• Category Archives Finances
  • Interesting Critique of Picketty

    I find this essay, by Gary Burtless (an economist at the Brookings Institution, which is one of the few think tanks not entirely staffed by hacks) quite interesting. His argument is that inequality is nowhere near the level it was in the 1920s, because government programs that transfer money (and goods) ┬áto lower- and middle-income people are dramatically higher than they were in the 1920s. I think that’s a fair critique, although since I haven’t yet read Picketty it’s kind of hard to know.

    However, one of the points he makes is that because of these transfers from the government, income has risen a lot for the bottom three fifths of the country since 1970. And he cites things like Medicaid (and ACA) spending as a primary driver behind this. To me, it seems rather disingenuous to claim that the government paying $10 ($56 in 2010 dollars, accounting for inflation) for a doctor’s visit in 1970 for me, and then paying $112 for a doctor’s visit in 2010, represents an increase in income for me of $56 over that period. It’s still just a doctor’s visit. (Meanwhile, food is much less expensive, adjusted for inflation, than it was in 1970, but the food aid we give now buys less than it did then. Or, at least, the amounts that I see certainly don’t match up with the amount of food, including government cheese, that I recall being able to afford as a child on food stamps.)

    He also argues that because household size has shrank, actual incomes for individuals have gone up even if average household income has stayed the same. This seems to me to be rather missing the point: even if household sizes on average are smaller now, the trend of two-income households becoming more prevalent is much stronger, so that although there are more single-parent households now than there were in 1970 by far, there are also drastically more two-income households than there were in 1970. And yet average household income hasn’t changed significantly, even though many households have twice as many earners as they did before.

    Finally, and this is a point I think a lot about: in 1970, pensions were the norm, but were not figured into average wages as income at that time… they are instead figured as income when you receive them, after you retire. So let’s say that in 1970 you were making $10,000 a year (~$56,000 in 2010 dollars). In addition to that your employer was putting aside money for you in the pension fund. Your take-home pay was in the $40,000 a year range in 2010 dollars, plus you had a pension. If you had to spend all $40,000, that was okay… you were still gaining on retirement.

    Contrast that with today’s worker, making $56k a year in 2010. We’ll be generous and assume a 401k: putting aside $10k means that you have $34k to spend. But according to the usual analysis, you are making the same wages that the 1970 worker was. That seems… ill-informed.