EconTalk: Burkhauser on the Middle Class

So, again, late to the blog party as usual, but my comment today is on Econtalk's, April 9th, interview with Richard Burkhauser.  In it, Burkhauser refutes what us RavingLeftatics have been claiming for over a decade, about how the middle class is shrinking.

So Burkhauser's argument is simple.  It's not that Piketty and Saez were wrong, its just they measured the data differently than we did.  This was a highly technical podcast, and I won't pretend I understood everything I heard.  The way Piketty collected his data was to look at the figures and divide it by what they call the "tax unit" that is, the primary filer, adding his dependents, and/or including the income of a spouse.  Burkhauser instead, uses a number of person per household.  So Piketty's 1-3% growth, recalculated, is 15%.

I have a couple of thoughts on this.  Burkhauser makes a good point, in that a lot of young couples live together before marriage.  And so, there income is joint, and should be counted as such.  However, both he and Russ got a few things essentially (to my perspective) wrong.

Economies of scale are a grand thing.  But going from a one person household to a two person, or three person household does not a scale make.  Maybe its anecdotal, but when I moved in with my wife, she told me and I didn't believe her, "If you think this is going to save money, you're wrong." As she is with so many things.  She was right and I was wrong.

One person living by themselves is basically in subsistence mode.  They can skip meals, they can use pizza boxes for tables, they can have a whole box of blueberries for dinner.  They can do what they want, and that in and of itself, makes the calculus that backs the conclusion of this paper fundamentally wrong.

Now, maybe, (I didn't read the paper) but maybe there is an intermediary cited, another paper by this author, or another that says, "here is statistical evidence that families in economies of scale do on the whole spend less money."

But without that, the central mechanism for this conclusion to be true fails.  At some point, couples that live together are usually planning on making a life together.  At that point, their personal economies shift completely.  They "nest," they acquire things jointly, they start building joint resources, maybe they go in on health insurance together getting domestically partnered. And suddenly, they're spending more than they would before.  They're taking vacations together, they're visiting each other's family, they're buying food for two instead of skipping a meal because they had a big lunch.

Another thing I think both Roberts and Burkhauser misapprehend is that Burkhauser blithely states that "more and more people are living together," which is driving costs down.  Even assuming that living together is driving down costs, which clearly I don't, then maybe people are moving in together because they're cost of living is going down, not up.  That is the case for most of Europe, children live with their parents well into their thirties.  And they do so because housing is damned expensive, and there aren't enough jobs!

Last, what Roberts and Burkhauser ignore, and it seems likely that Piketty and Saez do as well (simply because as economists they are measuring just a few points of data) they ignore completely rising individual and household debt.  Given the recent crisis this seems like a grave omission.  But in all fairness, the papers are very explicit in what they do cover.  It's just disingenous to claim things are all rosy for the middle class when in fact most of us will probably never climb out of personal debt.

And then, he adds the value of health insurance.  This gets a little technical, and I don't really understand why.  Health insurance is a benefit, granted, but its one we pay for, and its not income.  If anything, its a tax on our earnings.  But clearly, his estimates rise from 23%, there was an intermediary step after 15% (government transfers, social security, unemployment, etc.) now all the way to 36%.  Why, the American middle class must have it better than ever! Frankly, health insurance isn't a privilege, its an entitlement.  In a civilized, fully functioning democracy, we should all have access to the best care.  Now, we shouldn't have coverage to get cosmetic surgery certainly, unless of course of a disfigurement, but basic medical needs are a critical issue in this country.

But why, on God's Greenish Earth, government transfers?  So, I can see where it might be useful: my parents are retirees.  The income they have is prinicipally from social security, and their remaining investments.  That money should be tracked.  And they are solidly in the middle class (not because of social security, but because of their investments), but this is not a statement of progress.  Most of the people who receive these benefits, must be in the waning years of their lives, tracking their data, isn't tracking a progressing movement at all.  When we measure income, we do not do so in a vacuum, we do so because there is a concern that there is a certain inequity or dearth in the workplace.  That is what we are looking to find out.  So adding all these other data points is simply making the picture more cloudly.

I should also note that Burkhauser graduated from the University of Chicago economics program, so we already know he has to be anti-Keynsian (though, in fairness, that is just an assumption!) One last point I'd like to make on Burkhauser is that in October of 2005, he was a panelist at a Bush economics forum event, and said the following, summing up his comments:

"The economy is fundamentally sound and if the current economic downturn is similar to those in the 1980s and 1990s, and I believe it is, we will soon be back on the path of economic growth."


Riiiight.  Maybe if Lehman Brothers and Washington Mutual had moved in together things would have been rosy for everyone.
 
Burkhauser closes with a very interesting comment.  That he is in favor of the 50 years of government transfers.  His work essentially proves that government programs work--and yet, the very act of his acknowledgement makes it obvious that there is something wrong with our economy as it is.  If the only way median middle class income is "ok" is through additional government transfers and healthcare, than people are clearly not making enough money from their jobs.  And those "non-payment" benefits, health insurance, life insurance, in no way increase our life-styles.  They just keep us from sliding into poverty.