Crucial Update: Donna D'Souza, who worked with me on an electronic money storybook, tweeted the CBO document to which Neil Gilbert refers in claiming that the bottom quintile’s average disposable income us up 49% since 1979: page 18 here. But she also tweets that, puzzlingly, the CBO numbers for bottom-quintile income growth from 1979 to 2007 are much lower at 18% as you can see here. It seems unlikely that the real disposable income of the bottom quintile has shot up dramatically in the last 7 years without all of us noticing. Like Donna, I would be glad for any clarification of what is going on.
Donna’s Clarification: Donna tweets that on closer study of the CBO’s documents, what happened is that the CBO recently (since 2007) started to include more fully the value of government-provided health insurance, such as Medicaid. The bottom line, I think, is that to the extent the bottom quintile can be said to have 49% higher real disposable income now than in 1979, more than all of the increase in imputed disposable income is in the increased value of the medical care that they get.
On December 31, my post “The Wall Street Journal’s Quality-Control Failure: Bret Stephens’s Misleading Use of Nominal Income in His Editorial “Obama’s Envy Problem” amplified David Beffert’s tweet that the Wall Street Journal had let Bret Stephens inappropriately use nominal income figures to suggest that the middle class has seen truly dramatic economic improvements over the last few decades. He wrote:
Besides which, so what? In 1979 the mean household income of the bottom 20% was $4,006. By 2012, it was $11,490. That’s an increase of 186%. For the middle class, the increase was 211%. For the top fifth it’s 320%. The richer have outpaced the poorer in growing their incomes, just as runners will outpace joggers who will, in turn, outpace walkers. But, as James Taylor might say, the walking man walks.
Paul Krugman further amplified our complaint at this serious misuse of statistics in his post "Disinformation on Inequality.”
I followed up later with the post “Bret Stephens and Paul Krugman: What Should a Correction Look Like in the Digital Era?” talks about how Paul Krugman further amplified this complaint. Since then, I have noticed that as I recommended, the Wall Street Journal does seem to be posting corrections at the end of the online version of the original article, where it is easier for those who most need to know about the correction to see it.
Although the numbers are not ones that would suggest a use of nominal income, the numbers Neil Gilbert's op-ed piece “The Denial of Middle-Class Prosperity” in the May 16, 2014 Wall Street Journal seem very far off to me–perhaps indicating another serious quality-control failure on the part of the Wall Street Journal. Neil writes:
Countless reports now claim that the middle class is being crushed by inequality, declining mobility and diminishing income. A closer look at the facts suggests otherwise: Members of America’s middle class are better off than they were 30 years ago, and they live much more comfortably than counterparts in other countries.
The problem with the research showing middle-class stagnation is that it looks at market incomes, which exclude taxes, government transfers and adjustments for household size. Market income is an accurate gauge of employment compensation but a misleading way to consider a family’s financial resources. It overlooks the welfare state’s enormous power to redistribute income.
The Congressional Budget Office’s 2011 report on income inequality trends offers a more precise accounting, dispelling the notion that the past three decades have been characterized by the rich getting richer at the expense of the poor while the middle class stays about the same. The CBO adjusts market income by subtracting taxes and adding the cash value of social benefits. When households are then divided into five equal income groups, the data reveal that average disposable household income has increased across all groups since 1979. The average household income grew by 40% for the middle quintile and increased by 49% for the bottom quintile.
The numbers I am familiar with suggest that at the bottom, things have gotten a bit worse in the last few decades before fringe benefits are taken into account and marginally better if the increasing value of fringe benefits (especially medical benefits) is added in. Neil emphasizes income after taxes and transfers, but I just don’t see taxes and transfers as having become so much more redistributive since 1979 that they could generate the 49% increase in the average disposable income of the bottom quintile since 1979. Thus I suspect some non-random error is at work on Neil’s and the Wall Street Journal's part.