Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Tuesday, May 19, 2009

The Middle Class and Income Inequality in the USA

A recent comment by an anonymous contributer on an earlier thread asserted that there was no middle class in the USA.  "There are only two ways to be in the US.  Rich or dirt poor."  LTG responded that the middle class is being "sorely squeezed and impoverished."  I think LTG was mainly referring to the increasing cost of living and stagnant incomes of the middle income brackets here in the US.  He refereed to things like the cost of housing and education (which are especially problematic in overpopulated and badly governed California).  While he exaggerates (rather dramatically) the amount of debt when he says it takes $100,000 of debt to get through state university, the average amount of debt for college graduates is about $20,000 which is bad enough!  Of course, $100,000 is closer to what the debt levels are for professional school graduates - and this may be what LTG was thinking of.  This all got me thinking about what the situation with income disparities is in the US.  It is fairly clear to anyone who observes US society these days that income disparities are getting worse.  But there are several ways for income disparity to get worse and which way it's getting worse matters.

Let's divide the country into two groups:  Rich and everyone else.  And let's say that both groups can either see their incomes rise, stagnate or drop.  There are 9 different trends in socioeconomic changes in this model.  Here is my first attempt at a preference ordering of these 9 combinations (rich first, everyone else second):
1) Rise, Rise 2) Stagnate, Rise 3) Rise, Stagnate 4) Stagnate, Stagnate 5) Drop, Rise 6) Drop, Stagnate 7) Rise, Drop 8) Stagnate, Drop 9) Drop, Drop

You'll notice that I have an overall preference for pareto improving scenarios (scenarios in which someone is benefitting without anyone being worse off).  There are some on the left who have a punitive preference ordering in which they actually prefer to see the rich have dropping incomes for no other reason than to see the rich punished.  This preference ordering is mocked by the Ten Years After song, "I'd Love to Change the World" in which Alvin Lee sings, "Tax the rich, feed the poor, 'til there are no rich no more."  The point this guitar legend is trying to make is that this preference of course misses the point about income redistribution.  The goal is not the destruction of wealth but the destruction of poverty.  

So what are we seeing in the US?  I found this on wikipedia.  It shows the type of rising inequality we have in the US.  In nominal terms we are either in a state of Rise, Stagnate or Rise, Rise depending on how much credibility you give the increases shown for the income groups at or below the median in the graph.  In real terms however, and this is where LTG's points about the rising costs of education and housing come into play, we are probably in either Rise, Stagnate or Rise, drop - depending on how much faster you think costs of living are rising than nominal incomes.  

Regardless of how you interpret these numbers, the situation for the middle classes is far from apocalyptic.  Indeed, if you look at the graph linked above you'll notice that the people in the income bracket just above the median are doing rather well and they could arguably be called "middle class." 

In the US, those income brackets above the median are rising reasonably quickly.  Those at and below the median are either stagnant or rising extremely slowly.  This is a problem.  But, as I said in my comment earlier, it's not the end of the middle class.    Neither is this close to the worst situation we could be facing.  


Dr. Strangelove said...

Quick comment: I would order it differently.

[rich, poor]
1) Rise, Rise
2) Stagnate, Rise
3) Drop, Rise
4) Rise, Stagnate
5) Stagnate, Stagnate
6) Drop, Stagnate
7) Rise, Drop
8) Stagnate, Drop
9) Drop, Drop

To be clear, this is not punitive, not in the slightest. I do not want to see the rich stagnate or drop. But to me, the overriding concern is to maintain or improve the condition of the poor. If the incomes of the rich must drop somewhat to make that happen, so be it.

Anonymous said...

As a country that only has about 9% of it's GDP in the manufacturing sector, we are a country that provides financial services, and that really means, we produce nothing. This is nothing more than a country of middlemen...layer upon layer of people getting paid to do and basically produce nothing. We are losing our auto industry, so that means we will have another 2 million people looking for middle man jobs or service industry labor. You can not consistently farm out our industries and jobs out to the 3rd world cheap labor market and of late, the high paying software engineering jobs and the like and expect to keep an economy of any balance in the US. Contrary to popular belief, the public trough does have a bottom and I think we are facing the worse situation possible because the momentum has yet to begin to change.

Raised By Republicans said...

Dr. S. A reasonable person could certain argue in favor of your preference ordering. However, I was concerned about the long term consequences of "drop, rise." Wouldn't that ultimately just switch positions? Of course a temporary phase of "drop, rise" would be a useful corrective after a long period of "rise, drop." But even then it would establish a precedent of nasty attitudes towards political economy.

Anonymous: I wouldn't be so dismissive of the service sector. They are more than people who "do and basically produce nothing." Many services are vitally important not only to our own economy but to the world. You certainly make a number of strong arguments. But they raise as many questions as they propose to answer.

Anonymous said...

While it is true that the service sector provides some critical areas of our economy, they typically do not pay that well. Service sectors like investment banking and insurance and financial services perhaps, were the highest paid jobs in the country...but look where that put us. Rewarding the big middlemen bankers, traders etc...what do they produce? Well, wealth for shareholders and corporate consolidators, meaning fewer jobs and the whole down hill cycle. Another example of this econmy not producing: The man who started the web site Plenty of is a match making website and he wrote an piece of code that works well matching people. His sit is free, but now that he has one billion hits a month on the site, he sells ad space for pay dating sites. He makes 10 million a year and up until 6 months ago, his only employee was himself. He now has one part time girl working for him. His company produces 10 million a year in revenue but produces no jobs...great for him and I applaud his ingenuity but he is not the only one doing that, so it is a model for more money going into fewer hands.

Raised By Republicans said...

Anonymous 5:12 (are you new to the blog or have you posted here before under a pseudonym...if the former, welcome! Glad to have you. If the latter please tell us your pseudonym),

Doctors, car mechanics, plumbers, electricians etc are all in the "service sector." So are teachers, professors, nurses, accountants, lawyers, etc. This is a diverse group of people. And I'm guessing you respect the ones who get dirt under the nails as actually "producing something" more than the others.

As for what bankers and traders produce, they produce a lot. They facilitate the transactions between the manufacturing sector you seem to be holding up as the ideal. Without bankers there would be no factories anywhere in the world. Without traders, there would be no investors to finance the factories. Capitalism and industrialization are 100% dependent on the "middleman bankers" you seem to despise and disrespect so much.

I do not follow your logical link between "what do they produce? Well, wealth for shareholders and corporate consolidators" and "meaning fewer jobs and the whole down hill cycle." Where is the causal link there? Can you make the connection more explicit for the sake of argument?

The guy with the website is producing's just not made of metal. He providing a service for which people will pay - in the form of watching commercial ads online. That's a valuable thing. If it weren't he'd be broke.

This "only manufacturing actually producing things of real value" argument is something one hears a lot. I think it is largely - but not entirely - nonsense though. It fetishizes industrial labor of the 19th and early 20th century variety. It is also based on a crude conception of how economics - even manufacturing - actually works.

I hear the "only manufacturing" argument from some of my relatives in the midwest. Often, their thinking is driven more by bitterness about the decline of particular economic sectors with which they have some connection than any kind of discernible logic.

The Law Talking Guy said...

RBR, I was not exaggerating by saying 100K. Most people entering law school have $60+K in debt, and leave professional school with $150K in debt or worse. These are the figures I know from the people around me. $20K-$25K/year for public school is not that far off the mark. Sure, it's not all public loans, but that's $12Ktuition plus room, board, and lots extra. It's really bad out there, way worse than when we went to school.

The Law Talking Guy said...

I concur with Dr.S. I am more concerned about the welfare of the "everyone else" group. I would put Drop/Rise in 3rd, leaving the rest the same. It's not about punishment, but the elimination of poverty.

Anonymous said...

RBR...yes, I do respect the job functions and the services they provide generically. I know there are good people who are good at their jobs and 'produce' good quality service. I also don't really have as big a hate on as you might imagine...perhaps my tone of writing.

I also am not speaking about the kind of banking you are describing and what you describe is a good service for the economy. I am speaking about the kind of banking that was fueled by deregulation and GAP accounting. This is a little complex for me top explain my position, so forgive me if it gets disjointed...also, my comments do not really refute what you are describing, it is like Hemmingway said, "not one thing is true, all things are true."

In the 1970's a oil industry analyst named Wolf realized that all of the oil reserves that the oil companies had were of great value but the value was not reflected in the stock price...hence, the power of new valuation formulas changes the way we valued everything and Wall Street licked it's chops...and did not produce much of anything but centralizing wealth. The GAP accounting rules, in my opinion, are as much to blame for where we are today as the banks. In the 90's the big 8 accounting firms were given slaps on the wrist and Price Waterhouse paid a 400 million dollar fine and admitted to no wrong doing and a pass by Bush 41 for there mis-represntation of financial statements of Sand L banks after the debacle. Also, same thing happened with the Equitable insurance company, then World Com and Enron and so on...these companies were showed to be healthy and strong and they were paper houses and a lot of people knew it and yelled about it, even Ben Stein was vocal about what World Comm really was...a shell...

What we have experienced is a cascade of criminal behavior in public accounting, banking, law making... a perfect storm if you will. Now back to the link you asked me to make. When deregulation came on strong in 1982, banking and media were two sectors that went first. From 1980 to 1990, thee were 17% fewer companies on the stock market due to consolidation. Consolidation meant loss of jobs, massive lay offs...any sector Wall Street saw or perceived as under valued, they attacked, drove the stocks up, and the bigs ate the smaller they didn't produce anything but wealth for the wealthy. Surely some industries needed to be gardened if you will, but not to the degree we have let it occur. In 1982 there were 13 billionaires in the US...'83 - 15; 85 - 13; in '860-26; '87 - 49 and in 2008 - 359. There is a direct correlation to deregulation and the consolidation of so many sectors of the economy and the consolidation of money.

Thanks for the has been a while since I posted here, enjoy you stuff and educational.

Raised By Republicans said...

LTG, do you have a source for the 60k+ debt levels you are referencing? I looked an all I could find was references to 20k for BAs and 100k or so for professional degrees.

But I agree, 20k is bad enough!

My concern with the drop, rise scenario is that assumes that wealth accumulation must be zero sum. It doesn't have to be and usually isn't. Also, if you do that scenario for long enough you'll just switch the identity of the screwee and the screwer.

That said, i could see a role for a phase of drop, rise as a corrective measure after a long period of rise, drop. But I'd rather not establish a political pattern of some group or other always screwing the other when they win elections. In the long term it is much better to get the rich to realize that we can all win if we set up the political economy right.

Raised By Republicans said...

Anonymous 10:32,

Yes, I've posted a few times over the past couple of years about the screwed up accounting regs. My father is an accounting professor and he's been complaining about this stuff since before ENRON.

But complaining about accounting regs is a much more nuanced argument (and one I find it much easier to sympathize with) than arguing that the percentage of the economy invested in the service sector should be reduced.

Anonymous said... slant on the service sector is biased, the emphasis being on the financial services a broker, investment banker, estate planner and mortgage broker over a 15 year time period, working for wire houses, investment banks, commercial bank, S&Ls and insurance giants, I have seen all of the abuse and blatant disregard for ethics and true right action. My experience spanned through the infancy of deregulation of the financial system and the raw and gross incompetentcy at the highest levels, particularly in the banks, it would literally make you shudder. So many of these folks would make Bush look like a Rhodes Scholar...and that is not a huge stretch. I don't recall saying that the service sector should be reduced and I think the point I was attempting to make was missed, perhaps due to my communication skill limitations.

Dr. Strangelove said...

RbR wrote: "My concern with the drop, rise scenario is that assumes that wealth accumulation must be zero sum."

No, it does not. No assumption was made.

RbR wrote: "Also, if you do that scenario for long enough you'll just switch the identity of the screwee and the screwer."

Technically speaking, yes. But surely you are not raising the specter of a proletariat uprising as a serious objection to modest redistributive measures!

It's really not an outlandish idea, not at all. If you are in favor of ending the Bush tax cuts for the rich and giving the middle class a break--in other words, if you are in favor of the Obama tax plan--then you are supporting "Drop, Rise."

Raised By Republicans said...

Dr. S. I don't think we disagree that much. As I've said twice, I don't object to a temporary phase of "drop, rise" to correct a long period of "rise, drop." And after all, I've ranked at 5/10 and you have it at 3/10. Not so different really... certainly an outsider would figure we vote for the same people.

But I still don't like the politics that would surround a long term adoption of a "rise, drop" approach by the Democrats. I'm not raising the specter of proletarian revolution of course. But I am raising the specter of the continuance of a kind of tit-for-tat see-saw approach to political economy. The Democrats win and screw the rich. The Republicans win and screw everyone else. This has been the approach of the Bush II administration. But for most of the post-WWII era the Democrats' economic policies have resulted in "rise, rise."

But really the ranking difference isn't whether rise, rise is best. We agree on that. The real difference is what weight we place on the well being of the opposing group (the rich). I place a high intrinsic value on no one getting screwed by anyone - it makes for better politics.

Pombat said...

RbR: don't know if you can edit a post once posted, nor if I'm confused, but in your second para, that "rise, drop" should be "drop, rise" shouldn't it?...

Raised By Republicans said...

Thanks Pombat. Yes, I made a typo. I meant to allude a possible strategy of "drop, rise" by the Democrats.

Dr. Strangelove said...

FYI, to my knowledge, the only way to "edit" a comment is to delete and resubmit. (The main postings, however, can be edited.)

Bob said...

Dr. S, quoting RbR:
RbR wrote: "My concern with the drop, rise scenario is that assumes that wealth accumulation must be zero sum."

No, it does not. No assumption was made.

RbR wrote: "Also, if you do that scenario for long enough you'll just switch the identity of the screwee and the screwer."

Technically speaking, yes.
I echo Dr. S's refutation of "the zero-sum assumption." Putting a Drop/Rise scenario higher on your preference list doesn't assume anything. What's more, without quantifying losses and gains, such a scenario could be positive, zero, or negative sum.

But both of you are simply wrong about Drop/Rise switches the classes. Unless you're literally taking the entire wealth of the rich and giving it to everyone else, "Drop/Rise" will just result in the categories merging; the people that _were_ Rich will become less distinguishable from everyone else.

Despite Obama's characterization, political policies are simply not written in terms of "whoever the top 5% is, we cut them at the knees, and we give everyone else an extra two weeks pay." Instead, tax brackets are based on income, not on what percentile you fall in. Even a policy that produces a Drop/Rise in the short term won't stay that way; whatever the category "Rich" means will shrink, so fewer people will be in the Drop case. There'll be an accumulation of people at the cutoff between zones ("upper middle class', although if your category cutoff is at the "seven-figure income" level, I'd say that was a lot of upper, not so much middle.)

But the question is brutally oversimplified -- most policy proposals aim at a Rise/Rise scenario, just a "Rise somewhat less than before, Rise somewhat more than before" (or vice versa). No one's actually trying to make _anyone_ actually worse off.

That said, RbR has a valid point that a lot of liberals around the water cooler tend to express a desire for the Drop/Rise scenario, and that talk isn't helping gain any political traction with anybody.

The Law Talking Guy said...

"Drop/Rise" will just result in the categories merging; the people that _were_ Rich will become less distinguishable from everyone else"

Only if it goes on for a really, really long time. A set of policies that reduces the wealth multimillionaires slightly while increasing median salary for the lower middle class by $3,000 is not exactly a leveling move.

Bob said...

LTG: yes. I was just trying to go to the extreme case, to show that even then, "Drop/Rise" doesn't mean actual switching of classes, just more accumulation toward the dividing line.