Economics, Consequentialism

Inequality, Mobility, and Being Poor in America

That’s the title of a recent paper of mine that is now forthcoming in Social Philosophy and Policy, as part of a conference and symposium coordinated by Mark LeBar. I have put a draft version up at SSRN for those who would like to take a look at it.  I will try to link the final version if possible.  Here’s the abstract:

Abstract:

The conventional narrative that the last generation has seen the rich get richer and the poor get poorer while the middle class gets hollowed out has serious flaws. First, the claims of growing inequality overlook data on income mobility. It is not the same households who are rich and poor each year, and many poor households become richer over time. Second, the claim of middle class stagnation is largely a statistical deception based on an incomplete interpretation of median household income. The middle class has shrunk but so has the percentage of poor households as the percentage of rich households has grown significantly in the last few decades. Third, looking at consumption rather than income enables us to see both the absolute gains of poor US households and the narrowing of the gap with the wealthy. Poor US households are more likely to have basic appliances than the average household of the 1970s, and those appliances are of much higher quality. Together these three points offer a much more optimistic view of the degree of inequality and the ability of the poor to become rich. The picture is not all rosy and a final section discusses the relevance of housing, health care, and education costs to this argument.

 

Published on:
Author: Steve Horwitz
  • Jerome Bigge

    Having been born in 1938, I’d say that things were better in the past than now. Certainly the availability of good paying jobs for HS grads was much better. The only two major differences between then and now is that we didn’t have computers or cell phones or all the other electronic gadgets. We did have TV, air conditioning, etc. Minimum wage relative to the cost of living was higher. More availability of factory jobs in unionized factories. Cost of education as compared to the average income was less. You could get training in night school for these jobs. Welder, machinist, auto mechanic. Full serve gas stations also offered basic mechanic services. Cars were simpler, less complex, if not as energy efficient as today’s.

    • An old dude complaining about how times were better back when he was a young dude? Say it ain’t so!

      Warren Gibson, another old dude, has a much more balanced take on standards of living: “1953.”

      • adrianratnapala

        @NoL, just because what he says fits a pattern, doesn’t mean it isn’t true. Jerome is clarifying exactly the conventional wisdom that the abstract above is denying.

        Now the nice thing about the paper is that it is statistical rather than anecdotal, though I am sure some can provide statistics supporting the conventional wisdom. And in all likelihood there is no logical contradiction between such competing sets of statistics.

        The West has grown richer over the last 30 years, but is (perhaps) more pessimistic than after other such periods of growth. It’s by looking seriously at claims like Jerome’s that we can get a sense of what is really going on.

      • Sean II

        I’ll tell ya’ boy, they don’t make confused old nostalgics like they used ta’.

        In my day, if you wanted to hear a fella romanticize the backward past and shake his fist at undeniable material progress, you had to go meet ’em in person, ‘stead of typin’ on some blasted wireless!

        • Libertymike

          There were two things not on stage during the play of 1953 that would make it most difficult for me to endure should I time travel to that year:
          (1) NFL Films
          (2) The diversity and potency of today’s MJ.

    • TracyW

      On the other hand, road accident rates were much higher than now.

      My mother did some work for Ford, and while there she learnt that the old model of car design was to make the car strong so it would survive the accident, the problem being that all that energy from the crash had to be absorbed somewhere, so the stronger the car, the more the people in the car were thrown around. Modern cars are built to crumple up and absorb energy, protecting the people in the car.

    • TracyW

      Cars were much less safer back then too.

      • TracyW

        Sorry about double post.

      • Sean II

        Totally false. Cars back then broke down so regularly that they became safe by virtue of not moving.

        Now come join me at the piano, Edit: “Didn’t need no welfare state. Everybody pulled his weight. Gee, our old LaSalle ran great. Those were the days….”

    • TracyW

      Also, back then, food took about 34% of average household income, now it takes about 13%. (See http://visualeconomics.creditloan.com/100-years-of-consumer-spending/). Transport spending has gone up, but that in large part is a change from time – people used to spend a lot more time walking.

      • j_m_h

        the link’s not working for me — no error but the page just says nothing found…

        Okay figured out you have to re-enter the search (100 years of consumer spending) to get the report. Might want to include “The relationship between income and expenses has varied over the years, with income generally growing faster than expenses until the 1970s. During the following decade, it dropped significantly.” for completeness.
        100 Years of Consumer Spending http://visualeconomics.creditloan.com/100-years-of-consumer-spending/#ixzz3QjEdr5wL

        • TracyW

          A lot more families have two cars than back in the 1960s and 70s. And of course, house prices have been ridiculous.

          • Libertymike

            How about the percentage of income that now must be earmarked for taxation and compulsory purchases, like auto insurance and health insurance?
            How about the percentage of income that now is otherwise taken by government in the form of fees, fines and surcharges?

          • j_m_h

            Very true n both counts — but there are also a lot more two income families now than then as well. Is that a better or worse situation — not sure. Clearly a lot of both the two income family a house prices (to some extent driven by a preference for larger houses now than then – we all want more privacy, even at home) has been choice people have made and partly market outcomes that drive the available choices in that direction.

            At the end of the day I don’t think we address the social issue by pointing to these types of changes for the society. There is a place for noting these facts but a much larger influence will always be the relative performance. In short, if a lot of people have a bigger slice of pie but a smaller relative share they will still have some dissatisfaction with the process. This may be mistaken or ligitimate in any given situation but if statistics are showing that large block of people are lossing in a relative sense then there’s some smoke there and very likely fire.

            The main point is that it’s not something that’s really driven by the absolute comparisons but is driven by the relative outcomes.

    • ted

      Well for sure I wouldn’t want the healthcare standard of the ’30s. Not even that of the ’80s. I’m speaking as someone who’s about to have keyhole surgery, after the diagnostic involved various imaging techniques which weren’t widely available until very recently.

      The quality and abundance of everything we buy is simply incomparable, from entertainment to food to plane tickets.

      I went skiing last weekend, and carving skis, which are the standard today, were really unheard of until the ’90s.

      The change is that fundamental, and found in minute details that make modern life so much easier and more enjoyable. I’d say that if someone made you live again in the ’60s you’d go crazy.

      Actually I cannot think of anything else I would want from the “good old days”. Certainly not a unionized job!

    • j r

      Having been born in 1938, I’d say that things were better in the past than now.

      It’s hard for me to evaluate this claim without wondering if what you really mean is that things were better for you in 1965 or ’75 than they are for you in 2015. People often have the habit of confusing when they were having their best times and when everyone else was having their best times.

      • Jerome Bigge

        The purchasing power of the minimum wage in 1968 was equal to about $10 today. Lower population meant rents were less. Using the minimum wage as a base of comparison, you could rent an apartment (here locally, Muskegon, MI) for about a week’s wages.
        Not possible to do that today with our $7.25 minimum wage. Jobs were more plentiful, mostly because of fewer imports. I have the advantage of having lived in this era, it’s not something I have to read about in a book. Were cars less safe? Probably. We did have seat belts, and there was less traffic then due to less population. In 1973 I was earning $2.00 a hour and gasoline was $.30.9 a gallon. So an hour’s wages would buy about 6 gallons (ignoring taxes, etc). Right now six gallons of gasoline @ $2.08 a gallon is $12.48. My 1972 Chevy Vega got about 20 mpg around town. The minimum wage was $1.60, but many employers were paying more for jobs that are straight minimum wage now. I was working in a gas station pumping gasoline at the time. I was living in an apartment with utilities paid for $55 a month.

        • Sean II

          Sorry to be blunt Jerome, but you just said this: “Lower population meant rents were less.”

          And anyone who could say a thing like that, should not be saying anything about economics.

          • Jerome Bigge

            There is only a certain amount of real estate. Supply and demand determines rents. In the past there was less “demand” thus lower rents. Part of this also is due to increased regulation by local governments which also increases rents. Back then less government regulation. Lower rents. More people, more “demand”. However limiting supply through regulation means higher rents.

          • Sean II

            You’re making it worse. I’ll just list the obviously wrongs:

            1) “There is only a certain amount of real estate.”

            Nope. The thing in question is habitable dwelling space, and yes, it can be increased. Has been, in fact.

            2) “In the past there was less “demand” thus lower rents.”

            Are you sure there was less demand per capita? Seems unlikely…impossible, even. How about per capacity?

            3) “Back then less government regulation.”

            Right. When you were a kid in that libertopian golden age known as the World War II, anyone who wanted could build a dwelling and rent it at any price he liked.

            Sure enough, it was a time of bold experimentation on the market.

          • Jerome Bigge

            Less regulation in the past than now. Regulation is actually increasing here locally, resulting in higher rents. However, there is also the case of demand and supply. When supply is cut, but demand remains the same, there will be an increase in “price”. We’ve seen that with a number of things including gasoline. If “demand” is relatively inelastic, prices will rise even more. This is apparently the case with rents. Due to people losing their homes to foreclosure, the number seeking apartments is now greater than ever. But building more apartments does require financing, which in turn means rents have to be high enough to pay off loans. There is also a factor of “buy outs” where the real estate owner sells out his property, the buyer then raises rents to pay for the loans he had to take out. I saw this happen with a mobile home park. The original owners sold out (got a good price). The new owner raised rents (to cover his loans), which in turn raised the cost of living there.

            Same principle was used in “flipping houses”. Buy a house, value goes up, sell out, take the money and go buy another house. This was part of the cause of the “Crash of 2008”. When the value housing rose higher and higher through “profit seeking”. The same principle is the cause of rents increasing faster than wages due to “churn” in real estate.This is why today the percentage of your income spent on housing is considerably higher than it was some decades ago.

          • Sean II

            You’re talking straight out of your ass. I’m not even gonna bother going through your errors point for point. There are just too many. Maybe someone else wants to jump in? Any of the bloggers and most of the regular commenters have the knowledge required to correct you.

            Me, I’ll just take a moment to deal with one glaring example:

            You assume that housing in, say, 1955 is the same good as housing in 2015. So you conclude that if people spent X% of their income on housing in 1955, and >X% in 2015, this is clearly a change for the worse.

            But your premise is wrong. A 2015 house is not the same good as a 1955 house. Also, there’s another perfectly benign reason why the PERCENTAGE spent on housing might have increased in your lifetime. And if you can’t think what that is, well…like I said, econ ain’t your game.

          • Jerome Bigge

            Bigger houses, something that everyone knows. But what about the smaller house of 1955 that someone in 2015 buys? How well have housing prices related to wage rates? Or does it take more hours of labor to buy the same house that your parents might have bought with fewer hours of labor? Going by housing prices this year as compared to previous years, the effect of the “sub-prime mortgage” crisis and resulting foreclosures definity did have an effect upon housing prices. All I need to do is to refer to past property valuations to see that the change in these valuations was due to the change in housing values driven by the “no money down, variable rate mortgages” that caused a temporary “boom” in housing, then a “crash” as the system eventually readjusted in the past years.

    • Adamo330

      1) When did you first visit another country? Or even the coast of the US opposite your birthplace? Or travel on an airplane?
      2) What percentage of your parent’s income was spent on basics, like food?
      3) If your father had a heart attack or stroke in his early 50s, is there any hope he would have survived?
      4) Did any of your friends/classmates get polio?
      5) Did your house have central air?
      6) If you had been black, would you have been able to eat at restaurants/go to movies/drink at water fountains with white people?
      7) Did you have your own phone in your house, or did you have to use a shared neighborhood line?

  • John Halstead

    Great paper!

  • j_m_h

    I think the biggest thing that needs to be address in this general social question is the relative and not the absolute results and positions.

    The problem of social unrest and discontent is not resolve by suggesting the poor live better than royalty in the 15th Century. That’s the the type of inter-generational/inter-period comparison that matters.

    I’m having a hard time trying to clearly articulate the idea but the following may do it. Borrowing from Jermome’s minimun wage thought, if we compared the bundle of goods the bottom incomes supported compared to the bundle of goods middle incomes and upper incomes support 100 years ago, 50 years ago 20 years ago and today what would that graph look like?

    If it’s only slightly sloped then perhaps not much of an issue in reality and most of the issue is closer to urban myth than serious social issue. If there’s a significant slope then it’s pretty clear that the lower ends of the spectrum are not getting the same bang for the but from general economic growth and development. I think that can create significant social divisions and dissatisfaction.

    Similarly, the ability to effectively participate based on one’s own personal merits and hard work seem to be eroding — it’s all about signally via that College degree and employers no long wanting to bring someone without a college degree in for an interview even though the position doesn’t require any special skills one might have gotten from college (many programming jobs don’t need any college, many don’t even need a high school education just some basic common sense and hands one experience with the syntax — certainly junior programmers; same for things like system ad, email admin…) The funny thing is that even with the college degree most new hires will need to be trained on all sorts of things in order to be productive in the position. This type of evolution sees to skew the relative evaluation of earlier periods to that of today from the perspective of income mobility. Not sure if the data used in the article suggest this is a misperception, doesn’t include such aspets or supports the view.

    One thing I do question from the above abstract is:

    Third, looking at consumption rather than income enables us to see both
    the absolute gains of poor US households and the narrowing of the gap
    with the wealthy. Poor US households are more likely to have basic
    appliances than the average household of the 1970s, and those appliances
    are of much higher quality.

    I don’t know if the second statement is suppose to support the first statement but I don’t see it as doing so. If not then given the growth in consumption power for the top I don’t see how there’s been a gain at all. If the point is about social welfare contributions then that suggests that the “rising tide lifting all boat” is not working and I don’t think that’s where the authors are trying to take things.

    Last question, is the dataset available to others?

    • Jerome Bigge

      I had my own security guard agency at one time. One of the requirements to be licensed was to be a high school grad. For all practical purposes all the knowledge I needed (math, reading, etc) I already knew by the time I graduated from the 8th grade. I could do almost everything except for the yearly taxes (which had to be filed corporate) myself using nothing more than grade school level math. The simple fact of the matter is that until you get into “technical” type work, there is really no need for college. I did go to a private grade school, so my education might have better than that of the public school system. Of the courses I had in high school, I can say that the only portion of math I ever used was fiquring square root and today we have pocket calcultors to do that. I did use simple geometry as an amateur telescope maker, but it was still only grade school level. I had the certification for computer technician, but again that was just reading, working on my own computer to pick up some “hands on” experience.

      • Les Kyle Nearhood

        Your last paragraph is entirely incorrect. The reason you cannot just look at statistics and say “hey we still die of cancer and heart disease” is because if you live long enough you will eventually die of one of those things. The fact is we live much much longer on average and live a better healthier old age.

        • Sean II

          His comment “early detection is the reason [cancer] survival rates [have improved]” is particularly idiotic.

          • Libertymike

            MORE CHEMO AND RADIATION!

        • Jerome Bigge

          Due mostly to the use of blood pressure and cholesterol medications. High blood pressure puts a strain on the heart and also on the arteries. Which causes heart attacks and strokes. Cholesterol blocks the arteries and creates problems all of its own. Medication for these conditions is relatively “modern” and certainly has been one of the reasons for the increase in life span. Then there is the decrease in cigarette smoking, which used to be common.

    • “I think the biggest thing that needs to be address in this general social question is the relative and not the absolute results and positions.” I’d add to this that relative position likely means more in some aspects of life than others. Having to fly coach while Bill Gates flies in his private plane is one thing; it’s quite another thing to have loved ones die from maladies that Bill Gates’s loved ones survive.

      That’s why I think the “hey, you’re better off than your ancestors!” argument is much less compelling when it comes to access to health care, and why people seem to resist the entreaties of economists to treat health care more like consumer goods in general.

  • j_m_h

    I did like the point about expansion of the income groupsing rasing the bar to measurements of mobility.

    As for the thought experiement — I’ll take the median imcome today and put me back in 1967 over 1967s median income and today’s world, if I were making less (or maybe even equal) than median income today. My saving and investion opportunities would be much better so my expectations about my future consumption much higher.

  • Sean II

    Suggestion for your next paper:

    Tell the story of how statists drove the cost of borrowing to zero, created a whole class of people with negative net worth, and then had the temerity to complain about a wealth gap caused by statistical drag from the debtor class they created.

  • Les Kyle Nearhood

    You mention problems with housing, health care, and education. Gee, the three areas where government has meddled the most.

  • Jerome Bigge

    The discussion about past America as compared to modern America is interesting as while we have advanced technologically, there has also been a growth in government that has taken away freedoms people once paid little attention to because they took them for granted at the time.

    As a 5 year old kindergartener I drew line drawings of battleships on the blackboard. This would have been about 1943 or so. The teacher was rather amazed at this and showed these pictures to my mother when she came to pick me up. What do you think would be the reaction today if a 5 year old drew pictures of military weapons on a blackboard? Remember the “fuss” that was made when a child chewed a Pop Tart into the shape of a pistol? The recent “fuss” that was made when a child with a copy of the “One Ring” from “Lord of the Rings” told another child that this “ring” would make him invisible?

    Back when I was going to school, it wasn’t that unusual for children to have pocket knives. We also (out of school) had cap guns, squirt guns, BB guns. Imagine the “uproar” that would arise if a 9 year old was walking down the street with a Daisy “Red Ryder” BB carbine today! At the same age I was riding the “city bus” back and forth to school. Took the bus on Saturdays to go to the movies. Kids back then pretty much did a whole lot of stuff without supervision from our parents. Different society of course, far different than that of today’s.

    I started smoking at the age of 16. No trouble at all buying cigarettes. Most adults smoked. My parents did. No one really thought too much about it then. Liquor was a different matter, of course. Bought a ,22 rifle when I was 18. Nothing to sign, just hand over the money and take your rifle home in its box. Ditto with ammo. Or you could order firearms by mail order. Handguns were a different matter and you needed a “permit” from the state. This is the America I grew up in.

    Health care was much cheaper then too. My mother spent three weeks in the hospital in 1948 and her bill was $300. Doctor visits in the early 1960 were from $6.50 to about $8 depending on what was done. Note this was in a relatively small town (Muskegon, Michigan).

    My wife with a HS education did work in one of our local hospitals that now requires an associate degree. Back then hospitals trained their own nurses. People “learned by doing the job”. It seems unbelievable today, but this was the way it was back then. Remember we took women who had never seen the inside of a factory and had them building the weapons of war. Weapons that defeated the Axis. People were taught “how” to do a job. What we call “cookbook” learning. It worked, although I suppose today the legal profession would file lawsuits if such a thing was done today. That’s one of the differences between the America I grew up and the “American Nanny State” we have now.

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