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Senior economist Terry Fitzgerald of the Federal Reserve Bank of Minneapolis tries to figure out why different measures of the same thing -- individual incomes of average Americans -- look so different:
"In brief, it seems that individual workers and households have experienced stagnation, while the national economy has grown robustly. How can it be that these two sources of data -- microeconomic data on individual wages and household income, and macroeconomic statistics covering the national economy -- lead to such different conclusions? Since a nation comprises a group of individuals, these statistics would seemingly be compatible."
In the first of three articles on this subject, Fitzgerald finds that it helps if he uses the same correction for inflation in both sets of data, and it helps some more if he counts benefits as well as cash wages. Both adjustments tend to show that middle-American incomes have not stagnated in recent years.
To this non-economist, this looks like an admirable piece of scientific work, trying to figure out why different measurements of supposedly the same thing don't match up, and how to make them more accurate. Whether the end result is what I might prefer politically is irrelevant.
The existence of the discrepancy in the first place isn't all that surprising, since these measures were designed originally for different purposes. The discrepancy doesn't prove that economics is a fraud, nor that the creators of either data set were conspirators or tools of a capitalist conspiracy to deceive people. This rather obvious point should give pause to intellectually honest conservatives who take it for granted that economics is good science, while making up reasons to disbelieve climatology because they don't care for its well-established findings about our civilization's uncontrolled effects on the earth's climate.
Propagandist Don Boudreaux at Cafe Hayek is quick to jump to his own politically preferred conclusion -- that we're all much wealthier now than 30 years ago -- without waiting for Fitzgerald's next two articles. I think Boudreaux is probably right, but only by accident. I look forward to his thinking more clearly about other sciences in the future.
and otherwise. Recently updated blogs are in bold text.
One might add that the above should give pause to intellectually honest liberals who take it for granted that global warming is based on good science, while declining to believe any economic analysis which fails to support the idea that income disparities have grown.
As for "we're all much wealthier now than 30 years ago", does anyone seriously think the opposite? The debate has been about increased stratification not absolute levels of wealth in different socioeconomic strata. Seems like Boudreaux is just putting up a straw man to knock down.
Economic theory tends to be excellent in terms of describing what has already happened, or in terms of some macro observations.
but that's about it. When in microeconomics they tried telling us you could use Calculus to define buying behavior I knew something was terribly wrong- people just aren't that rational or predictable (not in a good or bad sense, mind you, just as a general rule).
is Econ truly science? well, here is the litmus test:
Are there peer-reviewed journals which are open to scrutiny by the public as well (as with Nature and Science)?
Can any economist test the theories of another in the real world?
I am certainly not saying economic thought and theory isn't valuable, of course it is, on many levels.
But to put "Economics" (as if any two people really would even agree what parameters that science might consist of) it up with hard, peer-reviewed science is just wrong. Apples and oranges.
Here's a perfect example, Paul says:
"As for 'we're all much wealthier now than 30 years ago,' does anyone seriously think the opposite?"
On one level he is likely correct, if aggregate wealth is measured in terms of the value of possessions by society as a whole.
On another, more pragmatic level, he couldn't be more wrong. The gap between rich and poor has been growing steadily for decades, with the richest 10% holding an ever-increasing share of the wealth, and the folks on the bottom getting squeezed. So clearly, to state "we're all" is a reach, and unfortunately, one symptomatic of economic findings, they are just too easily manipulated as they deal with vague, subjective judgments.
by the way, for an example of the kind of debate you get in the scientific community, go to:
http://www.realclimate.org/
where the climate scientists have a blog running, and take all questions (and deflate skeptics of global warming, using actual hard science).
If all the "climate scientists" do is "deflate skeptics of global warming" then that is certainly not hard science, it is just propoganda (and I refuse to look at the site).
I am of the opinion that sensible people can disagree about global warming and the effects of having a big gap between rich and poor.
A sensible person cannot claim that poverty is somehow greater now than it was 30 years ago. Not having a DVD player in one's car does not put one into poverty status.
JBP
I deliberately used the word "skeptics" to indicate those who have already made up their minds and don't care about the evidence.
People with that attitude tend to get their heads handed to them by actual scientists when it comes down to brass tacks like weather patterns and ice core studies, etc., etc.
Sensible people - and scientists - can and do disagree about some details, and potential courses of action, but those folks are not in the same boat as people who simply refuse to believe global warming exists at all.
Again, you perfectly illustrate why economics can never be a truly hard science. While I'd agree that society's overall wealth has increased dramatically, poverty is extremely, extremely subjective, and a lot of people are living in it. Poverty means one thing to those from the outside looking in (material possesions/wealth), and something entirely different from those who grow up in it (gangs, poor schools, etc). If you look at stats like the official poverty line figures and how many people survive below it (and how it hasn't really been adjusted for inflation, it's really inhumanely low) you see a different picture, or if you look at how many families are technically impoverished even though a family member works full time.
To look at it another way, with science it was always a given that you try and remove observer bias - it can never be done 100.00%, as the mere act of observing something has an effect, however minute.
But people observing and recording the economic actions and situations of other people bring biases to the table we'll never really be able to make distinct from the study itself. "Trickle down economics" is a good example - George H. Bush (41) rightly called the theory "voodoo economics" until he was brought on to Reagan's ticket, and then he had a sudden change of heart.
Don Boudreaux is a very, very smart guy and the George Mason University Economics Department, which he heads, has some of the best economics professors blogging today (e.g. check out Tyler Cowen at “Marginal Revolution”). So to call him a propagandist, when he explained why he came to the conclusion about “ordinary Americans” being wealthier, is a disservice to his intellect.
Carter,
The reason Don comes to the conclusion he does (coupled with the paper from the Fed) is the same reason you are confused about different economic concepts: income, wealth, and poverty. The poorest members of a particular society might be wealthy compared to the richest members of a different society (e.g. compare the poorest members of the Arab Gulf States with the richest folks living in Kenya). Income and wealth are measures of future consumption: Don’s point is that most Americans, thanks to technology and trade, can buy all sort of cheap consumer goods that improve the quality of our life that weren’t available to us 30 years ago. Even the poorest Americans can afford some of these goods (whereas the poor in Africa and much of the ‘Third World’ struggle just to survive…who in America has died from famine lately?) Of course, measuring poverty is tricky because of its relative nature. But Carter is wrong to first of all assume that Americans “on the bottom” are getting squeezed (evidence please?) and second of all to attribute this “squeezing” to the richest 10%: he seems to believe that income is a static pie that must be divided amongst Americans when we all know that the pie is growing and as I explain above, even the poorest Americans have benefited from this expanding pie.
I do agree with Carter about the climate blog “realclimate” – it is quite good. For a somewhat more contrarian climate viewpoint, yet still very scientific, check out this blog:
http://sciencepolicy.colorado.edu/prometheus/
At least a couple decades ago I bet, from your comments. You are reflecting an outdated view of how economics is practiced.
"I can tell you with 100% confidence it most certainly is not hard science the way we traditionally think of it."
I dunno what the "traditional way" of "thinking about" hard science means exactly, but in the way I think about it (uses the scientific method, and successfully explains and predicts the real world), modern economics firmly qualifies.
"Economic theory tends to be excellent in terms of describing what has already happened,"
Well yes. In the same way that, say, the theory of gravity successfully describes what has already happened in our solar system. Not sure what your point here is.
"or in terms of some macro observations."
Actually the macro level is precisely where economics as a field has been repeatedly humbled, as most practicing economists under the age of 40 freely concede. Turns out that human systems as large as national economies are far, far more complex in practice than the guys who wrote your college textbooks had ever accepted.
"When in microeconomics they tried telling us you could use Calculus to define buying behavior"
Ah ok I see part of the problem here -- you're carrying around the baggage of the silly-assed ways that economics used to be _taught_. No practicing economist under the age of 50, and I hope no economics professor today, would say anything so dumb as that.
"people just aren't that rational or predictable"
People are not _entirely_ rational nor are we _always_ predictable. Good science, such as modern economics, accepts and successfully deals with those sorts of inherent uncertainties.
"Are there peer-reviewed journals which are open to scrutiny by the public as well (as with Nature and Science)?"
Well sure.
"Can any economist test the theories of another in the real world?"
Yes, and they do so routinely.
"Paul says:
"As for 'we're all much wealthier now than 30 years ago,' does anyone seriously think the opposite?"
On another, more pragmatic level, he couldn't be more wrong. The gap between rich and poor has been growing steadily for decades,"
To believe this requires ignoring the actual evidence from the real world. Since peer-reviewed economic research consistently produces the evidence that the claim isn't true, that requires insisting that economics isn't really science, evidence presented as statistics is always manipulated bullshit, etc.
It's a comfortable place to be, where critical thinking isn't required or needed. Fortunately its opposite is what Harold is about here, and reading you comments does have the effect of reminding me to thank him for maintaining one small sanctuary of critical thinking amidst today's great flood of smug delusion which you have provided one more example of.
of course, if you believe research shows there is no income gap, I'm not sure how much stock I can put in either them or your reading of them.
I also won't pretend to have any handle on the global economy, although I'd suggest the World Bank's failings debunk the idea that the world has been made a better place thanks to applications of economic science.
I'd suggest RT Naylor's book "Hot Money and The Politics of Debt" to see how the US and its allies have destabilized economies around the world - intentional or accidental?
Either way it shows that economics is all relative.
Specific to the USA, let's look at the assertion that the income gap isn't widening:
http://www.nytimes.com/2007/03/29/business/29tax.h...
"Income Gap Is Widening, Data Shows
By DAVID CAY JOHNSTON
Income inequality grew significantly in 2005, with the top 1 percent of Americans — those with incomes that year of more than $348,000 — receiving their largest share of national income since 1928, analysis of newly released tax data shows.
The top 10 percent, roughly those earning more than $100,000, also reached a level of income share not seen since before the Depression.
While total reported income in the United States increased almost 9 percent in 2005, the most recent year for which such data is available, average incomes for those in the bottom 90 percent dipped slightly compared with the year before, dropping $172, or 0.6 percent.
The gains went largely to the top 1 percent, whose incomes rose to an average of more than $1.1 million each, an increase of more than $139,000, or about 14 percent.
The new data also shows that the top 300,000 Americans collectively enjoyed almost as much income as the bottom 150 million Americans. Per person, the top group received 440 times as much as the average person in the bottom half earned, nearly doubling the gap from 1980."
Damn that liberal media, eh?
An abundance of cheap consumer products does not cancel out this growing problem.
The larger point is simply this - nobody has "fixed the economy" for everyone. Nobody in their right mind would trade a DVD player for being stuck in an urban ghetto or not being able to afford health care, either here or anywhere around the world. Is the US in a better spot on average than most countries? Sure, but it has more to do with us keeping a military presence in some 150+ countries to ensure a steady delivery of natural resources and products to us than miracles based on economic theory.
Findings in science, not being partisan or motivated by an individual's wealth, are not as easy to distort as economic data and "analyses."
See the realclimate.org site for evidence of that. Laws of physics are not in my mind the same thing as "laws" of economics (which seem to change far more regularly, as is admitted above).
This is where the problem comes in, if you want to claim various sampling techniques and monkeying with interest rates & the money supply are hard science, you can likely make that claim, I'll buy that.
But we all know that economists actively engage in public policy, and are trotted out by various politicians. this is where the line gets crossed, and economics becomes less science and simply more spin (go back to the days when we got off the gold standard if you want further proof that not everyone even remotely agrees on economic predictions).
"hard science means exactly, but in the way I think about it (uses the scientific method, and successfully explains and predicts the real world), modern economics firmly qualifies."
that's the problem, it does not predict the real world, at least not in the sense it takes everyone's concerns into account.
and it can't also be repeated - how do you repeat in Mexico policy enacted in Belgium? too many variables that people will never agree on.
did Greenspan predict the foreclosure crisis or the effect on global credit?
either he did but he kept his mouth shut for political expediency, or he's been overhyped. I'd suggest both after listening to him mumble about regretting supporting Bush's tax cuts without a cut in spending to accompany them.
not really sure what my smug delusions are- I recognize there are haves and have-nots, and that economic policy tends to be driven more by the haves, who are better able to have their voices heard in govt.
doesn't mean I don't believe in the virtues of hard work, saving, etc., I just see where the system is rigged and I see how economists are used to muddy the waters.
"Of course, measuring poverty is tricky because of its relative nature. "
that's really the point here, we're talking about subjective opinions, not "hard" science.
there are all sorts of wildly competing economic theories that can never be solved - does an extra dollar mean less to a rich person than a poor one, etc.
in 20 years watch as many of the allegedly "hard science" economic truths touted above are thrown out the window (every generation seems to believe they have the final truth), that's a prediction I'd put money on.
Heh. So you decline to put any stock in research which does not support what you already believe to be true. Yea I think we'd already grasped that about you.
I would still be interested in the peer-reviewed journals of which you speak.
btw, which economic genius can we assign this budding disaster too, our good friend Greenspan?
seriously, we're $9 trillion in the hole, not counted underfunded "entitlements" - who's gonna pick up China's slack?
http://www.investors.com/editorial/IBDArticles.asp...
Hinted China Shift Sends Dollar Diving; Stocks Off Sharply
BY SCOTT STODDARD
INVESTOR'S BUSINESS DAILY
Posted 11/7/2007
The dollar dived to a record low vs. the euro Wednesday, roiling financial markets, after Chinese officials suggested Beijing would shift more of its $1.4 trillion hoard of foreign currency reserves away from dollar-based assets.
The U.S. currency hit a new low vs. a basket of major currencies. The euro rose about 0.007 of a cent to $1.4627 after topping $1.47 overnight. The dollar hit multidecade lows vs. the pound, Canadian dollar and Australian dollar.
Stocks sold off hard. The S&P 500 sank 2.9%, the Nasdaq lost 2.7% and the Dow fell 2.6%.
A top Chinese central bank official and a senior lawmaker said the dollar is losing its status as the world's top currency, and that China should use its huge reserves to buy appreciating currencies.
Journal of International Trade and Economic Development
International Economics and Finance Journal
International Journal of Economic Research
Review of International Economics
International Journal of Business and Economics
Journal of Development Economics
International Economic Journal
American Economic Journal
American Economic Review
Contemporary Economic Policy
Journal of Economic Theory
etc.
The WSJ has run a series of debunks on the income gap. There are some serious flaws with those measures you cite, as only taxable income in included..401k retirement savings are not included, which is a major investment vehicle for the vast majority of Americans. Also S-type corporations are not included, which throws out small business from the data set.
Put tax deferred savings and small business back in the equation and you may find that the "income gap" is completely overblown.
JBP
Regarding the debunks, not buying that explanation, John - the poorest people in this country aren't sitting on fat 401K accounts, and there's no reason I can think of that would explain why poorer and lower middle class people would have these in abundance while higher wage earners would not.
I would have put some stock in the WSJ before Murdoch bought it, now, I'd prefer to see such a debunking come from a journal such as the ones listed above.
And btw, why would small businesses be included, when corporations aren't people?
http://tinyurl.com/2xmm3p
http://www.sbs.utexas.edu/resource/onlinetext/Defi...
http://ingrimayne.com/econ/Introduction/Science.ht...
http://www.abc.net.au/science/k2/moments/s971012.h...
What other data would you throw out? Part of the "scientific method" is using accurate data. 401k's are certainly income, but they do not show up on taxes.
In years past, there was no such thing as an S corporation, so small businesses just filed taxes as individuals rather than corporations. Now small businesses can file as S Corporations, although many are owned by a single person.
If you want to be consistent, then be consistent.
JBP
Regarding the phantom growing income gap, easily the biggest single distortion is that the figures showing growing income disparities always exclude government benefits payments. Always struck me as a downright Orwellian leap of logic: "Good news Grandpa, your vet pension got approved, our monthly income is doubling!" "That's not income, son." "But I have the first check and we get to spend it, so it's money coming in right?" "Yep, but it's not income..."
The 401(k) and S-corp factors are smaller distortions. Also there is another significant factor at the other end of the spectrum from the small business owners: changes in the tax rates in the 1980s removed incentives which had long caused a lot of high-income earners to file their incomes as corporate rather than personal incomes. Several million high-end incomes "came in from the cold" so to speak and started being counted as personal incomes. This was not a substantive change simply one of appearances.
I'll admit I'm not too familiar with S-corps, but again, barring a study showing how the bottom 20% of wage earners are being under-represented in this category, I'm not buying that either.
Which govt benefit payments are we speaking of, medicare? social security? both would be pretty poor examples of economic science in action as I see it from my generation X standpoint, and again, how is this going to greatly narrow the gap between the top 5 or 10 or 20% and the bottom one?
The argument stands, economics is at best social science, it most certainly does not rise up to the level of hard science like organismal biology or genetics.
Where are the rock solid predictions you can make years and years out?
Either of you happen to catch the Nova special last night on the Intelligent Design/Evolution trial in Dover, PA a few years back? That's an example of real science being used to debunk total mish-mush psuedo-science.
Darwin's theories in the late 1800s predicted perfectly the discovery of transitional species/fossils such as Archaeopteryx (dinosaur to bird) and more recently, Tiktaalik (fish to amphibian).
What exactly is the economic equivalent of that? Adam Smith and his silly, "everyone acting selfishly magically improves the world for everyone?" tell that to the millions of people dying from AIDS in Africa, or unable to get clean drinking water in India. The sheer fact the basis of capitalism lies on something called the "invisible hand" ought to send up quite a few red flags IMO.
My problem (shared by many, it seems) is economics is by definition dealing with subjective judgments, so it's biased from the start no matter how badly someone wants to prove otherwise.
Would it be fair to say a "bedrock" of economic thought is that more material wealth is desirable? It is essentially the basis of the entire supply and demand curve theory, yes?
Well, unfortunately it doesn't explain why many people leave jobs in the business to go teach, or work in the arts, etc. So then the counter-argument becomes that those fields offer some sort of equivalent satisfaction which can then be measured - except that it can't, at that point you're comparing apples and oranges. You can't sell your satisfaction that comes from helping people, it's not a "good."
Another case in point, property values. Economists assume homeowners are happy with rising property values, however, many people are not, particularly when they have no desire of selling, as higher assessments simply result in higher taxes, and of course as we see now, what then happens when/if home values sink?
Way too many judgments involved, way too many differing preferences and living situations to make generalizations, etc.
End of day - a lot of very smart people can use economic theories and intuition to make very well-informed decisions, but even those aren't always agreed upon by everyone.
People bicker over every 1/4 point adjustment by the Fed, as there always winners and losers with every change.
On the other hand, nobody argues that gravity is real. Or that the science which went into producing a vaccine for various horrible diseases and viruses worked, or that a suspension bridge really does support xxxxxxx lbs of weight, etc.
Again, I'm glad to hear the peer review system is thriving, that's magnificent. But hard science, defined by the development of scientific thought based in the natural world over the past 5 centuries? Just ain't so.