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Home Publications Blogs Beat the Press Economists Generate Confusion About Poverty: Old and Young

Economists Generate Confusion About Poverty: Old and Young

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Thursday, 14 March 2013 04:12

Given the disastrous failure of the economics profession to warn of the housing bubble, it is amazing that the country has not rounded up the lot of us (I'll go too) and chased us out of the country. Unfortunately, we still have a profession continuing to use its authority to spread confusion rather than enlightenment. 

Thomas Edsall and his readers are the victims today. In an interesting discussion of trends in poverty, Edsall includes a reference to work by Bruce Meyer and James Sullivan that shows poverty among the elderly has fallen to just 3.2 percent using a consumption based measure of poverty. There are many issues that can be raised about this analysis, as my colleague Shawn Fremstad has pointed out.

However perhaps the most fundamental point for purposes of Edsall's analysis, which explicitly compares poverty rates among the young and the old, is the fact that Meyer and Sullivan:

"report results using an adjusted CPIU-RS that subtracts 0.8 percentage points from the growth in the CPI-U-RS index each year (p 17)."

Okay, if the meaning of this line is not immediately clear, Meyer and Sullivan are assuming that actual rate of annual inflation is 0.8 percentage points less than official data show. This claim is debatable, but its implications are not. If we have been overstating inflation by 0.8 percentage point each year, then we have been understating real income growth by 0.8 percentage points.

This claim lies at the center of Meyer and Sullivan's claim that poverty has fallen sharply. Their adjustment would mean that income has risen by roughly 8 percent more over the last decade than official data show and 16 percent more over the last two decades. (I'm ignoring compounding to keep this simple.) This additional rise in income (or consumption) gets a lot of people over the poverty line.

The Meyer and Sullivan assumption has another important implication which they do not discuss in this paper and apparently did not discuss in their conversations with Mr. Edsall. If income is growing more rapidly than the official data indicate then people were much poorer in the recent past than official data indicate.

The Census Bureau's data show that median household income, measured in 2011 dollars, was 9.4 percent lower thirty years ago in 1981 compared to 2011. It was $46,024 in 1981 compared to $50,054 in 2011.

However if we make the Meyer and Sullivan adjustment then real income has been rising by 0.8 percentage points more rapidly each year than these data assume. This means that Meyer and Sullivan would say that the median income for a household in 1981, measured in 2011 dollars, would be $35,637, 28.8 percent less than the 2011 level. Meyer and Sullivan's adjustment implies that today's elderly were considerably poorer in their working lifetime than the official data show.

This goes in the other direction as well. If we apply Meyer and Sullivan's adjustment to projected income growth then income will be rising much more rapidly. If the Meyer and Sullivan adjustment is applied to the projection of average annual wages from the Social Security trustees then the average real (inflation adjusted) wage in 20 years will be more than 50 percent higher than it is today. If we go out to 30 years, then the Meyer and Sullivan adjustment means that average wages will be more than 80 percent higher than it is today.

This pattern of income and wage growth would likely be relevant to anyone trying to make an assessment of the relative well-being of the young and old. If today's old were relatively poor through most of their lives then we might think it makes less sense to take away benefits that sustain their current standard of living. On the other hand, if today's young can anticipate rapid wage growth in the future we might be less concerned about providing them additional support. The Meyer and Sullivan adjustment also helps to highlight that the main problem is distribution within generations, since there is no guarantee that most of today's young will share in the rapid rate wage growth that is projected.

Anyhow, the implications of the Meyer and Sullivan adjustment are very important for the issues that Edsall addressed in his blogpost. It would have been helpful if they had made these implications clear in their communications with Edsall. Since many economists share Meyer and Sullivan's view that the official data overstate the true rate of inflation, it would be helpful if they would draw out the implications of this view for public policy issues. Of course it would also have been useful if economists had warned of the dangers of an $8 trillion housing bubble.

Comments (7)Add Comment
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written by Chris Engel, March 14, 2013 6:19
I'm unclear as to why you're including yourself in the group of to-be-exiled economists.

http://www.cepr.net/index.php/...her-bubble

You called housing price action a bubble back in August 2002.

Did you change your tone in the continued run-up in the 4 years after that report? If so I didn't catch it and the search function isn't either.

On another Press note, Henninger has cited A-A to support his pro-austerity rants against Keynesianism:

http://online.wsj.com/article/SB10001424127887324077704578358391794787824.html?mod=rss_opinion_main


Here's an excerpt of his interpretation of Alesina's paper:

The path back to stronger growth, argues Mr. Alesina, is a combination of significant, permanent cuts in public spending and relatively small tax increases, if any.


I wonder sometimes if we're in a bizzarro world in the field of Economics, with Harvard academics giving fodder to pundits who claim that in a near-deflationary economy with excess slack in all measured inputs, the solution to provide growth is a large permanent spending cut by government.

Boggles the mind.
...
written by JaaaaayCeeeee, March 14, 2013 6:25
I thought it was bad enough to pit poor against poor, but you show how tricky it can get.
The Harder They Fall: If They Were Poor Then, They Deserve to Be Poor Now
written by Last Mover, March 14, 2013 7:46
Meyer and Sullivan's adjustment implies that today's elderly were considerably poorer in their working lifetime than the official data show.


That would be back in the good old days when labor was supposedly paid what it was worth. Taken literally, it means as later productivity gains were captured and diverted to the rich, the result was to insure the next generation started off poor as well, today pumped up with propaganda for a generational war with its elders, now so poor they are cast off as an economic cancer bleeding the younger generation dry with excess retirement and health care costs.

Talk about getting caught in the duh headlights by Dean Baker. Meyer and Sullivan's data backfire on them from both directions. As they attempt to show seniors are better off, they end up claiming seniors never did earn what they were worth in the first place.

For that they imply seniors now deserve steep cuts in government funded retirement and health care for which they actually overpaid, given their real income in early years was so much lower than the nominal value due to a "faulty excess rate of inflation".

When protecting the rich from pillage and plunder of America over the years, there is no shame in how the data can be used. No shame whatsoever.
Useful article until the end
written by Jennifer, March 14, 2013 8:34
I found it useful to have the poverty measures laid out like that. Of course I would have never caught the point you are making here; I'm guessing 90% of the readers who read this article won't either. There are some other issues though
"because older Americans are more likely (than other age groups) to be spending out of savings and using assets (like homes and cars) that they own”
Going with the numbers quoted in the endless stream of the old-taking-from-the-young articles I have been struck by how low the numbers for the assets of the elderly numbers are. You can't eat your home, or use it to pay medical bills. Plus, there has been a recent spate of articles on the failure of 401(k)s-there have been a few suggestions in the MSM that Social Security should actually be increased (!)
The end of the article was disappointing, as he goes off the rails with the we-can't-afford-to-pay-for-end-of-life-care- theme that is often invoked when elderly health care costs are discussed. First, Medicare costs have been going down so the situation is not as dire as people like to say. Second, as readers of this blog know there are many simple if politically difficult ways to bring health care costs down that do not require actual health compromises.
Finally he practically invokes death panels when he talks about increases by institutions in pushing for end-of-life planning. It's true that end-of-life care costs money but to conflate increases in this planning with the idea it's being done because we can't afford to pay for it is wrong. Hospitals and the like have been pushing for people to make end-of-life directives for ages as a quality-of-care issue. Most people do not have good knowledge of these issues, most people do not want extraordinary measures taken, most people WANT to have help with these issues. The fact that more of this is being done is a positive should not be presented as a ominous sign.
...
written by skeptonomist, March 14, 2013 8:50
Whatever measure of inflation is used, the practice of indexing SS benefits to inflation means that retirees are frozen into a standard of living that existed when the overall level of benefits was last fixed (not even the level when they actually retired). This means that retirees do not benefit from overall productivity increases, that is overall increase in standard of living. Young people in principle do benefit, and in principle they also get the old people's share, so there is an inherent bias in favor of the young in this method of computation. Of course the whole picture is also affected by the undeniable increase in income inequality, such that all lower-income people have been getting relatively little of productivity increases for the last 40 or 50 years.

I say again that the standard for setting retirement compensation - at least as the starting point for discussion - should be nominal GDP instead of inflation. If nothing else this would simplify computation. Of course in order to make this work in practice the tax base for SS would have to be expanded to include all income (capital gains, dividends and interest) and not just wages and salaries for the lower end of the income spectrum. The fact that this is not even discussed means that the whole debate starts from denying the benefits of economic progress to old people.
...
written by Kat, March 14, 2013 12:09
Even better!:
http://opinionator.blogs.nytim...r-kids/?hp

There's a serious poverty (of ideas) problem over at the Times.
Homes opened
written by Daman , March 18, 2013 4:16
Hello,
I love this information.Fantastic blogs.

Homes opened

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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