The 2% Rule & You, The Destruction of the Middle Class

You call this a middle class? "I’m trying not to lose my house"
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Russ: And that's really all they have as their income measure, because they have tax data. They don't have transfers, they don't have in-kind benefits, they don't have compensation that's non-monetary. Guest: They are asking a perfectly valid question: What's been happening to the median market income of tax units? That is, when you add up the returns to land, labor, and capital, what's been happening to median income? They don't adjust for tax-unit size, and as you said, they don't adjust for government transfers. They are just looking at the returns to land, labor, and capital. And when we use their measure in the CPS data from , we get a pretty discouraging result.

The median income of these tax units has only increased by 3. Russ: Which is close to zero. That's not annual; that's not per year.

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That's over the total--that's flat. Guest: That's stagnation. And that's what they call it: the middle class has stagnated over the last 30 years. And that statement is correct. But what does that statement mean, and how do you put it in the context of how the typical American has done in the last 30 years?

Is it true that we haven't increased at all in the last 30 years in our ability to consume things? The pie is clearly bigger. There's two issues here. One is one's absolute command over goods and services. And then you can discuss one's relative command and where you are in the distribution, or a group's command, a certain segment of the population--the middle fifth, say. But this is saying in absolute terms, if you just look at income and capital income--earnings plus dividends plus capital gains--correct? Russ: Then it's flat between and That's corrected for inflation.

Once you correct for inflation, no gains to the median household. Median tax unit--excuse me. Now, I want to be careful here: the CPS does not collect capital gains. So capital gains are not in here. And actually in the original paper that Piketty and Saez did, where all this stuff came from, they also didn't use capital gains in their principal measures. So that's a problem. Russ: But for the median it's not that big.

It's pretty small. Russ: Okay, so carry on. But then you made a different assumption, so you got a different result. Guest: Okay; so let's--and this is the fun part of the puzzle. Let's no longer take the tax unit as the unit of analysis. Now let's look at the household. And you go from a gain of 3. And that happens because the number of tax units per household has been rising over that year period. There are a lot more people living together and sharing everything except a marriage certificate.

Russ: Fascinating. Let's stop there for a second. So, that, just changing the unit of analysis from tax unit to a household unit, taking account of the fact that there are people who are living together who are called separate for tax purposes but actually can have some economies of scale--that changes the growth rate by a multiple of almost 5. Guest: It's actually different even than that.

We haven't even brought in economies of scale yet. In the sense of dividing. Russ: Oh, it's just the unit. But they also want to include not only the people who pay taxes, but the people who don't file taxes. So they have to make some assumptions about who is in these tax units. And their assumptions are that anyone over the age of 20 who is not married is an individual tax unit.

So, they get a lot more individuals, low numbers than you would when you recognize that most of these people who are above the age of 20 but aren't married are connected in some way with other individuals in households. So you get fewer. Russ: So, they've got a bigger left-hand tail. They get a lot more units, total. And since they are below the median, typically, they are pulling the median down. Now, I want to be clear on this.

They can't do this. That's why they didn't. The advantage of what we can do is we can actually get a median because we know what the distribution is below these top units. They don't know that. They make assumptions about that. Piketty and Saez can't tell you what the median tax unit's pre-tax, pre-transfer income is: they just don't have that data. We do because we have the CPS and we can put it into smaller tax units. And the important thing about the recent paper that we've done is we can virtually get their results using the CPS.

That's what is really cool about that paper. Russ: Just to make that clearer to people who find that confusing: You are using a different data set than they are using. But you can replicate their results because you have a lot of the data that they are effectively using.

They have more of it; yours is just a sample. But it doesn't matter. Because you can mimic what they've done by taking the same assumptions in your data. So that's a way to check the sensitivity of the results to the assumptions. If you start with their assumptions with your data, you get a similar result even though you are not using the exact same data set. Guest: That's exactly right. And here is the really important intellectual point here: No one has been able to do this before.

So, people have argued that you can't actually use the CPS to look at the tails of the distribution, and therefore, Piketty and Saez, even though their data has problems, those problems are less than the problems in the CPS. The thing that took us 4 years to do was to show people: No, that's not true.

That's what took a long time. Once that is established. Once you grant me that the CPS can get approximately what the IRS is getting, then you can write a National Tax Journal article that can actually show how sensitive the assumptions that they are forced to take, because of the limits of their data, matter if you go beyond what it is that they are asking. That's what this paper is I think interesting about, and is so profound--this one table, as we go through it, is, I think, so shocking that you can get such dramatically different numbers for a simple concept, like median income.

So, we've gone from tax units, where there's an increase between and of 3. Russ: Almost a five-fold increase. But still, It's like a half a percentage point a year. It's fair; it's pretty good. It's not stagnant. But it's not great. Guest: So now, when you go to household, size-adjusted, pre-tax, post-transfer income--so now we are going to the usual measure that I've been using, the Census Bureau's measure: pre-tax, post-transfer income and the unit is the household; and we are adjusting by the number of people in the household to the 0.

You go from So, now, instead of 3. Russ: Is it pre-tax, post-transfer? Guest: Yes, that's right. Russ: It's not post-tax, post-transfer. We haven't looked at income taxes and sales taxes yet. Guest: Okay, then, what you need to recognize is: Not only does the government transfer money from high-income to low-income people through government transfers like Social Security benefits, disability benefits, Temporary Assistance for Needy Families TANF benefits, and those sorts of things, but it also does it through a progressive income tax. So, when we then use the National Bureau of Economic Research's tax simulator, with the CPS data, we can simulate the amount of income taxes, state taxes, and payroll taxes that people pay.

Russ: Because you know a lot of their characteristics. So you are going to try to approximate what their income tax form would be filled out to yield, if you could see it. You can't see it, but you know a lot about it. You know how many kids they have, what kind of income; you don't know everything about them because you don't know their charitable deductions, all their medical deductions.

Do you know the value of their house--do you have their mortgage? You might have that, right? Guest: We don't know about mortgage payments. Russ: So, it's a crude estimate. So, what do you find, then? Guest: So, then we go from Now you might say: How can you get median income growing faster when you are subtracting things out?

And the answer is that we've actually been paying, at the median anyway, a smaller share of our income into taxes; and that's why you get the growth is And then there's one last change. Guest: Yes, and then the last change is to talk about this growing share of earnings that comes in non-wage compensation, and also the fact that Medicare and Medicaid have been growing also.

So, as an example of how important it is to think about in-kind transfers as well as in-cash transfers, and to think about the value of health insurance for employees as well as their wages, we are able to estimate the employer share of employer-provided health insurance to workers and the insurance value of Medicare and Medicaid to lower-income people who are getting those benefits.

And when you do that, it goes from So, we are really talking about a difference from 3. Russ: It's a tenfold increase. So, I think there are two obvious thoughts here. One is: Boy, it sure makes a difference, what you can assume. And as you point out, there are different justifications for what you might look at. But if you are looking at economic wellbeing, it's hard to argue that that first measure is the right measure. You'd want to include things like transfers and health insurance.

And you've left out a bunch of stuff, by the way. There are at least two things you've left out. One is: there's all kinds of other non-monetary compensation that isn't in the CPS that I suspect has been growing. Small things, but not zero. Dental benefits, vacation; I'm not sure it gets bonuses. Does it get non-regular bonuses, in the March CPS? Guest: In principle it does, but how well that does I don't know. Russ: But they've become more important over the last 30 years in compensation.

The point is: one, as you said, it's a beautiful example of how assumptions matter and data analysis.

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There's "lies, damn lies, and statistics. But the other thing that some people will be asking, and this is the kind of thing I hear sometimes from students: So, which one is right? Because they can't both be right.

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One's really big and one's really small. So, which one's right? Because they want to write it down on the exam. When the exam comes and says, how is the median income person doing, you've got to put in an answer. And there's A. What's the right answer, Professor Burkhauser? Guest: Well, I think the right answer depends on what the right question is. So, if you are asking what's been happening to market income, I think there's no question that wage rates have become more unequal.

But once you adjust for health insurance and other things, it's less unequal. And that in terms of real compensation, it's clearly rising. So, I think that even there, returns to work have been rising. The notion that we as a society are not doing as well as we were 30 years ago, I think by virtually any reasonable measure, is just false. And I think that's the main statement.

The issue of distribution is a little harder. It's a little harder to argue. We have become somewhat more unequal. So, if people look at the CPS data and don't recognize that in we suddenly were able to better capture income, they will get the false notion that income inequality increased between and It didn't. It just was in our ability to capture that income. And we actually adjust for that here.

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But what it says is that when you get people telling you things that just don't seem to be consistent with reality, you really do need to look very carefully at the assumptions they are making. Russ: So, what kind of reaction have you gotten from these two papers? Oh, by the way, we haven't talked about the Review of Economics and Statistics paper.

Give me a punchline on that one. Well, the punch-line on that one is that when we sent that paper to the American Economic Review AER --we sent a paper to the AER that made the following statement: that income inequality in the United States rose substantially between and , but hasn't increased very much since And we did that using the measure I just talked about--household size-adjusted pre-tax, post-transfer income.

And we got back a referee report from the AER that said: This clearly can't be true because Piketty and Saez have found that income inequality has risen dramatically in the last 20 years. So, we were just minding our own business, using the traditional measures, and hadn't paid a lot of attention to Piketty and Saez in that literature. So, in order for us to publish, clearly, in traditional ways of measuring things, we had to demonstrate to referees that in fact you could get those two results.

So, that's when we looked more carefully at what Piketty and Saez did. We then took--the other thing we had that was really cool was that the CPS public use data limits what you can know about top-income people, because in the top codes, each of the 23 types of income that people get--by top-coding I mean that they want to protect the confidentiality of people, so that if you have a lot of income and a particular source of income, they-- Russ: They truncate it.

So, good economists, recognizing that, stopped using the CPS to measure inequality, because the top parts of the distribution were non-systematically lopped off. And they started using ratios, and those sorts of things: looking at persons in the 90th percentile and the 10th percentile. So, we actually gained access--and this is kind of a cool story in itself--to the internal CPS data. And were able to get around these top codes.

And to see much more clearly what was going on. At least the top codes, in the interim, they were much more in the range of the top And we observed one important thing. In , it appears in the public use data that income inequality gigantically increases. Well, it turns out the only reason it gigantically increased was instead of using top codes, in starting in the public use data, it began using cell-means of the top parts of the distribution. That is, rather than lopping things off at a million dollars and giving everyone a million dollars as the value, they looked at all the values above a million dollars, found out what the mean of those values was, and gave you that.

So people naively used the public data. So, all these kinds of things. Russ: And it always makes the NY Times , and I always look at those data and I want to say: They changed the definition or it's a coding error. The world doesn't change like that in a year.

But that never stops them. And maybe I'm being unfair to the NYTimes. But I guarantee, I'm very confident that someone wrote an embarrassing article assuming those numbers were meaningful. Guest: Absolutely. So anyway, we got around all that. We got the internal data. And that's when we found this kind of important point: that while income inequality has increased slightly since , it hasn't increased by all that much.

We couldn't get that published, because people said that was inconsistent with Piketty and Saez. Then that led us to see that Piketty and Saez were really measuring market income, not the total income.


They were looking at tax units rather than the households. They weren't looking at government transfers. How much of total tax market income do they hold? And we were able to show that for the th percentile, when we used the CPS data but their definitions, we got their trends dead on. For the 90th, 95th percentile. For the 95thth percentile, we got their trends dead on. The two biggest differences--and this is kind of cool--is that in , , when I told you that they changed the ability in the Census to get these exotic numbers, there is a big jump in our data that's clearly an error--not an error, it's a change in definition-ology in the CPS.

We get a big uptick, where they are actually getting a downtick. So, their numbers are better there, and that's clearly wrong. And that said that we should lift all of our previous years up so that there is no break. But they also have a tick. The Reagan Administration worked with the Democrats in Congress in the s to adjust the top taxes of the top personal income taxes, and in the reforms, for the first time made the highest personal income tax rate lower than the corporate rate. And when that happened, not surprisingly, there was a dramatic increase in the amount of market income recorded on people's taxes.

Russ: Because they used to take it as distributed profits in partnerships and other businesses. So, I would argue that that is the exact same problem. When you adjust for those two sorts of things, then the trends are actually pretty close.

So then you were then able to look at a different trend, when you include--I assume you are then going to do something similar to what you do in the National Tax Journal piece. Guest: Actually, we didn't even do that. All we did in that was show we could get their results. Russ: Oh, okay. Guest: But that's important because it says--it's important for them and important for us--we both verify that if you are asking the question that they are asking, they are correct, and we can verify it.

And if we are asking the question we are asking, we are correct. And it's not inconsistent with what they are doing.

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But it goes back to this question. The ultimate question is: What's the question? To me, here's how Piketty and Saez can really be misused. There's a book out that uses the Piketty and Saez numbers and it's by a political scientist. Well, that is true of market income. But let's think about the s and think about today. In the s, there was no Social Security System. If you weren't earning market income, you were in bad shape. We do now have a Social Security System, and all the people over the age of 65 who have no market income are not starving in the streets. But that transfer income is not included in that comparison.

So, to make comparisons with what's been going on with market income and imply something about the economic wellbeing of people in the United States, is to completely misuse Piketty and Saez's numbers. Russ: I just want to mention to listeners that Pitketty and Saez's work--we'll put links up to it--they make their data available online. If you are playing with it, you can see it. They are very transparent about their data. You can create your own spreadsheet or cut the numbers a little differently than they've done it.

But as you point out, they are asking a different question. What I think the real issue is, is people don't care what question they are asking. They are going to take their answer and they are going to use it to answer their own question, which is: How are people doing? How is the country doing? I think to give them the benefit of the doubt--and as my listeners know I'm very skeptical about these theories that the average person is doing poorly, so I'm very amenable to your kind of improvement--what I would call an improvement.

But let me play devil's advocate for a minute. If you look at, say, men's income or men's wages, it is remarkably flat. Now, you have to be careful because--and I'm talking about individual workers now--one of the mistakes that people make, it's a very subtle point, is that if you are taking an increasing share of your income in the form of health care insurance from your employer, the Consumer Price Index CPI that you are using then to deflate your market earnings is misleading.

Because that CPI has been going up somewhat dramatically partly because health care costs are going up. But if you have health care insurance you are insulated from that somewhat. You are taking your income in the form of that insurance, but you can't then use the entire CPI to deflate your market income. It's not the correct measure because you don't have to use that market income to buy health care. So, that's a subtle point; I don't know if people listening can grasp it; maybe I spoke too quickly there. But the point is that on the surface the stagnation of market income is not encouraging.

It's not that comforting to be told: Oh, well, don't worry, you are getting it in the form of health care insurance. Well, yeah, but what I have left over isn't changing much. Part of what you have left over is actually a little bigger than it appears because of the way the CPI is calculated and this fact that you are getting this in-kind transfer. But still, it's not the cheeriest conclusion to say, well, the middle class is doing better because if you include transfers it turns out it's pretty good. That is slightly alarming. Guest: Well, I think that the more important point is that what is driving these kinds of changes and what can you do about it.

I think that's where all of this goes to. These are social success indicators that hopefully give us some idea of what's happening. So, I think that's what happening is that the returns in the market place are now more unequal, that there is a great premium on education and training. The French Revolution began the process of political change in Europe, which is why it is considered so important and why we study it today.

The way France and most European countries was governed in the eighteenth century was very different from democracy. Political scientists are people who study and write about politics. They do not agree on the meaning of the term "revolution" and the explanation of exactly what occurs in a revolution. Most theorists agree that a social revolution is the ultimate challenge to a government, bringing about a complete change. The revolution that had the most profound effect on the political development of Europe and the modern world is the French Revolution, which began in Some theorists see this revolution as the paradigm- the model or example- of a revolution.

According to this model, political revolutions are not caused by one event only. Various factors, evolving over time, can contribute to a revolutionary situation. Usually there is an event that sparks off the revolution, but the actual beginnings and endings of political revolutions are difficult to pinpoint in time. The philosophy behind a revolution is usually directed by and educated elite group who wish to write a Constitution for the country and to institute liberal reforms.

The process, however, is often taken over by radicals. Radicals demand more sweeping and extreme changes. Violence and anarchy often erupt. Human rights are suspended, and tyranny and terrors are sometimes features of revolution.

Table of Contents

In thousands of ordinary people in France participated in a violent revolution. Over the next ten years they radically changed the way their country was governed and the structure of their society. Why did they want to destroy the Ancien Regime the political and social system in France before the Revolution? We will be able to understand why the French Revolution occurred by learning about what France was like before French Society was divided into three estates.

Each estate had its own place in society. A person's position in society mattered a great deal. The first and second estates had privileges which gave them advantages over the members of the estate. It was difficult for a person to move from one estate to another. The third estate consisted of all the people who were not nobles or members of the clergy or monarchy. These people had no privileges and were all regarded as members of the third estate, regardless of their education or wealth.

There were some peasants who were reasonably successful but the vast majority was desperately poor. They had a hard life, being forced to fight whenever France went to war, sometimes paying three-quarters of their income in tax and having to do forced labour on roads and for the local landowners. Many were highly educated and some of them were quite wealthy, but they were very rarely appointed to top positions and had no chance of gaining power.

They also had to pay taxes. When he was 15 years old it was arranged for him to marry an Australian princess, Marie- Antoinette. They lived in splendour and luxury at the royal palace at Versailles which had been built at a great cost by Louis XVI. Many nobles also lived at Versailles, hoping to impress the King and get good jobs in the government. They spent their days hunting, gambling, fishing and drinking.

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As you have read, the King had absolute power and did not have to answer to the people for what he did. In an absolute monarchy, the character of the king is vitally important. Louis XVI started his reign as a popular king but, within ten years, he and his queen were hated. It was not only the Kings' weak character and the extravagance of Marie-Antoinette that made the royal government unpopular.

Many people thought that the King had too much power. They particularly dislike his use of lettres de cachet , which were royal warrants ordering imprisonment without trial. During Louis XVI's reign, lettres de cachet were issued to people who opposed the government. The vast majority of French people did not question the way their country was run. They knew no other way of life. During the eighteenth century a small group of educated people did begin to question the situation. They are called the Philosophes and were a group of writers and thinkers who shared a way of thinking which they called Reason.

They refused to accept things without questioning and tested them. Many of them began writing long before Louis XVI came to power, but even after their deaths their writings influenced public opinion and educated people began to agree that they wanted reform change for the better. Louis XVI took over a country with serious economic problems. Many historians believe that it was a combination of social and political discontent, coupled with popular alternative ideas and economic problems which caused the revolution in France.

People had endured the Ancien Regime for centuries. But it was the economic ruin of France which sparked the revolution. France had been bankrupt since its involvement in the American War of Independence in The government had borrowed money but could not afford to pay it back. The people of France resented the fact that the King and Queen and the nobility lived in luxury, spending extravagantly despite the country's problems.

Widespread poverty in the rural areas caused many poor people to go to the towns to look for work. Unemployment became a problem. The nobility who owned the land imposed harsher taxes on the peasants in an attempt to maintain their standard of living. Thus, in , the already poor conditions were aggravated and people were desperate to find a solution to the country's economic problems.

The delegates of the Estates- General met at Versailles on 1 May The King hoped that this meeting would enable him to raise money. However, the delegates of the third state had their own plans. The third estate had mainly elected members of the middle class e. They had collected lists of grievances of the third estate called cahiers and brought them to Versailles hoping to persuade the king to reform the government. The drawing up of these lists of complaints created great excitement everywhere in France. Many people believed that the King cared about their problems and that he would try to solve them.

The King's plan was that each estate would discuss the issues and then vote separately. This meant that the first and second estates would always outvote the third estate no matter how many delegates the third estate had or how many people it represented. The representatives of the third estate refused to meet separately.

They gathered on an indoor tennis court and invited the other estates to join them. On 20 June , they took an oath not to go home until they had drawn up a constitution for France. They called themselves the National Assembly. The King had little choice. He ordered the members of the first and second estates to join the National Assembly and agreed that a constitution reforming the government could be drawn up.

These events are sometimes called "the revolt of the bourgeoisie" because the leaders were the middle class. Many of the bourgeoisie were happy now- they regarded as over. They had what they wanted- they would soon have a constitution that would reform the government, giving them a say in how the country was to be run. However, this was just he beginning.

While the National Assembly talked at Versailles food prices continued to rise and there were riots in Paris. The situation could not be put overnight; it would take time to draw up a new constitution for France, to create a fairer society and to solve all the economic problems. Jackson vs. Irish and German Immigration Transcendentalism, An American Philosophy The Southern Argument for Slavery Gold in California The Compromise of Preston Brooks and Charles Sumner The South Secedes Strengths and Weaknesses: North vs.

The Road to Appomattox The Assassination of the President Rebuilding the Old Order The New Tycoons: John D. The New Tycoons: J. Politics of the Gilded Age Labor vs. Eugene V. Debs and American Socialism Artistic and Literary Trends The Print Revolution The Wounded Knee Massacre The Election of Booker T. DuBois Woodrow Wilson's New Freedom The Panama Canal The Treaty of Versailles and the League of Nations Fads and Heroes Old Values vs.

Domestic and International Politics Social and Cultural Effects of the Depression An Evaluation of the New Deal Pearl Harbor The Decision to Drop the Bomb Domestic Challenges