Such popular claims are not without their professional proponents, either; economist Paul Krugman has claimed that “wages for ordinary workers have in fact been stagnant since the 1970s.” And, of course, the affable Senator Elizabeth Warren from Massachusetts has parroted these claims, claiming that insidious “trickle-down” economic policies are to blame for income stagnation since 1980. But does the evidence really support this crude “income-stagnation” hypothesis? As we shall see, these claims are little more than emotional assertions.
What is profoundly mystifying about this argument is that real consumption per capita increased during these very same decades of supposed income stagnation. As economist Alan Reynolds pointed out in his book Income and Wealth, real consumption per person increased by 74 percent from 1980 to 2004:
Average real wages and benefits have risen by nearly 40 percent since 1973, after adjusting for inflation. Sensational claims that 80-90 percent of Americans have experienced low and stagnant real incomes since 1973 are also shown to be incorrect . . . real consumption per person increased 74 percent from 1980 to 2004—a rate of improvement that far exceeded the trend from 1950 to 1979.
In fact, as public policy writer Peter Ferrara argued in an article for Forbes, per capita consumption in real terms nearly doubled between 1973 and 2004: “From 1973 to 2004, about 30 years, such real per capita consumption in America nearly doubled. Over 75 years, 1929 to 2004, real per capita consumption by American workers increased by 5 times, and even faster since 1961 than before.”
Further, as economist Thomas Sowell argues in his Economic Facts and Fallacies, many of the statistics offered by the proponents of the stagnation argument do not take into account the value of job benefits offered by employers:
In the case of statistics claiming that workers’ incomes have not risen significantly – or at all – over the years, these data exclude the value of job benefits such as health insurance, retirement benefits and the like, which have been a growing share of employee compensation over the years.
Thus, a larger portion of employees’ pay (which critics leave out of their analyses) is comprised of employment benefits—about 19 percent of a worker’s total compensation in 2014 as compared to 10 percent a few decades ago.
Finally, we may point to studies indicating increased mobility for individuals within lower income quintiles during this era of alleged stagnation. In their book Myths of Rich and Poor, economists Michael Cox and Richard Alm cite a study from the University of Michigan that tracked the income of over 50,000 Americans for three decades to study economic mobility. They unearth some truly remarkable data, including the following:
- Less than 1 percent of the sample population remained in the bottom 20 percent during the 1975-1991 period.
- More than half of the families surveyed in the bottom quintile in 1975 rose to a higher bracket within four years.
- Individuals and families starting in the bottom quintile in 1975 had a gain (adjusted for inflation) of roughly $27,000 by 1991.
How could it be that incomes have stagnated over the past thirty years when available data indicates that rates of real per capita consumption and income mobility were on the increase? The answer to this question depends on how the data is collected and measured. Many of these “statistics” put forth by the political circus are produced via questionable methods of analysis.
One example of these questionable statistical methods is to aimlessly lump together part-time work and full-time work. Doing so undoubtedly drags down the statistical average of workers’ incomes as a whole despite adding to the total production of real goods and services, which, as Sowell further notes, has been the case:
. . . the weekly earnings of part-time workers drag down the statistical average of workers as a group, even though part-timer’s work adds to both national outputs and to their own families’ incomes. It is not that full-time workers are paid less than before, but that more part-time worker’s earnings are being averaged in with theirs statistically.
Thus, an era of growing economic prosperity can be completely misrepresented as a period of economic decline with poorly analyzed data. By grossly lumping together part-time and full-time weekly earnings while leaving out job benefits such as health insurance (among other things), such “data” is often produced and cited to support the stagnation argument frequently made by Krugman and company. The critics of capitalism have been caught in their shortcomings.
Another fantastical trick is to measure the erosion of real income via the Consumer Price Index (CPI for short). Yet the CPI has a tendency to overstatethe annual rate of inflation as a function of how it gathers data. By counting the price of a collection of goods and services over time while these very products are themselves changing over time, CPI data often miscounts ordinary price increases as inflationary. This conversely means the CPI understates gains in real income.
If, however, we use different measures of inflation, we uncover a totally different story from that depicted by the CPI. According to Don Boudreaux, an economist at George Mason University, measuring the rate of inflation between the 1970s and 2006 with the Gross Domestic Product Deflator indicates real wage increases of roughly 18 percent. Once again, the validity of the evidence supporting the naïve stagnation hypothesis is found to be deficient after scrutinizing its methodology.
There are a number of flawed methods political sophists might use to paint a depressing depiction of reality. Once scrutinized, however, the weakness of their claims become apparent. The evidence is clear: despite the snide aspersions cast by critics, the free enterprise system creates a rising tide that lifts all boats. A bloated federal government, which Warren and company champion as the solution to these perceived ills, is a danger to our prosperity and our freedom.