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Myths of Rich and Poor: Why We're Better Off Than We Think

Book Review

March 1, 1999


Preston J. Miller Former Vice President and Monetary Adviser

Myths of Rich and Poor: Why We're Better Off Than We Think

By W. Michael Cox and Richard Alm
Basic Books
256 pages

Too bad this book wasn't out a few years earlier. I had the bones of the argument. This book provides the meat.

The situation was this: I was on a panel for a nationally televised economic forum held in 1996 at the Minnesota State Capitol. The forum addressed the plight of common working people and featured such notable speakers as the then U.S. Secretary of Labor, president of the AFL-CIO, and a U.S. senator and U.S. representative from Minnesota. Their message, one and all, was that the U.S. economy was failing a vast majority of its citizens.

Myths of Rich and Poor Book Cover Image Since 1973, average hourly earnings in constant dollars had declined. Incomes had remained stagnant overall, with the bottom quintiles of the income distribution losing ground and only the top fifth gaining. In fact, the Secretary of Labor had stated just previous to this forum that 97 percent of the income earned since 1973 had gone to the top fifth of the income distribution.

I made the counter argument, as do Cox and Alm, that the U.S. economy is succeeding in providing real gains to a majority of its citizens. Why, you might ask, did the authors and I feel compelled to make our arguments? I'm sure their answer would be the same as mine: to prevent bad policies from being enacted. If one believes the U.S. economic system is failing, one is prone to suggest policies to repair it.

Thus, at the economic forum I heard calls to raise the minimum wage, slap a confiscatory tax on CEOs' salaries, increase the progressivity of the income tax and restrict some business practices of corporations. However, if one believes the U.S. economic system is not failing, all of the proposed policies are seen to be counterproductive government interventions.

By comparing the argument I made then with the one the authors do now, one can judge the contribution made by the book. My argument was based on careful academic studies that attempted to set the aggregate statistics straight. I relied heavily on the work of Richard McKenzie, which directly took on the claims made by the prominent speakers at the economic forum. (See, for example, The "Fortunate Fifth" Fallacy, Center for the Study of American Business, May 1992.)

On the decline in the real wage, McKenzie exposed problems in both the measurement of the numerator, average hourly earnings, and the denominator, the consumer price index. Average hourly earnings omit benefits and pay increases in the form of promotions and bonuses. Over recent years, these nonwage forms of compensation have risen relative to wages. Meanwhile, the consumer price index is now widely recognized to have been biased up historically. This bias was estimated by a government-appointed commission to be 1.1 percent per year. The bias has been addressed by the Bureau of Labor Statistics (BLS) in a series of revisions to its method of calculation. However, when the BLS revises its method, it does not go back to correct previously reported data.

How important are these measurement problems, say, over the period 1970-1998? If we look at average hourly earnings divided by the reported consumer price index, we find that real earnings on average declined by 8 percent over this period. In contrast, if we look at a comprehensive measure of workers' pay (private nonfarm compensation per hour) and divide by a corrected, unbiased consumer price index, we find that real earnings on average increased by 84 percent over this period. Cox and Alm cover a lot of this same ground.

In terms of the distribution of income across households, McKenzie also showed there were all kinds of problems of measurement with respect to both income and households over time. His corrected measures show that all quintiles of the income distribution have been gaining real income, although the gains for the top quintile have been the largest. But, then McKenzie makes his strongest argument that even if all the income gain is concentrated at the top, that need not be a cause for concern. That is because if we look at lifetime earnings profiles, the most common picture is people starting low on the income ladder when they begin their careers and then steadily working their way up the ladder. It is not a big problem that the top quintile gets the majority of the gains, if a majority of the employees eventually work their way to the top. Again, Cox and Alm cover a lot of this same ground.

So, what do Cox and Alm add to the argument? Essentially, McKenzie, I, and others had to argue that our aggregate data were better than that of the opposing side. To a nontechnical audience, it could well appear that the difference in the arguments of the two sides just pits one set of phony books against another. What Cox and Alm provide are the real-life stories behind the numbers. They move the argument from the abstract to the concrete: from "goods" and "services" to "microwaves" and "laser surgery." Instead of numbers, they remind people of the great progress that has been made, describing specific examples to which readers can relate.

Cox and Alm harness a tremendous volume of knowledge, in the form of survey data, historical facts, and personal observations, to buttress the arguments of McKenzie. After reading this book, no one can doubt that the vast majority of Americans are better off today than they were 20 to 30 years ago. Cox and Alm show that in terms of material goods, such as televisions and appliances, today's poor own more than the middle class did earlier. They show that we work less and spend more time on recreation and entertainment.

Perhaps their greatest contribution is to bring to life the dynamism of the U.S. economy: the unending churning, as new products and services are invented and developed to improve the well-being of society, and the associated churning of jobs, as workers are moved from older, less productive industries to newer, advanced technology industries. They include a wonderful chapter on products and technologies that have been either recently developed or are still in the development stage. The authors display an impressive breadth of knowledge concerning technologies at the frontier. The chapter also indicates another problem with using wage and income data to measure well-being. How does one measure the value of receiving life-saving organ transplants, communicating instantaneously worldwide via the Internet, telephoning from one's car in an emergency, or buying peaches in the middle of winter-options that were not even available a few years back?

The book is not perfect. The vast amount of data it conveys makes for a lot of tedious reading. A chapter is included to demonstrate that the U.S. economy was, and continues to be, the best in the world. That may or may not be, but it is irrelevant to their main thesis that the United States is succeeding in providing improvement to the lives of a majority of its citizens. Another chapter indicates that the time, on average, U.S. employees must work to purchase a large number of goods has gone down. They do this by looking over time at the price of individual goods divided by average hourly earnings. But their analysis is flawed by their selection of goods. They largely omit services for which prices have risen relative to goods. It cannot be that average hourly earnings relative to the price of the whole market basket (the consumer price index) has declined (which indicates that the time working required to buy the whole market basket has increased), while prices taken one at a time have declined relative to average hourly earnings (which indicates that the time working required to buy each individual good has declined).

The book leaves us with an unsolved puzzle: If times are so good, why are there so many complaints? Part of the answer, the authors suggest, is that the churning of new technologies, products and jobs has sped up and people are uncomfortable with change. Another part of the answer, I believe, is that an industry or organization does not get a larger share of the economic pie by saying how well they are doing. Whether they are spokespeople for unions or employers, for the old or young, or for students or teachers, they can only get public largesse for their members by articulating how badly their members are doing. Whatever the answer, though, Cox and Alm make a convincing case that the complaints should not blur the big picture of how well the U.S. economy is performing.