Don’t Worry, Middle Class, Be Happy

12 Apr

Is the anxiety over income inequality over the last few decades overblown? According to Richard Burkhauser, on the EconTalk podcast with Russ Roberts, the figures used in most media reports and academic articles provide only one piece – but still accurate – of a complex puzzle. What’s missing is even more provocative. And, there are still questions left unanswered.

Drawing on recently published papers, Burkhauser shows that changes in the standard of living of the middle class and other parts of the income distribution are extremely sensitive to various assumptions about how income is defined as well as whether you look at tax units or households. He shows that under one set of assumptions, there has been no change in median income, but under a different and equally reasonable set of assumptions, median income has grown 36%. Burkhauser explains how different assumptions can lead to such different results and argues that the assumptions that lead to the larger growth figure are more appropriate for capturing what has happened over the last 40 years than those that suggest stagnation.

BurkhauserTable1.jpgBurkhauser performs this statistical trick by taking the household unit, not the individual taxpayer, as the focus using Current Population Survey (CPS) data instead of Internal Revenue Service (IRS) stats. His research also involves not just income, but also government transfers and healthcare insurance, but not other in-kind benefits, capital gains, or subsidies. What results is a ten-fold increase in household wealth since the late 60s, from 3.2% to 36.7%.

Aside from this wonkery, there’s the issue of what effect fiscal policy, transfer payments, and health insurance have on pre-tax income. It certainly seems as if all three are boosting growth. There are also some demographic changes occurring, like single mothers seeing income growth. Yet I wonder if the statistical tricks don’t expose the fact, that families need to cooperate because individuals are experiencing downward pressure on pre-tax income due to technological change. In that sense it’s not a cause for relief, but more anxiety. Or, does Burkhauser’s data just reveal how threadbare the story of the individual and the market really is?

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