April 10, 2019


Ray Dalio is wrong about capitalism (James Pethokoukis, April 10, 2019, The Week)

Right off the bat Dalio writes, "There has been little or no real income growth for most people for decades." It's a gloomy statistic that many policymakers on the left and right accept as inarguable fact.

But they shouldn't, and neither should Dalio. If you use an inflation adjustment like the one preferred by the Federal Reserve -- it assumes consumers alter their buying habits in response to changing prices -- then it turns out that real wages for production and nonsupervisory workers have risen by a quarter since the mid-1970s, according to 2017 research by Dartmouth University economist Bruce Sacerdote. (Or maybe even twice as much.) And if you broaden things out to income rather than just wages, then the stagnation argument looks even weaker. According to the Congressional Budget Office, middle-class incomes after government transfers and federal taxes rose by 46 percent from 1979 to 2015. And incomes in the bottom fifth did even better, rising 79 percent.

And if those numbers seem too abstract, there's the simple reality that lower income folks are living better today than decades ago. For instance: The number of cars per household with below median income has doubled since 1980, notes Sacerdote, and the number of bedrooms per household has grown 10 percent despite decreases in household size.

Dalio also cites research that finds that only half of 30-year-olds today earn more than their parents at the same age. Or to be more specific, half of Americans born in 1984 grew up to earn more than their parents did at age 30, adjusting for inflation, vs. 92 percent of children born in 1940. So clearly upward mobility isn't what it used to be. But, again, Dalio offers the worst possible interpretation of the data. If you adjust that 50 percent stat for all sorts of reasonable tweaks -- changes in family size, a better inflation measure, increasing employer and federal benefits -- researcher Scott Winship concludes, "roughly three in four adults -- and the overwhelming majority of poor children -- live better off than their parents after taking the rising cost of living into account."

Accounting for deflation is a psychological roadblock, not just a mathematical one.  Equally difficult is accounting for how little actual labor our jobs entail now.

Posted by at April 10, 2019 4:04 AM