Summary: First thing first: Solitude Challenge Results!!! So finally back to a nice boring economics podcast again. This is a bit like a nerd alert on steroids but is kind of true to my theme of bringing an alternate view, backed by data, to some conventional wisdom. This time, I want to tackle the alleged stagnation of the middle class. Everyone knows the media spin on this. Articles like this have been a dime a dozen in the last several years. The basic theme is that over the last several decades, while America has grown a lot economically (Think of where we were 30 years ago), the vast majority of those gains have gone only to the super-rich. And those in the middle class have ‘stagnated.’ That is their real wages have either stayed the same or declined. So to examine this, I’m going to use for the bulk of this podcast, an incredible working paper put out by an economist at Cornell named Richard Burkhauser. I actually heard him interviewed on one of my favorite podcasts; Econtalk. (Episode here). What I really like about his work, is that not only is it a great perspective on kind of a hot button issue, but it is also a great example about how important it is to define our assumptions and exactly what we are measuring when doing this type of analysis. So let’s dive in and see what Burkhauser and his team did. At the root of everything, they are basically trying to answer the question; ‘How has the middle class done over the past 30 years or so, and is it true that they have stagnated?’ So the first question we need to answer, is how do we measure that? Personally I think the best way to measure well being would be to take all sorts of stats about how much leisure time people have, what kind of cool electronics they have in their house, combined with their income etc. But that type of data is super hard to get, so we are a bit limited by the data that is out there. The simple answer is to just measure their income (inflation adjusted of course). So we just go to the IRS, get everyone’s tax returns, take the average each year, and whammo, we’ve got a nice looking graph that definitely trends up and to the right. Case closed, everything’s good right? Turns out that when we are talking about income, just simply taking the average to find the “middle-class” has some problems. The main problem is outliers. With all of the economic growth over the past few decades, there have been some really super rich people created, and those outliers can artificially bring up the average and make the middle class look a little better than they probably are. So the generally accepted way to measure income, or at least to find the middle class, is to look at median income. Quick review on what a median is, you just line everyone up in a gigantic line, and pluck out the person in the exact middle. No calculations necessary, you’ve found your median income. Our next question is what are we lining up? Should we line up every single person? Man, woman, child etc? Obviously then you’re going to wind up with a ton of individuals that look like they have no income. That might be valuable for answering certain questions, but remember, we are asking ‘How has the middle class done?” So for our question, a stay at home mom of 2 whose husband makes $100K should probably not be seen as living in poverty because her personal income is zero. So instead of lining up individual people to find the median (middle class) income, we need to use some type of sharing unit. This is where the Burkhauser paper really gets awesome, because his whole thesis is that this next decision we can make, has big implications on what he resulting data looks like. So there are basically two sharing units that he addresses; the tax unit, and the household. It’s very possible that these are exactly the same, and actually, in most cases they are, but let’s define what they are and what each means: Tax Unit: This one’s pretty easy. A tax unit is whatever is filed on your income tax return[...]
