Income

Middle Class Incomes and the Economic Productivity Conundrum

Median household incomes would have been double: Roughly $100,000 rather than $50,000

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Middle Class
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Washington Post economics columnist Robert Samuelson has a fascinating op-ed in today's paper. Samuelson cites a thought experiment found in the latest annual report of the president's Council of Economic Advisers. The CEA considers what would have happened to middle class incomes had the growth in economic productivity remained at the high rates experienced in the 1950s and 1960s, inequality had stayed at lower levels, and labor force participation had remained steady.  Broadly speaking economic productivity is the rate at which goods or services are produced, especially the output per unit of labor.

Samuelson asks:

What happens then to middle-class incomes?

Answer: They double. The income of the median household goes from roughly $50,000 to $100,000 after inflation. The biggest increase, about $30,000, would stem from faster productivity growth. Less economic inequality would account for $9,000 and higher labor-force participation — more workers — for $3,000. (Yes, that's only $42,000; the rest reflects the favorable interaction of the three trends.)

Just why this didn't happen is a central economic story of our time. The CEA doesn't offer a comprehensive theory. It merely divides the postwar era into three subperiods based on the economy's changed performance. For example, the years from 1948 to 1973 are labeled "The Age of Shared Growth," because the economy grew rapidly and gains were widely distributed.

Samuelson does not solve the mystery of why productivity growth slowed. But is it just a coincidence that it began to fall off just as the Great Society programs began to take hold; the accumulation of U.S. government debt increased; and regulations started to multiply rapidly?

The whole Samuelson column is worth reading.

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  1. We need equality and social justice. That means everyone being equally poor. Except for the political elite class that is. Someone has to ensure the equality and that’s only possible for the more equal.

    1. +1 Dacha

      1. No no no, no plus anything.

        = 1 dacha, please.

  2. Yeah, as an employer, this is a real fucking mystery. We’d be more productive, but the GOVERNMENT WON’T LET US, in a thousand ways.

    Therefore, we can’t pay our people for the productivity they aren’t producing.

    But it’s the evul Kochporashunz fault…

    1. Without government regulators you, as an employer, would be more productive but you’d do it like a reckless buccaneer instead being prudent. Besides, there are no innovations without government funded research. So we need government to prevent us from unnecessary innovation that can’t happen without government. Doublethink is an amazing thing.

      1. Our R&D organization and facilities are fucking AMAZING. It’s like Science Klass!! to go through and see what they’re working on periodically.

        But, yeah, most people seem to think research only comes from government.

        When I was in Cleveland, we did some work with the Glenn Space center. Holy FUCK – that was some trippy shit they were working on! Just really cool – totally different industry than us – but so many areas of potential crossover in the tech. That’s what we were working. Really cool.

        Anyhoo…

        1. Did you or the Glenn Space center receive a single dollar in tax breaks or research grants? Because if so, then government gets all the credit.

          1. I..I..I DON’T KNOW!! I DON’T KNOOOOOOOW!!!!!

            *runs away*

          2. Government probably taxed them less. Not taking is giving.

          3. Did anyone working there attend public school? = you didn’t build that

        2. You didn’t build that R&D organization.

  3. “But is it just a coincidence that it began to fall off just as the Great Society programs began to take hold; the accumulation of U.S. government debt increased; and regulations started to multiply rapidly?”

    Partially yes.

    While I agree the Great Society programs are a fairly big part of the problems we have today they didn’t begin having large impacts on the Macro economy until the 80’s.

    The reason why productivity growth began to tail off starting in the 70’s was the rest of the world finally finished rebuilding after WW2 and China began to industrialize

    1. The answer to “which” with these sorts of questions is often “yes.”

      1. ^^ exactly this

  4. What happens then to middle-class incomes?

    Answer: They double. The income of the median household goes from roughly $50,000 to $100,000 after inflation.

    Aaaaaand you’ll have to read the full report to find out if that takes into account changes in household composition. Ugh.

    1. You just assume culture is constant from 1950 to now. Duh.

      1. ceteris paribus, yo!

  5. Consider, too, that America was the only heavily industrialized nation not physically wracked by WWII. The lack of competition came to an end by mid-1970s and U.S. management, unions and government failed to come to grips with a changing economic world.

    1. Pretty much. I’ll bet if we bomb Europe, China and Japan flat again we can experience 1950s style growth.

      1. At least Paul Krugman would be intrigued by this economic prescription.

      2. Ah yes, the Shit-ton of Broken Windows Economic Expansion Plan. Krugman would approve.

        1. you broke my comment window.

          1. +1 Brick of Alien Invasion.

            1. Bricks don’t even exist on their dimensional plane Charles. Seriously, you should take more acid.

              1. +1 windowpane

    2. Don’t be ridiculous. It’s because of all the infrastructure development and shovel ready jobs we had under Eisenhower.

      1. and don’t forget the high taxes on the rich Scrooge McDucks.

    3. Strange that the people who say things like that are the same people who tell use protectionism is evil because foreign competition always benefits the nation because economics.

      1. If you actually understood what was being said, you would realize that it was the United States’ unique position as sole industrial producer and exporter to the world that enabled it such relative prosperity for those decades. Once the rest of the world caught up, no amount of “protectionism” was going to bring all of that relative prosperity back, nor could it even preserve it, because it depended in the first place upon having the rest of the world be a captive market.

        It is amazing how people like you think decreasing access to goods and services will somehow generate prosperity. Where exactly is all of this money supposed to come from?

        1. I was assuming a pro-protectionism position and that is what I responded to. On further reading, it’s not exactly clear what position The New Rise is taking w/r/t protectionism.

        2. Exports are worth less than nothing if they can’t earn money which can be used to buy imports. A captive market isn’t worth much if the market is poor. You can easily confirm or deny this by looking at the volume of imports over that period and the following periods.

          1. Exports are worth less than nothing if they can’t earn money which can be used to buy imports.

            When you export something, you get money in return. That money can be used at home as well as abroad.

            A captive market isn’t worth much if the market is poor.

            This much is true, but poor places don’t (have to) stay poor forever. Capital imports can provide the means for wealth creation.

            Truly destitute places of course can’t afford to import anything, but after the end of WW2 most of Western Europe was just momentarily poor, not completely destitute.

        3. sole industrial producer and exporter to the world t

          Perhaps, but not due to prior bombing. Rather, it was due to half the planet thinking central planning would solve everything instead of making their war-wrecked economies worse.

          1. You’ll get no disagreement from me. Also, “sole” is an exaggeration but I figured most people are smart enough to understand that and it doesn’t affect the point.

    4. Consider, too, that America was the only heavily industrialized nation not physically wracked by WWII.

      I am here to stop this adolescent thinking.

      Bombed-out factories are NOT that big of a deal. Factories can be rebuilt in a couple of years. With the demand of the “bombed-out” countries, there’s no good reason why most of Europe and Asia couldn’t have had their manufacturing up and running at pre-war speed by 1955.

      Except one: COMMUNISM and the idiocy of central planning.

      Yes, the scourge of the productive is idiotic socialistic programs. You have half of Europe and most of Asia not being productive ON PURPOSE. The remaining countries, especially the US, benefited from such stupidity. Until they became just as stupid.

  6. What’s more fascinating? The fact that there maybe politicians that actually believe this populist bullshit? or that people don’t seem to understand that the majority of politicians “nuanced” positions at their base level are nothing more than “free ice cream for everyone and three hour long recesses”.

    1. But the people want free ice cream and recess!

      1. so is there peanut butter in this recess ice cream?

  7. Did they consider the cost side of the equation? I mean, how much did a TV cost in 1955 relative to a modern flat panel? How long did cars last before becoming unreliable, rusted out hulks vs. a so-called “econonmy car” of today? Maybe you don’t need to make $100k if you can enjoy middle class amenities for $50k.

    1. I make $75K, but housing in my area is such that I can’t afford any house I’d want to live in. (My critera are: “structurally sound, good plumbing, low street crime, sane commute”) My threshold for ‘middle class’ includes home ownership.

      1. You should probably get married. I wouldn’t realistically be able to afford a house outside of the ghetto within 45 mins of my office without my wife’s income.

        Serious question: just how much is the going rate for a decent place in metro-Albany?

        1. The “bottom of the line, size of my apartment, no lawn, no parking, some termite damage” was 100K.

          Getting married has a prerequisite of finding a person to fill the role of spouse. I have thusfar not been successful at that.

          1. I have thusfar not been successful at that

            Choose wisely. Much will depend on it.

          2. You could trying buying one from Russia. There are many really attractive Slavic women out there.

          3. I would think you can swing a nice enough place for $150k, and the terms on that on a fixed-rate even with PMI on a minimum-down loan (5% IIRC) should leave you plenty of disposable income, assuming you have a smaller debt load and are comfortable trading away your liquidity.

            Hell, we basically have the same salary (and my wife 25% less) and my house was more than double that with NJ-sized property tax to boot and we don’t struggle.

        1. I’m trying, but unless my revenue from writing picks up, I’ve got the stain of seven years of government service on my resume. That’s worse than prison in the areas I’d want to head for.

          1. I hear you can borrow a lot of money get an advanced degree, and that’s like starting with a clean slate.

            1. I’ve almost paid off my student loans, I don’t want to go back to that cesspit of stupidity.

              1. But I heard Obama was going to make all those old loans go away.

                1. But I heard Obama was going to make all those old loans go away.

                  Being cynical and self-serving, I always look at the details of those proposals whenever they roll around. It’s never a blanket forgiveness or paydown, it’s always for the chosen few who work in ‘progressive’ but low paying fields who probably have degrees that have nothing to do with their job duties. Never once has there been one where I’d have benefitted.

                  1. Never once has there been one where I’d have benefitted.

                    Story of my life (under democratic administrations).

      2. My wife and my income was just shy of $160,000 last year.

        When I add up my basic monthly expenses they exceed our combined take home pay.

        We have low credit card debt (less than $4000 total outstanding balance), 1 car payment, her student loans (which were a total waste as she never graduated and then spent 10 years as a SAHM). We also have no expensive vices or hobbies do not take vacations or really have any other slack in our budget that can be cut outside of $80 a month for Cable and about $100 a month for smartphone data plans.

        The one real expense is having 4 kids.

    2. The pros and cons of being one of the untouchables:

      “Chief Interrogation Officer”

      Pros
      -Interrogation techniques are utilised on a daily basis
      -Good pay considering I get to do something which I love
      -Progression opportunities within the organisation

      Cons
      -long hours travelling to far away countries
      -travel to far away countries which are very hot
      -No work/life balance, job is your life

      “Analyst”

      Pros
      I know everything, I get to travel the world, keep a weapon and spy. It’s amazing . So many beautiful places on this earth and I’ve seen almost all of them

      Cons
      I know everything, there’s no turning back. I’m stuck doing this for the rest of my life. It’s over.

      1. goddammit. meant as OT. Not a reply.

        1. Maybe. How much do they make?

    3. Don Boudreaux makes that exact argument all the time.

    4. Depends on which state you live in. A couple making 100k in MD are poor.

  8. We have always been at war with . . . . . .

  9. “Samuelson does not solve the mystery of why productivity growth slowed. But is it just a coincidence that it began to fall off just as the Great Society programs began to take hold; the accumulation of U.S. government debt increased; and regulations started to multiply rapidly?”

    Ron, I thought FDR was the Great Satan, not LBJ. Is it possible that productivity growth in the fifties and sixties was “unnatural,” a bounce-back from all the drag on economic development created by the Great Depression and WWII? I would note that from 1950 to 1970, the French economy grew faster than ours did, despite, among other things, virtually every worker in the country being a member of a single giant union run by, you guessed it, communists. Not to be a total bitch, but I suspect that there are more factors related to economic growth than are dreamt of in your philosophy.

    1. “I would note that from 1950 to 1970, the French economy grew faster than ours did, despite, among other things, virtually every worker in the country being a member of a single giant union run by, you guessed it, communists.”

      lol.

      1. Why, it’s almost like there was some sort of catastrophe in France in the 1940s and then a wave of foreign investment to rebuild the country in the ensuing decades.

        Nah, couldn’t be.

    2. I wish you’d stop spelling your name wrong.

    3. “Ron, I thought FDR was the Great Satan, not LBJ. Is it possible that productivity growth in the fifties and sixties was “unnatural,” a bounce-back from all the drag on economic development created by the Great Depression and WWII?”

      That would address the size of demand, not the quantity produced per worker. If the rest of the world were buying our goods because the rest of the world’s industrial capacity had been destroyed, why would that make our output per worker increase?

      “I would note that from 1950 to 1970, the French economy grew faster than ours did, despite, among other things, virtually every worker in the country being a member of a single giant union run by, you guessed it, communists.”

      Again, let’s try to compare apples to apples.

      We’re not talking about the growth rate of the economy itself–we’re talking about the growth rate of productivity specifically.

      The economy could grow even as productivity starts decreasing., but productivity increases result in a rise in the standard of living.

      When people can buy the same things for less, they can afford to buy things they couldn’t afford to buy before.

      1. I would note that from 1950 to 1970, the French economy grew faster than ours did, despite, among other things, virtually every worker in the country being a member of a single giant union run by, you guessed it, communists.

        Guessing it may have grown at a stronger rate because it was growing from a very low base – a base that had been drastically reduced by war – whereas the US economy was not similarly reduced.

        1. You’re right, but he’s mixing his terms anyway.

          This wasn’t about why the economy grows.

          It’s about productivity growth–which is everything.

          When Germany had the highest paid workers in the world, they also had the world’s highest productivity rate.

          That their national defense was largely bought and paid for by the U.S. taxpayer probably wasn’t completely unrelated.

          Like I said, the fact that we started paying for things that don’t add much, if anything, to growth and siphon it away from consumers and entrepreneurs into unproductive government programs–couldn’t have had no effect at all.

          Ron’s right, too. When the government is procuring planes, helicopters, and bombs, it’s probably not especially contributing to productivity growth, and when the government is procuring what would be consumer discretionary spending and spending it on Medicaid and other Great Society programs, you’re not going to get any productivity growth out of that, either.

          Quite the opposite.

          1. Got it, and thanks.

    4. Re: Anal Vane-man,

      Ron, I thought FDR was the Great Satan, not LBJ.

      Here we go…

      I would note that from 1950 to 1970, the French economy grew faster than ours did

      If you mean GDP growth, that includes government outlays. Any idiot government can increase their GDP by spending money opening and closing ditches.

      Not to be a total bitch[…]

      Failure IS an option – at least for you.

      1. Anal Vainman thinks “economy” = “productivity”. People with brains know they are not the same thing.

  10. Speaking of ice cream – it wasn’t free. But the Guernsey Diary peppermint my wife and I picked up this weekend on a lark….

    Guernsey is a local dairy – expensive, but SUPER high quality shit. Peppermint was always my favorite as a kid.

    And the Guernsey peppermint? Oh. Mah. GERD. The peppermint was the best I’ve ever had. Just perfect.

    Nom nom nom. I’m surprised I’ve been able to keep myself at one cone a day so far…

    1. Peppermint Ice Cream? What kind of monster are you, A?

      1. One who like peppermint stick ice cream.

        I highly recommend the Guernsey – it’s utterly different than any other i’ve had. They’re out of Novi.

        IIRC, you’re on the west side of the state in Van Der Wooden Shoe land? Might not make it over that way….so, Hudsonville would be the pro tip.

        1. Ya Ya – I’m da Dutchen siden of da staten

          1. We were just over in GR last weekend. Party with my odl fraternity brothers and their wives and kids. A bunch of 50-ish fucks getting stupid drunk – goddamn it was fun!

            Grand Haven last summer – sooooo beautiful!

    2. There was a Guernsey dairy farm near me when I was growing up. Awesome ice cream.

    3. Do they not have Blue Bell where you live?

    4. Guernsey Fudgy Way or GTFO.

  11. I think we’re partially looking at the effect of central planning on the productivity rate falling.

    The government is notoriously bad at making a profit. This is not to say that every single thing they do is useless, but as government agencies’ staff and resources became larger and larger, it meant that the money that would have been going into more useful enterprises (even if the money were directed to those enterprises by consumers) was going to government activity instead–that just doesn’t lend itself to productivity growth.

    What’s the productivity multiplier of spending a consumer discretionary dollar on paying interest on the national debt?

    1. As I’ve tried to point out from years, the fact that half the planet was central planning was the US’s biggest productivity booster, since the US really didn’t go whole-hog into central planning until Nixon lost what was left of his mind.

  12. Less economic inequality would account for $9,000 and higher labor-force participation ? more workers ? for $3,000

    I don’t understand where he gets the idea that there was less income inequality during the period of 1950-1970. What makes him say that? Inequality is a function of a Pareto distribution in a free market. 1% of the population will always own about 50-51% of the wealth as long as people are free to transact.

    As always, little red Marxians (or like they want to call themselves today: Keynesians) tend to conflate TAX RATES with income distribution. There is no compelling reason to believe that people back in the 1950’s, 60’s and 70’s weren’t as creative in taking advantage of tax loopholes and shelters than people of today.

    1. Also ignored is the fact that those higher tax rates from 1950-1970 also came with low capital gains taxes and a shit-ton more household deductions that are no longer allowed.

      Comparing tax tables from different years is what naiive children – as indeed all Keynesians are – would do.

    2. Many famous tax cases come out of that period, dealing with…you guessed it, people utilizing tax “loopholes.”

  13. Zero sees the decline in middle class income growth highly correlated with the end of the gold standard.

    http://www.zerohedge.com/news/…..d-standard

    1. Not to dispute the notion, but the end of the gold standard coincides with the exponential growth of chiseling – also known as central planning.

  14. Tyler Cowen addresses this question in Average is Over.

    Taxes as a percentage of GDP:

    http://www.project.org/images/…..of-GDP.jpg

  15. World went off the Bretton Woods standard in ’71. Poverty stopped going down that same year, ’73 productivity and wages split, ’76 last time we had a trade surplus, ’78 top .1% of wealth holder went from holding 8% of nation’s wealth to holding 23% of nation’s wealth.

    1. The wealth holder effect took about 30 years starting in ’78. I didn’t mean to imply it was overnight.

    2. Those are interesting stats. You seem to have them readily at hand (unless you have them memorized). Care to share a link?

      I don’t understand why who holds the wealth is a problem for productivity growth.

      Again, we’re not talking bout sharing slices of a static pie; we’re about increasing productivity by each worker.

      As productivity increases, so does the standard of living. Productivity per capita doesn’t change because more people get rich. GDP per capita doesn’t change because more people get rich, either.

      1. I don’t have the links. I’ll see if I can find them again.

        As to the wages and productivity graph I don’t know if they include benefits.

        I know the last statistic about the wealth gap is not really seen as a problem around here and it may not be. But it does seem to get the proggies to think. The only way the wealth gap could be a problem is if it forces the savings rate up without there being much in the way of good investments. But overall savings in the US isn’t high so I’m streaching here.

  16. I believe the threshold for being part of the middle-class is at least $100k family income in the Northeast. Whether it is one wage-earner or two, there is no way you can raise kids on much less around here with any kind of decent lifestyle.

    So…the middle class has been steadily shrinking for some time.

    1. I think people’s perceptions of what is middle class can be dramatically influenced by what they see, for instance, on television.

      You can be middle class and live in a shitty closet in New York City, but if you watch reruns of that show–King of Queens?

      Fat, lazy guys who work for UPS live in multi-million dollar homes. When I’ve had friends and family living in NYC in the past, they tell me that after a while, they forget that not every middle class person…lives like that.

      Did you ever see that old episode of the bachelorette, when she goes to see where the three contestants live? One of them she goes to see is this guy in a pretty nice apartment by NYC standards.

      One look, and dude’s eliminated. She’s like, “I have no idea why he chooses to live in such a dump”. It wasn’t a “dump”, per se. That’s just the way middle class people live in New York City. The delis and Chinese food are supposed to make up for it, though.

      1. When I say “Northeast” I mean normal cites and towns, not NYC or Boston. I’m too cheap to park my car and look around those places, much less consider renting a shithole for more than my mortgage just for the shitty location.

  17. It is amazing what you can “prove” by cherry-picking endpoints.

    Just look at this chart for Disco record sales in 1976, 1977, and 1978. If these trends continue …..

    And look at the economic, population, and territorial growth of Germany for 1936-1939. If these trends continue for the next 1,000 years … whoa!

    OMG, have you seen the growth rate of investment, employment, and total revenue for the railroad industry for 1832-1869? It’s a decades-long trent – this is no fluke! Railroads will constitute over 100% of the world’s GDP by the beginning of the 20th century!

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