explosive growth in the income of the top 1%, etc.

    If you look just at median income, then the picture doesn’t look so bad. But income translates into happiness via social psychology, and there the mean income looms larger , because via saturation advertising in a very consumer oriented society we are all of us exposed to a social reality beyond our immediate circle of friends, family and associates. And of course much advertising is geared towards the top earners because they have more discretionary wealth to spend, so it portrays a world which most of us don’t inhabit. Most of the folks who see that advertising end up thinking “everybody else must be rich, why aren’t I?”.

    The other component is that households are expected to bear much more in the way risk today, whether market risk or the risk of personal misfortune. One of the things lost in translation in the move to a dual income household is that if you end up with two wage earners each bringing in one-half of the inflation adjusted income of a single wage earner back in the 1950s then great, you’ve managed to tread water in terms of net household income. But unfortunately you’ve also doubled the net household exposure to risk, in the form or either career disaster (fired, laid off, etc.) or in the form of health-driven income loss if one of the wage earners gets too sick to continue working.

    Keeping net household income constant while doubling the downward risk is a bad bargain, one that is becoming more obvious now that the Baby Boomers are reaching the age where the income risks posed by health problems are becoming serious.

  76. 76
    bemused says:

    @Shadow’s Mom:
    I hope this catches on here. You’d think this would be a cause that tea party folks would join but something tells me it will be more important stopping for an hour on The Road to Ruin with their vehicles running and causing traffic jams.

  77. 77
    Martin says:

    @liberal:

    While home sizes have increased, I’ll bet good money that construction is far more productive than it was in the 1950s. Land, OTOH, they aren’t making any more of it.

    Construction is considerably more productive than it used to be, but the labor savings have largely been replace by upgraded materials and the increase in home size – at least around the median point. Have overall home construction prices increased (even accounting for the bubble)? I don’t know, but I suspect so.

    And they are making more land. It’s called zoning. My city has recently zoned for 20,000 new homes. Now, cities and developers do constrain zoning in order to artificially keep supply low to drive up prices, but this has always been true. Quite simply, you can no longer build a home where no road, power, water leads. At least, you don’t build very much off-grid.

    But the problem where I live is, why pay $800,000 for a home with a replacement value of $160,000 due to that inflated value of land? Why not put an extra 10% in on the overall value of the property and get 50% more house for it?

  78. 78

    Regarding the original post and the original email:

    Raising a family with some degree of comfort on one income always was an urban, white, middle-class dream.

    In rural areas, EVERYBODY in the family had to work to meet the family’s needs. In families that weren’t of white European descent, even if they lived in the city, several family members had to earn money to keep the family afloat. Members of minority groups who owned their own business had to have the help of family members in order to make it. There just wasn’t enought money to take care of the family and pay wages, too.

    And now that urban, white, middle class dream has slipped away.

    [I know that I am commenting and running, but this was typed during stolen moments. :-)]

  79. 79
    Martin says:

    @ThatLeftTurnInABQ: Divergence between median and mean is part of it. I think part of it too is that because we spend so much more of what we earn and individually rely on a bunch of other mechanisms to produce income or defer or change spending, that there is simply a kind of social inflation taking place.

    For the sake of simplicity, let’s reduce the CPI down to just one measure – housing. There’s three ways to change the relationship between wages and spending here – 1) change the wage, 2) change the base cost of housing, 3) change what people are willing to spend on housing. If you can convince people to increase their spending from 30% of gross wage to 50% of gross wage, and you simply measure what people spend on housing, then it’s going to look as though buying power has dropped considerably as a function of wages, even though that increase in spending may have been entirely voluntary.

    I don’t mean to pick on housing here, I think you see it across a broad spectrum of spending, actually, including healthcare, education, and so on. But I see a LOT more discretionary spending on these things around the mean income than I used to. But down around the median? I bet they feel like they’re completely unable to keep up with those at the mean compared to 50 years ago.

    As a somewhat connected, somewhat disconnected statistic. Last month, 31% of all home purchases in SoCal were all-cash purchases. That puts the median home surprisingly close to a mortgageless purchase. I wonder how that compares to 25, 50 years ago? My guess is that quite close to 0% of those median home price buyers are median income earners. Some will be, but not many.

  80. 80
    Herbal Infusion Bagger says:

    Like others have noted and Tom himself corrected, there’s double counting of inflation in Tom’s calculations. There’s differences between the CPI and the GDP deflator used for constant dollars, but not enough to be material in this calculation.

    This is a McMegan level error, though.

  81. 81
    evinfuilt says:

    @Shadow’s Mom:
    Most people forget how Reagen paid for his tax cuts, by hitting the middle and lower class super hard with payroll taxes.

    First those have to go, they are horribly unprogressive and I feel are the main hold back on salary increases.

  82. 82
    Shoemaker-Levy 9 says:

    the issue lies in consumption patterns,

    When I first became a grown-up (late 70s-early 80s) My telephone needs were usually covered with about $15/month. Fast forward to today, I don’t think I know anyone under 40 who can possibly survive with a phone plan costing under $200/month. Thus, phone costs have gone up about 20 times in thirty years.

    Not making any cosmic point here, this is just a minor obsession of mine, the mind-boggling amount of money people spend on telephone activities. I could rant about TV and convenience food and many other things, but I think I’ll just stop here.

  83. 83
    Tom Levenson says:

    @Herbal Infusion Bagger: Boy, you know how to hurt a guy. Can’t really argue though. ;(

  84. 84
    Martin says:

    @Shoemaker-Levy 9: $200/mo? That more makes my point. My home phone plan is $6/mo. My 2 mobiles are a combined $70/mo, and that’s a significant increase from the $45 we were paying (with unlimited long-distance) before we added my wife’s iPhone data plan. My son has a pre-pay plan for emergencies that is under $10 per month. We could easily run the whole operation for under $75/mo, and under $25/mo if need be. The only reason to pay $200/mo and see that as ‘normal’ is that the expectation of ‘normal’ has changed to a large degree.

  85. 85
    Batocchio says:

    Tom, it happens to all of us, and unlike some bloggers, you corrected it. Income inequality, quality of life and all the rest are important subjects that demand further discussion.

    If it was McMegan, it would be:

    Honesty. Corrections. How do they work?

  86. 86
    Tonal Crow says:

    Tom: Thank you for the correction. That takes guts.

  87. 87
    JPL says:

    @evinfuilt: Reagan also did away with deductions that hit the middle class..the interest expense deduction on cars and credit cards, but he never paid for his tax cut.

  88. 88
    Herbal Infusion Bagger says:

    Boy, you know how to hurt a guy. Can’t really argue though. ;(

    Y’know she’s going to throw it in your face the next time you point out her screw-up.

    However, we correct you and you correct yourself, which is 180 degrees after from McMegan and her fanboyz.

  89. 89
    Tom Levenson says:

    @Herbal Infusion Bagger:

    Y’know she’s going to throw it in your face the next time you point out her screw-up.

    Wouldn’t be surprised. It’s a high risk gesture on her part, given the material the blogger formerly known as DougJ and others have left for use on this point. But yeah, mine was exactly the kind of mistake we’ve seen in that quarter often, which is what makes this sting. A lot. “Hurts to much to laugh; I’m too big to cry.”
    @Batocchio: @Tonal Crow: Thanks for the props. They are very welcome.

  90. 90
    Carnacki says:

    @Tom Levenson: You’re doing it wrong. When you make a mistake, you don’t admit you’re wrong. Gawd, haven’t you learned anything from your business and economic betters @ The Atlantic /meganisms

  91. 91
    West of the Cascades says:

    @Tom Levenson: Don’t begin to compare yourself to “the kind of mistake” that’s in that quarter. If you were “exactly” that kind of mistake you’d still be arguing that your figures are correct, and even if they’re not that your underlying point is true, even if the support for it is collectively nonsense. No way, no how would there have been prompt correction and apology without lots of “move along, nothing to see here.” Kudos on fixing it.

    Get more coffee.

  92. 92
    WyldPirate says:

    @ThatLeftTurnInABQ:

    If you look just at median income, then the picture doesn’t look so bad. But income translates into happiness via social psychology, and there the mean income looms larger…

    To a point, according to this.

    @Tom Levenson:

    I rather thought I ate all my crow, thank you very much.

    You did and you did it with much class and humility.

    You’re a gentleman and an honest scholar, Tom. All four of these things are rarely found in one person from my experience.

  93. 93
    Peter A says:

    One confounding issue is that things that have gotten significantly cheaper are often things that we don’t really need to consume, so the ability to buy them in mass quantities doesn’t make us feel that much richer. Most food is cheaper today after adjusting for inflation, so is basic furniture, and certainly items such as clothing, toys, gadgets, books, recorded music, and access to information in general, are shockingly cheap, to the point where much of it is essentially free. Even poor people today have access to a far greater quantity and variety of “stuff” than middle class people did 40 years ago. But how much “stuff” can you really consume? At some point housing, education, travel and medical care seem more important.

  94. 94
    El Cid says:

    @liberal:

    I don’t know about now versus, say, the mid-1980s, but I’m pretty sure the average worker (if not the avg household) labors for fewer hours than in the mid-20th century.

    There is a substantial debate on this topic in the professional and scholarly literature.

    Conventional estimates based on things like surveys by the Current Population Survey and the BLS do show a lessening overall, with an increase from a low point in the mid-1980s.

    For example, the OECD uses BLS stats to review just that.

    But such figures may be missing out on reality if different measures are used and/or problems with frequently used data are addressed.

    One of the ways in which annual hours worked could increase without changing the work day, for example, or running up against overtime pay, is if the number of vacation days taken by Americans had been reduced.

    The number of paid vacation days offered has reduced, but apparently more Americans work them instead of taking off.

    That’s a higher number of hours worked.

    This is a good discussion by one of the scholars who has in fact argued in the scholarly literature that working hours have increased since at least the 1960s, by over 150 hours annually.

    I don’t have access to the electronic versions (or print for that matter) so as to get to the main sections of articles on this in the scholarly journals.

  95. 95
    alwhite says:

    I’ll admit I got here late so all the edits confused me more than usual. But my brother got a teamster job on a trucking dock in 1965, he made just shy of $10k a year. My inflation calculator tells me that would be equal to $67k this year. I bet nobody on the docks is making $60k/yr today.

    Anecdote is not data but I think it is indicative of the decline of the wages for labor that I believe is supported by data.

  96. 96
    Gian says:

    if you want to look at inflation the CPI isn’t a bad place, but it’s not the be all and end all.

    If you take the price of gold when Nixon closed the gold window (ending part of the Bretton Woods monetary agreement)

    it was about 40 years ago, and about $40 an ounce. It’s well over a $1200 now.
    My recollection from the time, being in middle school back then was that St Ronnie was one of the first to start really dickering with the formula for the CPI/inflation as a way to tighten screws on people who lived on fixed incomes and get a COLA based on the CPI
    like the recipients of a sucessful retirement supplemant that Bush wanted to piratise for wall street

    IMR it was St Ronnie who started screwing how unemployment was measured to make it seem better than it was. Point being the CPI is I think gamed to read lower than any sort of real change in cost of living.

  97. 97
    gnomedad says:

    @Clown Shoes:
    From the article:

    We don’t want to vilify the top 1 percent and give stuff to the bottom. We want to raise them up, so that on their own maybe one day they’ll get to the top 1 percent.

    And we won’t rest until everybody’s in the top 1%!

  98. 98
    mclaren says:

    Let’s start at the beginning. The CPI is bullshit. The CPI excludes crucial expenses like energy (gasoline) and food. Moreover, the CPI assumes a certain proportion of expenses that’s no longer remotely accurate. One of the assumptions in the CPI is that the average person will spend 1/3 of income for rent. In any big city in America, this has long since ceased to be true.

    Let’s go at this from multiple directions. First: one datum your CPI stats don’t show is the fact that in 1950, a middle class family was able to buy a home and raise a kid with one income. One. Income. As long as the husband worked, a family would do fine. Try that today. Unless you’re a Master of the Universe, you cannot buy a home and raise a kid with one income today.

    So that basic fact alone shows us incontrovertibly that real incomes have dropped. In 2011, it requires 2 incomes (husband and wife) to buy what one income got in 1950.

    But let’s move on to compare actual prices in the past as opposed to today, and then compare actual incomes.

    Here’s a little blast from the past for you: in 1962, the actual minimum wage was $1.15 per hour. That’s 1962 dollars, not inflation-adjusted. Instead of falling into the foolish trap our economist blogger here has fallen into by trying to inflation-adjust that wage, let’s instead take representative expenses in 1962 and compare ’em to representative expenses today.

    The minimum wage in 1962 was $1.15 (Source here.)

    A VW beetle in 1962, brand new off the lot, cost $1295. That was the cheapest car you could buy in 1962. That equates to $1295/(2392 hours*$1.15/hour) = 47% of the before-tax income of one person. Compare with the cost of the cheapest car you can buy in 2011 as a percentage of the before-tax.

    If you check this list of the cheapest cars in 2011 you’ll find they’re all about $16,000. Minimum wage in 2011 is $7.25, so as a percentage of before-tax minimum wage we get $16000/(2392 hours * 7.25/hour) = 92% of our before-tax income.

    So right off, we can see that the real cost of a car has doubled since 1962. In 1962, you had to work less than 6 months to make enough money to buy the cheapest new car. In 2011, you have to work just about a full year to make enough money to buy the cheapest new car. So immediately it’s obvious that real wealth has not increased. It’s instantly clear that actual income has fallen just by that measure.

    In reality, of course, things are much worse than that, since courtesy of the senile sociopath Ronald Reagan’s huge increase in the FICA tax, the typical minimum wage worker today pays a minimum of 25% of income in state and federal and FICA tax. By contrast, back in 1962, because of the much much lower FICA tax, the typical minimum wage worker paid closer to 15% of income in state and federal and FICA tax. So the actual disposable income after taxes of your typical minimum wage worker in 1962 was even higher than specified here.

    Now let’s compare the typical price of a house in 1962. Clearly this depends to some extent on where you live, but let’s assume an average suburb in a mid-priced area like Dayton OH or someplace like that. The median price of a home in Dayton OH in 2011 right now is $80,000. According to several different websites, in 1962 the average cost (not median, but average, which may be misleading) of a home was $12,500 while the average (not median) income was $5315 per year. Let’s compare that to today’s average cost of a home in Dayton OH ($80,000) and today’s median income for Dayton OH ($27,523). Compare the ratio of home price to income in 1962 ($12,500/$5315) to the ratio of home price to income in 2011 in the same average community ($80,000/$27,523).

    Notice that once again we see a drastic decline in purchasing power in 2011 compared to 1962. The ratio of average home price to average income in 1962 was 2.35:1, whereas the ratio of median home price to median income in 2011 in the same community is 2.906:1. But it’s actually much worse than that, because remember that in 1962 your typical middle class worker paid much less in FICA taxes than today. So actual disposable income in 1962 was much higher than today. If we take into account the effect of the much higher regressive FICA taxes today, we see that back in 1962 a worker making $5315 paid around 18% federal plus state plus FICA tax, whereas today a worker making $27,532 will pay well over 30% federal plus state plus FICA taxes. The reason for that huge increase, once again, is that FICA taxes have skyrocketed to 10% of the typical paycheck in 2011, whereas they accounted for less than 3% of the typical paycheck in 1962. (I’ve run out of links, since there’s a ridiculous limit of 3 links per post on this cockamamey forum, but you can look up the historical FICA rates and verify that what I’m saying is correct.)

    When we include these corrections the actual ratio of home price to income in 1962 is around 2.35 while in 2011 it jumps to well over 3.3. So in real terms, purchasing power has dropped by 2.35/3.3 = 71.2%. Real purchasing power for the typical middle class person has collapsed by around 30%.

    But it’s really much worse than that. Because college costs have exploded, the cost of gasoline is way way way up as a percentage of income, the cost of basic services like health care has skyrocketed.

    If we were to include all those increases in costs, instead of just looking at basics like the cost of the cheapest new car or the cost of a typical new house in an average area, we’d see that real purchasing power has collapsed by somewhere around 50% today as compared to 1962.

    As usual, the economists don’t bother to do this kind of analysis because it requires common sense and actual math, and as we all know economists can’t handle either of those tasks. Throw out the CPI, it’s bullshit. As the site shadowstats points out:

    Have you ever wondered why the CPI, GDP and employment numbers run counter to your personal and business experiences? The problem lies in biased and often-manipulated government reporting.

    The real unemployment rate today is U6, which runs around 17%. The real inflation rate today is above 9% according to shadowstats, while the bogus CPI-U and CPI-W run 1.6% and 1.8% respectively. The reason for this drastic divergence in unemployment and inflation measures isn’t hard to figure out: the government unemployment rate of U-3 does not include discouraged workers who’ve stopped looking for work. Presto! Change-o! If you’re out of work for more than 26 weeks and you no longer draw unemployment, according to the government, you no longer exist! Great for artificially reducing the rate of unemployment, but not an accurate reflection of the real world.

    Likewise, the phoney CPI-U and CPI-W deflators don’t include basics like the cost of energy or the cost of food –both of which have skyrocketed in cost over the last year.

    Of course, to claim that the Bureau of Labor Statistics is producing gross inaccurate statistics on basic economic measures like inflation and unemployment is just crazy, right? After all, no serious economist would claim that there’s a problem with government unemployment or inflation statistics, right?

    Wrong. According to the testimony of Katharine G. Abraham Commissioner Of Labor Statistics Before The Senate Finance Committee February 11, 1997:

    I have, purposely, spent a good deal of time talking about substitution bias. The largest share of the bias in the CPI that the Commission concludes exists — 0.7 percentage point per year, or nearly two-thirds of the total of 1.1 percentage points per year — arises from other sources. The Commission believes that the failure to make adequate adjustment for changes in the quality of the goods and services people buy and to account properly for the value to consumers of newly available goods, together with deficiencies in the way the CPI treats differences in the prices charged at different retail outlets, constitute a serious problem.

    Of course she seriously understates the severity of the problem — but the point is, she recognizes that there is a problem with government statistics. Simply put, the CPI deflator used today assumes a representative basket of goods and services which is no longer remotely accurate, and it excludes crucial high-cost items like food and energy which didn’t make up a large part of the cost of living of the average middle class person back when the CPI deflator formula was created 45-plus years ago, but which make up a huge percentage of the typical middle class expenses today.

    The first thing to keep in mind is that the CPI is not an economic variable. It is a statistic that at best gives an inaccurate picture of an economic phenomenon: inflation. To calculate the monthly CPI, the USDepartment of Labor takes a weighted average of prices of various things that consumers purchase, and then its statisticians try to figure out the various proportions of different items in a “mythical” household budget. For example, the statisticians may hold that housing costs are 30 percent of household expenditures, food costs 20 percent, gasoline another 15 percent, and so on.

    Armed with the proportional spending of the “average” household, the statisticians then assign that percentage to price changes of each item. Obviously, the higher the percentage of a household budget for a certain item, the more “influential” that item may be. For example, if gasoline prices rise sharply, then those particular price increases are seen as “fueling inflation” (no pun intended).

    From “What’s Wrong With the CPI?” by William L. Anderson, August 2001, The Mises Institute Monthly.

    You can see immediately what’s wrong with this bizarre set of measurements that make up the CPI. Today housing costs are much more likely to be 50% or 60% of household income than 30%. Just take, for example, the typical cost of a 2-bedroom apartment in Los Angeles CA: it’s around $2000 per month. But according to the latest statistics, the median 2-person income for a family in California is around $50,000 per year. Clearly the after-tax proportion of income spent on housing for a 2-income family in Los Angeles is going to be closer to 75% of after-tax income than 30%. Likewise, it costs around $50 to fill up the gas tank on a typical commuter car in Los Angeles today, and that means fuel costs of $200 per week, or $800 per month, for a 2-income family in Los Angeles. That works out to a lot more than the 15% estimated in the CPI.

  99. 99
    Hob says:

    @mclaren: THANK YOU. It’s amazing how rarely anyone bothers to look at really basic stuff like this. Professional obfuscators are constantly saying “Who are you gonna believe, the CPI or your lying eyes?” and people so often accept it– they just assume that their own experience, and the experience of pretty much everyone they know, must be unrepresentative of the great times that everyone else is supposedly having… or must be their fault somehow… or both.

  100. 100
    polyorchnid octopunch says:

    @Jager: I think this is an important point. Getting an age breakdown of where the money is going would undoubtedly be very interesting.

  101. 101
    polyorchnid octopunch says:

    @Martin: Outside of North America people use mobile phones like that all the time, and pay the kinds of numbers you do.

    In Canada, byte for byte, a text message costs more money than data from the Hubble Space Telescope.

    I think there’s a lot of soaking of the public going on in telecom. I see that Verizon has just increased the price of a text message to 15 cents. Up here, under the worst case scenario, they can cost up to forty. The cost to the telecom of sending the text message is less than a penny.

    If the real costs were anything close to what we pay here in NA, how could anyone in the third world ever afford to use them?

  102. 102
    serena1313 says:

    @Peter A:

    Steve, yes people have ‘access to a far greater quantity and variety of “stuff” than they did 40 years ago’ and yes things are much less expensive, however, that “stuff” is not quality.

    Things did not have to be replaced as often as they do today. Appliances used to last 25 to 30 years more or less; today they last maybe ten to fifteen years at most. Even everyday products like dish washing soap, shampoo, razor blades, kleen-x, toilet paper, etc. are made so that you have to use almost, if not, twice as much or more. Socks did not wear out for at least a year or more, today you are lucky if sox last a month — including those made by Ralph Lauren and other designer names.

    BTW: always steer clear of any product labeled “new and improved” because “better” and/or “improved” more-often-than-not means just the opposite.

    I’d rather pay more for quality-made items. Unfortunately quality is hardly part of the equation anymore notwithstanding. Sure we buy things that may cost less, but they do not last.

    So in the long-run we are actually spending more but getting less, much less. Yet that is the price we pay today for cheaply-made, rather than quality-made, products.

  103. 103
    Paul in KY says:

    @JPL: I would be for bringing back the deduction for credit card interest. Would help people who carry that debt (rich or poor, but I would expect more poor carry the amounts from month to month).

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