Cafe Hayek

On America's Middle Class

In two of his Forbes columns, NYU's Thomas Cooley challenges - with data - the widespread misunderstanding that America's middle-class is disappearing.  Here, and then here.

(HT Greg Mankiw)  The Terry Fitzgerald work that Cooley mentions was mentioned here at the Cafe a while back.

I raise, though, one objection to Cooley's otherwise excellent columns.  In the first one linked to above, he credits technological change for the explosive economic growth of the 1980s and 1990s.  I don't accept technology as an explanation.  A rush of technology has causes; it must be explained.  Technology is not a variable exogenous to economic growth.

Absolute mobility, quantified

This post looked at the proportion of children who have done better than their parents. Here's a measure of the amounts.

Half empty or half full? Both no doubt. Just don't tell me that people in the bottom 40% haven't received any of the economic gains of the last 30 years:

Absolute mobility

Half empty or half full?

You decide.

This is from the Pew Economic Mobility Project. Look at it carefully. I'll try to say more about it later and to bring some additional data.

It is from the PSID. It follows the same people. It is corrected imperfectly for inflation. But it's the best you can do.

Brilliance from Bryan

Bryan answers Brad. Beautifully.

Commerce Rolls On

I'm on the road today.  As I checked out of my hotel room -- rolling my suitcase behind me -- I wondered how many bellmen jobs were destroyed by the innovation that put wheels on luggage.

Final Exam

Here is an interesting exam question that could be the only question on the final exam of a first rate economics class. I don't know if there is such a thing. I think many econ majors around the world when confronted with this question would struggle to put the right answer into words. My idea for the question comes from a post by David Henderson over at EconLog, who quotes a Robert Frank column. Here is the quote from Frank:

For example, as a Peace Corps volunteer in Nepal long ago, I hired a cook who had no formal education but was spectacularly intelligent and resourceful. Beyond preparing excellent meals, he could butcher a goat, thatch a roof, plaster walls, resole shoes and fix broken alarm clocks. He was also an able tinsmith and a skilled carpenter. Yet his total lifetime earnings were less than even a very lazy, untalented American might earn in a single year.

And here is the question I would ask:

Why does a spectacularly intelligent and resourceful person in Nepal earn spectacularly less than a lazy untalented American?

Robert Frank's answer
:

Well-paid Americans owe an enormous, if rarely acknowledged, debt to the social investments that supported their success.

I'm not sure what what Frank means by social investments. The theme of his column is that financial success rarely depends just on hard work and talent. It also depends on luck and even where you are born. And he's critical of those who opppose larger government.

 David Henderson's answer:

There's a more-obvious cause of the wealth that we have been born into: a great deal of economic freedom compared to that in other parts of the world.

I think David Henderson's answer is part of the answer. But neither Frank nor Henderson's answers really get at the essence of the paradox implicit in Frank's observation. I'll give my answer in another post. In the meanwhile, the comments are open.

Foolishness on Film (Or, Wiping the Sheen Off of Silliness)

Tyler Cowen hits a home run with his review of Phillipe Diaz's movie The End of Poverty.  Here's one especially nice selection:

I can only report that The End of Poverty, narrated throughout by Martin Sheen, puts Ayn Rand back on the map as an accurate and indeed insightful cultural commentator. If you were to take the most overdone and most caricatured cocktail-party scenes from Atlas Shrugged, if you were to put the content of Rand’s “whiners” on the screen, mixed in with at least halfway competent production values, you would get something resembling The End of Poverty. If you ever thought that Rand’s nemeses were pure caricature, this film will show you that they are not (if the stalking presence of Naomi Klein has not already done so). If you are looking to benchmark this judgment, consider this: I would not say anything similar even about the movies of Michael Moore.

In this movie, the causes of poverty are oppression and oppression alone. There is no recognition that poverty is the natural or default state of mankind and that a special set of conditions must come together for wealth to be produced. There is no discussion of what this formula for wealth might be. There is no recognition that the wealth of the West lies upon any foundations other than those of theft, exploitation and the oppression of literal or virtual colonies.

Or as I recall Peter Bauer's way of putting the matter: "poverty has no causes; wealth has causes."

The American Dream

Here is an hour of me on Wisconsin Public Radio talking about whether the American dream is dead, dying, or still alive.

The Unsung Successes of the Market

It's become an article of faith among lots of people that recent events prove (or at least suggest) that markets don't work very well.

Let's assume -- contrary to what my assessment of the evidence tells me -- that the housing bubble and its crash, along with the current ills suffered by Detroit and other sectors, are exclusively the fault of the market.

How much skepticism of markets would this fact generate relative to the amount of skepticism that is justified?  I think way too much.  The reason is that market successes go unnoticed and, hence, unappreciated.

The vast majority of market exchanges and relationships work smoothly and to the advantage of all participants.  Indeed, the market works so well and so consistently that it creates ever-higher expectations among the broad populace.  When these expectations are dashed, if only for a handful of persons and if only rarely, the market is deemed to have failed.

But despite the current downturn, the market continues to work well in its typical silence.  Do you have trouble today finding gasoline to buy?  Are your local supermarket's shelves not stocked with food, wine, and (watch for it soon!) Easter candy?  If your cat eats your socks, will you have trouble buying several new pair?  If your car's battery dies this afternoon, must you resort to bicycling or public transportation because you can't replace your dead battery?  If you're bored this evening with nothing to do, is there no movie you can go to or no DVD you can rent?  If you miss your mom in Minneapolis or your boyfriend in Boston, can you not call them on your cell-phone -- or even buy a plane ticket and go visit them?

Two items arrived in my e-mailbox this morning to drive home the remarkable success of markets.  The first is this excellent short essay by Bob Higgs.

The second is this hilarious, short dialog between the comedian Louis C.K. and Conan O'Brien.  (Note that O'Brien mistakenly believes that our modern standard of living is caused principally by technology.) (HT Rudy Schober)

Stagnant wages vs. rising compensation

The so-called Employee Free Choice Act (George Orwell call your office) would end secret ballots in union voting making it easier for unions to organize. A bunch of economists signed an ad in today's Washington Post in favor of the Act. I hope to write more on this, but for now, I'll focus on the opening paragraph of the ad:

Although its collapse has dominated recent media coverage, the financial sector is not the only segment of the U.S. economy running into serious trouble. The institutions that govern the labor market have also failed, producing the unusual and unhealthy situation in which hourly compensation for American workers has stagnated even as their productivity soared.

This alleged disconnect between wages and productivity and the stagnation of wages is sufficient proof to some that labor markets are broken and an increase in unionization is necessary to protect workers from exploitation.

Here is one noted economist's response to a similar claim made by Michael Lind a while back citing the same disconnect. Can you guess who it is? No googling. (HT: David Bieler):

One of America's new intellectual stars is a young writer named Michael Lind, whose contrarian essays on politics have given him a reputation as a brilliant enfant terrible. In 1994 Lind published an article in Harper's about international trade, which contained the following remarkable passage:

"Many advocates of free trade claim that higher productivity growth in the United States will offset pressure on wages caused by the global sweatshop economy, but the appealing theory falls victim to an unpleasant fact. Productivity has been going up, without resulting wage gains for American workers. Between 1977 and 1992, the average productivity of American workers increased by more than 30 percent, while the average real wage fell by 13 percent. The logic is inescapable. No matter how much productivity increases, wages will fall if there is an abundance of workers competing for a scarcity of jobs -- an abundance of the sort created by the globalization of the labor pool for US-based corporations." (Lind 1994: )

What is so remarkable about this passage? It is certainly a very abrupt, confident rejection of the case for free trade; it is also noticeable that the passage could almost have come out of a campaign speech by Patrick Buchanan. But the really striking thing, if you are an economist with any familiarity with this area, is that when Lind writes about how the beautiful theory of free trade is refuted by an unpleasant fact, the fact he cites is completely untrue.

More specifically: the 30 percent productivity increase he cites was achieved only in the manufacturing sector; in the business sector as a whole the increase was only 13 percent. The 13 percent decline in real wages was true only for production workers, and ignores the increase in their benefits: total compensation of the average worker actually rose 2 percent. And even that remaining gap turns out to be a statistical quirk: it is entirely due to a difference in the price indexes used to deflate business output and consumption (probably reflecting overstatement of both productivity growth and consumer price inflation). When the same price index is used, the increases in productivity and compensation have been almost exactly equal. But then how could it be otherwise? Any difference in the rates of growth of productivity and compensation would necessarily show up as a fall in labor's share of national income -- and as everyone who is even slightly familiar with the numbers knows, the share of compensation in U.S. national income has been quite stable in recent decades, and actually rose slightly over the period Lind describes.

The answer is here.

Upside to Suicide

New York Times columnist Floyd Norris argues that there is "an upside to resisting globalization."  It is this: economies unintegrated into the global economy aren't very much subject to global-economy downturns.

To be sure, Mr. Norris is correct.  But the Times should be consistent and have, say, one of its medical reporters write about the upside to suicide.  Suicide's practitioners, after all, inoculate themselves against all future illnesses.

Easterly on Hayek

Today's Dean of development economists, William Easterly, won the inaugural Hayek Prize, offered by the Manhattan Institute, for his splendid book The White Man's Burden.  Congratulations Bill!

Here's the Hayek Lecture that Bill delivered this past October when he was awarded the prize formally.  Like all of Bill's work, it is written in a lively, engaging, fast-flowing style, filled with humor and important facts and insights.  I whet your appetite with the opening paragraph:

Tonight we find ourselves in a moment similar to that in which Hayek wrote The Road to Serfdom in 1943. Then, as now, a great financial crash was seen as a failure of freedom. Actually, things were even worse then for Hayek’s point of view. In the aftermath of the Depression, many pointed out the apparent success of centrally planned industrialization in the Soviet Union in outperforming markets. As Hayek wrote in 1943, democracy barely existed outside of a few English-speaking societies. Even in the U.S., people noted the apparent success of government top-down planning for wartime production of arms. Under these circumstances, Hayek knew he would be caricatured as a right-wing ideologue, even though his ideas did not fit into the stale partisan debate about markets versus government. He argued that the best system in the long run relied upon the creativity of individuals at the bottom who had both political and economic freedom. In a way I will describe below, Hayek saw both government and markets as functioning better the more they were the outcome of spontaneous development from the bottom up, with nobody in charge. It took courage to criticize top-down control after the scary calamities of the Depression, yet Hayek’s vision would be vindicated by subsequent events. How many of us will show similar intellectual courage in the midst of today’s financial crash?

Ordinary Americans Growing Wealthier Over the Long-Run

In the September 2008 issue of The Region, Terry Fitzgerald, Senior Economist at the Minneapolis Fed, has another revealing article.  In this one he explains that

after adjusting the Census Bureau data for three key factors — inflation-adjusted median household income for most household types increased by roughly 44 percent to 62 percent from 1976 to 2006. The only household types with substantially lower growth were “working-age male householder without spouse present” and “male householder with children but without spouse,” but these types constitute just 10 percent of all households. Household income inequality increased notably over this period; nonetheless, middle American households had substantial income gains.

Fitzgerald's analysis is careful and data-rich; it can be found by clicking here, and then clicking on "Where Has All the Income Gone?"  (An earlier, related article by Fitzgerald is discussed here.)

Let's Hope this Trend Continues

Here's a letter that I sent back in June of this year to the New York Times:

Bob Herbert asserts that the United States economy "has trouble producing enough jobs to keep the middle class intact" ("Out of Sight," June 10). While there are always cyclical ups and downs, Mr. Herbert's statement - if meant as an indictment of the economy's long-term performance - is contradicted by the facts. Not only is the unemployment rate still at a reasonable level, the Census Bureau reports that real median household income (reckoned in 2006 dollars) was $48,201 in 2006, up from $36,847 in 1967 - an increase of 31 percent.  And this  growth has been pretty steady over these 40 years.

Moreover, this figure underestimates the middle-class's increasing prosperity, for it ignores the shrinking size of households. In 1967, the average household contained 3.14 persons; in 2006 it contained 2.57 persons. This fact means that the real income for each member of the average household grew from $11,735 in 1967 to $18,755 in 2006 - an increase of 60 percent.

Sincerely,
Donald J. Boudreaux

(For figures on U.S. household size, see Brad Schiller, "The Inequality Myth," Wall Street Journal, March 10, 2008, p. A15.)

Julian Simon

The three scholars who have had the the greatest impact on my own thinking are F.A. Hayek, James Buchanan, and Julian Simon.

I just found this nine-minute-long video of Julian Simon summarizing his vital idea of "the ultimate resource."  This idea is one of the most profound -- and least understood -- in all of the social sciences.

The Economy Ain't In Bad Shape

In today's edition of the Washington Post, Donald Luskin does his best to calm people's fears about the state of today's economy.  He's got lots of solid facts on his side.

Rising Incomes and Falling Income Statistics

Here's a letter that I sent recently to the Washington Post, in response to the same Robert Samuelson column that Russ blogged on:

Robert Samuelson helpfully explains why the data routinely cited to show the alleged economic stagnation of middle-class Americans are misleading ("The Real Economic Scorecard," September 3).  In particular, he's correct that average or median income can stagnate or fall even if everyone's income rises.  Here's how I explain this possibility to my students:

Imagine what the average or median income would be in a room occupied only by Bill Gates, Warren Buffet, and Bono.  Now imagine that I enter the room and accept their offer to become their full-time shoe-shiner at an annual salary of $500,000.  Because this income is higher than I earned before entering the room, I'm richer. And because my entering the room does not lower their annual incomes, none of them is poorer.  But my presence in the room (with my new income still far below that of each of these men) dramatically lowers the room's average income, and pretty significantly lowers its median income, even if the income of each of these men rises during the current year.

Everyone is richer, yet average and median incomes are lower.  As Mr. Samuelson points out, this possibility is not merely academic.

Sincerely,
Donald J. Boudreaux

Samuelson on standard of living

Robert Samuelson does a nice job explaining why living standards are rising even though we sometimes hear otherwise:

Just last week, the Census Bureau released its annual study of household incomes, poverty and health insurance -- often called the nation's "economic report card." Its hard numbers seemed to confirm how many Americans feel. Sure, we're prosperous, but prosperity is fraying. Except for the rich, living standards are stagnant. Poverty is up; health insurance coverage is down. Naturally, both Barack Obama and John McCain seized upon the report to claim that their policies would restore progress.

Hold it.

Though echoed by policy wonks, pundits and politicians -- last week, Bill Clinton -- the conventional wisdom is wrong or, at least, misleading.

A couple of high points from the rest of the article. FIrst, he argues (as Don and I have frequently argued here) that low-skilled immigrants distort the measurement of our standard of living:

Low-skilled immigrants, concentrated among Hispanics, outnumber the high-skilled. They drag down median incomes and raise poverty and the number of uninsured. One way to filter out the effect on income is to examine groups with few immigrants or their American-born children. Consider non-Hispanic white families. From 1997 to 2007, their median incomes rose about $6,000, to $69,937, a gain of about 9 percent. For black families, the increase was also about 9 percent, though only to $40,222. Again, not stagnation.

Census counts only money income -- wages, salaries, dividends, interest payments. But compensation growth is increasingly channeled into fringes. From 2000 to 2007, only 53 percent of the increase in average compensation came from wages and salaries, says economist Gary Burtless of the Brookings Institution. The rest went to health insurance (21 percent), pension contributions (19 percent) and payroll taxes (6 percent).

On the negative side, Samuelson says:

Americans understandably feel they're on a treadmill. They don't see fringe benefits in their paychecks, and small year-to-year cash gains barely register.

A nit-pick: take home pay is deflated by the CPI which includes health care. Because health care is a big part of the rising CPI in recent years, deflating take home pay with the CPI (which is what everyone does) distorts the purchasing power of take-home pay for people with generous health care plan. Suppose all of your health care costs are insured by your employer. Health care costs double but all other prices fall so that the overall CPI is unchanged. Suppose your total compensation is unchanged—your take home pay declines exactly offsetting the increase in the value of your fringe benefits. The drop in take home pay makes it look like your standard of living has fallen. But because the price of non-health care items has fallen, your actual command over goods and services is unchanged.

In recent years, take home pay for some has not kept up with inflation or maybe has just kept up with it, suggesting the standard of living is stagnant. But if take home pay grows slower than inflation, you can actually be getting ahead as long as your fringes are covering the part (health care) that's growing rapidly.

Wipe that Smile Off of Your Face

We can only hope (however hopelessly) that Chandrama Pyakurail is a master of satire rather than a Person Really and Truly Concerned With the Environment -- and likewise for the folks at Wallypop (here, and here). 

Government Brings Out the (Undisciplined) Kid in Us

Here's a letter that I sent today to the Boston Globe:

Derrick Jackson wants government to reduce income differences among Americans ("Politely declining to touch the income gap," August 19).  Forget that even poor Americans today generally have greater access to goods and services than did middle-income Americans of a generation ago.  Instead ask: what kind of philosophy demands that government adopt and act on values that all decent parents teach their children to reject?

Who among us sends our children to school or to the playground with admonitions to begrudge classmates or playmates possessing nicer clothing or fancier toys?  Who among us counsels our youngsters to form schoolyard coalitions for forcibly confiscating expensive sneakers and video games from 'rich' kids for "redistribution" to poorer kids?  Who among us would not scold our children for such envy, and punish them severely if they participated in such thievery?

Children should avoid envy and learn to thrive by producing rather than by taking.  The same is true for adults.

Sincerely,
Donald J. Boudreaux

The Course of Human Labor in Markets

Russ's new book, of course, is now out; a copy already graces a bookshelf in my home.  But for those of you who haven't yet read Russ's first book -- The Choice -- I urge you to do so ASAP.  It offers the best explanation of trade, and case against protectionism, penned since Bastiat last wrote more than 150 years ago.

A major theme of The Choice is that free trade -- or, more generally, producing any good or service with fewer and fewer resources (including human resources) -- releases resources (again and especially, including human resources) to produce other goods and services that would not otherwise be possible to produce.

And when human resources are released from many of the tasks that demanded it over the years (agriculture, manufacturing), human beings are able to find other occupations that generally are more fulfilling.  Although the span of time over which this emancipating process takes place is long enough to avoid detection and appreciation by those whose observation is only casual, stepping back and looking at our society today in comparison with that of 200 or even 50 years ago makes clear that this process of emancipating human labor from tedium is real and is responsible for much (I would say most) of what is fine and wonderful about our world today.

This comic-book account of robots replacing human labor makes the point.  (HT Ronald Hayden, who found this nice story at ColbyCosh.com)

The Minimum-Wage and Poverty

Here's a letter of mine published in the August 7 edition of the Baltimore Sun:

The Sun should rethink its editorial "Rethinking minimum wage" (Aug. 4).

The editorial's account of history is flawed; the federal minimum wage began in 1938, not in the 1950s.

More important, it's untrue that the data  are "compelling" that "a minimum wage is helpful in the fight against poverty."

Economists Joseph Sabia and Richard Burkhauser, in research published last year in the respected journal Contemporary Economic Policy, found that "minimum-wage increases (1988-2003) did not affect poverty rates overall, or among the working poor or among single mothers."

This finding is consistent not only with the fact that just a tiny fraction of workers (less than 5 percent) are paid wages as low as the minimum wage and the fact that 80 percent of minimum-wage workers live in non-poor households but also with the findings of other rigorous studies.

Donald J. Boudreaux

Americans' Standard of Living

Mike Cox and Richard Alm continue their compelling and straightforward use of data to show that ordinary Americans' standard of living continues to improve.

Reality Check

Everything is relative, of course -- but Jeff Jacoby's Boston Globe column of July 23rd offers evidence that Phil Gramm is correct that our economy today isn't as gruesome and foreboding as many pols and pundits proclaim it to be.  Here's a clip (citing, you'll notice, the important work of my colleague -- and EconLog's -- Bryan Caplan):

Voices of reason keep trying to point out that conditions are not nearly as bad as they were the last time consumers were this despondent. That was in May 1980, during the final year of the Carter administration, when the "misery index" - the sum of the inflation and unemployment rates - hit an excruciating 21.9. Inflation was then at 14.4 percent; unemployment was 7.5 percent. The numbers today are 5 and 5.5 respectively.

But voters don't want to be told to buck up. When former senator Phil Gramm, an economic adviser to John McCain, said last week that America had "become a nation of whiners" and described the current slowdown as a "mental recession," the backlash was immediate. McCain repudiated Gramm's remarks and quickly issued a statement assuring voters that he "travels the country every day talking to Americans who are hurting, feeling pain at the pump, and worrying about how they'll pay their mortgage."

Well, that's politics. Politicians who want to get elected genuflect to what Bryan Caplan, in "The Myth of the Rational Voter" calls the pessimistic bias: the "tendency to overestimate the severity of economic problems and underestimate the (recent) past, present, and future performance of the economy."

Wal-Mart and Food

A good rule of thumb to follow these days is that any book or article that blames Wal-Mart for some real or imagined evil should not be taken seriously.  The meme "Wal-Mart is a destructive sorcerer spreading poverty and hardship throughout the world" is now so ingrained in the minds of so many Very Smart And Well-Read People that accusations against Wal-Mart are met with too little skepticism and scrutiny.  It's now a ritual to blame Wal-Mart -- and following this ritual, while it might sell books and make the heads of Very Smart And Well-Read People nod, too often signals mental laziness or analytical weakness or both.

The above paragraph was prompted by reading a review in today's New York Times Book Review, as was the following letter:

John T. Edge - reviewing Paul Roberts's apocalyptic book "The End of Food" - quotes Mr. Roberts's claim that today's "food system can only truly be understood as an economic system" ("Nothing to Eat," July 27).  Indeed so. Unfortunately, though, Mr. Roberts is starving for economic understanding.  Predicting that the age of abundant food is ending, he blames not only that timeworn (and mythical) scapegoat 'overpopulation,' but the devil du jour: Wal-Mart.

How does Wal-Mart hasten global hunger?  By continuing "to drive down retail prices to unsustainably low levels."  But when resources become scarcer - or when people working with those resources suspect their increasing scarcity - prices rise, not fall.  Falling prices signal greater abundance.  Whether Wal-Mart is a principal cause of this greater abundance of food or, more likely, a retailer especially skilled at bringing the advantages of greater abundance to its customers, the fact that Wal-Mart continues to lower the prices it charges for food is solid evidence that we can safely ignore Mr. Roberts's chicken-little-like assertions that we're running out of food.

Donald J. Boudreaux

Times Aren't '70s-Bad

Here's a letter of mine sent recently to the Atlanta Journal-Constitution:

We can debate just how closely the economy of 2008 parallels that of the 1970s ("Today's crunch feels like '70s," July 13).  But one big difference unquestionably - and happily - distinguishes today from the dismal days of disco: no wage and price controls.  This fact alone goes far toward making our prospects today brighter than they were during the presidencies of Nixon, Ford, and Carter.  No inflation camouflaged by government fiat, and no long lines at gasoline stations or anxiety about finding fuel.

Plus, we're much wealthier today.  Those who doubt this truth can get any Sears catalog from the 1970s, study it, and ask if they'd prefer to use their 2008 incomes to buy 1970s-era products at 1970s prices, or buy today's products at today's prices. Even though nominal prices in the 1970s were much lower than prices today, very few persons would choose the 1970s option.

Sincerely,
Donald J. Boudreaux

Situational Ethics

Reading this morning these opening words in a report at Yahoo Sports -- "Wimbledon came under fire from animal activists on Tuesday for using marksmen to shoot down dive-bombing pigeons" -- reminds me yet again that our society is extraordinarily wealthy.  That ordinary people are sufficiently and securely fed, clothed, shod, and sheltered to enable some of them to devote substantial stores of their emotional energies to the care of pigeons is a sure sign of deep and widespread prosperity.

True Progressivism

According to today's Wall Street Journal, Barack Obama alleges that "Globalization and technology and automation all weaken the position of workers."  If this presidential wannabe is correct, then some of the world's most prosperous workers must be the people in that newly discovered tribe in Brazil -- persons with absolutely no contact with the global economy or with modern technology.

Less extreme cases, of course, include persons not so cut off from the world as these Brazilian tribes.  Sub-Saharan Africans should be more prosperous than eastern Europeans, who, in turn, should be more prosperous than Americans and western Europeans.

Of course, if the facts don't follow this pattern, then I guess that Sen. Obama will soon publicly apologize for either misspeaking or admit that his thesis is flawed.

The Real Life of Low Carbon-Footprint Locovores

The late William Manchester's 1992 book A World Lit Only By Fire provides a well-paced and vivid look at life in late-medieval and renaissance Europe.  For example, consider his description of the homes and some common experiences of peasants (pp. 52-54):

Lying at the end of a narrow, muddy lane, his rambling edifice of thatch, wattles, mud, and dirty brown wood was almost obscured by a towering dung heap in what, without it, would have been the front yard.  The building was large, for it was more than a dwelling.  Beneath its sagging roof were a pigpen, a henhouse, cattle sheds, corncribs, straw and hay, and, last and least, the family's apartment, actually a single room whose walls and timbers were coated with soot.  According to Erasmus, who examined such huts, "almost all the floors are of clay and rushes from the marshes, so carelessly renewed that the foundation sometimes remains for twenty years, harboring, there below, spittle and vomit and wine of dogs and men, beer...remnants of fishes, and other filth unnameable.  Hence, with the change of weather, a vapor exhales which in my judgment is far from wholesome."

The centerpiece of the room was a gigantic bedstead, piled high with straw pallets, all seething with vermin.  Everyone slept there, regardless of age or gender -- grandparents, parents, children, grandchildren, and hens and pigs -- and if a couple chose to enjoy intimacy, the others were aware of every movement.  In summer they could even watch.....

If this familial situation seems primitive, it should be borne in mind that these were prosperous peasants.  Not all of their neighbors were so lucky.  Some lived in tiny cabins of crossed laths, stuffed with grass or straw, inadequately shielded from rain, snow, and wind.  They lacked even a chimney; smoke from the cabin's fire left through a small hole in the thatched roof -- where, unsurprisingly, fires frequently broke out.  These homes were without glass windows or shutters; in a storm, or in frigid weather, openings in the walls could only be stuffed with straw, rags -- whatever was handy....

Typically, three years of harvests could be expected for one year of famine.  The years of hunger were terrible.  The peasants might be forced to sell all they owned, including their pitifully inadequate clothing, and be reduced to nudity in all seasons.  In the hardest times they devoured bark, roots, grass; even white clay.  Cannibalism was not unknown.  Strangers and travelers were waylaid and killed to be eaten, and there are tales of gallows being torn down -- as many as twenty bodies would hang from a single scaffold -- by men frantic to eat the warm flesh raw [original emphasis].

Autarky is Bad Policy

University of Illinois law professor (and co-blogger with me over at Market Correction) Andy Morriss sent this superb letter to the Wall Street Journal:

Sirs,

Contrary to the impression left by your story on agriculture and trade (“Food Crisis Forces New Look at Farming,” June 10), higher commodity prices do not result in a repeal of the principle of comparative advantage. Trade benefits people and trade distorting subsidies do not. This simple truth seems to have escaped both the “experts” interviewed in the story and those doing the interviews as the story quotes multiple experts complaining that countries like Haiti are no longer self-sufficient in various commodities. But food is no different than any other good. In no case is autarky a welfare-enhancing public policy, as the disastrous example of Albania under communist rule ought to have demonstrated once and for all. Public policies built around subsidizing inefficient producers in agriculture will raise, not lower, the price of food in poor countries and divert scarce resources from other, more productive investments. The problem for countries like Haiti is not a lack of investment in agriculture but the existence of a predatory public sector facilitated by international institutions like the World Bank and IMF peddling the latest fad. Poor countries are poor because they lack secure property rights, free markets, the rule of law, and free trade. Sorting that out, rather than developing a new Five Year Plan for agriculture, is what will lift their people out of poverty.

Andrew P. Morriss
H. Ross & Helen Workman Professor of Law and Business
University of Illinois

"Essentials" On Cars

I like this post by Carpe Diem's Mark Perry.  Pay special attention to the table (toward the bottom of his post) that he reproduces from USA Today.  It presents yet more evidence that ordinary Americans are not stagnating economically.

"A Clean and Snappy Place!"

McDonald's makes the world a cleaner place.  So concludes Wharton's Adrian E. Tschoegl in his 2007 paper "McDonald's -- Much Maligned, But an Engine of Economic Development."  Here's the relevant passage (from page 12):

McDonald’s emphasis on cleanliness, including or especially in restrooms, has led its competitors to upgrade their facilities.  Before the first McDonald’s opened up in 1975, restrooms in Hong Kong’s restaurants were notoriously dirty (Watson 1997).  Over time, competitors felt compelled to meet McDonald’s cleanliness standards.  The same thing appears to be occurring in China (Watson 2000).  In Korea, McDonald’s introduced the practice of lining up in an orderly fashion to order food; traditional practice was simply to crowd the counter, with success in ordering accruing to the most aggressive (Watson 2000).  In the Philippines, Jollibee mimics McDonald's clean and well-lighted look.

Here's yet another small way that capitalism makes humans' environment safer and more pleasant.

Capitalism Day

On this Earth Day, I celebrate capitalism -- the institution that, far more than any other, has made human lives clean, safe, dignified, and culturally rich.  Capitalism is also responsible for giving people the wealth and leisure to permit them to mis-perceive nature as loving and bountiful, and to enjoy nature in a way that few of our pre-industrial ancestors could ever have enjoyed it.

So, on this Earth Day, I offer you here my essay, inspired by the work of Julian Simon, entitled "Cleaned by Capitalism."  Here are the central paragraphs:

Before refrigeration, people ran enormous risks of ingesting deadly bacteria whenever they ate meat or dairy products. Refrigeration has dramatically reduced the bacteria pollution that constantly haunted our pre-twentieth-century forebears.

We wear clean clothes; our ancestors wore foul clothes. Pre-industrial humans had no washers, dryers, or sanitary laundry detergent. Clothes were worn day after day without being washed. And when they were washed, the detergent was often made of urine.

Our bodies today are much cleaner. Sanitary soap is dirt cheap (so to speak), as is clean water from household taps. The result is that, unlike our ancestors, we moderns bathe frequently. Not only was soap a luxury until just a few generations ago, but because nearly all of our pre-industrial ancestors could afford nothing larger than minuscule cottages, there were no bathrooms (and certainly no running water). Baths, when taken, were taken in nearby streams, rivers, or ponds, often the same bodies of water used by the farm animals. Forget about shampoo, clean towels, toothpaste, mouthwash, and toilet tissue.

The interiors of our homes are immaculate compared to the squalid interiors of almost all pre-industrial dwellings. These dwellings’ floors were typically just dirt, which made the farm animals feel right at home when they wintered in the house with humans. Of course, there was no indoor plumbing. Nor were there household disinfectants, save sunlight. Unfortunately, because pre-industrial window panes were too expensive for ordinary families and because screens are an invention of the industrial age, sunlight and fresh air could be let into these cottages only by letting in insects too. Also, bizarre as it sounds to us today, the roofs of these dwellings were polluted with all manner of filthy or dangerous things. Here’s the description by historians Frances and Joseph Gies, in Life in a Medieval Village, of the roofs of pre-industrial cottages:

Roofs were thatched, as from ancient times, with straw, broom or heather, or in marsh country reeds or rushes. . . .  Thatched roofs had formidable drawbacks; they rotted from alternations of wet and dry, and harbored a menagerie of mice, rats, hornets, wasps, spiders, and birds; and above all they caught fire. Yet even in London they prevailed.

Peace and free trade.

Adding to the Prosperity Pool

One of my earliest posts at the Cafe -- dated June 28, 2004 -- is on what I call "the prosperity pool."

This article in today's Wall Street Journal, about new technology on automobiles to help protect drivers from crashes, offers yet another example of the countless ways that our lives become materially more prosperous, almost on a daily basis, in small steps -- steps so small that we seldom notice any one of them, but so large in number that they make us much wealthier than we realize.

Here's the article's sub-headline:

Systems Are Trickling Down From Luxury to Mainstream Vehicles

And here's the article's opening sentence:

Sophisticated technology that helps drivers avoid a crash is accelerating its descent from the rarified reaches of super luxury cars.

No Cause for Pessimism

George Will has long been one of my favorite conservative columnists.  I often disagree with him, but even more often I agree with him.  And, boy, do I agree with the lesson he conveys in his column appearing in today's Washington Post.  Will's point is that to call today's economic woes a "crisis" is to define the word "crisis" way, way down.  Here's are the opening few paragraphs from this excellent column:

During presidential elections, when candidates postulate this or that "crisis" for which each is the indispensable and sufficient cure, economic hypochondria is encouraged, so a sense of suffering is rampant. Recently the Wall Street Journal, like Joseph Conrad contemplating the Congo, surveyed today's economic jungle and cried, "The horror! The horror!"

Declines in housing values and the stock market are causing some Americans to delay retirement. A Kansas City man had been eager to retire to Arizona but now, the Journal says, "figures he'll stay put for another couple of years." He is 59.

So, this is a facet of today's hydra-headed "crisis" -- the man must linger in the labor force until, say, 62. That is the earliest age at which a person can, and most recipients do, begin collecting Social Security.

The proportion of people aged 55 to 64 who are working rose 1.5 percentage points from April 2007 to February 2008, during which the percentage of working Americans older than 65 rose two-tenths of one percentage point. The Journal grimly reported, "The prospect of millions of grandparents toiling away in their golden years doesn't square with the American dream."

Oh? The idea that protracted golden years of idleness are a universal right is a delusion of recent vintage. Deranged by the entitlement mentality fostered by a metastasizing welfare state, Americans now have such low pain thresholds that suffering is defined as a slight delay in beginning a subsidized retirement often lasting one-third of the retiree's adult lifetime.

George Will's wisdom inoculates him from the pessimistic bias.

I would add only that government subsidies to Americans in their 60s and older (most notably, Social Security and Medicare) are not the only forces enabling Americans today to retire earlier than in the past.  The increasing wealth generated by the private sector is another reason -- in fact, I suspect, the principal reason.

Optimal Population?

In his new book, Common Wealth, Jeffrey Sachs expresses his concern about population growth.  Worried by a U.N. prediction that global population will rise to 9.2 billion by the year 2050, from 6.6 billion today, Sachs says (on page 23 of his new book) the following about these additional 2.6 billion persons:

I will argue at some length that this is too many people to absorb safely, especially since most of the population increase is going to occur in today’s poorest countries.  We should be aiming….to stabilize the world’s population at 8 billion by midcentury.

(HT Karol Boudreaux)

Eight billion.  I'm not sure where Sachs got that number.  And, to be frank, I'm not curious about where he got it.  He could have dreamed it up in his sleep, or taken it from a multi-year study conducted by a lavishly funded committee made up of the world's most accomplished economists, demographers, environmentalists, statisticians, physicians, and other Very Smart Experts.  No matter where the number comes from, it's worthless.  There is simply no way to know how many persons the earth can "support" in the year 2050 (or any other year, for that matter).

First is the question: support at what standard of living?  Even if we grant the validity of the resources-are-very-tightly-limited supposition (upon which fear of population growth chiefly rests), there is no objective, scientifically determinable "optimal" number of people who can be alive at any one time.  According to the resources-are-very-tightly-limited supposition, the less that people consume, the greater are the amounts of resources that will be left for the future -- the greater is the earth's carrying capacity.  In this view, resources are simply 'out there,' waiting to be gathered, processed, and consumed by humans.  So more humans (or the same number of humans consuming more) will deplete resources faster than will fewer humans (or the same number of humans consuming less).

So on this resources-are-very-tightly-limited supposition, as people decrease their material standard of living, the earth can sustain a larger population.

How do we know today at what average standard of living persons alive in 2050 will seek to achieve?  We don't.  It's conceivable that the typical person alive in 2050 will have become so devoted to saving the earth that the prevalent culture and norms will dictate that most persons settle for material living standards lower than those that ordinary Americans enjoy today -- or, perhaps even lower than ordinary Americans enjoyed in 1950.  If so, then surely the "optimal" global population in the year 2050 will be lower than it would be if most persons alive in 2050 will seek to achieve living standards much higher than ordinary Americans now enjoy.

A much deeper problem with Sachs's eight-billion number is that, in calculating it, there is no way to predict how human creativity will alter the world during the next 42 years.  It's ludicrous to pretend that we can know now what, say, the average MPG will be for internal-combustion engines in 2050.  Hell, we don't even know if automobiles and lawnmowers and the like will still use such engines then.

Will another Norman Borlaug arise, between now and 2050, to spark another green revolution?  Will someone invent a way to efficiently power automobiles with air?  Will someone develop new and better techniques for defining and enforcing private property rights in ocean-going fish stocks so that the tragedy of the commons called "over-fishing" is eliminated?  Will an enterprising entrepreneur invent a means for ordinary households to power their homes with mulch or autumn leaves or small fragments of fingernail clippings?

Think back 42 years to 1966.  Who in that year imagined personal computers in nearly every home in America?  The Internet?  Digital cameras?  Cell phones?  Quality wines sold in screw-top bottles?  Buying music with literally the click of a button (and not having to burn fossil fuels in driving to the record store).  Aluminum cans that contain only a fraction of the metal that cans contained back then?  The Kindle (that will reduce the number of trees cut down to enable people to read books)?  Medical advances that make hip-replacements about as routine as getting cavities filled by the dentist?  Microfiber?

There is no way -- literally, no way -- to know how technology and social institutions will change between now and 2050.  Given this impossibility -- and given the fact that we can nevertheless predict with confidence that technology will advance and that social institutions will change -- to assert that "optimal" population in the year 2050 will be eight-billion persons is ludicrous in the extreme.  It's faux-science, and deserves only ridicule.

Commerce and Nature

Over at Say Anything Blog I find this wonderful quotation from the late science-fiction master Robert Heinlein:

There are hidden contradictions in the minds of people who “love Nature” while deploring the “artificialities” with which “Man has spoiled Nature.” The obvious contradiction lies in their choice of words, which imply that Man and his artifacts are not part of “Nature"-but beavers and their dams are.  But the contradictions go deeper than this prima-facie absurdity.  In declaring his love for a beaver dam (erected by beavers for beavers’ purposes) and hatred of dams erected by men (for the purposes of men) the “Naturist” reveals his hatred for his own race-i.e., his own self hatred.

In the case of “Naturists” such self-hatred is understandable; they are such a sorry lot.  But hatred is too strong an emotion to feel toward them; pity and contempt are the most at any rate.

Reading this Heinlein quotation -- which, because I've never developed a taste for reading science fiction, I've not encountered before today -- reminds me of one of my favorite passages from Thomas Babington Macaulay's History of England.  I re-run Macaulay's passage below (I've run it before), for it is both eloquent and wise -- and should be reflected upon deeply by all, especially by those persons who profess to love nature and who worry about commerce and civilization spoiling nature:

Indeed, law and police, trade and industry, have done far more than people of romantic dispositions will readily admit, to develop in our minds a sense of the wilder beauties of nature. A traveller must be freed from all apprehension of being murdered or starved before he can be charmed by the bold outlines and rich tints of the hills. He is not likely to be thrown into ecstasies by the abruptness of a precipice from which he is in imminent danger of falling two thousand feet perpendicular; by the boiling waves of a torrent which suddenly whirls away his baggage and forces him to run for his life; by the gloomy grandeur of a pass where he finds a corpse which marauders have just stripped and mangled; or by the screams of those eagles whose next meal may probably be on his own eyes. . . .

It was not till roads had been cut out of the rocks, till bridges had been flung over the courses of the rivulets, till inns had succeeded to dens of robbers . . . that strangers could be enchanted by the blue dimples of lakes and by the rainbows which overhung the waterfalls, and could derive a solemn pleasure even from the clouds and tempests which lowered on the mountain tops.

The Pessimistic Bias

Reading the comments on this post (which in many ways are very much like the comments on many other posts, both here at the Cafe and on other blogs) prompts me to make a couple of points that I've put off making for too long now.

In his indispensable book, The Myth of the Rational Voter, my GMU colleague (and EconLog's) Bryan Caplan finds powerful evidence that non-economists suffer from the "pessimistic bias," which Bryan defines (on page 45 of his book) as

a tendency to overestimate the severity of economic problems and underestimate the (recent) past, present, and future performance of the economy.

Russ and myself (because we're economists?) and many of the commentors here at the Cafe are not pessimistic about the long-run.  Problems come; problems are solved.  Inability to see the details of the future scare many people; this inability doesn't scare me.  As long as individuals have a sufficient quantum of freedom, their self-interest and creativity and inevitable competition will "solve" almost any problem over the long-haul.  It's a pattern repeated countless times over the past two-hundred years in capitalist countries.  (Please, please don't trot out the Great Depression as a counter-example.  First, it was clearly worsened by the Federal Reserve's catastrophically bad monetary policy, and by the worldwide spread of protectionism -- helped along by the Smoot-Hawley tariff.  More importantly, there's compelling evidence that the risks of full-throttle socialization of the economy were then real enough to scare investors away until the mid-1940s.  And even this greatest of all of America's depressions lasted only ten or fifteen years, depending on how you define the end of the Depression.)

Being optimistic doesn't mean being blindly insistent that the future will always be better than today.  Take away enough freedom and, kaboom!, the economy implodes.  (Or should I instead say "moobak!"?)  Fortunately, though, the capitalist economy is so remarkably robust that it can take lots of beatings -- lots of interventions -- lots of unnecessary taxation -- lots of foolish dissing -- and keep on keeping on at raising living standards.

I'm more optimistic today than I was ten or twenty years ago about just how much counterproductive regulation and taxation the capitalist economy can take before it really starts to fail.  But my sense is that the American economy still retains enough freedom -- that property rights remain sufficiently secure -- to ensure continued economic growth over the long run.

I remain bullish over the long run.  Very bullish indeed.
....
My second point is that it is a curious phenomenon that those who want more government control over the economy tend to be those who insist that the American economy has performed poorly over the past thirty-five years.  Again, as regular patrons of the Cafe know, Russ and I are quite sure that the economy has done very well during these years, even for poor and middle-class workers.

But if I were a pro-regulation and high-tax kinda guy, why would I dispute the claim that America's economy has performed remarkably well for everyone even since 1973?  Why would I not say "See, the government programs enacted from the New Deal forward are working!"  At no time during the past 35 years has Uncle Sam's budget been severely reduced.  During those years, some welfare programs have been scaled back, while others have been expanded and even newly created.  Trade is freer today, but the post-WWII trend toward freer trade began in the 1940s, long before those allegedly blissful years of the early 1970s.  Since the early 1970s, some regulations have been repealed, while others have been created at both the state and national levels. 

In short, despite what some pundits mysteriously assert, America during the past twenty-five to thirty-five years has emphatically not been a laissez-faire society.  Not even close.  So why do so many persons on the political left see in the economic data of the past three decades a compelling case for even greater government control over our lives and pocketbooks?  And why don't more of these same persons on the left respond to those of us who advocate less government by pointing to the evidence of continued and widespread growth in prosperity by saying proudly "See!  We're right and you're wrong: government intervention does work well!"

I believe that I know the answer to my (non-rhetorical) question, but this post is long enough, so I'll end it here.

Falling Housing Prices and Labor Mobility

Do falling home prices distort the labor market, as Louis Uchitelle argues in today's New York Times?  That is, are workers really generally unwilling to sell their homes -- because home prices have fallen -- even if failure to do so keeps these workers from moving to locations where employment prospects are brighter?  My initial instinct is to doubt the severity of this problem -- as this first of two letters that I sent today to the NYT explains:

Louis Uchitelle reports that falling home prices keep workers stuck in their homes, unwilling to sell and, hence, unwilling to move in order to take better jobs in different locations ("Unsold Homes Tie Down Would-Be Transplants," April 3).  Perhaps; but I have my doubts.

While it's true that people prefer to sell their homes at high prices, it's also true that people prefer to buy their homes at low prices.  So why should people's disappointment at being unable to sell their homes at prices as high as they once thought possible not be offset by their happiness at being able to buy new homes at prices lower than they once thought possible?

But my respect for many of the findings of behavioral economists is sufficiently high to cause me to grant the possibility that this phenomenon is real.  The endowment effect and loss-aversion might well make workers unusually resistant to sell their homes at prices lower than they've become accustomed to suppose that they could fetch for their homes.  So perhaps the phenomenon identified by Uchitelle is real.

When I sent the above letter to my list of letter-recipients that I keep, I prefaced the letter with the following remark:

Even if this phenomenon is real (perhaps it's one of the anomalies identified by behavioral economics), what does it say about the prosperity of America's workers if such considerations stymie their willingness to move in order to get better jobs?

A few minutes after I sent this letter to my list, NYT science writer John Tierney wrote me back expressing his agreement with this prefatory comment.  John's e-mail prompted me to write and send this second letter:

Louis Uchitelle reports that falling home prices keep workers stuck in their homes, unwilling to sell and, hence, unwilling to move in order to take jobs in different locations ("Unsold Homes Tie Down Would-Be Transplants," April 3).

But far from being evidence in support of your incessantly expressed belief that American workers today are in desperate shape economically, this phenomenon instead suggests that American workers are doing very well indeed.  Persons in miserable economic straits would not allow loss-aversion on their real-estate holdings to prevent them from taking better jobs.

Sincerely,
Donald J. Boudreaux

Are workers falling behind because of rising health care costs?

As is often the case, the glass is half-empty over at the Washington Post (HT: Steve Chapman). The headline on today's front page:

Rising Health Costs Cut Into Wages

Higher Fees Squeeze Employers, Workers

The article begins:

Recent history has not been kind to working-class Americans, who were down on the economy long before the word recession was uttered.

The main reason: spiraling health-care costs have been whacking away at their wages. Even though workers are producing more, inflation-adjusted median family income has dipped 2.6 percent -- or nearly $1,000 annually since 2000.

Employees and employers are getting squeezed by the price of health care. The struggle to control health costs is viewed as crucial to improving wages and living standards for working Americans. Employers are paying more for health care and other benefits, leaving less money for pay increases. Benefits now devour 30.2 percent of employers' compensation costs, with the remaining money going to wages, the Labor Department reported this month. That is up from 27.4 percent in 2000.

So the point is that because of rising health-care costs, workers are worse off. Pretty depressing. And there's a graphic to help make the point:

Unfortunately, the text accompanying the graphic is a non-sequitur--"The annual increase in the cost of benefits for workers has far outpaced wage increases in recent years." That sounds bad. That sounds like the costs of health care is growing faster than wages and higher health care costs would seem to imply a lower standard of living for workers. But it doesn't imply that at all. It simply says that the benefits component of compensation has been growing faster than the wage component.

And what does it mean that the "cost of benefits" is rising? What does the word "costs" mean in that phrase? It's a cost to employers. But to workers, benefits are, well, benefits. Higher compensation. What the chart shows is that benefits have been rising rapidly. That's actually a good thing. Yes, part of that increase is that employers are covering health care costs that have been rising. But it also includes other types of benefits, forms of compensation that are usually tax-free to employees.

To find out whether workers are doing better or worse than they once did, you want to look at whether total compensation is growing faster or slower than inflation.  Look at the graphic--it shows that other than a couple of months at the end of 2005, total compensation has been growing between 3% and 4% a year since 2000. But between 2000 and 2007, the CPI increased about 20% or less than 3% per year. So real compensation has been rising.

It's not clear from the graphic whether this is compensation per worker or per hour or whether it's total compensation across all employees. So the conclusion could be distorted by increases in the labor force since 2000. But what is clear is that the graphic has nothing to do with the pessimism of the article and seems to refute it.

As for the 2.6% fall in median income since 2000, the one seemingly hard piece of evidence in the  article, if the number is from the Census (which I assume it is), the Census income figures don't include health care benefits or employer contributions to retirement. So those income figures tell us nothing about the role of rising health care costs' effect on the standard of living of the median worker.

The rest of the article is a series of anecdotes about how expensive health care is. There is no hard evidence for the central claim that rising health care costs have reduced the standard of living of the average American. In fact, the graphic implies the exact opposite.

 

Stagnation Contest

Spencer suggests in a recent comment that no one is really claiming that middle class incomes are stagnant and to dispute this claim is to attack a straw man. I don't think he's right, though I always appreciate the perspective of our readers who do not agree with everything said here at the Cafe. So I thought we'd have a contest to find examples from the web or the media that make the claim that our standard of living is stagnant or that the middle class can't get ahead and so on. Or better yet that the middle class is falling behind. Or that all the gains of the last x years have gone to the top 1% or the top 20%.

I'll kick things off with a quote from Michelle Obama from a recent speech:

And things have gotten progressively worse throughout my lifetime, through Democratic and Republican administrations. It hasn't gotten better for regular folks.

I saw many versions of this quote in the news and the blogosphere but I struggled to verify it. I found an audio clip here. The quote starts at the 3:55 mark of the clip. To be eligible for the contest, you must provide a URL or verifiable source for the quote. Incidentally, Michelle Obama was born in 1964 but I'll give her some wiggle room for when she believes the decline in the quality of life for regular folks began.

Half Full or Half Empty?

In this post, I showed that net worth per household had risen dramatically in recent years. Of course, I admitted that the average might be skewed by the high end households but that I thought the median was up as well. The Washington Post has a piece today with the data for the median household, Turns out it's up 35% in real terms (that is, corrected for inflation) between 1989 and 2004. Pretty good news, and the article is generally sympathetic to the surprising possibility that the middle class is thriving.

But the graphic that goes with the article is much gloomier:

I don't know if you can read it, (you can click on it and make it bigger) but here's the first sentence that goes with the graphic: "Between 1989 and 2004, the net worth of the average American family increased by 35%, but household debt more than doubled as more families used debt to finance day-to-day expenses."

Here is another way to describe the data: "Between 1989 and 2004, Americans accumulated more wealth. They decided to  use some of that wealth for increased consumption today."

Notice the chart to the right on productivity and wages. By ignoring benefits, it paints a much gloomier picture than is the reality.

UPDATE: As Randy pointed out in the comments to this post, $55,000 seems like a lot of debt for the median household. Actually the number is not correct. It's taken from the Federal Reserve Board's Survey of Consumer Finances. It's the median debt among families that have debt, about 3/4 of all families. So it is not analogous to the income in the chart. It's not clear what kind of debt it includes. When I find out, I'll post on it.

Wealth, Savings and Debt

One comment on this post about the state of America mentioned our rising debt, negative savings and so on. Savings is mismeasured in the US--it doesn't include investment in human capital and ignores asset appreciation. As I said in the post, yes, debt is rising. But debt isn't what matters. It's net worth. Here are the data on real net worth. It's at an all-time high.

And yes, I know this is the total and doesn't hold for every individual. The same data for different quintiles of the income isn't quite so cheery. But they're still cheery. The chart is taken from a post by Michael Mandel at Business Week. Read the whole thing.

Prosperity and making stuff

Harold Meyerson thinks we've become a nation of shoppers rather than a nation of producers:

If 19th-century England was a nation of shopkeepers, the United States today is a nation of shoppers, and our role in the world economy is to buy what other countries -- or U.S.-based corporations with factories in other countries -- make. It was not ever thus. In the four decades following World War II, our largest employer was General Motors; for the past decade, it's been Wal-Mart.

It's a fact. Sort of. Actually, the federal government is the largest employer—1.7 million employees and that excludes the Post Office. Does that mean we've become a nation of bureaucrats because a little over 1% of all employees work for the government? Does it mean we're on a perilous downward path where instead of making things, we regulate things? That would be a silly statement. It is equally silly to conclude that because Wal-Mart is the largest private employer we've stopped making things.

Actually, making things is not the road to prosperity. The road to prosperity for a nation is to use the skills of its citizens wisely. The wise use of those skills depends on the skills and desires of people in other nations. Sometimes that means making stuff. Sometimes it means providing services in exchange for making stuff.

And as it turns out, we do make a lot of stuff here in the United States. Manufacturing output is dramatically greater today than 30 or 40 or 50 or 60 years ago, the halcyon era that Meyerson imagines once existed. Manufacturing output has almost tripled since 1970. What has happened over the last 60 years is that productivity in the manufacturing sector has increased greatly. That has allowed the US manufacturing sector to produce a lot more stuff with  roughly the same or even a declining number of employees.

Wal-Mart is a red herring. It's success hasn't come at the expense of the manufacturing sector. The trends in the manufacturing sector go back 60 years, long before Wal-Mart existed.

Meyerson continues:

GM followed in the footsteps of Henry Ford, who by 1913 had concluded that he needed to pay his workers enough that they could afford to buy a new Ford. Wal-Mart, by contrast, pays its workers so little that they are compelled to shop at Wal-Mart.

But even if Wal-Mart weren't a downward force on wages throughout much of the economy,

Sorry to stop the quote in mid-sentence, but it's such a great stopping point. Wal-Mart is a downward force on wages throughout much of the economy? What does the word "much" mean in that sentence? I think it's a hedge for the author. It covers a lot of ground. It would be absurd to argue that Wal-Mart lowers wages in Manhattan so maybe it's a geographical qualifier. It would be absurd to argue that Wal-Mart lowers wages in baseball or journalism or the computer industry, so maybe it's a sectoral qualifier.

But where is the large part of the economy (much, after all, means a substantial part) that Wal-Mart does affect wages in a downward fashion? Is it in certain geographical areas where Wal-Mart stores have opened, like say, in DeKalb county, outside of Atlanta? When Wal-Mart opened a store there recently, 7500 people showed up for 400 jobs. Did Wal-Mart attract those people by offering LOWER wages than were being offered elsewhere?

And how is it that a company that employs slightly less than 1% of the labor force affect wages in much of the economy, however you define "much?"

But Meyerson has a worse problem to explain. How does a nation of shoppers thrive when incomes are stagnating, as he believes they are?

Here's the full quote:

But even if Wal-Mart weren't a downward force on wages throughout much of the economy, consider the implications of a nation whose chief economic activity is personal consumption -- more particularly, personal consumption at a time when incomes are stagnating. The only way such a nation can get along is to go into debt, which is precisely what Americans have done.

Do you see the problem? How can a nation of stagnating incomes get to enjoy so much stuff? It must be debt. We're living beyond our means. We're borrowing to support a lifestyle we can't afford.

Debt is up in recent years, but so is wealth. I'd like to see evidence that the prosperity of say the last 25 years is due to borrowing. The prosperity of the last 25 years is real. It has been driven by productivity increases in manufacturing and the service sector, created by an explosion of innovation in how we handle information.

Meyerson's solution to our alleged economic crisis is to elect either Hillary or Obama:

One of the crucial differences between the two parties this year is that Hillary Clinton and Barack Obama have both revived the idea of a national industrial strategy -- better late than never -- while John McCain still acts as if banks and corporations, left to their own devices, would revive our economy through their investments. Problem is, we've left banks and corporations to their own devices for decades, and they've funded the rise of low-wage, high-profit East Asia . Nonetheless, McCain calls for across-the-board corporate tax cuts, though that money may well be bound for Shanghai. Clinton and Obama, by contrast, call for the public sector to take up the slack created by the private sector's reluctance to invest in the United States.

Ah, that's the ticket. Let's try the Japanese economic strategy. And what does he mean by the private sector's reluctance to invest in the United States? Everybody wants to invest in the United States. Foreign governments, foreign investors, American investors and American companies. The money flows in because the United States is the most productive economy on the face of the earth. Would someone let Harold Meyerson in on this secret?

If Simon's Bet Had Been Repeated.....

If the famous Ehrlich-Simon wager -- the one that ran from 1980 to 1990 -- had been done again from 1990 to 2000,  Julian Simon would have won that bet, too.  My former research assistant at GMU, Prof. Mark Perry, has the story over at his excellent blog Carpe Diem.

American Consumption

Mike Cox and Richard Alm have an excellent op-ed in today's New York Times.  It exposes as (at best) facile the view -- expressed just yesterday by the Gray Lady's columnist Bob Herbert -- that "[t]he middle class is hardly flourishing" -- that America's middle-class is disappearing and needs to be "resuscitated."

Here are some key paragraphs:

Income statistics, however, don’t tell the whole story of Americans’ living standards. Looking at a far more direct measure of American families’ economic status — household consumption — indicates that the gap between rich and poor is far less than most assume, and that the abstract, income-based way in which we measure the so-called poverty rate no longer applies to our society.

The top fifth of American households earned an average of $149,963 a year in 2006. As shown in the first accompanying chart, they spent $69,863 on food, clothing, shelter, utilities, transportation, health care and other categories of consumption. The rest of their income went largely to taxes and savings.

The bottom fifth earned just $9,974, but spent nearly twice that — an average of $18,153 a year. How is that possible? A look at the far right-hand column of the consumption chart, labeled “financial flows,” shows why: those lower-income families have access to various sources of spending money that doesn’t fall under taxable income. These sources include portions of sales of property like homes and cars and securities that are not subject to capital gains taxes, insurance policies redeemed, or the drawing down of bank accounts. While some of these families are mired in poverty, many (the exact proportion is unclear) are headed by retirees and those temporarily between jobs, and thus their low income total doesn’t accurately reflect their long-term financial status.

So, bearing this in mind, if we compare the incomes of the top and bottom fifths, we see a ratio of 15 to 1. If we turn to consumption, the gap declines to around 4 to 1. A similar narrowing takes place throughout all levels of income distribution. The middle 20 percent of families had incomes more than four times the bottom fifth. Yet their edge in consumption fell to about 2 to 1.

Let’s take the adjustments one step further. Richer households are larger — an average of 3.1 people in the top fifth, compared with 2.5 people in the middle fifth and 1.7 in the bottom fifth. If we look at consumption per person, the difference between the richest and poorest households falls to just 2.1 to 1. The average person in the middle fifth consumes just 29 percent more than someone living in a bottom-fifth household.

The vanishing middle class

Here is a very nice video from Reason.TV of Drew Carey talking about how the middle class actually is alive and well. Although I like the economics, I also like the clips from Dobbs et al relentlessly trying to scare people.

Viktor Schreckengost

Ever hear of Viktor Schreckengost?  I hadn't heard of him until this morning when I read his obituary in the Washington Post.  Mr. Schreckengost died recently, at the age of 101.

So why do I care?  Why should you care?

I care and you should care because Mr. Schreckengost likely has done more to make your life better and pleasant than has nearly any of the politicians you can name.  Measuring any one person's contributions to a society whose essence is vast and on-going social cooperation is inherently difficult and often speculative.  Still, I'll speculate.  I have a strong sense that the positive value of Viktor Schreckengost's contributions to human well-being exceeds that of FDR, Richard Nixon, Jimmy Carter, Ronald Reagan, any Kennedy or Bush, Kofi Annan, Nancy Pelosi, Tip O'Neill -- you name the political operative.

A good sense of Mr. Schreckengost's contributions comes from the opening paragraph of the Post's obit:

Viktor Schreckengost, 101, a celebrated industrial designer whose products included mass-produced dinnerware, riding lawn mowers, bicycles and coffins, and who revolutionized trucking by putting the cab over the engine, died Jan. 26 at his condominium in Tallahassee.

Read the entire obit to learn more fully just how much this man has contributed.

His mass-produced dinnerware is especially interesting.  Here's more from the obit:

Mr. Schreckengost -- whose name means "frightening guest" in German -- was born June 23, 1906, in Sebring, Ohio. He learned clay sculpting from his father, a commercial potter, and said his parents expected their children to make their own toys.....

In the early 1930s, he was hired by American Limoges to design what is widely believed to be the first modern mass-produced dinnerware. Its patterns had a Manhattan theme and became ubiquitous in homes of that era.

So Mr Schreckengost contributed in a major way to a commercial enterprise that was in competition with his father's profession.  With the advent of mass-produced dinnerware -- designed, by the way, by a man whose work was sought after by the likes of Eleanor Roosevelt -- millions of ordinary families could acquire higher-quality or lower-cost dinnerware from large-scale producers.  Surely this development wasn't good for the business of most commercial potters.  But it was good for ordinary people.

So rest in peace, Mr. Schreckengost.  I salute you.  I salute your creativity, your work, your life.  Even though I, like most people, had never before heard of you, know that I am happy not only to have learned of you but, perhaps ironically, also to live in a society that encourages creative people such as yourself to work for my betterment without my having to grovel before you, to enslave you, or even to pay you the kind of modest homage that I offer here.

UPDATE: Steve Horwitz has these important reflections on Mr. Schreckengost over at The Austrian Economists.

"24" circa 1994

I watch very little television, so I've never seen the show "24."  (I don't even know what it's about.)  But I understand and enjoy this spoof on "24" -- a pilot for the show allegedly shot in 1994.  For those who believe that America's middle-class has been economically stagnant, this short video gives you some reasons to doubt the stagnation hypothesis.  (HT to Mathieu Bedard)

Not stagnant

Here is Harold Meyerson in the Washington Post, singing the same old false song (HT: Co-host Don Boudreaux):

...we face an economy that's been warped by two developments we've not seen since FDR's time.

The first of these is the stagnation of ordinary Americans' incomes, a phenomenon that began back in the 1970s and that American families have offset by having both spouses work and by drawing on the rising value of their homes.

Unfortunately for Meyerson's unrelenting pessimism, median family income (median, not mean) corrected for inflation, was up 23% between 1973 (a good year in the early 1970's that the gloom and doomers like to call the good old days.)

Is that increase due to both spouses working? For families where both spouses work (so holding constant the number of workers in the family), the increase is 36%.

The data are from the US Census and can be found here.

These income numbers do not include employer contributions to health care or retirement unless they get converted into income. They correct for inflation using a flawed index that probably overstates inflation by 1% a year for the last ten years. They include composition effects of an increase in immigration that reduces the measured median by adding in newcomers who have fewer skills.

Incomes in America have not been stagnant since the 1970s.