What’s Really Happening in the Economy?

TCS Daily: What's Really Happening in the Economy?

This is the first in a three-part series of articles by David Henderson about a book by Alan Reynolds called Income and Wealth (and at $55, you will need some income and wealth to buy it!). You have heard there are lies, damn lies, and then there are statistics. Reynolds' book purportedly shows how this is true with poverty and income disparity claims. Henderson believes this will be one of the top five most important books on economics for the decade.

How often have you heard that the vast majority of families' incomes in the United States are rising little or not at all, that the middle class is shrinking, that real wages are stagnating, that the top 20%, or 5%, or 1% are getting the lion's share of the gains in the U.S. economy, that average CEO pay is getting to be a couple of orders of magnitude larger than average people's pay, or that mobility across income groups has declined? Princeton economist and New York Times columnist Paul Krugman has made a good part of his living credulously repeating most of these claims. Wall Street Journal reporter David Wessel has also often written long articles laying out some of these claims. It seems that not a month has gone by in the last few years that a major respected newspaper hasn't made such statements as if they were well-established facts.

… Well, guess what? All of the above claims are either absolutely false or at least highly misleading.  …

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As for the Piketty-Saez study that Krugman and many others have cited, Reynolds points out just how implausible their data are as a measure of family income. Piketty and Saez write that in 2000, "the median income, as well as the average income for the bottom 90% of tax units is quite low, around $25,000." Note the use of the term "tax units." "Tax units" are not the same as families. In my family, for example, we have two tax units: my wife and I file our taxes jointly and our daughter files on her own. But that has not stopped people, including Krugman, from writing as if "tax unit" and "family" are synonymous. Reynolds points out that if tax units were the same as families, highly implausible implications would follow. Given the meaning of the word "median," 45 percent of families (half of 90 percent) would have had to make less than $25,000 in 2000. But U.S. Census data show that for 2000, median family income was $50,732, which means that we know, to the extent we can trust Census data, that 50 percent of U.S. families made more than $50,732 in 2000. That means that the 5 percent of the family income distribution not accounted for (100 percent minus 50 percent minus 45 percent) would have had to be the people with incomes above $25,000 but below $50,732. While that is mathematically possible, it is empirically virtually impossible. The problem stems from the equation of "tax unit" with family.

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Reynolds continues by telling of a 2004 story in the Washington Post titled, "The Vanishing Middle-Class Job." The Post article pointed out that in 1967, nearly a quarter (22.3 percent) of households made between $35,000 and $49,999 in inflation-adjusted terms, but that that share was down to 15 percent by 2003. Reynolds notes that the same article showed that the percentage of U.S. households with a real income higher than $50,000 rose from 24.9 percent in 1967 to 44.1 percent in 2003. Moreover, the percentage with income lower than $35,000 fell from 52.8 percent to 40.9 percent. In other words, the "middle class" was shrinking because people were moving out of the Post's statically defined middle class into a higher income class. Comments Reynolds: "The article could have been more aptly titled, 'The Vanishing Lower-Class Job.'" But because Reynolds shows elsewhere that higher-income households tend to have more than one worker, one can't simply equate households and jobs. Therefore, the article would have been even more aptly titled, "America's Families are Getting Wealthier." But that's not exactly the message or the tone the Post was shooting for.