Matt Yglesias

John Stossel’s Tall Tales About Middle Class Income

For reasons that have long escaped me, ABC News thinks it’s a good idea to have a fanatical libertarian pundit on their payroll and presented as a newscaster. They don’t balance him with any social conservatives. They don’t balance him with any liberals. They don’t even balance him with any opinionated moderates. Instead, ABC News puts out a product that’s mostly banal TV news and sometimes 100-proof “we should let corporations do whatever they want,” often riddled with errors. Apparently the pundit in question, John Stossel, has a special coming out later today and he’s been hyping it on various conservative media. Hence this exchange on the Bill O’Reilly show:

O’REILLY: Do you believe the middle class in 2009 is worse off than it was 20 years ago in this country?

STOSSEL: No, I think the middle class is much better.

O’REILLY: Because that’s the liberal line. The liberal line is the middle class get pounded and they need my money and your money. You make an enormous amount of money, Stossel. The middle class needs our money because they just can’t keep up. But what about the middle class?

STOSSEL: The middle class has gone from something like $25,000 average income in today’s dollars to $75,000 today.

The basic liberal line is that middle class wages have stagnated for decades while the rich have gotten richer. I think you can make a credible counterargument that since the CPI doesn’t properly account for “new goods” (nobody had an iPhone or a DVD player in 1988, etc.) that this factoid is unduly bleak and actually there have been modest improvements in living standards due to the improvements in available gadgets. Alternatively, you could argue that this is offset by things like the increase in commute times, the decrease in air travel quality, and other elements of quality of life that have been on the decline. What you can’t really argue with is this chart that shows that something’s gone amiss:

I got that chart from Heather Boushey, one of our economists here at CAP. The other salient point here, of course, is that it’s hard to understand where Stossel got this $75,000 figure. One assumes that the median American household has a middle class income. And the median American household has an income of about $50,000 a year. That’s a lot less than Stossel’s number. Heather and I both immediately thought of some work Third Way’s done that’s probably the source of Stossel’s “finding.” In particular, Third Way (a valued progressive ally!) points out that “in 2006, the median income of working-age husband-wife couples (ages 25-59) was $73,765.” By this standard, Stossel is only being a little inaccurate about the current level of middle class income, though nobody can say where this trend information comes from. On the other hand, it’s not clear why you would redefine “middle class” from meaning “similar to the typical American” to meaning “married couples aged 25-59.” It’s interesting that married couples ages 25-59 have an average income that’s a lot higher than the income of the median American, but it’s not clear what this tells us about middle class well-being.

Here’s another chart:

One thing you could say on behalf of the Stossel/ThirdWay approach is that the ideal of a married household ages 25-59 encompasses the very essence of middleclassitude and everyone else doesn’t really count. Thus it turns out that the average middle class family makes about $75 grand a year. But all that follows from this, if you look at the chart above, is the conclusion that the United States doesn’t qualify as a “middle class” society. Instead, perhaps, we’re a country like Pakistan or Brazil (SEE CORRECTION BELOW) where there’s a tiny hyper-wealthy elite such that one percent of the population monopolizes 20 percent of the income, then there’s a larger middle class, and then a broad majority of the population that has a sub-middle class standard of living.

That, however, isn’t the standard way of thinking about a developed world democracy, and I don’t see any particular reason we should adopt it. Instead, the typical American family is a middle class family, and it’s quite a bit poorer than Stossel suggests and has been suffering from a long period of wage stagnation. I would also note that the aforementioned Third Way report was from a little while back and includes the claim that progressives are wrong to worry about rising indebtedness because those debts have been paired with rising asset values. Joke’s on them. Or the American people.

The Importance of Refundability

To provide some context related to Third Way’s proposal for a college tuition tax credit it’s worth looking at Barack Obama’s proposals in this regard:

According to Obama’s Web site, the Democratic presidential candidate wants to eliminate federal subsidized private loans and instate a $4,000 student tax credit to make college more affordable to students. [...] Obama’s other solution to the college affordability issue is a $4,000 tax credit. The fully refundable credit would be available to students who complete 100 hours of community service. Castellblanch sees the tax credit as Obama picking up the students’ tab. But Kevin Carey, a policy director for Washington D.C.-based think tank Education Sector, said he’d rather see the money come in the form of a grant.

Carey said the problem with Obama’s tax credit is that the money won’t be available when tuition is due. Carey’s observation raises the question: Will students be forced to swallow tuition costs while they wait for their tax refund?

That’s an okay idea. It would help some people. Back in 2006, the DLC had a somewhat similar proposal:

To make college as universal as high school, college aid needs to be simpler and more generous. We should simplify the tax code by replacing the HOPE tax credit, the Lifetime Learning Tax Credit, and the higher education deduction with a single, refundable $3,000 college tuition tax credit to help offset undergraduate and graduate costs for all families. This new credit will cover up to 4 years of college, graduate school, and training. Net cost: $70-80 billion over 10 years.

Third Way’s new proposal, by contrast, is a repackaging of this old idea from their outfit:

Families earning up to $200,000 should receive a generous new college tuition tax cut in the form of a $5,000 credit toward the costs of college tuition, fees and books.

Compared to proposals from Obama and from the DLC, this is more generous to relatively prosperous families, but does nothing for more economically struggling families. The political rationale for the switch I understand—Third Way does more for people who are more likely to be swing voters. The policy rationale escapes me. It seems to me that the marginal dollar of tuition assistance should be directed at at poorer people rather than richer people. But that’s just my shrill left-wing blogger perspective. And the DLC’s.

UPDATE: NB, a higher ed buddy writes it to warn against conflating the student loan issue and the tax credit issue the way that first article I linked to does. These are separate proposals that don’t need to go together. The point about refundability versus non-refundability stands.

Third Way’s First 100 Days: Retirement Security Edition

As we’ve clarified, speaking as ever purely for myself and not as an institutional position of CAP/AF, Third Way’s First 100 Days agenda strikes me as pretty weak tea. For starter’s here’s their retirement security agenda:

Rebuild retirement wealth

• Federal 401(k) match. Provide federal matching funds to 401(k) and IRA contributions, up to $1,000 per worker per year.

• Temporary tax exemption for 401(k) withdrawals. Provide a temporary exemption from federal income taxes for the first $15,000 in 401(k) withdrawals for seniors who are withdrawing from their accounts.
• Streamlined consolidation of 401(k) accounts. Nearly half of all workers who switch jobs cash out their 401(k)s. Create a streamlined, automatic roll-over process for workers with multiple 401(k) accounts or who are switching jobs to avoid the problem of “cash out.”
• Federal 401(k) contribution insurance. For most workers today, a 401(k) account is the centerpiece of their retirement security and savings. Yet
  workers approaching retirement are unprotected from having their investments decimated by market shocks. Create an entity modeled after the Federal Deposit Insurance Corporation that would protect the principal contributed to workers’ 401(k) accounts until a worker retires.

The consolidations thing seems like a fine idea, although “create a streamlined, automatic roll-over process” is more of a placeholder than an actual policy. And I’m not sure I fully understand the 401(k) insurance proposal — how could it be modeled on the FDIC? 401(k)s don’t, as far as I’m aware, suffer from “runs” in the same way that bank deposits do. And a guarantee of this sort seems like it could create a substantial moral hazard problem in a way that’s not really true of bank deposits. It’s conceivable that this is a good idea, though, but you’d want to know more details — details that don’t seem to be available.

Federal matching funds for 401(k) and IRA contributions seems like a pretty ill-considered idea. In the short run, if this succeeded in boosting short-term savings rates it would have a contractionary impact on the economy and make things worse. In the long run, the idea of federal matches to boost savings has some merit, but this is an odd way of implementing it. In particular, it would be pretty regressive — an additional subsidy for families already sufficiently well-off to be saving money that does nothing for the economically struggling. CAP has, by contrast, proposed a Universal 401(k) approach that seeks to target aid to the neediest (for whom Third Way would do nothing) while not extending additional help to the wealthiest Americans.