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Stagnationists Are Simply Wrong

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Stagnationists Are Simply Wrong

Forbes June 16, 2016
EconomicsIncome Inequality
OtherPoverty

Kevin Drum has a post up titled “Yes, Middle-Class Incomes Have Been Pretty Stagnant Since 1979,” saying I’m all wet. I had argued that the most important measure of median income is income after taxes and transfers and that that has risen by nearly $20,000 since 1979. Kevin makes the reasonable point that people can be interested in pre-tax and -transfer income (or “market income”) rather than disposable income because it’s an indicator of how the economy is doing by the middle class, before government does any redistribution. But then things go south, and he concludes by asserting that “the increase in middle class earnings for working-age families since 1979 is a whole lot closer to 12-20 percent than it is to 40-47 percent.”

So what happened to middle-class parents? Their market income rose by 26% from 1979 to 2013, or $16,500 in terms of 2013 purchasing power.

Well, I’ve actually addressed this question before, using the CBO data (and I linked to this earlier analysis in the section of my Forbes column Kevin is criticizing). As he notes, my claim was that you should ignore the finding that median market income has risen by only 18%, a result he nevertheless highlights with a CBO chart he annotated. The reason to ignore it is that the figures in the chart are based on all households, including elderly households. Elderly households rely heavily on transfers—Social Security and Medicare especially, but also Medicaid and SSI.

Because of the baby boom, elderly households have become a bigger share of the population over time (and an even larger share of the middle class). Therefore, looking at market income when one includes elderly households in the analyses pulls down the median, making income trends look worse than they are.

Fortunately, we can see whether Kevin is right that the nonelderly middle class has stagnated by using the spreadsheet CBO provides that, while not perfect, will serve our purposes. In Tab 14 of the spreadsheet, CBO shows for each quintile and for each year from 1979 to 2013 averages for different types of income, including market income, for households with children. By focusing on this group, we can be sure the elderly aren’t confusing things. What makes the estimates non-ideal is that “middle fifth” here means the middle fifth of pre-tax post-transfer income, not the middle fifth of pre-tax pre-transfer income. Also, “middle fifth” doesn’t mean the middle fifth of households with children, but the middle fifth of all households. But within this middle fifth, we can easily look at the change in market income.

So what happened to middle-class parents? Their market income rose by 26% from 1979 to 2013, or $16,500 in terms of 2013 purchasing power. Market income has been rising in this group since 2012, so by the time we get to the next business cycle peak, that amount will be higher. If we compare 1979 to 2007—both business cycle peaks—we find that the market income of the middle fifth rose by 35%, or $22,400. Intra-business-cycle changes in income aren’t relevant to claims of long-term stagnation.

In Tab 12, CBO shows the same estimates for nonelderly childless households. These households are smaller than households with children (and younger), so the absolute increase in their income has been smaller, but the percent changes are basically the same. From 1979 to 2013, market income in the middle fifth rose among nonelderly childless households by 26%, or $10,800. From 1979 to 2007, the increase was 33%, or $13,700.

If Kevin wants to claim victory that for 1979 to 2013, a 26% rise is “a whole lot closer” to 20% than to 40%, then fine. He’s even welcome to put this increase in annualized terms to make it sound small. (Pro tip: put it in terms of daily growth rates and it will look even smaller!) But the fact of the matter is that Kevin would have a hard time convincing middle-class parents that the $22,400 more they had in 2007 than their counterparts had in 1979 doesn’t really matter and that middle-class incomes have actually stagnated.

This piece originally appeared on Forbes

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Scott Winship is a senior fellow at the Manhattan Institute. Follow him on Twitter here.

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