Mr Kristol, you get a C in economics!

There! I said it, and I feel better already.  I have waited a really long time to do this, and I am happy that Bill Kristol finally gave me an opportunity with his column in today's New York Times. More on what he wrote below, but first let me explain why I take great pleasure in pointing out his boo-boo.  No, it's not because we probably disagree on everything nowadays.

It's that he was my dreaded instructor long ago in two of the classes that I took as a Harvard undergraduate. He was a doctoral student at the time in the Government Department (no relation to the HKS), and I was a freshman and sophomore in the college.  The first course was Harvey Mansfield's political theory course (for which Kristol served as teaching fellow), and the second was a sophomore tutorial (a required course for government concentrators). 

In each course, we had to write short papers once every couple of weeks. I can say that my performance on these papers, which Kristol graded, was fairly consistent.  The essay on Machiavelli? Here is a C-.  The essay on the Federalist Papers?  Here is a C.  John Stuart Mill?  Well, how about, yes you guessed it, another C.  You can say that Kristol did his best to discourage me from pursuing a career in political science...

I remember well the very first time I saw  him.  It was the first meeting of the discussion session in Mansfield's course, and I had been assigned to Kristol's section.  He walked into the classroom and his first words were: "Hello, my name is Mr. Kristol."  To underscore the point that he was that, and not Bill or any other friendly appellations by which we students may have chosen to address him, he went to the board and wrote "Mr. Kristol." I may have been a poorly adjusted Turk in my first year in the U.S., but this still struck me as odd. He was certainly the only graduate student I met in my four years as an undergraduate who insisted on being called by his last name.  

Well, Mr. Kristol's column today takes aim at Barack (and Michelle) Obama, and does so quite unfairly in my view.  But I will leave a detailed exegesis of his argument to others.  What caught my attention was this passage:

Michelle Obama, in the course of a stump speech, remarked, “For the first time in my adult lifetime, I’m really proud of my country. And not just because Barack has done well, but because I think people are hungry for change.”

Michelle Obama’s adult life goes back to the mid-1980s. Can it really be the case that nothing the U.S. achieved since then has made her proud? Apparently. For, as she said later in the same appearance: “Life for regular folks has gotten worse over the course of my lifetime, through Republican and Democratic administrations. It hasn’t gotten much better.”

Now in almost every empirical respect, American lives have in fact gotten better over the last quarter-century.

Really? Look at the chart below, which comes from Frank Levy, my authority on such matters. It shows the median compensation since 1980 of different groups of prime-aged men, alongside productivity. 

 

People like me with graduate degrees have done great.  But the median compensation (that includes fringe benefits, by the way) of high school graduate men has declined by about 10 percent since 1980!  Mr. Kristol: that means that for a high-school graduate, the odds that his compensation would have fallen by more than 10% is 50-50.  Note that even college graduates have not seen any income gains since around 2000.  The increase in labor productivity has outpaced the earnings of all these groups, including that of workers with graduate degrees.  (The outcomes for women have been much better.)     

What is special about the last quarter century, as Frank Levy makes clear, is that it followed a period when productivity increases were broadly shared by different groups in society. That is no longer the case, and some groups have definitely been left worse off--not just in relative but also in absolute terms.

So statistics aside, who do you think has a better sense of what has happened to "regular folk" since 1980? Michelle Obama or Mr. Kristol?     

Comments

[Nilgun]

Brilliant... I was flabergasted as I read the NYT this morning... Dani, please send it to NYT if you have done it already... You have an excellent point and the chart tells it all...

[Nilgun]

Brilliant... I was flabergasted as I read it this morning at the NYT. Dani, please send it to the NYT if you have already done so. You make an excellent point and the chart tells it all...

[Frank]

Interesting, but how do you reconcile big rises in productivity with declining earnings for workers with low education? Your implicit answer is that technological progress has acted as a substitute for low-skill workers. I buy that, but here are other alternatives. 1. The price deflators are wrong. After all, computers, videos, TVs, refirgerators, etc.. have dropped in price remarkably after adjusting for quality. This does not overcome the inequality (unless consumption patters differ) but it should lift all boats in real terms. 2. Immigration. Adding newly arrived immigrants every year may dent the calculations somewhat.

[JT]

A "C"? What a generous grader you are!

[Dani Rodrik]

Frank--

The difference goes to capital. Read Levy's paper.

[Frank]

Yes, the difference goes to capital CONDITIONAL on the data one has. Yet better use of hedonic prices,etc... may alter the accounting identity.

[Frank]

Can we really say that the purchasing power of the low education workers has remained constant or declined slightly from 1980s in the face of increases in product quality, diversity, etc.

That would imply they have been trading down in relative (not absolute) quality ever since, so today poorer folk drive the equivalent of a 1980s Ford Escort, warts and all.

Maybe, but I'd like to see more meat on the bare statistics of income quantiles, etc.

[Rob]

Frank are you so used to throwing out that answer that even when it doesn't apply you'll still use it? Real GDP increased, even if the price deflator is wrong, capital would still be getting a much bigger share than previously.

[Denis Drew]

Two comments,
Michelle Obama entered Harvard -- left Chicago -- in 1985 I believe. Meaning she left Chicago just before it shed its significant white racism (significant meaning up to 50% of the whites had some taint; maybe 7% were serious racists) -- in my personal observation anyway.

In 1985, Harold Washington was elected mayor, here. That same week, black taxi riders began tipping drivers (me) -- half as much at first (I was formerly a Bronx/Harlem gypsy in case there is any question of my motives here) -- they finally started to feel "freakish" about not tipping; I guessed as in they were finally feeling they had something social to lose.

Over the next five years I sensed, though I cannot quite explain why (by now anyway) that Chicago's white racism was receding "backwards", that is: as the blacks cared less about white racism, whites reacted by feeling less racist. By, 1990 I no had to agree with my black riders from out of town that I wouldn't want to raise a black child here because it would grow up feeling too "different."

So that is the not so nice American experience that Michelle Obama started out with.

(Very ironically I now have run into racist blacks at about the same percentage as Chicago whites formerly were in the San Francisco/Berkeley area of all places. Super-sized Evanston: supposedly the most liberal whites in the country; actually the richest whites in the country who do absolutely nothing for their poor minorities [in S.F. they will vote for a high minimum wage if someone puts it on the ballot, heavy activists, not them -- but would never conjure up such an action on their own]. As a result when I get back to Chicago after a while there, I am afraid to talk to black people for two weeks: I cringe and wait to see if they will answer me back or pretend I don't exist (not embarrassing there; normal) -- I know better but after months of S.F./Berkeley it becomes a Pavlovian expectation. When you gonna best LBJ's minimum wage by $100/wk Berkeley?).
**************
If you go by an actual minimum needs budget (adjusted for current dollars) as found in the 2001 book Raise the Floor (minimum needs contrasted to the half the median income European poverty standard which definitely wouldn't be accurate here*, or America's farcical three time the price of an emergency diet poverty standard), the minimum needs of a family of four with a $10,000 health insurance bill is $41,000 -- not hugely off the median compensation for high schooled men in the chart above. If the median wage in America is such a near fit to a realistic family poverty standard we definitely may be doing something very wrong.

*According to p.121 of The State of Working America, 2006/2007: the median wage in America grew only 10% from 1973 to 2005 -- while the Census says per capita income grew about 70% (albeit while a lot more family members went to work).

[robertdfeinman]

The secret of neo-con rhetoric is that it unconstrained by any attachment to real data. Remember the quote about the administration making its own reality?

This is a characteristic of true ideological followers (what psychologist Robert Altemeyer calls the Right Wing Authoritarian personality type). Whatever doesn't fit their framework is ignored, dismissed with irrelevant counter arguments, or if that fails, then replaced by ad hominem attacks on those presenting the data.

Kristol is especially valuable to the neo-con leadership because he is a fool, but a witty one. He lacks the intellect to examine the data for himself and thus is the perfect conduit for the propaganda effort of the moment.

He can reframe a dry argument into a colorful piece and get it placed in a highly visible spot such as the NY Times or on one of the talking head shows.

The right seems to have a stable of them currently, including David Brooks and Ben Stein. The left needs better writers! They can't depend upon Comedy Central to do all the heavy lifting.

[Peter]

Dani, you can wear those C's as a badge of honor: you resisted Straussian indoctrination. Keep up the good work.

[Frank]

Rob--

You said "Real GDP increased, even if the price deflator is wrong, capital would still be getting a much bigger share than previously."

I said: "1. The price deflators are wrong. [..] This does not overcome the inequality (unless consumption patters differ) but it should lift all boats in real terms."

In other words I am questioning not the rise in inequality - there is no doubt about that - but the decline of real income of those with low levels of education. I am concerned about the absolute levels. Different prices would definitely affect that.

Now, we know there have been enormous increases in quality of many products. Suppose our price index over-estimates inflation by 3% p.a. (is that plausible? I DON'T KNOW but I'd like a good answer) and incomes of those with low educations rise by the same amount in nominal terms. Then the net effect is no gain in MEASURED real terms. My point is that since income gains are likely to have been small, they will easily be washed out by small errors in prices.

Anecdotally, TATA of India just brought to the market a $2,000+- car. At this pace of technological innovation you would need massive declines in nominal incomes to keep real incomes constant...

[Alex]

Anecdotally, TATA of India just brought to the market a $2,000+- car.

Which a) has been on sale for a massive week, b) isn't on sale in the US, and c) can't legally be sold in the US (or Europe, Canada, developed Asia, or Australia or New Zealand) because it doesn't meet crash-safety standards or air pollution standards.

Suppose our price index over-estimates inflation by 3% p.a. (is that plausible? I DON'T KNOW but I'd like a good answer) and incomes of those with low educations rise by the same amount in nominal terms. Then the net effect is no gain in MEASURED real terms.

"There's no evidence for that...but it is a *scientific fact*!"

Seriously, if the foundation of your argument is that absolutely all the measurements are wrong in the direction you would prefer them to be wrong and you have absolutely no evidence for this, you ought to shut up.

[hari]

Dani -

You can now start a new carrier in politic(al)s. More power to you...

[Denis Drew]

Frank,
Technological deflation improves the value of incomes that have grown faster than inflation, too -- not just the folks left behind by what is gently called "inequality" (I prefer Great Wage Depression!). The true question is not whether "flying cars" for the same price will put those left behind by economic growth (or even inflation!) ABSOLUTELY better off -- but whether they are relatively better off (that is the question to THEM anyway :-]).

It may be of great succor to me that we can have this conversation that would have been impossible 28 years ago -- not to mention HDTV for the same 600 adjusted dollars -- but if I were still a Chicago cab driver I would literally be earning half as many of those adjusted dollars per hour as I did 28 years ago ( after starving the meter, building subways to both airports, opening up unlimited limos -- but did they have to add 40% more cabs? -- labor don't matter much here) I would also be missing neat vacations and investing in securities (no more responsibilities) that the job one time would have paid for. It's not about numbing poverty -- its about everybody making out.

In 1991, I read in BusinessWeek that McDonalds had 70% employee turnover every 90 days. As the fed minimum wage sunk to 1939 levels, $5.15/hr (v. $4.50/hr w/no tax) I observed the same happy Mexican faces year in and year out behind the counters, here and in S.F. (also Chinese out there). Now that the min wage here has moved up to about 50 cents short of Eisenhower's 1956 minimum, I actually see some American born faces showing up behind the counter (business has noticeably picked up too -- all from the third-world segment who may now be able to purchase what they serve occasionally).

It is not all about higher tech folks getting a greater share: docs' incomes dropped 7% from 1993 to 2005 as per capita income grew about 10%. Docs have to depend on the majority to pay them I guess; the ever richer don't have more livers or teeth to attend to.

[Denis Drew]

Frank,
Three reason why hedonics don't wash as far as I am concerned:

1) For people on indexed incomes, we cannot cut back on their potato money because they may obtain a better TV (or "flying cars") for the same price).

2a) Only God could compute a sensible "unified" inflation number for my modern Timex being X? many better than the Timex of my 1960 youth for half the price;
2b) We humans could not make any sense out of the single number unless it were broken back out into the two original ones.

3) Since average income grows 15-20% every decade anyway, the sky wont look like it's going to fall (unless your name is Newt Gingrich) if we don't have a "philosophically" perfect inflation number (most of us can wait until we get to heaven). Don't worry; be happy (assuming everybody gets their fair share, of course).

[pgl]

That must have been a gentleman's C!

[Charlie]

Frank,

There is no way we could be off by really far like 3%. For one, there are lots of ways to measure prices. We can measure consumer prices, producer prices, we can look at wages, and we can look at interest rates.

Let's suppose that somehow prices each year were really 3% lower than the CPI said. How would companies be making profit? They'd have to be paying lower costs (or see huge increases in sales). So we'd have to see concurrent drops in prices producers pay like the PPI, wages and interest rates.

Think of what an investor would do, interest rates would have to be 3% higher here to attract capital. We'd also see lots more foreigners buying US products to benefit from our low prices.

There is just no way an error like that could happen and not be observed. It is true that electronic goods have seen dramatic decreases in prices over that time period. But to help your intuition, it might help to think about the other areas of consumption. Computer power has gotten very cheap very rapidly, but other things haven't, things like labor, raw materials, agriculture. Where are prices rising? Labor intesive sectors like medical care and education are seeing big price rises. Housing has seen a modest price increase (price to rent, price to own saw major increases due to asset bubble). And energy and food stuffs have seen price increases.

Average all this stuff out and you get moderate inflation, which all the indices agree on.

Charlie

[Arnold Kling]

Bill Kristol is wrong on a lot of economics, but he is more right than Rodrik and Frank Levy on this one. Listen to the podcast at www.econtalk.org with Russ Roberts and Thomas Sowell.

[Carter]

I wonder if the decline in compensation for high school graduate men you're upset about is in someway related to the mass immigration of low skill workers that you're in favor of?

[Bernard Guerrero]

"So statistics aside, who do you think has a better sense of what has happened to "regular folk" since 1980?"

I take it that we're supposed to use the population of non-college-grad males as our touchstone for "regular folk"? :^)

Bernard "Irregular" Guerrero

[Jacob Rus]

As a student currently taking both Mansfield’s political theory course, and gov. sophomore tutorial, and writing papers on both the Federalist and Machiavelli in the next few days (both courses with the same awesome-so-far, but-we’ll-see-how-the-paper-grades-go, graduate student tutor/teaching fellow), this post seems particularly relevant. :)

Kristol is a predictable clown though, and it’s a wonder the New York Times would honor him with a column. Safire at least wrote well, and occasionally said something interesting. Every Kristol column I've seen so far has been both ploddingly dull stylistically, and stupidly argued.

[Jacob Rus]

And I suppose that's a dangling modifier … C- for me.

[JRip]

"Now in almost every empirical respect, American lives have in fact gotten better over the last quarter-century."

Sounds like neither Kristol or Rodrik is fully, completely wrong.

What has gotten better?
1. all sorts of goods and services BOTH cost less and do more than 25 years ago.
2. Life expectancy is better.
3. Personal computers - Apple-Mac & MS-PCs
4. Mobile phones
5. FAX machines
6. The Internet came out of the government/military into the rest of the world.
7. Communism in the USSR went kaput and China became a market economy.

and DR correctly points out that wealth distribution skewed toward the rich.

and BK worries about Islamic terror and Iran but not so much the fate of the perpetrator of 9/11.

PS If you kept those "C" papers from your undergraduate days I wonder what grade you might get if you submitted them anonymously to other graders.

[Jacob Rus]

Also worth noting—I'm with Michelle Obama: This is certainly the first time in my lifetime that I've felt proud and hopeful about American presidential politics.