Miserabilism Debunked: Middle Class Stagnation

Humans by nature are inherently discontent—not that this is a bad thing. Much of human progress can be traced to people striving to improve their own personal circumstances. Discontent in fact drives much of the human innovation that ultimately benefit everyone. As Adam Smith famously noted “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

Unfortunately, this trait can also be exploited. Politicians and the press often pander to public discontent and the insecurities that come with it for their own purposes, namely votes and profits. In the fierce competition of our information age, simply pointing out actual problems is no longer sufficient. Rather, the conversation has devolved into wildly exaggerated or simply ‘created’ problems that really don’t exist at all, a form of miserabilism that might be summed up best by Donald Trump’s campaign slogan “Make America Great Again.”

This is not a trivial issue. Such antics distract from real issues that need addressing. Perhaps worse is when enacting policies to fix problems that don’t exist create real problems. Consider the damage that Proposition 13 continues to do to the California economy or the price the Brexit will cost the UK in terms of long run growth. A great example of such nonsensical miserabilism is the ongoing hand wringing over the stagnant standard of living for America’s middle class.

You’ve surely heard the rhetoric. Bernie Sander’s entire campaign was wrapped around it. Hillary Clinton gave her own nod in a recent campaign speech where she said “Americans haven’t had a raise in 15 years,” a statement that Politifact rated as true. And it isn’t a left-wing only issue—numerous commentators have suggested that the rise of Donald Trump is being driven in part by the disaffection of the middle class within current economic realities. And apparently Americans aren’t expecting much better in the future. Consider the recent Wall Street Journal/NBC News poll that found 76% of adults don’t think their children’s generation will have a better life than they do.

These worries are all wrapped around one statistic published annually by the U.S. Census Bureau—real median incomes for American households. According to this data real (inflation adjusted) median household incomes peaked in 1999, and have since been slowly falling—the median is now 7% lower than at the peak. And this isn’t just about gains going to the top; the same data set suggests that average real incomes peaked in 2000 have since declined by 3.5%. [If income gains were accruing just to the top 10% or 1% this would cause average incomes to rise even as the median remained flat or declined. If there was pure redistribution from the lower to the upper end, then the median would almost assuredly be falling even faster.] This data is not only cited in political conversations, well respected think-tanks such as the Pew Research Center and the Economic Policy Institute feature this data prominently in their work.

But there is simple problem with all this fuss—the data being cited is largely meaningless.

The well-being of Americans is ultimately a function of the goods and services we consume. The assumption being made by the groups who worry about this trend is that this data accurately reflects consumption. It doesn’t, not even close. The Census data is based on measures of gross cash income for households. There are many reasons why the metric doesn’t correlate with actual consumption including:

1. The data does not include income or consumption received by households in non-cash forms. This includes private and public healthcare benefits, private and public pension contributions, and other government support services such as food stamps or housing supports.
2. The U.S. Bureau of Labor Statistic’s CPI (Consumer Price Index) is used to deflate the data, despite the fact that economists almost universally agree that this index overstates the true increase in the cost of living and prefer to use the more accurate Bureau of Economic Analysis’s (BEA) PCE deflator.
3. The aggregate economic data used by economists does not include unpurchased consumption. This includes leisure time, transaction benefits, and very importantly, free online services from Facebook to video chatting to media entertainment and news.

All of these issues imply that the actual wellbeing of Americans is higher than the numbers cited in the Census data. More importantly the bias in the data is increasing sharply over time because of the large increase in the number of retired people (lots of leisure and government provided healthcare there), the expansion of private benefits for employees (healthcare), other public programs for low-income households (housing supports), and increasingly ubiquitous access to a growing variety of online services.

How much of a difference does this make? We cannot adjust for unpurchased consumption—this is a problem economists are still trying to figure out. But we can adjust for non-cash benefits and the inflation issue by using the more complete data from the BEA. The Census data and the BEA adjusted data are both displayed in the graph below. In 1975, the gap between these two measures was 12%. By 1999 it had increased to 18%. And since then—right about the time American incomes supposedly stagnated—the bias has exploded to over 40%.

To put this in context, over the period of time when pundits claim that real average household incomes have fallen by 3.6%, the adjusted data shows they have actually increased by 13%. And remember, this data still misses the unpurchased consumption, implying that the true standard of living has increased even more. Of course this information fails to take into account changes in the distribution of consumption—this is a topic that we will tackle in the next edition of Miserabilism Debunked.

This is not new. Economists have regularly raised these issues in various publications and op-eds. Consider, for example, an excellent piece in the Wall Street Journal in 2013 by Donald Boudreaux and Mark Perry, or another Journal piece in 2015 by Marty Feldstein, a highly regarded economist and government policy advisor. Yet each time such basic logic is pointed out, there is a ferocious backlash by people who prefer miserabilism to realism in pursuit of their own personal agendas. And this is the true tragedy.