Now that we know that an economist is someone who is honest and a public intellectual is someone who is not, suppose we were to read the following.
We have data on the real income—that is, income adjusted for inflation—of American families from 1947 to 2005. During the first half of that fifty-eight-year stretch, from 1947 to 1976, [the argument for deregulation was not well received] But the economy…delivered dramatic improvements in the standard of living of most Americans: median real income more than doubled. By contrast, the period since 1976…free-market policies became much more widespread. Yet gains in living standards have been far less robust than they were during the previous period: median real income was only about 23 percent higher in 2005 than in 1976.
Starting from a narrow perspective, why is the writer not using real GDP per capita, the standard measure of economic growth? Family income is distorted, over this period in particular, by changes in family structure and size. If a household shrinks from 4 to 2, family income falls in half, but that is a misleading indicator of economic performance.
It turns out that real GDP per capita grew at about the same rate over the period. Using 1946, 1976, and 2005 as endpoints, the average annual growth rate was 1.021 in the first half and 1.020 in the second half.
And what about the choice of endpoints? Why is the author going all the way back to 1947? At that time, the economy was still under wartime controls to some extent, so some of the rapid subsequent growth was arguably due to deregulation. Why not wait until the effects of removing wartime controls had worn off, and start in, say, 1955? Perhaps because from 1955 to 1976, average annual economic growth was only 1.014 percent, while it rose to 1.020 percent thereafter. CORRECTION: it’s 1.02 in both periods. (messed up the spreadsheet the first time). So that particular choice of endpoint is not an issue.
In the larger scheme of things, no economist would evaluate whether deregulation is good for economic growth by looking at this sort of data over time periods like this. Too many arbitrary choices need to be made. Too many other variables (oil shocks, for example) can affect the results.
But suppose that in the economist’s mind there is a clear dividing line between being a professional economist and a public intellectual. Suppose that he believes that a public intellectual naturally has lower standards of honesty. In that case, the economist–er, public intellectual–might attempt such an exercise.
READER COMMENTS
James McNasty
Jan 25 2007 at 5:24pm
I just finished reading the article and I had the exact same reaction as you, Arnold. Krugman can easily be characterized as possessing the same zeal as a public intellectual that Friedman had. Based on my reading of his academic work, I get the sense that Krugman has a much more nuanced view of economics than his NY Times op-eds indicate. I think that both Friedman and Krugman didn’t like the trends they were seeing in popular politico-economic beliefs, so they both set out to use every tool at their disposal to slow or reverse those trends. In that way they are very similar.
Arnold Kling
Jan 25 2007 at 5:31pm
I don’t see Krugman and Friedman as similar. I cannot think of a single instance in which Milton Friedman said one thing in public and another to economists.
Gabriel M.
Jan 25 2007 at 5:32pm
Yeah… the parallel is exagerated. Also, as economists, the two are nowhere nearly on the same level.
Krugman is a big-mouth, let’s face it. He’ll go and say, publicly, on TV, what many Leftists only think and won’t dare say publicly. So he’s their hero. Good for him.
Jim
Jan 25 2007 at 7:08pm
“why is the writer not using real GDP per capita?”
You really can’t think of any reason why he might choose a median measure over a mean when discussing trends in income for the typical family?
Steve Verdon
Jan 25 2007 at 7:37pm
Also, there are things like health care benefits. Employers care about total compensation, so if some benefit like say…oh I don’t know…health care grows rapidly, wage growth might slow down, stagnate or even decline. Does household income include the imputed value of health care benefits?
John Thacker
Jan 25 2007 at 7:58pm
You really can’t think of any reason why he might choose a median measure over a mean when discussing trends in income for the typical family?
But when the divorce rate increases, and people get married at a later age, then those statistics for the “typical family” are worse than useless when comparing statistics for different time period, because the “typical family” makeup has completely changed.
If one somehow corrects for age and marital status, then maybe it’s relevant.
snark
Jan 25 2007 at 9:53pm
Of generals, economists, and bovine scatologists, Friedman is to Krugman, as Schwarzkopf is Hussein.
Bruce G Charlton
Jan 26 2007 at 1:17am
I find Krugman’s journalism to be pretty disgraceful – to me he comes across as a power-seeking rabble-rouser, who is trading on his high professional reputation as an economist.
In stark contrast to Friedman, Krugman portrays his political enemies as not just misguided, but actively evil in their motivations – and Krugman deliberately uses economic analysis to whip-up hatred and resentment.
Paul Zrimsek
Jan 26 2007 at 7:52am
I was surprised by the extent to which Krugman makes successful prediction the measure of an economist. Are you sure you want to go there, Paul?
Sheldon Richman
Jan 26 2007 at 9:50am
“If a household shrinks from 4 to 2, family income falls in half….”
Even if families have shrunk because people have fewer kids? In that case, falling family income does seem to tell us something about economic performance.
Isn’t it the case that in the earlier period there were more single-income families than in the later period? Wouldn’t that also tell us something about economic performance?
John Thacker
Jan 26 2007 at 10:01am
Even if families have shrunk because people have fewer kids? In that case, falling family income does seem to tell us something about economic performance.
Yes, in that case absolutely. If that were the only sort of change, then comparisons would seem possible. But it’s absolutely true that people are getting married later (for a variety of reasons such as being students for longer), divorcing more, and marrying less; see a recent New York Times article on it. Those are powerful effects that render the crude statistics nearly useless with correction.
The point is that statistics based on household income can be very misleading when the typical household changes.
Isn’t it the case that in the earlier period there were more single-income families than in the later period?
More single-income married couples, yes, but not more single-income families, because the divorce rate and the number of single adult households (whether never married or divorced) has massively increased.
Wouldn’t that also tell us something about economic performance?
Well, only if you pretend that housewives didn’t have a lot of work and add value to a house. If families change so that wives work, but a lot of the extra income of the wife goes towards paying people to do the housework that she would do staying at home, then people “need more money to stay in place,” but it’s not clear that the economic numbers are useful. We’ve just put a dollar value on work that already being done.
csning
Jan 26 2007 at 10:47am
It’s the nuance, as Krugman says. Friedman, honestly speaking, left far too much of it off in his public pronouncements. And Krugman hardly attributes slowdown in median economic growth to Friedman alone. It’s written for the general public, not for academic economists, and it’s a little bizarre to take down his assertions by applying academic standards to an essay meant for the general public.
John Thacker
Jan 26 2007 at 11:10am
Another thing about the “typical family” is how much sense does it make to talk about the “typical family” when the percentage of people who are immigrants has definitely risen? Certainly there are reasonably arguments that bringing lots of immigrants from countries here does negative things to society. However, I hardly see how it’s morally better to have them be poorer in their old country but without us having to see them or know about them.
Randy
Jan 26 2007 at 11:34am
Bruce C,
That is my impression as well.
TGGP
Jan 26 2007 at 12:40pm
Milton Friedman should not be blamed for immigration, which we should expect to lower median economic indicators. He said that you cannot have open borders and a welfare state at the same time, and as long as we had the latter he opposed the former.
Krugman’s point about Friedman blaming the government for not acting during the Great Depression was made from an Austrian perspective by Mateusz Machaj here
David B
Jan 26 2007 at 3:58pm
“In the larger scheme of things, no economist would evaluate whether deregulation is good for economic growth by looking at this sort of data over time periods like this. ”
This is completely correct. As for the rest of the post and the comments, just because the typical family is changing, doesn’t mean that median household measures are distorted. On the extensive margin, running a family is primarily a fixed cost (house), not a marginal cost (room and board for 3 vs. 4 people). If the household size decreases due to divorce, people really are worse off. Median household income really is a good way of looking at the typical family!
The paragraph about inequality tells exactly why GDP per capita is a bad measure; in fact, he uses that measure to contrast against median household income–so why would you criticize for not using GDP per capita? At least try to understand Krugman’s point before blasting: the rate of improvement in the typical household’s life was not improving nearly as quicklly as the average (even in % terms). There’s no reason to “control” for anything! Not immigrants, who are part of the typical household, and not divorcees, who are part of the typical household, and not children, who are also part of the typical household.
This is a petty attack, and the fact is that you (Arnold and the commenters) had to resort to holding academic standards of empirical data perfection to a article for the public in order to discredit it.
Which means you’re not really interested in what Krugman might say right, just trying to attack things he says in popular articles without full academic backing. It’s a good thing every blog post and comment written here at EconLog has full academic backing.
You’re not a scholar until you say, “I almost always disagree with this person, but they made a point that changed my mind on something about which I had strong priors.”
Scott Scheule
Jan 26 2007 at 4:16pm
Arnold,
Careful not to pick at Krugman, the man. You’re being snipey. If you want intellectual authority, simply say, “I disagree with these statements, and here are my reasons.”
To wit, the last paragraph of this post is unnecessary, and perhaps the penultimate as well.
Jim Glass
Jan 26 2007 at 5:16pm
Starting after almost 20 years of Depression and World War, I would hope living standards would rise a good deal faster than in a period starting 28 years later, after a generation of prosperity.
Krugman a while back wrote a Times column in which he attributed the narrowing of the income gap during the 20 years starting in the 1930s, with the top incomes being much lower than before or after, to New Deal policies and the public’s approval of them.
Somehow he didn’t mention the Great Depression or World War II. (Or maybe just figured his readers counted them as New Deal policies.)
David Nieporent
Jan 26 2007 at 5:56pm
Granted that this may be true, it doesn’t have anything to do with the state of the economy.
happyjuggler0
Jan 27 2007 at 1:11pm
Jim Glass,
That’s the first thing I thought about. I am stunned by how many people give an administration or a policy credit for an “large” economic recovery following a recession or depression.
If they want to claim credit for ending the recession or depression, well, they can try to make that argument. But the worse the damage from a preceding economic downturn, the better the recovery ought to be, assuming the incoming government doesn’t destroy good institutions.
I think the current recovery in Argentina fits that notion very well. Of course they have a fabulous growth rate. An economic “panic” (a word formally used to describe “depressions”) drove a lot of wealth out of the country. Once things stabilized enough, people felt free to reinvest their money. It is the stabilization and the good institutions that deserve the credit, not the leader who inherited them.
Matthew
Jan 28 2007 at 4:46am
“This is completely correct. As for the rest of the post and the comments, just because the typical family is changing, doesn’t mean that median household measures are distorted. On the extensive margin, running a family is primarily a fixed cost (house), not a marginal cost (room and board for 3 vs. 4 people). If the household size decreases due to divorce, people really are worse off. Median household income really is a good way of looking at the typical family!
The paragraph about inequality tells exactly why GDP per capita is a bad measure; in fact, he uses that measure to contrast against median household income–so why would you criticize for not using GDP per capita? At least try to understand Krugman’s point before blasting: the rate of improvement in the typical household’s life was not improving nearly as quicklly as the average (even in % terms). There’s no reason to “control” for anything! Not immigrants, who are part of the typical household, and not divorcees, who are part of the typical household, and not children, who are also part of the typical household.”
The number of working age adults in the household does matter. As a single guy, I live with four other guys in a house built in the twenties for very reasonable rent. I have to share a bathroom and kitchen and my own bedroom isn’t that big. Now, say I got a wife with the same income as me. There’s no way she would ever agree to such an arrangement and we would probably get housing that costs near twice as much as what I’m paying now. But, am I really worse off with my own bedroom than I would be with sharing a bedroom and everything else at a bigger apartment with a wife?
Immigration is the other failing of the median family income statistic. You glibly classify them as part of the “typical household,” but the average immigrant comes from a background worse than the average native. Take a worker who leaves his 50 cent an hour job in Mexico and starts work at a golf course for 8 bucks an hour. Since his income is definitely less than the current median household income, the median household income of the US drops. It drops when all that’s happened is one guy making a much better living for himself and everybody else’s income stayed the same.
On a broader level, immigration would only not affect the median household income statistic negatively if the average income of immigrant households equaled the average household income of natives, and you know that isn’t true.
As a conservative/libertarian, I’m well aware of the problems of per capita real GDP(i.e. rich outliers). Liberals should also realize the problems with the numbers they hold as dogma and we could get a lot farther in this debate.
spencer
Jan 28 2007 at 4:02pm
What are your sources for real per capita gdp growth. When I do the calculations I get very different results then you suggest. For example, I calculate that it was 3.3% from 1950 to 1980 but only 2.4% from 1980 to 2005. My calculations are based on the growth of the log trend with the end points of the actual data being virtually on trend in both cases , ie, the choice of end points does not distort the trends..
Essentially every measure of economic well being I know of , real gdp, real income no matter high defined, productivity, etc, etc, show a clear break in the trend growth rate around 1980 — depending on how you adjust for the business cycle.
blade
Jan 31 2007 at 9:02pm
Spencer, what is your source?
Using the Penn Tables shows real GDP/capita
1950 $11,087
1980 $21,680
2004 $36,100 (2005 was about average for the 25 year period)
3.1% pre 1980
2.8% post 1980
How does Kling get 1% in both periods?
blade
Jan 31 2007 at 9:24pm
oops…
3.3% for 1950 to 1980
2.9% for 1980 to 2004
Comments are closed.