More on Wages and the Middle Class: A Response to Rortybomb

By / 1.14.2010

I will be posting soon on the living standards of the poor, but I first wanted to take some time to respond to Mike Konczal of Rortybomb. Mike argues that incomes have stagnated since 1999, which coincides with a dramatic rise in consumer borrowing. Kevin Drum picks up his post and runs with it. Let me start out by saying that I wasn’t so much objecting to Mike’s (or more specifically, Raghuram Rajan’s) hypothesis as I was objecting to general claims that wages have stagnated.

But Mike’s analysis has some problems. First, while he wants to argue that 1999 represented the start of a period of stagnation, a quick look at his chart will reveal that the significance of that year is that it is a cyclical peak year. The trend line hits local peaks at the height of the business cycle going all the way back through the late 1960s. The decline in real income from 1999 through the early 2000s isn’t any steeper than in previous downturns (it’s the recovery from the mid-2000s forward that’s weak). So it’s unclear to me why consumers became overleveraged this time but not in previous recessions.

Beyond that, Mike’s chart on household credit market debt is misleading. He’s comparing income levels in his first chart to debt changes in the second one. Conveniently, they sort of support his hypothesis. But he should be comparing levels to levels. Here’s the chart showing levels of household credit market debt:

Put the two charts together and you get this one:

If you can find a relationship there, you are more creative than I am. One more thing: “credit market debt” includes mortgages, car loans, and credit card debt. But the first two of those are secured by assets, so charting the change in debt without accounting for changes in assets is also misleading.

OK, Mike’s next objection is that the increase in income that I documented is due to households working more hours—in particular, wives. But here’s the thing—part of the reason that male compensation has “stagnated” (in quotes because I don’t believe that’s true) is due to the increase in work among women (increased supply of labor leads to lower wages). We don’t know what the counterfactual would have been had women not increased their hours.

As for “middle class woes,” foreclosures have risen dramatically, but they are a tiny percentage of mortgages (and a sizable chunk of homeowners don’t have mortgages because they’ve paid them off). The Calculated Risk post that Mike links to shows that other than Florida and Nevada (where many foreclosures are properties owned by speculators), between one and six percent of mortgages were in foreclosure as of mid-2009.

Oh, and about that “stagnation” since 1999—if you compare 1999 to 2007 (both peak income years), median household income using a comprehensive measure (that nevertheless does NOT include the value of health insurance) rose from $44,205 to $46,201 (in 2007 dollars, using the CPI-U-RS). [See Alternative Measures of Income and Poverty, Definition 14a.] Using my preferred PCE deflator, the increase is from $42,786 to $46,201—an 8 percent increase.

As for Kevin’s contrasting of per capita income growth and household income growth, see Steve Rose’s explanation of why these comparisons are apples-to-oranges.

The views expressed in this piece do not necessarily reflect those of the Progressive Policy Institute.