Great post David.

I would argue that although housing, transportation, and health costs are "basic", they can also be a luxory expenditure. We're buying bigger houses, more elaborate cars, and demanding more high-tech, state-of-the-art health procedures.

As I wrote here, "Health costs makes up 14% of our gross domestic product (GDP), a larger percentage than any other country, and it continues to grow at a significant rate. Yet spending and GDP ratios don't really suggest there is a problem or crisis because we don't know the 'correct' amount to spend on health care. It's important to remember that, based on purchasing power, the US has the highest standard of living in the world. (Our GDP per capita is 55% higher than Western Europe, 35% higher than Australia, 28% more than Japan, and 11% higher than Canada.)" Is it any wonder that we spend a bigger share on medical needs as we grow more prosperous? I have every incentive to spend an extra dollar on health care than I would on new clothes.

Anyway, this is a very thought provoking post.

Warren is a lawyer, not an economist; lawyers writing about economics are not always wrong, but they usually are. Moreover, her language is vague ("the modern single-earner family trying to keep up an average lifestyle"), and her hysterics about childcare omit the fact that more people are putting off child-rearing until much later in life. Neither does she fully account for changes in consumption baskets that can have remarkable effects: http://www.pkarchive.org/theory/viagra.html.

Of course, if you care about this, there are three big things to be done:

1) Raise taxes on those with higher incomes to pre-2001 levels (or maybe a bit higher, if the cap gains tax goes to zero).
2) Fund universal healthcare and creches.
3) Repeal the new bankruptcy act and make consumer lending quasi-transparent.

PM,

What makes you think that the US can make universal healthcare work in the long run when no other country has been able to do so?

Besides, somebody has to pay for the healthcare (and creches). You think a modest tax hike would be enough to fund such a massive infrastructure? Especially when taking into consideration the increased demand for such services once they are available without up-front costs. The person who gets "free" government goodies pays for them through indirect costs. Thus the attempt to decrease the cost of living has the opposite effect.

I believe the image at the top of this post best illustrates the delusion of the welfare state.

How exactly does consumer lending reform lower the cost of living?

Great, though-provoking post.

I agree with Josh:

We're buying bigger houses, more elaborate cars, and demanding more high-tech, state-of-the-art health procedures.

I have previously written about this nexus of two-income households, big houses, fancy cars, and paying someone else to raise your kids.

Also, the fact that we're spending less on clothing and less on major appliances does not necessarily indicate we're *getting* less of those things. The fact that so much of our clothing is now made in developing countries and many appliances are also made in places with lower wages would seem to indicate that those things have simply gotten cheaper. And it's quite obvious from the increase in obesity that we're not eating less, even though we're spending less on food (and that despite the fact that we are eating fewer home-cooked meals).

One final thought. Could it be that the stagnation of male wages is a result of women entering the workforce, and (probably to a lesser extent) the greater equality in wages? Basic economics would predict that with more workers seeking jobs, wages will decrease. And if a company is no longer paying a man 20% more than a woman to do similar work, it seems likely that, ceteris paribus, the man's salary will decrease by 10% as the woman's salary increases by 10%.

What makes you think the U.S. system works?

"Universal healthcare" could mean a lot of things--single-payer, nationalized, etc. It wouldn't necessarily displace a private system. And the fact that every other industrialized country in the world manages to get better healthcare results for less money is testament to the futility of the current American attempt to wrongly apply what are misleadingly described as market principles.

Bankruptcy reform has little to do with the cost of living, but it--like creches and healthcare--has everything to do with providing greater security for the working and middle class.

the fact that we're spending less on clothing and less on major appliances does not necessarily indicate we're *getting* less of those things. The fact that so much of our clothing is now made in developing countries and many appliances are also made in places with lower wages would seem to indicate that those things have simply gotten cheaper

Eric, Atwood (who's a prof at Indiana, BTW) makes that same point in his commentary when he says: "It's worth interjecting here that the savings in food and clothing are something which we can attribute to the Wal-Marts and Sam's Clubs of the world. Greater efficiency in the retail market has made a real difference to peoples' incomes." It's a fair point.

We still have to deal with the increased middle class tax burden and rising housing costs. Atwood says that "the desire for bigger houses is the main driving force behind the dual-income family," a point echoed here by with Josh and Eric.

It also bears suggesting that the decline in food and clothing costs we can attribute to the Wal-Marts and Sam's Clubs of the world might be partially responsibility for the decline and stagnation in median incomes.

Could it be that the stagnation of male wages is a result of women entering the workforce...

Before someone accuses me of sexism, let me say that I believe that equality for women in the workplace is definitely a good thing. I'm generally opposed to both parents working full-time when there are young children in the household, but I understand it is sometimes necessary.

Great post, and great questions/issues raised by everyone. It's an interesting dilemma.

When you figure that costs and profit margins affect the retail/market prices for goods and services, and that the cost of living increases as a result, logic seems to indicate that additional workers bringing income into a household should mean a higher overall household income and providing additional money to put into retirement accounts, etc.

But the value of services performed by the individual(s) who previously performed the basic tasks of running the household then must be replaced by others - sometimes (or often) at a significant additional cost.

At one point, I toyed with the idea of a "modest proposal" of my own on this: remove all women from the work force. That would free many, many jobs for men to work at, thereby eliminating unemployment and probably underemployment as well. It would provide greater available capital for salaries and benefits because fewer workers would be paid. And, it would allow married women to stay home and take care of their husbands, households and children, instead of delegating that responsibility to others, in addition to restoring the value and honor previously afforded to wives and mothers.

Of course, the implications for single women (whether their marital status exists because of divorce, widowhood or just never marrying) would be affected, but returning to earlier gender roles might result in men who take on a more protective role with respect to women in their lives, and might result in women looking to men for protections previously afforded by marriage - making both sexes more amenable to the institution of marriage, instead of living in as much disregard of it as seems to exist now.

NOTE: THIS WAS NOT A REAL IDEA - IT WAS DELIBERATELY TAKING THE PROPOSAL TO THE ILLOGICAL CONCLUSION! :)

What makes you think that the US can make universal healthcare work in the long run when no other country has been able to do so?

HAHAHAHAHHAHHAHAH... oh wait. He wasn't joking.

But seriously, it is not just increases in the efficientcy of the retail sector that make the dollar go farther, or the fact that there are now "basics" now include ridiculously large houses and medical procedures unthinkable thirty years ago that make now the better time to live. We can now get ridiculously fast computers, cell phones, better cars, better appliances, etc., due to engineering advances over the past thirty years.

That said, rising inequality in America is not cause for more tax cuts on the wealthiest 1%. It's time that conservatives start sending this memo up the GOP chain of command. For better ideas, I think this is a sensible place to start... http://www.weeklystandard.com/Content/Public/Articles/000/000/006/312korit.asp

Question: If "the average family of four today spends 33 percent less on clothing than a similar family did in the early 1970s, 23 percent less on food (at-home and restaurant eating combined), and 51 percent less on major appliances than their predecessors" relative to inflation, isn't possible that the inflation adjustment is wrong? And therefore the whole argument is off?

Does anyone here have 51% less appliances than their parents?

*raises hand*

But of course, I'm a bachelor, so that's to be expected. :-)

Peter: http://www.intheagora.com/archives/2005/11/biggovernment_c.html

"She also supports traditionally generous pension and healthcare benefits programs, like the kind that once defined the steel, airline, and automobile industry. These measures would take some of the "risk" out of middle class life"

As one of those airline employees whose "generous pension and healthcare benefits programs" have vanished into the chapter 11 mist, I have to question Prof Warren's connection with reality (yes, I'll get some PBGC pennies on the dollar). The idea that there's no, or even reduced risk in accepting a corporate entity's promise in the distant future rather than cold cash now is just idiotic.

I came to ITA just after reading an article about the Harvard student who got a huge advance for a book she plagarized. My company was run into the ground by a Harvard grad. Now this. If you want an example of a precipitous decline in quality and value...

This is from an article in the Consumer Bankruptcy News, March 16, 2006, edition:

About one in 11 American families needs more than 40 percent of its monthly gross income to make the minimum payments required on its debts. According to the Federal Reserve's triennial survey of consumer finances, 76.4 percent of American families are in debt. Of those families carrying debt, one in eight families must commit more than 40 percent of their monthly gross income to making minimum debt payments. The survey also found that about one in 11 families with some debt had at least one payment more than 60 days past due.

****

Every American should be able to achieve middle class economic security, a hall mark of national and household stability in this country. But the Federal Reserves's findings spotlight trends that are causing economic fragility in today's middle class and are closing the door on low-income Americans that are trying to reach it.

****

The average American family's income fell by 2.3 percent from 2001 to 2004, the survey said. The average American family had an annual income of $70,700 before taxes in 2004 and an annual income of $72,400 (adjusted for inflation) in 2001. The median family income increased slightly to $43,000 in 2004 from $42,500 in 2001. [End quotes].

While on one hand, the survey numbers look dismal, there were a coupld of bright spots for homeowners - "[t]o the extent that families took on more debt by investing in their homes, they were able to increase their net worth by an average of 6.3 percent from 2001 to 2004. However, those families who do not own their homes saw their net worth drop during this time period by an average of 7.5 percent."

The financial picture was attributed to "stagnant wages mixed with skyrocketing health care, education and housing costs, plus greater job instability...and they're borrowing on high-cost credit just to make ends meet."

The answers aren't easy, but they are simple: the call has to go out to the average American to reduce debt. As long as we spend more money than we make or save, we're going to be in trouble.

OK, LC1--the average American's wage went down in a time of tax cuts for the rich, rising corporate profits, and increased global competition, even as health care and education costs soared. And your solution is ... be thriftier.

Really? That's it? There's no political action to be had here at all?

The last how many years of political action in this arena have accomplished what, exactly?

If the "tax cuts for the rich" line refers to the 80s, recall that the first major tax cut was the Kemp-Roth bill that cut taxes 25% across-the-board - not just for the rich.

When did real incomes decline? Please supply documentation.

Many citizens do spend too much money. But political solutions are necessary, too. Simpler, less costly tax code. Streamlined bureaucracies. Get the Feds out of education; it adds nothing to its quality. (I'd like to see schools completely privatized, but that ain't happening in my lifetime.) End corporate welfare via the Overseas Private Investment Corporation, the Export-Import Bank (Enron got some taxpayer-backed loans from both), and farm subsidies. End the death tax so that small businesses and the jobs they create can survive the passing of their founders.

One idea: get rid of a bureaucracy if an already-existing private-sector entity can do its function. OSHA is a prime example. Insurers of businesses lose to competition if they overestimate safety threats, and lose to accident insurance claims if they underestimate safety threats. OSHA has no incentive to properly assess workplace safety, since it cannot suffer from a bad decision.

Oh heck, just visit Citizens Against Government Waste for ideas.

Great post! And a huge, daunting subject.

How are things so different economically in 2006 than 1966, when the overwhelming majority of middle class households (lower middle , too) needed only one wage earner?

I wonder how much our economy has grown since 1966 (as in actual dollars floating around) and what is the ratio of workers to dollars today as compared to then.

I would imagine that either the workforce has grown disproportionally, or the income has been redistributed upwards, or maybe some combo of both.

The income has been redistributed upwards (see the Census bureau's GINI coefficient history). This coupled with the fact that the economy has not expanded in pace with population growth since the 1970s (median individual wages have fallen since then).

We reached the peak of our affluence around the end of the Johnson administration and it's been in relentless, albeit slow, decline since. It's nice to see that, perhaps, the issue is finally getting some traction three decades later.

greg

Alan,

Um, the "tax cuts for the rich" would refer to the tax cuts enacted within recent memory, not twenty-five years ago (which is not even living memory for many ITA readers). And the real incomes stagnating point comes from LC1's post immediately above.

Greg's point is flawed somewhat more subtly (it's production growth per capita that's important, as well as its distribution). But what's interesting is that it is obviously not true that all people have been dealt an unfair hand by the post-1975 (or so) economy--the very rich are doing very well.

And can we please not fantasize about the wonderful world of 1966? The systemic injustices of the one-breadwinner model are hardly worth praising.

Greg's point is flawed somewhat more subtly (it's production growth per capita that's important, as well as its distribution).

It's true that the only way economies truly grow is through rises in productivity as rises in productivity create attendant rises in leisure and leisure (as in the freedom from obligation to work) is the only true measure of economic progress.

But Paul belays his own point when he says it's the distribution of leisure that matters. An economy doesn't really grow if it produces large amounts of excess leisure but then makes available that leisure only to a narrow segment of the population. Productivity growth only has meaning to people, in the catholic sense, if they can all receive its benefits.

And the easiest way to measure if productivity growth is translating to equitable gains in leisure is by tracking median personal income (income and leisure being, for all intents and purposes, fungible). When productivity gains translate into upward movement in median individual income, the economy is growing. When they don't, it's not, reallly.

The systemic injustices of the one-breadwinner model are hardly worth praising.

I find much to praise in the single wage-earner model of the traditional family. When both members of the family are pressed into the wage force, out of economic necessity, all kinds of inefficiencies come into play, depressing the real earnings of both members significantly.

On the other hand, an economy that allows a single wage earner per family (I don't care which one) also allows the other parent the ability to take care of domestic duties -- all while avoiding the transaction costs associated with outsourcing them (such as childcare, home maintenance, home economics, etc.)

If an "average" family in 1966 had an income of $50,000 (in today's dollars) with a single wage earner (at 2000 hours/annum) and the "average" family in 2006 has an income of $70,000 with two wage earners each putting in 2000 hours (4000 total), then I'm not really sure we're better off at all.

Especially when today's family needs to pay for daycare, a second car, a maid, takeout meals, etc. -- all with significant costs not present if one spouse can "stay at home."

greg

PM,

My bad. Your "tax cuts for the rich" rhetoric sounded just like it did in the 80s. However, the codephrase for "increased global competition" back then was "increasing trade deficit."

So what's the evidence that Bush's modest tax cuts were cuts predominately for the rich?

You talk about rising corporate profits as if there were something wrong about that.

So what's the evidence that Bush's modest tax cuts were cuts predominately for the rich?

"By 2010, when (and if) the Bush tax reductions are fully in place, an astonishing 52 percent of the total tax cuts will go to the richest one percent—whose average 2010 income will be $1.5 million. Their tax-cut windfall in that year alone will average $85,000 each. Put another way, of the estimated $234 billion in tax cuts scheduled for the year 2010, $121 billion will go just 1.4 million taxpayers."

http://www.ctj.org/html/gwb0602.htm

"'Tis true that governments cannot be supported without great charge, and it is fit everyone who enjoys a share of protection sh
ould pay out of his estate his proportion of the maintenance of it." -- John Locke

"The subjects of every state ought to contribute toward the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state
" -- Adam Smith

greg

Rising corporate profits aren't wrong in themselves--far from it--but if part of that rise is attributable to government policies that have weakened the working and middle classes, then there is something wrong.

Greg, the normal Christian Democrat (that's the typical European right-wing party, natch) policy aimed to not just allow, but to force, all families to participate in the one-breadwinner model. And that breadwinner was usually a man, of course. Although the U.S. never quite got to that point, nevertheless the course of U.S. industrialization and corporatization explicitly favored men. That's something I'm not eager to return to.

Regarding leisure: It's true that this point is somewhat at odds with my point about your post, which is why--as someone committed to intellectual honesty:)--I brought it up. The economy has grown substantially in terms of per capita GDP; it's the distributional effects that should properly concern public discussion (although the first question should be "Is there something nefarious going on here?").

Such discussions, by academic statute, must always bring up one of the Scandinavian countries; I note, therefore, that at PPP, Norwegian GDP per capita growth has outpaced U.S. growth over the past 45 years, and the Norwegian standard has been higher in the past (although apparently not this year) than the American, even by exchange-rate computations. Is thrift really the issue?

Returning to the main question--the one raised in the main page post--we should look at whether the status of the middle class is equally precarious in similarly developed countries, but ones which have greater state involvement in funding health care. I wonder what that would reveal.

Although the U.S. never quite got to that point, nevertheless the course of U.S. industrialization and corporatization explicitly favored men.

I'm not really sure about this as evidenced by the large number of industries that sought out both child and/or female labor vice that of male labor. Examples of the former always include the garment industries while (contemporary, even) examples of the latter included the electrical/electronic industries -- the home of your alma mater was, after all, also the home of the world's largest television factory; a factory staffed almost totally by women.

Industrial society prefers male workers only for those tasks which are too physically demanding for females or children and for those tasks where a patrimony of physical strength (the testosterone factor) ensures male domination -- i.e. managerial and executive positions.

For the rest, children and females are far preferable as they are traditionally far more manageble, require lower wages (which is the same thing as manageable), etc.

The economy has grown substantially in terms of per capita GDP;

GDP is not a measure of economic performance, it's a measure of economic frenetics. Per-capita GDP improves on raw GDP but it's still not a measure of economic performance. You could theoretically have a country with zero GDP but on in which everyone lived very well (every household had a magic machine which simply made, at a touch of a button, anything the household needed).

Conversely, you could have a nation with a sky-high GDP in which nevertheless economic performance was very low (i.e. a nation where everyone did nothing but mow each other's lawns).

I maintain that median leisure/income is the only real performance measure of economic success.

And by that measure, the United States has been regressing for quite some time.

greg

So in a mature industrial economy in which men have the high-paying factory jobs and the managerial/professional jobs, while women at best can hope for low-paid piecework, why is it wrong to say that the system "favors" men?

The ctj.org link isn't working. (Googling...) Don't know a thing about Citizens for Tax Justice. But I do know about the Cato Institute:

The media continues to report, as The New York Times has, that "90% of Americans…will get little or nothing from the dividend tax cut." Wrong. The Tax Foundation's recent examination of IRS tax return data finds just the opposite. Fully 34 million American tax filers reported some dividend income in 2000 and these returns represent 71 million people. That is a whole lot more than 10% of the population who will directly benefit.

The income tax cuts are even more widely distributed. Anyone who pays income taxes and dreads the coming of April 15th will get an income tax cut under the Bush plan. The typical working family with 2 incomes and an income of $60,000—and I suspect very few of these households regard themselves as "rich"—would get a $1,200 a year tax cut from the Bush plan. If the income is $40,000 the family gets a $600 tax cut —and not just for one year, as under the Democratic alternative plan, but forever.

Proportionately, the rich get a smaller share of the Bush tax cut pie, not a bigger slice than the middle class. For example, the Treasury Department reports that for Americans who make more than $100,000 a year, the share of all federal income taxes paid would rise from 72% to 73%. For those who make less than a six-figure income a year, their overall share of the tax load goes down.

CTJ link works fine (hint copy-and-paste it). Surprised you've not heard of CTJ, they've only been around about as long as CATO and they're just as, if not more, authoritative.

No one is arguing that the middle-class didn't get SOMETHING from the Bush tax cuts, what's being argued is:

1. That the cuts went disproportionately, and massively so, to the very wealthy -- not the "average" family.

2. That the amount of tax cuts received by the middle-to-lower income families and individuals was more than offset by the amount of public services cut to those sectors -- i.e. they may have paid $2,000 less in taxes but they got $3,000 less in public services -- something that has to happen when the vast majorithy of the cuts go to the upper quintile.

Taxes are a bill no different from your gas bill, your electric bill, or your cable bill. The only difference between the latter and the former is that the former is compulsory.

That said, you don't really believe that the government just takes taxes and, what?, burns them -- do you? No, they're payment for services rendered and thus an obligation for all of us who enjoy the luxury of civilization and its protections.

greg

We reached the peak of our affluence around the end of the Johnson administration and it's been in relentless, albeit slow, decline since.

Hahahahahahahaha! That's the funniest thing I've read all day. Certainly it's possible to construe a formula for measuring "affluence" whereby the "average American" was more affluent in 1973 than he/she is today. But it simply strains credulity to conclude that the average American was better off in 1973.

In 2004, I was making somewhat more than that median income figure of $41,670, but certainly not enough to count as one of "the rich" to whom all the benefits of economic expansion have supposedly accrued to. But there's no way in heck I'd trade places with a similar person living in 1973.

And regarding the old canard about "tax cuts for the rich," see the little parable on this page:

http://www.taxfoundation.org/news/show/168.html

I did copy and paste the link. Not even the link http://www.ctj.org/ would work. But today both links work fine.

CTJ says it supports making the wealthy pay their fair share. Is this fair?

Is this fair?

Certainly, since demand for government services is a function of one's net worth (those with more to lose, or maintain, need government more than those with less), it simply makes sense, and is fair, to charge the affluent more (as a percentage) in taxes than the less affluent.

"The subjects of every state ought to contribute toward the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state" -- Adam Smith

As for Rush Limbaugh's (an opiate addict currently serving part of of a plea-bargained sentence for illegally obtaining opiates (not that that's germane)) "The Top 50% pay 96.54% of All Income Taxes", the income floor of the "Top 50%" is a family income of $30,000 -- $15 dollars an hour; that's not "only the rich pay taxes" by any stretch.

See how much fun statistics can be?

greg

That reminds me of an old chestnut:

There are three kinds of liars in the world: liars, damned liars and statisticians..... :)