Russ Roberts asks for a response on TGS, plus some all-purpose responses to queries

Read the whole post by Russ, but here is one excerpt:

So my challenge to Tyler is to tell me what he thinks the stagnation in median income signifies. Has there been a change in the returns to education or creativity? Or is it mostly a statistical artifact? Whichever answer he gives, I would like to see him reconcile it with the panel data–the surveys of economic information that follow the same people over time.

I will put the rest under the fold…Russ makes points about household size and immigration and there are brief mentions of CPI bias and rising benefits.  A few responses:

1. I discuss household size in the footnotes to TGS.  Adjusting for it doesn’t make a huge difference and furthermore the rapid-median-income-growth 1960s were a time when household size was falling quite rapidly.  I blogged some of the details here.

2. Immigration doesn’t seem to shift the median enough to create an illusion of stagnation, I blogged the numbers and details here.

3. CPI bias has likely fallen over time, which will make the true median income growth differential over time even greater than the numbers indicate.  Furthermore CPI measures are getting better over time and doing more to adjust for quality biases; that’s further bad news.  Most of all, a lot of CPI bias is offset by ‘wasteful spending on health care, education, defense, and government yet all counted in gdp” bias.

4. Russ doesn’t mention the internet but it’s getting more monetized — and thus more counted in gdp — all the time.  The consumer surplus of the unpriced parts, once you eliminate double-counting, probably isn’t much more than two percent of income.  Not “two percent growth a year” but two percent period.  I could see it being three or four percent, for sure, but that still won’t overturn the basic slowdown.

5. Rising household debt and abysmal job creation since 2000 suggest to me that the quantity data are in line with the incomes data.  Around 1999-2000, stagnation suddenly becomes much worse.  The only good years since then are the bubble years, whereas across 1973-1998 there are some truly good economic years (partially offset by some very bad ones).

6. 1995-1998 are a poster child for what a non-stagnating period should look like in terms of wages and median income.  Lots and lots of years since 1973 don’t look anything like that period.  When the growth is real, it shows up in all of the standard numbers and no mystery variables or invocations of biased measurements are needed.  I find this comparison illuminating.

7. I discuss benefits in the book, for the time being I’ll note a) cradle-to-grave private sector jobs, with union-based pension benefits are rarer than they used to be, b) fewer people get health care through their jobs than used to be the case, c) most of the benefits are health insurance but don’t fixate on the size of the expenditure, rather consider that health progress has been slowing down, and d) last year health insurance costs rose by nine percent and no way should that be interpreted as equivalent to an increase in real income, rather it is a sign of system failure.  That all said, the text of TGS still leaves room open for a world where virtually all of the benefits of economic growth accrue to the elderly.  Such a world still will have a lot of TGS properties.

8. Consumption data often selectively focus on the commodities which have become much cheaper (e.g., flat-screen TVs) and ignore the growth in debt, which now must be paid back.

9. The 2000-2011 case for stagnation is stronger and clearer than the 1973-2011 and there also has been more growth along the latter and longer period of time, plus numbers are easier to interpret across shorter time stretches.  I will ask Russ if he at least can buy into TGS for the last eleven to twelve years.

I don’t see panel data as offering a significantly different story from the above but if Russ tosses me a specific citation I will consider it.

On the Conover critique of income stagnation, Karl Smith is devastating.  On all the general issues, Arnold Kling comments.

Going back to the Russ excerpt above, I don’t think we should reify median income statistics or give them a final ontological meaning; they are tools.  The slow growth in the measured median, or zero growth since that late 90s, strongly suggests that something is seriously wrong with the real economy.  That slowdown seems robust to the standard attempts to explain it away.

I don’t dismiss Arnold Kling’s factor price equalization hypothesis, but still the question remains why we haven’t kept leapfrogging ahead of our competitors, as we had done in earlier decades.  We’ve become much more of a sitting duck and that will make Samuelson-Stolper effects stronger if you are the world leader on the technological frontier.

On Russ’s other query, there has been an ongoing change in the returns to education.  Note the recent study that over the last decade only Ph.ds, MBAs, JDs, and MDs have seen real income gains; even individuals with a Masters degree are getting whacked.  One way of reading those numbers is that the workers with lower educational credentials are getting less “manna from heaven” in the form of new innovations cascading into their laps.  On top of that, there is more rent-seeking in the economy and many jobs require stronger cognitive skills than in the past.


You don't want to be right about everything.

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Let TGS be right about the past, but let's assume the end of the stagnation has already begun. Tyler points to innovation on the horizon...I am convinced it's coming faster (good and bad news). The next decade will be better.

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On the 9% health insurance figure, does anyone know the breakdown there between usage rates and price increases? In other words, medical prices for doctor's appointments, drugs and hospital beds likely did not rise 9%. Perhaps it was a 5% increase in usage and 4% price increases. And even the usage rates do not necessarily mean that any typical person is using more medical care than before. If the mix of _insured_ 30, 45 and 60 year old people shifts towards more 60 year old and fewer 30 year old people, and the typical 60 year old uses 4x the medical care of a typical 30 year old, then even declining individual age-adjusted usage rates could push aggregate usage rates up.

Anyway, if anyone has a link with approximate breakdowns, I would love to see it.

One theory is that insurance companies are trying to lock in a larger base line before ACA takes effect:

In other words, the health insurance executives anticipated Obama's election in 1999 and began hiking premiums 8-10% annually to more than double premiums before Obama signed ACA into law a decade later?

In Kaiser's survey, 2009 was the outlier with premiums going up only 3%, far under half the rate of the past decade.

Obama didn't call for health reform out of the blue as a lone politician or policy maker pointing to the long term government fiscal crisis from health care. The debate in the 2008 election had at its center, health reform policy. Clinton in 1993 pushed health reform because his look at the Federal budget deficit and long term debt made it clear that health reform was required.

I see health care policy in the US as a symptom of TGS, and at its root, the cause of TGS.

Health care costs in the US were within the cluster of developed nation in 1980 at 8% in the 6-8% of GDP range for the developed European nations, Japan, and the UK. By 1993, the other nations had increased and spread to 8-12% while the US had risen to 15-16%. The other nation at the high end were implementing health reform to address cost growth, and the newly developed nations were implementing national health care systems, eg Taiwan. The case for reforming health care in the US was as solid as one could possibly make it. In 1993, the Swiss started reform, as did a number of other nations, to control costs, and others to improve quality, but all the nations were easily competitive with the US on outcomes, and were far more efficient. Yet, in the period from 1980 to 2010, a highly vocal and active minority has fought change in US health care policy. Or, to be fair, they fought to reverse the changes that had occurred from 1930 to 1980, trying to eliminate employer benefits, Medicaid, Medicare, and regulation, over the wishes of the vast majority.

So, health care system stagnation is the only possible outcome from a conservative faction that wants to reverse time, and a conservative faction that resists change. From 1930 to 1980, health care reform was very much a constant and fully supported by the majority. As an example, the polio vaccine was given to millions of kids within a few years of it being developed and tested - this was just the next step in a public health effort to improve health. It was not a profit center, but a public good. The public policy was biased heavily toward progress, and the public was fully backing progress.

The public support for progress, for change, tipped over in the 70s, with many people wanting things to be constant and predictable, with some wanting to go back. Without progress, without support for progress, you are left with stagnation, or decay. For those who travel the world, many see the US decaying in its public face travelers see, its transportation system and the city centers. And on health care, the US system has decayed in the way it serves everyone. The degree of universality in the US has declined as those without the means to pay are pushed onto someone else's bill by one kludge after another on the theory that eliminating the non-payers the health care costs will go down, but instead the costs just increase faster. But because of stagnation, from 1999 to 2009, the system that increased costs 8-10% annually was locked in by the conservative desire for no change or for reversing progress.

I wonder how many people who decry our health care system's high costs and say it needs more gov't control are aware that we also spend far more on gov't education than other countries, with much worse outcomes.

Ironically, it's only with poor education that they could be tricked into measuring U.S. healthcare outcomes with metrics that have little correlation to healthcare.

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AFAIK no one thinks rising health care costs are driven by pricing.

There's a large incentive to create new, expensive treatments. There's little incentive for consumers to price-shop. We have exactly the healthcare situation those incentives predict.

Yes, there is a large incentive to create new expensive treatments. It is called the desire to stay alive. Patients will put up with doctors poking and prodding and puncturing and cutting and making them wear those humiliating hospital gowns because they hope to live long enough to tell their friends how little they enjoyed the experience, and long enough to complain to economists about how much it costs. Someday economist may figure out that most patients are not doctors, and don't know what treatment they need, and therefore are inept price-shoppers. Until then economists will continue to be astounded by the economically irrational behavior of sick people.

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are we not progressively supporting more retirees per worker? and if we are, isn't that where productivity gains would go?

But we are supporting fewer children per worker, and in the 30s we had the rather rapid removal of children from the labor force with the double whammy of child labor laws and the shift off the farm to the town - child labor laws do not apply, in effect, to farm labor - from age 13 on a child can be worked 15 hours a day in the field while being sprayed with pesticides. But by cutting the farm population from over 50% in 1930 to 10% today, 90% of kids are now prohibited from working to support the family. Yet, reducing the fraction of workers occurred with the creation of a large middle class - multiple generations lived together because they needed to so that most members of the family could contribute productively to the family income. Elders or children provided child care while the other adults labored for long hours, and the children performed the routine chores of the farm, or worked in the fields during the peak growing season. By the 60s, one person out of a family of four labored, while the kids studied and played with only light chores, and the wife spent a lot of time freed up by new appliances and markets making food quick to obtain in leisure or community activity.

Since the 70s, the progress from the 20s-30s to the 60s in reducing the fraction of workers has been reversed.

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Seems to me there are two completely separate arguments being made here and that it would be a good idea to distinguish them:

1: TGS didn't really happen, it's a statistical artifact, misinterpretation, etc.
2: TGS happened was due to something other than running out of "low-hanging fruit" in land, tech, and uneducated kids.

I'm with 2. TGS happened but was due to a culture shift that could be summarized (and vastly over-simplified) as makers -> takers. Just consider the perception in the media of the average businessman in the Leave It To Beaver era versus today. Consider the war on energy. Consider the vast expansion of government and law, and the current zeitgeist that anyone can sue anyone for anything, and everything has to be taxed, regulated, licensed, and subject to prior restraint.

I don't believe in the land or education part because there are success stories in tech areas that the culture shift didn't affect, e.g. computers and communication. Education should have had the same effect there as in energy and transportation, but the effect was opposite.

In addition to the culture shift, there was, I think, a strong shift to centralization, corporate as well as government. There has been vast innovation in areas where there is still competition, such as restaurants. Not so much in nuclear power. But current-day (e.g. 40-year-old technology) reactors aren't evidence of the lack of tech upside, but of lack of interest and resources. Instead of engineering, all our bright ambitious kids go into environmental law.

Economists who only look at aggregate dollar flows will miss the fact that over the latter 20th century there has been a vast shift from productive to counterproductive activities. There is a similarity to Austrian business cycle theory: our resources are being misallocated, but it's not just due to credit expansion but a culture shift in the direction of anti-technology, anti-energy, and anti-growth.

Um, all our bright ambitious kids go into finance actually. Mainly hedge funds and HFT shops.

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I'm wondering if you really think it is possible to have a Ben Franklin of nuclear power if only the government regulation was eliminated. Edison was the big name in a large enterprise, the central planner who all too often took credit for the work of others; the competitor Westinghouse had a better engineer/inventor in Tesla, but he was happy to get the money to fund his next crazy idea on power generation and distribution.

Polluting coal burning power plants are easily accomplished by individuals - it is a major source of new power in China, but replicating the best in 1990s coal power in China today is hardly innovative. But it is better than the US where half the coal power desperately clings to the 1960s era power plants, the plants before the EPA.

The US has been forced into stagnation as a large part of the population became the middle class who view progress as being able to breathe the air and drink and swim in water without fearing for one's health, in conflict with the industrial class who viewed progress as picking territory to transform through pillage and plunder for quick profit, whether strip mining, or building a huge chemical plant, with the people living on the land and around it having no say in how their health will be adversely affected. In contrast, China (and India) promotes rapid progress by government giving the industrialist the go-ahead and then the government bulldozing the people off the land, if necessary.

Conservatives are agents of stagnation, and it is the more conservative politics of the past few decades that has, in my view, caused TGS. Conservatives criticize the Chinese government for its corruption as seen in the violation of individual rights and standards to make rapid progress in building new factories and cities by just pushing people off their land by force, or building a rail system rapidly without carefully ensuring the work meets quality standards, and this has nothing to do with government when you look at the products shipped to the US by for profit corporations that are poisonous - standards and rights cut into profits.

On the flip side, conservatives condemn the government being the agent of individual rights in the US because individuals obstruct the industrialist who just wants to make a fast profit. To them, the government should just clear the way for the corporation put a nuclear power plant or oil refinery in that poor community for the common good of the majority because the poor in that community are blocking progress. In other words, the US government should do what the Chinese government does: override individual rights in favor of corporations.

When the dominant public policy is at war with itself in trying to have the progress of the path without the change of the past forced on the individual, stagnation is the only possible result.

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Empirically, isn't increasing debt usually associated with aspirational societies, not stagnation ones?

Only if the aspiration is consumption. I would consider China aspirational but not at all debt focused.

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All the smart kids went into the financial sector. Create a world where inventors and innovators earn more than those shuffling (figurative) paper.


I missed this. Exactly right.

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Great discussion guys.

1. That was actually one of the most persuasive elements of the book for me.

6, 8. Interesting points.

7. Something people should really be paying a lot more attention to. Kling's book is excellent in this regard.

To amplify Russ' point about median income -- one of the cardinal sins, imho, in looking at income is to say things like "most of the gains in income since the 1970s went to the top quintile." It's technically true, but implies a fallacy of composition -- the people in the top quintile in the 1970s are by and large not the same people who are there in 2011. What we really mean when we say this is that the distribution of income has spread out across the upper quintiles. We can talk about why this happened (some is tax effects due to changes in the 1980s as people move income to LLCs to avoid double taxation, the rest is probably driven by the fact productivity gains have been likewise unequally distributed), but it's a mistake to simply read this as "the rich got richer." Obviously a similar critique applies to the "median income" -- if the spread is getting larger above the median, a lot of people may be doing better even if the median doesn't change.

The one other sort-of criticism of TGS one could make that really resonates for me is the old Austrian point about about econometrics -- you can't really capture utility (or aggregate it) because it's in the eye of the beholder. So median utility may be rising even if median income isn't (and we would expect consumers to consume a greater proportion of "unmeasured" utility over time, since taxation of measurables encourages this). I say this is a "sort-of" criticism because it doesn't really affect a lot of the real-dollar ramifications much, it just lets us be a bit less depressed about them.

Education clearly seems as broken as healthcare. The massive increase in spending since 1979 hasn't bought us much in K-12 or higher ed; productivity (on a per dollar basis) seems to be much lower than it was in decades past. We badly need school choice in K-12 (it works great in Sweden!) and something like Rick Perry's request for Texas to develop an affordable 4-year degree.

Anyways, I just want to thank Russ and Tyler again for having this discussion.

The point about utility seems like an important one, and it is connected to what Tyler describes as "The consumer surplus of the unpriced parts of the internet". I still have a hard time to think that this unpriced part can be measured and the fact that Tyler calls it a 2 to 4 percent effect tells me that we really don't know how to measure it.

I think that the 90s 'look different' exactly because the benefit of those unpriced parts came into effect. Otherwise, what is the explanation for the 95-98 period? The tech bubble? Why would that bubble be any different than previous ones, and furthermore, why hasn't it popped up again in the 2000s?

Tyler_Cowen's estimate of 2-4% of internet consumer surplus has *never* stood up to serious scrutiny, and fails basic sanity checks like surveys of how much someone would have to be paid to give up the internet, or the most they would pay for it.

And it doesn't help that every single argument Tyler_Cowen advances to this effect uses techniques appropriate for calculating *marginal* benefit of one additional unit of internet usage, rather than the total consumer surplus, which yields completely different results.

What a phony.

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Re: unmeasured utility

The change in unmeasured utility could also be negative over time. I see no reason to assume that it is positive in expectation. For instance, consider the "Bowling Alone" effect.

Well, I wouldn't assume that, I would point to gains in utility in things like food choice and entertainment. Now, not everyone will necessarily agree that these things have gained utility, but that's the nature of utility. I think we can say that, on average, people see more utility from some things they are paying for.

The "Bowling Alone" effect can even be ascribed to this: all those things like public meeting attendance, serving on committees and working with political parties have less utility now relative to the entertainments that are available today. (I know that's certainly why I never attend any of my HOA meetings!)

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Except that the distribution of income has narrowed in upper percentiles. That is why even those with Masters degrees aren't doing any better.

That depends on the degree. The gains in hard science, engineering, and MBA degrees are being weighted down by relatively useless social science degrees.

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It is my impression that people work much less at hard and dangerous jobs that they used to. There was an article on yahoo a few years ago that said that despite people's complaints about the demise manufacturing jobs that there where more jobs openings in manufacturing than other areas because fewer people want to do those hard boring jobs in environments (factories) where there is a lot of aggression from worker to worker.

Also one of my pet peeves is that in Florida where I live now there are no good bakeries or delis (or even independent restaurants) and that those businesses are dying out in the North east where I come from because no one wants to work those long hard hours lease of all the children of the bakers and deli owners.

One other piece of evidence that people work less hard is from the book "The Millionaire Next Door". The author notes that the typical millionaire next door does not want his children to follow in his footsteps because though lucrative it is not a good life. They want their kids to get education credentials and a good job. With fewer well qualified people willing to go into business there will be less competition and so higher profits for those who do and this would effect the distribution of income making it less even.

The disutility of hard work is, imho, an under-discussed phenomenon.

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Independent bakeries, delis and restaurants are dying out because all too often they cannot compete against the chains, due to economies of scale or whatever. A little bakery opened in my neighborhood and lasted just a few months. I visited it once and found that its prices are higher than even Whole Foods'. That in a nutshell is why there are fewer of those sorts of businesses.

But was the food better or worse than the chain bakery?

Or are you typically American and you will eat crap if its cheap, or if it is sold with great status creating marketing at a high price?

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I agree with the points about hard work. I grew up on a hog farm. My brother has taken it over from my dad in the last fives years. As with any small business, it is tough, uncertain work. Plus the machinery on the farm poses real safety hazards. As a female macroeconomist, paper cuts and blisters (from new heels) are my physical "dangers" at work. My brother had a worker try to slug him once. I have seen heated arguments at work, but no hitting (which would probably be more funny than scary given the physical abilities of your average economist). I know how hard real work is so I feel blessed to have my job.

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I don't think you really answered Russ' main point, or maybe just what I see as his main point because I've been fixated on it since all this talk of "what's happened to median income" really got going.

You use cross-sectional data on median income, and then describe it using longitudinal language. TallDave points this out above in his post. When you say something like "income for the median household has 'stagnated'/not risen/fallen from XXXX to ZZZZ", a non-economist hears a statement about households over time. (In fact even economists and others who know better are experiencing and being influenced by this interpretation often unconsciously.) But the claim isn't about households over time, it's about one snapshot of one set of households at one point in time versus another snapshot of a different set of households at another point in time.

So there may be nothing at all wrong with the claims you've been making. What's wrong is how you are making them, because the people hearing that claim aren't getting the message, they're getting a different, conflicting message. This is what Russ means when he says, "You hear this claim about median income all the time (and you are going to hear a lot more between now and November 2012) and I do not understand it." If Russ doesn't clearly understand your claim, how many others don't, journalists and laypersons in particular?

Agree that you seem to have avoided the question.

Russ says that if you look at the same people over time, each of them is getting better off. Is that true?

Yes its true. Individuals have gotten better but as a society we have stagnated.
This could largely be demographic, because the large income gains happen early/mid career.
Late career gains would tend to be slower, and retired people have slower gains.

If median age is increasing we should see slower income growth just from this statistical artifact. This doesn't invalidate Tyler's argument, but does provide ammo for his opponents.

Individuals have gotten better but as a society we have stagnated.

That makes no sense, bro. If almost everyone within a society is getting better off, then the society is succeeding. You might say that the individuals would get even better off if the aggregate societal figures showed a more favorable trend, but I don't think that is Tyler's point (correct me if I'm wrong).

If everyone in society is living better by consuming beyond their means and going deeper and deeper in debt, are they really better off?

If your kid has a smart phone that was beyond Star Trek when you were a kid, but must live in your home and eat your food and drive the car you gave him, is he better off than you were at his age having moved into a nice apartment and bought the sports car of your dreams, and you can take off whenever you want because you have cash coming in and money in the bank, so you don't care that the bank won't give you a credit card?

(I'm an aging boomer turning 64.) Yeah, the 5 year old Honda Accord today is a better car than a new 69 Mustang, but is the Accord better than the 69 Mustang when you are 20-22? In the 60s and into the 70s, a "hot" car was readily within reach of pretty much everyone. Even the VW Bug was a status car. What is the Mustang or Bug today, and how much does it cost?

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You would want to look at median income of various age brackets, and median overall not increasing would be doubly bad since the median age of the workforce increased over that time.

Complete agreement!

I am all for a zillion permutations of the same graph, but average median household income looks so bad...good luck explaining that dismal pattern away. Effort should be directed on "fixing" that series going forward.

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Re: #6 (employment and wage data).

That data comes from Form W-2, but I'd guess much of that income has migrated to Form 1099s over the past 15 years. Has this been measured and accounted for?

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this seems simpler to answer via global competition, rather than stagnation: you've got an extra couple billion people coming into the world economy, plus communications breakthroughs that permit them to play in areas that previously were almost entirely local. it's no stagnation, just a significant chunk of growth going elsewhere. so the people who do OK are either immune to global competition (local and/or licensed), or able to compete in the global economy. and the people doing low-level local work are stuck competing with immigrants generally willing to work harder and for less. so you've pretty much got downwards drag on everything but superstar comp, which (presto!) is the story of our times.

In other words, progress is a zero sum game - if progress is spread more widely that those who were ahead need to regress because only so much progress can occur for a population because progress is not a product of individual effort, or the sum of individual efforts?

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I have a few comments. I have read "The Great Stagnation" and liked it, but I'm not convinced of your conclusions.
Your point (3) really does nothing to support the conclusion that the CPI index is becoming less biased, and the link doesn't help. I'm still skeptical that the inflation adjustments are accounting for differences in prices and quality of goods. I DO agree, though, that a lot of the stuff the government makes us buy is worth a lot less than what we pay for it. Consumer surplus on that stuff is getting more and more negative. So I won't stake too much on this point.

Russ Robert's point about income increasing over an individual's lifetime is important. It's my understanding that (1) average income has been increasing at a steady clip and (2) the Gini coefficient hasn't changed much. So it must be that a typical person is reaping the rewards of this steadily increasing average income, even though you would miss this by just looking at median incomes. (Why so little discussion of the Gini coefficient? It's a measure of inequality that reflect the entire distribution, unlike the median, which only captures one point on the distribution.) This is a very important point. Most people have incomes that rise over their lifetimes. This means that at typical person will spend some time below the median and some time above it. Your argument does little to consider what happens above the median income. I find that odd, because the "median person" will be well above the median income in the later years of his/her career.

And why is there no discussion of leisure? Steven Landsburg has an excellent piece on this point in Slate called "The Theory of the Leisure Class." Inequality in leisure has been increasing, and low-income people have been getting more of it. I believe this gain is not accounted for in your book. I actually think this trend will continue. People who place a high value on leisure will demand more of it, and will be able to sustain a decent lifestyle with fewer and fewer hours of work (as productivity per worker increases). People who place a high value on status will still be working 80+ hour weeks, and earning ever higher incomes. In this world, everyone is getting what they want, but it will appear on paper to be "stagnation for the median household." The median income in this world may even be lower than it is today but be more than offset with extra leisure time. My suspicion is that this will happen, and an analysis like yours will incorrectly label it a bad thing.

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No mention of divorce? Seems like it would have a large effect on the median household. What about there being more households now as social norms regarding the traditional family change? Glaring omission.

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