Social Democratic America (7 page)

FIGURE
2.7 Median income within and across cohorts

For each year, the lower line is median income among families with a “head” aged 25–34, and the top line is median income for the same cohort of families twenty years later. In the years for which the calculation is possible, 1947 to 1990, the average increase in income during this two-decade portion of the life course is $30,500. The data are in 2010 dollars; inflation adjustment is via the CPI-U-RS.
Data source
: Census Bureau, “Historical Income Tables,” table F-11.

In each year, the gap between the two lines is roughly $30,000. This tells us that the incomes of middle-class Americans tend to increase substantially as they move from the early years of the work career to the peak years.

Should this reduce our concern about the over-time pattern shown in
figure 2.5
? No, it shouldn't. Look again at
figure 2.7
. Between the mid-1940s and the mid-1970s, the median income of families in early adulthood (the lower line) rose steadily. In the mid-1940s median income for these young families was around $25,000; by the mid-1970s, it had doubled to $50,000. Americans during this period experienced income gains over the life course, but they also tended to have higher incomes than their predecessors, both in their early work years and in their peak years. That's because the economy was growing at a healthy clip and the economic growth was trickling down to Americans in the middle.

After the mid-1970s, this steady gain disappeared. From the mid-1970s to 2007, the median income of families with a 25- to 34-year-old head was flat. They continued to achieve income
gains during the life course. (Actually, we don't yet know about those who started out in the 1990s and 2000s because they are just now beginning to reach ages 45 to 54. The question marks in the chart show what their incomes will be if the historical trajectory holds true.) But the improvement across cohorts that characterized the period from World War II through the 1970s—each cohort starting higher and ending higher than earlier ones—disappeared.

For many Americans, income rises during the life course, and that fact is indeed hidden by charts such as
figure 2.5
. But that shouldn't lessen our concern about the decoupling of household income growth from economic growth that has occurred over the past generation. We want improvement not just within cohorts, but also across them.

3.
Families have gotten smaller
. The size of the typical American family and household has been shrinking since the mid-1960s, when the baby boom ended. Perhaps, then, we don't need income growth to be so rapid any more.

Let me pause briefly to explain why
figure 2.5
shows the income trend for families rather than households. The household is the better unit to look at. A “family” is defined by the Census Bureau as a household with two or more related persons. Families therefore don't include adults who live alone or with others to whom they aren't related. It's a bit silly to exclude this group, but that's what the Census Bureau did until 1967. Only then did it begin tabulating data for all households. I use families in
figure 2.5
in order to begin earlier, in the mid-1940s. As it happens, though, the trends for households since the mid-1970s have been virtually identical to the trends for families.

Should the shrinkage in family size alter our interpretation of slow income growth? No. As noted earlier, incomes have become decoupled from economic growth because a steadily rising share of economic growth has gone to families or households at the top of the ladder. But family size has decreased among the rich, too; they don't need the extra income more than those in the middle and below do.

4.
More people are in college or retired
. The income data in
figure 2.5
are for families with a “head” aged 15 or older. However, the share of young Americans attending college has increased since the 1970s, and the share of Americans who are elderly and hence retired has risen. Because of these developments, the share of families with an employed adult head may be falling. Does this account for the slow growth of family income relative to the economy? No, it does not. The trend in income among families with a head aged 25 to 54, in the prime of the work career, is very similar to that for all families.
⁵⁹

5.
There are more immigrants
. Immigration into the United States began to increase in the late 1960s. The foreign-born share of the American population, including both legal and illegal immigrants, rose from 5 percent in 1970 to 13 percent in 2007.
⁶⁰
Many immigrants arrive with limited labor market skills and little or no English, so their incomes tend to be low. For many such immigrants, a low income in the United States is a substantial improvement over what their income would be in their home country. So if this accounts for the divorce between economic growth and median income growth over the past generation, it should allay concern.

Immigration is indeed part of the story. But it is a relatively small part. The rise in lower-half family income for non-Hispanic whites, which excludes most immigrants, has been only slightly greater than the rise in lower-half income for all families shown in
figure 2.5
.
⁶¹

6.
Consumption has continued to rise rapidly
. Some consider spending a better indicator of standard of living than income. Even though the incomes of middle- and low-income Americans have grown slowly, they may have increased their consumption more rapidly by drawing on assets (equity in a home, savings) and/or debt.

But that is not the case. According to the best available data, from the Consumer Expenditures Survey (CES), median family expenditures rose at the same pace as median family income in the 1980s, 1990s, and 2000s.
⁶²

7.
Wealth has increased sharply
. Maybe the slow growth of income has been offset by a rapid growth of wealth (assets minus debts). Perhaps many middle- and low-income Americans benefited from the housing boom in the 1990s and 2000s. In this story, their income and consumption growth may have lagged well behind growth of the economy, but they got much richer due to appreciation of their assets.

This is true, but only up to 2007. We have data on wealth from the Survey of Consumer Finances (SCF), administered by the Federal Reserve every three years.
Figure 2.8
shows the trend in median family wealth along with the trend in median family income (the same as in
figure 2.5
). The wealth data are first available in 1989. What we see is a sharp upward spike in median wealth in the 1990s and much of the 2000s. The home is the chief asset of most middle-class Americans, and home values jumped during this period. But then the housing bubble burst, and between 2007 and 2010 median family wealth fell precipitously, erasing all the gains of the preceding two decades.
⁶³
And for those who lost their home, in foreclosure, things are worse than what's conveyed by these data.

In fact, even before the bubble burst, not everyone benefited. Of the one-third of Americans who don't own a home, many are on the lower half of the income ladder. For them, the rise in home values in the 1990s and 2000s did nothing to compensate for the slow growth of income since the 1970s.

8.
There have been significant improvements in quality of life
. The final variant of the notion that income data understate the degree of advance in living standards focuses on improvements in the quality of goods, services, and social norms. It suggests that adjusting the income data for inflation doesn't do justice to the enhancements in quality of life that have occurred in the past generation.

Fewer jobs require hard physical labor, and workplace accidents and deaths have decreased. Life expectancy rose from 74 years in 1979 to 78 years in 2007. Cancer survival is up. Infant mortality is down. An array of new pharmaceuticals now help relieve various conditions and ailments. Computed tomography (CT) scans and other diagnostic tools have enhanced physicians' ability to detect serious health problems. Organ transplants, hip and knee replacements, and lasik eye surgery are now commonplace. Violent crime has dropped to pre-1970s levels. Air quality and water quality are much improved.

FIGURE
2.8 Median family income and median family wealth

The wealth measure is “net worth,” calculated as assets minus liabilities. The wealth data are available beginning in 1989. The income data are the same as those shown in
figure 2.5
. Both series are in 2010 dollars; inflation adjustment is via the CPI-U-RS.
Data sources
: Jesse Bricker et al., “Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances,”
Federal Reserve Bulletin
, June 2012; Federal Reserve,
2007 SCF Chartbook
; Census Bureau, “Historical Income Tables,” table F-5.

We live in bigger houses; the median size of new homes rose from 1,600 square feet in 1979 to 2,300 in 2007. Cars are safer and get better gas mileage. Food and clothing are cheaper. We have access to an assortment of conveniences that didn't exist or weren't widely available a generation ago: personal computers, printers, scanners, microwave ovens, TV remote controls, TIVO, camcorders, digital cameras, five-blade razors, home pregnancy tests, home security systems, handheld calculators. Product variety has increased for almost all goods and services, from cars to restaurant food to toothpaste to television programs.

We have much greater access to information via the Internet, Google, cable TV, travel guides, Google Maps and GPS, smartphones, and tablets. We have a host of new communication tools: cell phones, call waiting, voicemail, e-mail, social networking websites, Skype. Personal entertainment sources and devices have proliferated: cable TV, high-definition televisions, home entertainment systems, the Internet, MP3 players, CD players, DVD players, Netflix, satellite radio, video games.

Last, but not least, discrimination on the basis of sex, race, and more recently, sexual orientation have diminished. For women, racial and ethnic minorities, and lesbian and gay Americans, this may be the most valuable improvement of all.

There is no disputing these gains in quality of life. But did they occur because income growth for middle- and low-income Americans lagged well behind growth of the economy? In other words, did we need to sacrifice income growth to get these improved products and services?

Some say yes, arguing that returns to success soared in such fields as high tech, finance, entertainment, and athletics, as well as for CEOs. These markets became “winner take all,” and the rewards reaped by the winners mushroomed. For those with a shot at being the best in their field, this increased the financial incentive to work harder or longer or to be more creative. This rise in financial incentives produced a corresponding rise in excellence—new products and services and enhanced quality.

Is this correct? Consider the case of Apple and Steve Jobs. Apple's Macintosh, iPod, iTunes, MacBook Air, iPhone, and iPad were so different from and superior to anything that preceded them that their addition to living standards isn't likely to be adequately measured. Did slow middle-class income growth make this possible? Would Jobs and his teams of engineers, designers, and others at Apple have worked as hard as they did to create these new products and bring them to market in the absence of massive winner-take-all financial incentives?

It's difficult to know. But Walter Isaacson's comprehensive biography of Steve Jobs suggests that he was driven by a passion for the products, for winning the competitive battle, and for status among peers.
⁶⁴
Excellence and victory were their own reward, not a means to the end of financial riches. In this respect, Jobs mirrors scores of inventors and entrepreneurs over the ages. So, while the rise of winner-take-all compensation occurred simultaneously with surges in innovation and productivity in certain fields, it may not have caused those surges.

For a more systematic assessment, we can look at the preceding period—the 1940s, 1950s, 1960s, and early 1970s.
⁶⁵
In these years, lower-half incomes grew at roughly the same pace as the economy and as incomes at the top. Did this squash the incentive for innovation and hard work and thereby come at the expense of broader quality-of-life improvements?

During this period, the share of Americans working in physically taxing jobs fell steadily as employment in agriculture and manufacturing declined. Life expectancy rose from 65 years in 1945 to 71 years in 1973. Antibiotic use began in the 1940s, and open-heart bypass surgery was introduced in the 1960s.

In 1940, only 44 percent of Americans owned a home; by 1970 the number had jumped to 64 percent. Home features and amenities changed dramatically, as the following list makes clear. Running water: 70 percent in 1940, 98 percent in 1970. Indoor flush toilet: 60 percent in 1940, 95 percent in 1970. Electric lighting: 79 percent in 1940, 99 percent in 1970. Central heating: 40 percent in 1940, 78 percent in 1970. Air conditioning: very few (we don't have precise data) in 1940, more than half of homes in 1970. Refrigerator: 47 percent in 1940, 99 percent in 1970. Washing machine: less than half of homes in 1940, 92 percent in 1970. Vacuum cleaner: 40 percent in 1940, 92 percent in 1970.