Dueling Headlines Re American Living Standards Explained

Are middle-class families getting ahead or selling bodily fluids to pay the rent? BLUF: both.

Here are two headlines from the past two days. First, from the NYT:

Next, from the WSJ:

Are American families climbing the economic ladder by selling their bodily fluids?!

It is important to understand why both of these perspectives are valid, which they are. First, if more people are getting ahead, why all the angst re affordability, which, ftr, the war is making worse? [It will continue to do so, even under the increasingly unlikely chance that it ends very soon. And it’s not just gas; food prices are already rising due to diesel costs—80% of food is delivered by trucks—and the rise in fertilizer costs—a third of which flows through the SoH—will create more lasting cost pressures.]

Second, I recently posted a figure supporting the WSJ’s case and, because of the way I constructed it, it confused more than clarified. This must not stand!

The WSJ article makes an important point that is simple, true, and yet often hard for folks to accept. The simplest way to understand it is to realize that GDP, or the great blob of income the US economy generates each year, flows to American households. In some periods—as we’ve seen in recent decades—those flows concentrate at the top of the scale. But it is simply not the case that economic growth consistently leaves everyone behind. To one degree or another—a very important caveat—it reaches most of us.

National living standards rise on average, though, especially when you factor in wealth, which is a lot more concentrated than income, they’ve often gone up faster for the top than for the middle. Such rising inequality shows up in everything from too many people being unable to afford one house while a few can afford numerous homes, to the flourishing of price discriminations I recently wrote about at Disney, on airplanes, etc.

But if you look, as the WSJ does, at household income by what share of households are in each income bracket (adjusted for inflation), over the long term (another important caveat) you will see low-income shares falling and higher income shares rising. I confused everyone with my last version of this figure but this one should be clear (source: US Census). The blue line shows the share of households with income below $50K in ‘24 dollars and the red (?) line shows the rest, i.e., the share with income above $50K.

The former drifts down; the latter drifts up. For clarity, I’ve aggregated all the households into two groups and this masks some of the inequality that’s transpired. The share of households with incomes above $200K is up by 14 percentage points over this full period. The share under $25K is down by a lesser 9 ppts. The WSJ quotes an analyst on this point: “Everybody is doing better, but the upper income households are especially.” Still, by the metric in the figure above, which is a valid one, living standards for most families have gone up over time.

And yet, according to the NYT:

Every day, an estimated 215,000 people donate plasma, the yellowish liquid component of blood. Mr. Briseño is among them. He is not jobless or facing eviction, but, like many in the American middle class, he is caught in the vise of rising expenses and wages that aren’t growing fast enough to cover them. So he is turning to a method more commonly associated with the lowest-income Americans. For people like him, an extra $600 or so a month can mean making a mortgage payment or covering increased health-insurance costs.

You can dismiss that as anecdote vs. the Census data, but you’d be mistaken to do so. These facts can be squared, and the hint is in the excerpt above, as well as the inequality developments I noted, along with an understanding of the real wage trends behind the income numbers.

First, readers of this Stack know that “mortgage payments and health-insurance” are references to the affordability debate. In the context of this discussion, the comparison invokes the key issue of relative price trends: some very cool, living-standard-enhancing goods have fallen in (quality-adjusted) price, while some old, boring necessities, including housing, childcare, healthcare, electricity, have gone up faster than average (this was Annie Lowrey’s key insight years ago, in the early affordability takes).

The figure below shows the price indices for computers vs. homes. Quite a difference.

Both of these things are true: real incomes mostly grow over time, and not just for the rich. But for many families, especially young folks starting out, buying a house or having enough left for life’s other needs and wants after you pay rent, is more out of reach than ever. No question, if you manage to buy that house, you can likely afford to put a kickin’ flat screen on the wall. But that’s an increasingly big “if.”

Two final points. First, for working-age families without big stock portfolios, which is, of course, the vast majority, income trends are a function of wage trends, and the basic building block therein is the hourly wage. In real terms, and especially for mid/low wage workers, there have been periods of stagnation typically associated with weak job markets, and in such periods, the only way for families to get ahead is to work more hours.

The figure below uses the Economic Policy Institutes invaluable wage series, plotting the 10th, 50th (median), and 90th percentile real hourly wage, indexed to 100 in 1973, so the y-axis is recording percent growth from that base period. Both in the mid-80s to the mid-90s and in the 2000s, real wage growth stagnated for mid/low-wage workers. BTW, don’t miss the very cool fact that in the very tight post-pandemic labor market, the hourly wages of the lowest paid workers grew most quickly, at least for a few years.

My final point is essential to understanding the current moment, today’s affordability concerns, and why the broad sweep of time in many of the figures above is often a lot more compelling to social scientists than to regular folks. You can call it a “current moment bias” if you want to be annoying about it, but people’s economic judgements tend to register their current concerns and anxieties.

Those are high right now. First, the pandemic justly freaked everyone out. In solely economic terms—not in broader existential terms—shutting down commerce, schooling, life as we knew it, was a massive shock to our collective security. Second, as I’ve shown in copious research, people are even now still acclimating to the price-level shocks of ‘21-’22. Third, the maniac in the White House and his feckless enablers are making affordability considerably worse in real time.

In fact, bringing this back to the hourly wage, it has been doing pretty well in real terms, growing for mid-wage workers by 1%-1.5% real. Well, I’ll give you the info on Friday when the March CPI is released, but I’m concerned that it’s going to be awfully close to the 3.4% nominal growth rate of mid-level wages that month.

Yes, real incomes and living standards for most people improve over time. And yes, a lot of people who depend on their paychecks are struggling to afford some basic necessities. They need policymakers to help them in all the affordability areas I ticked through above, wherein markets are flawed at best. And they sure as hell don’t need the President to make their economic lives worse.