(2006-12-21) Henderson Income Mobility Middle Class

David Henderson disputes the popular beliefs about Income Mobility and the Middle Class.

• Paul Krugman wrote: "According to estimates by the economists Thomas Piketty and Emmanuel Saez-confirmed by data from the Congressional Budget Office-between 1973 and 2000 the average real income of the bottom 90 percent of American taxpayers actually fell by 7 percent." (AlanReynolds, p. 38) But Reynolds shows that Krugman's statement is wrong for two reasons. First, CBO estimates go back only to 1979. Second, the CBO data show that between 1979 and 2000, average after-tax income in each quintile (fifth) of the household income distribution rose.

• 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.

Jan03: Henderson reviews Reynolds' critiques of typical Real Wage calculations. The average poor (Lower Income) family in 2001 did as well as or better than the average family in 1971 in ownership of motor vehicles, air conditioners, color TVs, refrigerators, VCRs, personal computers, and cell phones. Of course, the last three didn't exist in 1971, but that's part of the point. When poor families can afford what even middle-income families couldn't imagine having 30 years earlier, aren't things working out pretty well?

Jan11: Henderson reviews challenges to evaluations of changes in income to the Upper Class, who are more likely to own a SmallCo. So income of "tax units" after 1987 included more and more "units" that had previously filed under the corporate tax system. He also looks at Executive Compensation: Where did Krugman get the $37.5 million average CEO pay that led him to this conclusion? He credulously accepted Fortune magazine's estimates, even though, according to Reynolds, at least three quarters of this $37.5 million estimate was for stock options granted in 1999. Fortune valued these options by assuming that the prices of the stocks would rise by one third. Of course, the March 2000 stock market crash belied this assumption.... There's so much more in Reynolds's chapter on CEO pay and in the other chapters, such as the one on mobility across income groups (Income Mobility), that I don't have room for. My best advice: read the book, and mark it up while doing so.