Economist Russ Roberts Isn’t Worried About the Middle Class
“A lot of people think the middle class is dead, dying, hollowed out,” says Russ Roberts, an economist at Stanford University’s Hoover Institution and host of the podcast EconTalk. “And that’s a view that’s held now increasingly by not just the left…but by conservatives, Republicans, and economists across the spectrum.” Roberts’ trademark optimism has been tested by the authoritarian shift of American politics in recent years, but he still sees quantitative reasons to celebrate the U.S. economy. He says leading proponents of the claim that the country’s middle class is dying have offered “a misreading of the data, or at least an incomplete reading of the data, [ignoring] a much fuller story of opportunity and progress.”
In August, Reason‘s John Osterhoudt spoke with Roberts about how to measure economic progress in a way that tells a more nuanced story about the middle class.
Q: What are the most common errors researchers make when measuring economic progress?
A: There are a lot of different choices you have to make when you’re doing a study on how the middle class has done over the last quarter-century. For instance, how do you correct for inflation? One study found that middle-class incomes went down 7 percent over a 40-year period, which would be terrible, because the economy grew substantially over that period.
It turns out if you use a different measure of inflation, you get middle-class income growth of about 14 percent. Now, 14 percent is not very good at a time when the economy as a whole doubled, but even that number is flawed because your money actually buys a lot more today than it did 40 years ago. You can say a TV today is roughly the same price as a TV 40 years ago, but the TV today is a lot bigger. Do you want to correct your comparison for the size of the TV? How about the fact that modern TVs basically never break?
Q: Is there a more accurate way to measure wealth in 1975 vs. today?
A: A recent study found the bottom half of the income distribution today makes the same on average as the bottom half 35 or 40 years ago. That’s extraordinarily depressing, if true. It implies the top is just doing way too well. But a handful of studies have instead taken people in 1975 and followed them through time to see if the rich truly did get all the gains. When you do that, you find out that the people at the bottom have the largest percentage gains and often the largest absolute gains over time.
Q: Your colleague, the economist Donald Boudreaux, argues that we also need to look at benefits when comparing wealth across decades.
A: There are 10 different things to look at! Yes, you want to look at full compensation. Benefits and fringe benefits are a much larger proportion of compensation than they were 40 years ago. If you only look at money earnings, you’re going to get a distorted picture.
Q: Talk about the snapshot issue with the top 1 percent.
A: Let’s think about professional basketball. In the 1980s, the two best basketball players were Larry Bird and Magic Johnson. They made a lot of money and a lot more money than the people in the stands watching them. Now let’s come to the present, when LeBron James and Kevin Durant make a lot more money than the people in the stands. The gap between the best basketball players’ salaries and the average fan salary is bigger than it used to be, because basketball is more popular today than it was 30–40 years ago. But note that Larry Bird and Magic Johnson didn’t get those gains. Basketball players have gotten richer over time relative to their fans, but also relative to past basketball players. The bottom half is not static over time, and the 1 percent is not static over time. So when we use the snapshot model and say, “The top 1 percent has gotten all the gains”—they’re not the same people!
That’s kind of good, right? Sergey Brin and Larry Page founded Google. Sergey wasn’t born in the United States. He came here with his parents as an immigrant child. He wasn’t rich when he left graduate school. His parents weren’t rich. Yet he became one of the richest people in America. The 1 percent changes, and sometimes the poor don’t just get richer, they become truly rich.
Q: We shouldn’t throw the baby out with the bathwater.
A: The United States has a lot of cronyism we should get rid of. There are a lot of barriers for the poor. We give them a horrible education through the public school system. But the average person can make a lot of progress, and has. Economic progress doesn’t necessarily make us gloriously happier. But we also don’t want to conclude that the entire system is rigged simply because the measurements we have of economic progress are flawed.
This conversation has been condensed and edited for style and clarity. For a video version, visit reason.com.
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