Stagnant Wages and the Financial Bubble

I’m happy to see that both Alyssa Katz and Kevin Drum also think that there’s a ‘there-there’ to investigating the Rajan hypothesis I blogged about earlier, and each kick out a version of the hypothesis that you should go check out.

But there’s an interesting dissent to the hypothesis. Scott Winship at Progressive Fix lays out data that goes against this argument, concluding “Again, the point here is that progressives should care about the facts.” Oh dear. This is with a hat-tip to Will Wilkinson, who says that the left should be reminded of “of the general importance of a reality-based stance.”

Now I’ve always been more of a buffalo stance kind of guy, but I know enough about the internet to know one has to defend his or her reality-based credentials. So let’s check out this argument.

I: Stagnant Wages to Credit Bubble

You should go over and read Winship’s argument, but here’s the key point which also includes Rajan’s argument:

And yesterday [Kevin Drum] endorsed the views of economist Raghuram Rajan, who blames the financial crisis on “the purchasing power of many middle-class households lagging behind the cost of living.”…in terms of the level of income the typical American has and in terms of recent trends, a careful look at the data implies that the middle class is doing pretty well.

First, consider what many progressives consider “the good old days”—the height of the pre-1970s economic boom. In 1973, the median inflation-adjusted income was higher than it had ever been and higher than it would be again until 1978—$45,533 (in 2008 dollars). Call this the gold standard before, in the conventional progressive telling, things started going south.

How much did things go south? Well, in 2008 the median was $50,303. That’s right—about $5,000 higher (after adjusting for changes in the cost of living).

So the argument from my side is that at some point household income went stagnant and taking on debt took over for it. What Winship points out is that wages are actually higher today in 2008 than back in a supposed golden-age of 1978. Wages are $5,000 higher in fact (inflation adjusted). Now a quick read of that would make you think wages had always been increasing throughout this time period. However checking the data that he provides, wages didn’t peak in 2008; actually they peaked in 1999 at $52,587, or over $2,000 higher than it was 9 years later in 2008. Let’s plot that data:

Median household income is increasing from the early 1980s until 1999 when it went stagnant. Mean household income also peaked in 1999 in this data source. So, anything interesting happening in changes to consumer borrowing around 1999? Check this out:

Huh. This is Michael Mandel’s Economic Statistic of the Decade, taken from here (it’s the derivative of total borrowing). That’s something, borrowing goes crazy right around the time median household income peaked. I’m going to take both charts and normalize them to their value in 1980 (click through to get a larger picture of any of the charts):

I’m on a time crunch, so I’m sorry that’s a terribly messy graph, but it gets the point across – income flattens out (right y-axis) right around the time borrowing takes off. There’s clearly a “there-there” to the Rajan hypothesis in the graph. Now what is it telling us? I don’t know. Maybe the causation is backwards and people are working less cause they feel so rich off their houses. Maybe the growing inequality during this time period plays a role, or maybe it doesn’t. Same with the financialization of the economy. Maybe the middle-class suffers from the disease of ‘affluenza’ and buy too much stuff they don’t need, though Mandel found that couldn’t be the entire story. Maybe this is all just an unhappy coincidence. But this certainly needs more investigation, and shouldn’t be dismissed out of hand.

Winship doesn’t technically have an answer to this, other than (I think) the middle-class should feel richer because these income numbers don’t have the proper deflator on them. I’m not an expert on PCE versus PCI (who is? drop some comments), but is this one of those “your wages won’t increase but Wal-mart has very cheap goods so feel rich” arguments? If you are like me and view money as something that buys both consumption goods and autonomy in a liberal capitalist democracy, then the consumption good deflator only covers half the reason of why a worker values getting a dollar after a day of work.

II: Wage Growth

As for the increase in household median income from the late 1970s to 1999, I’m under the impression from many sources that the majority of it is simply households working more hours, particularly by getting a second worker into the workforce. That’s right, right? Here’s Steve Ross who is quoted as an excellent source in the critique for middle-class numbers:

It is true that much (but not all)* of household income gain can be attributed to wives working more, but neopopulists see the increased female workload in an entirely negative context and as a burden on women and families. We suspect many working women want to work….* If the working hours of wives are held constant at 1979 levels, median incomes at the 50th percentile for prime-age couple households would still have risen by 9 percent in real dollars from 1979 to 2004. For households at the 70th percentile, the increase would be 22 percent.

I’m happy many more women are in the workforce. But if the real driver of household wage growth is simply that households are working more hours, then that isn’t exactly wage growth. “I want to make more money so I doubled my shifts” isn’t really the same statement as “they are paying me more money.” Winship points out male wages have increased around 8% over a 35 year period, for an annual growth rate of 0.23%. Something eventually had to give: maxed out at capacity, both in the number of hours in a day and the line of credit approved – if this was a firm, would you want to invest?

III: Middle Class Woes

As a last aside, his analysis saying that the middle-class is doing fine surprisingly misses the biggest story that’s happening to them: foreclosures, underwater mortgages, and the housing crash. From The consumer isn’t overleveraged — the middle class is:

What’s more, on the asset side, BofA Merrill says the middle-class has suffered more than the wealthy from the housing crash because middle-class families tended to rely more on their homes to build savings through rising equity. Also, the wealthy naturally had a much larger and more diverse portfolio of assets — stocks, bonds, etc. — which have mostly bounced back significantly this year.

We talk about that more here. The rate of foreclosures won’t peak until the end of 2010, and will remain high afterwards. Meanwhile you have a huge amount of the middle-class underwater on their mortgages, and perhaps banks that can’t write down the LTV to market rates without going insolvent, leaving everyone in a standoff where the only options left for people is to keep throwing money down a failed investment (“How I Learned To Stop Worrying And Love The Sunk Cost Fallacy”) and keep bloated LTVs on the banks’ balance sheet or walk away from their mortgages. These are terrible options that call for at least some progressive thought thrown behind them.