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.


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