The Shrinking Middle Class in America

[Wiglaf]

I actually know the guy who wrote that Business Insider article. Any ideas for how I can repay him for emptying his bladder on all our brains? I can't get people audited anymore until 2012 but anything else is on the table.

[Hauldren Collider]

Put his name down to get those damn annoying campaign contribution ad letters from half of congress. You know the ones they send you after you give them 20 bucks and then for the rest of your life you get signed photographs from Barbara Boxer or Mitch McConnell or Ron Paul saying they'll never forget your generosity and friendship, sincerely, an insincere politician?

[Al B. Sure!]

I actually know the guy who wrote that Business Insider article. Any ideas for how I can repay him for emptying his bladder on all our brains? I can't get people audited anymore until 2012 but anything else is on the table.

I went to this Michael Snyder's blog and he actually doesn't seem like much of a leftist (his most recent post is about Americans being taxed to death) but he is a chicken little alarmist doom and gloom nut. His blog is theeconomiccollapseblog.com and all his posts have these absurd shock titles like:

Will thousands of police layoffs unleash chaos and anarchy across America?

The U.S. Economy Is A Dead Horse And The American People Are Starting To Get Really Pissed Off And Frustrated

20 Things You Will Need To Survive When The Economy Collapses And The Next Great Depression Begins

He's a douchebag.

His "Disaster Plan" entry is hilarious.
This guy is less economist and more Branch Davidian.

[SlowwHand]

So essentially what the charts and analysis tells us is that if you're working, it's better to be in the hospital, using your good benefits.

[Hauldren Collider]

Then let his correspondence all come from douchebags

xpost

[Barnabas]

I had an american outsourced job once, I had to pretend to be a woman from the USA and give relationship tips to Americans, they would chat with me through text messages, I used a computer program that would let me to chat with dozens of yanks at the same time.

It was a part time job and they payed like 420 dollars per month (more or less what was minimal wage in Argentina a few years ago) it was hilarious and a lot of fun, it didn't feel like working.

[Al B. Sure!]

So essentially what the charts and analysis tells us is that if you're working, it's better to be in the hospital, using your good benefits.

It isn't quite a slam dunk (though I'm sure Kuci or maybe KH if he comes in here will say it is). It does appear that while real wages haven't improved compared to the 1970's, total compensation (which DOES include other things besides health benefits such as retirement accounts [although Americans use those a lot less now]) tells a bit of a different story. But again, without seeing median numbers, variances, or considering the increase in productivity over that time frame, you can't really say much either way. Intuitively, however, it's pretty clear that living standards have increased significantly since the 1970's. Would you say that on average people have more things today than they did in the 1970's, Sloww? Definitely, although obviously that is only one measure of well-being and it ignored how many purchases are actually debt-financed.

I do suspect though that total compensation has increased slower than productivity, but increases in productivity have likely been positively affected by free trade policies.

[Kuciwalker]

The other useful point is that CPI overestimates inflation because it isn't corrected for increases in the quality of goods (faster computers, safer cars, etc.). IIRC the effect is something like 1%/year, but I'm not sure how far back that holds.

[Hauldren Collider]

I had an american outsourced job once, I had to pretend to be a woman from the USA and give relationship tips to Americans, they would chat with me through text messages, I used a computer program that would let me to chat with dozens of yanks at the same time.

It was a part time job and they payed like 420 dollars per month (more or less what was minimal wage in Argentina a few years ago) it was hilarious and a lot of fun, it didn't feel like working.

Sweet gig

[MrFun]

Examples of service industries:

* Government
* Healthcare/hospitals
* Public health
* Waste disposal
* Education
* Banking
* Insurance
* Financial services
* Legal services
* Consulting
* News media
* Hospitality industry (e.g. restaurants, hotels, casinos)
* Tourism
* Retail sales
* Franchising
* Real estate

You seem to think service = retail.

No, retail is obviously not the only type of service job out there.

[Al B. Sure!]

The other useful point is that CPI overestimates inflation because it isn't corrected for increases in the quality of goods (faster computers, safer cars, etc.). IIRC the effect is something like 1%/year, but I'm not sure how far back that holds.

The BLS uses hedonic adjustments to correct for quality changes in goods. Not sure how they do it though. There is somewhat of a correction for increases in quality.

[KrazyHorse]

The other useful point is that CPI overestimates inflation because it isn't corrected for increases in the quality of goods (faster computers, safer cars, etc.). IIRC the effect is something like 1%/year, but I'm not sure how far back that holds.

Another point is that the cpi uses a uniform deflator across the entire population. There is good reason to believe that inflation faced by lower income people has been lower than on higher income people. For example, low cost manufactured goods from overseas comprise a larger share of the expenditures of the poor.

[Al B. Sure!]

Kuci:

I got this from an article published by the BLS. I wasn't able to copy and paste from a better article ("Addressing Misconceptions about the Consumer Price Index" by Greenlees and McClelland in the Monthly Labor Review pp. 7-10) so here's this:

Many of the procedures used by the CPI program in processing data are
specifically designed for separating price changes from quality changes. The data
collection begins with detailed checklists that the data collectors use to assure that
precisely the same item is repriced from period to period. If the sample item has changed in any observable way, one of three general procedures may be applied to the data. An economist with specialized knowledge of the item examines information on the two versions of the item and determines whether: a) the change has not resulted in a significant change in the quality of the item, so that the prices of the old version and the new version can be directly compared; or b) a significant change in quality occurred and information is available for estimating the dollar value of the change in quality; or c) a significant change in quality occurred and information on the value of the change in quality is not available.
Manufacturers of a product are one possible source of information of what a certain change in quality cost. An alternative method is hedonic regression analysis. The hedonic method estimates the price-quality relationship by running regressions of price on characteristics of goods. The coefficients of these regressions can then be used to infer the value of changes in characteristics of the goods in the sample. For example, the observed valuation of computers with different processor speeds could be used to estimate the quality improvement of a new computer with a faster processor. The CPI has used 19 hedonic methods since 1988 for calculating the effects of depreciation on rent, and since 1991 for quality changes in apparel

Since that article, they've expanded usage of hedonic models to other goods. You can find the relevant data at the BLS website.

Here's a Pittsburgh Post-Gazette reprinting of an article from the WSJ about hedonic adjustments and their expanded use in recent years:

http://www.post-gazette.com/pg/05129/501565.stm

Hedonics, which literally means the "doctrine of pleasure," was a term first adopted by a General Motors economist, Andrew Court, who studied auto prices in the 1930s. He had created a method of linking car prices over time to features such as weight and horsepower, and wanted a name for the statistical method that emphasized the link between features and consumer utility.

The technique stirred few passions until the technology boom of the 1990s. By then, government agencies had realized they needed a better way to track quality changes in computers and other fast-changing high-tech goods.

Federal Reserve Chairman Alan Greenspan, testifying before the Senate Finance Committee in 1995, said that he thought the CPI was biased upward by as much as 1.5 percentage points. The political response was immediate: If inflation was lower than supposed, it would be possible to rein in deficits without cutting spending or raising taxes. That's because the lower inflation rate would translate into smaller payments to Social Security recipients and other big-ticket items for the government.

Shortly thereafter Congress established the Advisory Commission to Study the Consumer Price Index, better known as the Boskin Commission. The panel confirmed Mr. Greenspan's view and said about half the bias was due to product innovations, such as those seen in computers, which were being overlooked in the CPI. Thus began a push to apply hedonic techniques more broadly.

However, they have cut back use of hedonics in some areas:

The most visible and controversial application of hedonics in the CPI has been in computers, where hedonics sharply accelerated price declines starting in the late 1990s. Recently, the bureau has quietly stopped using hedonics in computers.

Mr. Johnson, the CPI economist, says the change, which took effect in September 2003, was mainly driven by "timeliness" issues. With computers changing so rapidly, the agency found it difficult to keep its hedonic models up-to-date. At the same time, he says, the components of home computers have increasingly become commodities, making it far easier to price the various parts separately, such as memory or screen size, by going straight to manufacturer sources that list those prices.

The decision to stop using hedonics on computers in the CPI, which hasn't been publicized, came in the wake of a 2002 report by the National Science Foundation's Committee on National Statistics. The report concluded that hedonics may be one of the most promising ways of dealing with quality changes, but the agency should be more cautious in adopting it.

But look to expand use of the adjustments elsewhere...

Meanwhile, the statistics bureau is continuing to look for new ways to apply hedonics. As part of its research, the agency recently selected 10 random items, including laundry detergent, to study as potential new areas to apply hedonics.

[Al B. Sure!]

Another point is that the cpi uses a uniform deflator across the entire population. There is good reason to believe that inflation faced by lower income people has been lower than on higher income people. For example, low cost manufactured goods from overseas comprise a larger share of the expenditures of the poor.

Watch it, KH. I had an economics professor who argued that that particular likelihood of disparate effects of inflation between different levels of wage earners meant that macroeconomic policy should favor employment over inflation control. Basically, inflation is something only the rich have to worry about so who cares?

I argued against him noting that because low wage earners have less savings and are more 'fixed-income'* that inflationary periods hit the purchasing power of low wage earners harder. Also, any cuts in labor spurred by a decline in production (or higher prices for input goods) would further limit the purchasing power of low wage earners because they are more likely to become unemployed. Also, low wage earners are more likely to use credit to debt finance these purchases that they are less able to afford.

So inflation is something that affects the poor at least as much as the rich. The rich can always substitute to cheap Wal-Mart goods at any time, remember

Of course, the savings of wealthier people would decline as well... but, typically wealthier people don't have as much of their wealth in cash as poor people do, let alone cash assets with a very short-leash (ie- poor will use up savings faster than the rich would for obvious reasons).

*(I'm not sure how wage inflation differs between different strata but in the short-run which is what I'm concerned about here, obviously, it isn't relevant)

Also, consider:

http://www.washingtonpost.com/wp-dyn/content/article/2008/03/20/AR2008032003517.html

An analysis of government data by The Washington Post found that prices have risen 9.2 percent since 2006 for the groceries, gasoline, health care and other basics that a middle-income American family has little choice but to consume. That would cost such a family, which made $45,000 on average in 2006, an extra $972 per year, assuming it did not buy less of such items because of higher prices. For a broad range of goods on which it is easier to scrimp -- such as restaurant meals, alcoholic beverages, new cars, furniture, and clothing -- prices have risen 2.4 percent.

[Al B. Sure!]

It just occurred to me that KH has me on ignore and likely won't even read my response to him

Oh well. Maybe someone else will read it and learn something

MrFun, you posted a short response to Kuci recently. Any thoughts on anything that Kuci or myself have posted that can change your mind about the original article or at least appreciate the complexity of the situation?