Contributor Post Created with Sketch. Should America’s Middle Class Really Envy Canada’s? — James Pethokoukis

 

The American middle-class certainly has reason to be bummed. The worst downturn since the Great Depression has been followed by an unusually weak recovery. Unemployment remains high. Median wages are still below their pre-recession peak. And if all of that weren’t bad enough, the New York Times’ new Upshot site offers this additional bit of discouraging news: “The American Middle Class Is No Longer the World’s Richest.”

Although economic growth in the United States continues to be as strong as in many other countries, or stronger, a small percentage of American households is fully benefiting from it. Median income in Canada pulled into a tie with median United States income in 2010 and has most likely surpassed it since then. Median incomes in Western European countries still trail those in the United States, but the gap in several — including Britain, the Netherlands and Sweden — is much smaller than it was a decade ago.

In other words, this is another story about income inequality and redistribution. Well, not just that. The piece also cites a slowdown in educational attainment versus other advanced economies. But given the high level of chatter these days about inequality, most readers will see the piece as more disturbing evidence of the growing 1%-99% gap. The US and UK, for instance, grew at about the same pace in the 2000s. But UK median incomes are up by 20% vs. 0.3% for the US. Where did the money go? To the rich, Upshot suggests.

But there are some problems here. First of all, the way you want to calculate these numbers is from business-cycle peak to business-cycle peak, not by decades. This is particularly true if you are doing cross-country comparisons. For instance, researcher Richard Bukhauser calculates US middle-income growth in the 2000-2007 business cycle at 5%. Now, this also includes health benefits, which the Upshot figures do not include. This is an important omission since a big chunk of US worker compensation goes to employer-provided health benefits.

And, hey, what about the recession and housing bust? As Derek Thompson nicely summarizes: “The U.S. is emerging from a catastrophic collapse of the housing market that obliterated household wealth for millions of middle-class families. Canada, however, is in the midst of a delirious housing boom and a personal debt craze that reminds some economists of the U.S. market exactly a decade ago (before you-know-what happened).” And as Reihan Salam writes:

Couldn’t it just be a coincidence that Canada has fared well and that it has yet to experience a housing price correction — while the U.S. housing boom came to a miserable close in 2006–7, the Canadian housing boom has continued more or less without interruption? Should we ignore the fact that house prices are still overvalued in Britain, the Netherlands, and Sweden, the countries where, according to Leonhardt and Quealy, the gap in median incomes with the United States is closing?

I wonder how these income numbers would have been different had the Fed reacted more aggressively in the 2008-2010 period to counter the huge demand shock experienced by the US economy. And I also wonder what exactly Upshot is supposed to conclude about the health of the American middle-class from such an imprecise and incomplete international comparison.

There are 12 comments.

  1. Misthiocracy ingeniously Member
    Misthiocracy ingeniously Joined in the first year of Ricochet Ricochet Charter Member

    Shhhhh…

    I’m trying to get my guy reelected next year. We need these middle class statistics!

    :-)

    • #1
    • April 25, 2014, at 12:07 PM PDT
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  2. Richard Oatway Inactive

    Percentage change in Canadian housing prices

    Canada’s housing prices declined in the second half of 2008 but have since recovered.
    Our recession was not as deep as America’s but was painful nonetheless. A major factor in Canada’s softer landing vis-a-vis housing price declines was Canada’s stricter rules for lending. Sub-prime lending was not practiced in Canada.
    In any event, I’m a little confused over the emphasis on housing prices in this article.
    When it comes to cause and effect, isn’t it being middle class that enables someone to buy a house in the first place.

    • #2
    • April 25, 2014, at 1:41 PM PDT
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  3. True Blue Inactive

    In terms of GDP per capita, the USA and Canada are roughly similar. We should really envy Australia, its GDP per capita is significantly higher than that of the United States. Looking forward, I’d strongly suggest that Canada and Australia will pull further and further ahead. They have much better immigration policies that avoid bringing in 10s of millions of third world immigrants who become dependent on the state and threaten to undermine the cultural strengths of their countries.

    • #3
    • April 25, 2014, at 2:10 PM PDT
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  4. JimGoneWild Coolidge

    Yes, American middle class should get mad-as-hell, kick the Democrats out of office, end ObamaCare, lower taxes, restore liberty and get this economy going.

    • #4
    • April 25, 2014, at 3:19 PM PDT
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  5. Zafar Member

    True Blue:

    In terms of GDP per capita, the USA and Canada are roughly similar. We should really envy Australia, its GDP per capita is significantly higher than that of the United States. Looking forward, I’d strongly suggest that Canada and Australia will pull further and further ahead. They have much better immigration policies that avoid bringing in 10s of millions of third world immigrants who become dependent on the state and threaten to undermine the cultural strengths of their countries.

     I don’t know about Canada, but Australia is a welfare state because that is what the population wants. It is also a very culturally diverse society. What has set us (maybe Canada?) apart is a combination of factors including the efficient provision of some public services (in Oz medical care costs 10% of GDP compared to 18% of GDP in the US) and the mining boom/China’s growth.

    • #5
    • April 25, 2014, at 8:31 PM PDT
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  6. DutchTex Inactive

    I think a better comparison between us and Oz would purchasing price parity. Aussies have higher incomes, but everything costs a lot more, too. I’m guessing Canadians pay more too, as I used to see them in Upstate NY all the time on shopping trips.

    • #6
    • April 26, 2014, at 5:59 AM PDT
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  7. True Blue Inactive

    Zafar: australia is 92% european. It is not very diverse.

    • #7
    • April 26, 2014, at 6:40 AM PDT
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  8. Gazpacho Grande' Coolidge

    Keep in mind GDP includes gov’t spending, so using it as a per-capita wealth metric is a bit off. Especially since what we’re talking about here is the distribution of wealth on a curve.

    Money velocity in the US has been declining even as billions of dollars were pumped into the economy via QE. Median household incomes declined, and continue to decline. The evidence seems to indicate that the real enemy of the middle class is a political class that assumes tripling the national debt is the best way out of a recession. The results speak for themselves, especially when compared to our largest (or used to be largest, at least) trading partner, Canada.

    http://confoundedinterest.wordpress.com/2014/04/25/m1-multiplier-and-m2-velocity-drop-to-all-time-lows-the-burst-of-the-great-american-debt-bubble/

    • #8
    • April 26, 2014, at 7:16 AM PDT
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  9. Zafar Member

    True Blue:

    Zafar: australia is 92% european. It is not very diverse.

    Europeans are not all the same, and Australia is changing quite rapidly – especially in the cities.

    • #9
    • April 26, 2014, at 7:04 PM PDT
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  10. EThompson Inactive

    Richard Oatway:

     A major factor in Canada’s softer landing vis-a-vis housing price declines was Canada’s stricter rules for lending. Sub-prime lending was not practiced in Canada.

    I assume that is because Canada did not elect the likes of Christopher Dodd and Barney Frank. 

    • #10
    • April 26, 2014, at 7:57 PM PDT
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  11. EThompson Inactive

    Should we ignore the fact that house prices are still overvalued in Britain, the Netherlands, and Sweden, the countries where, according to Leonhardt and Quealy, the gap in median incomes with the United States is closing?

    Certainly not. See: Ireland in 2009.

    • #11
    • April 26, 2014, at 8:01 PM PDT
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  12. SParker Member

    Richard Oatway:

    Canada’s housing prices declined in the second half of 2008 but have since recovered.Our recession was not as deep as America’s but was painful nonetheless. A major factor in Canada’s softer landing vis-a-vis housing price declines was Canada’s stricter rules for lending. Sub-prime lending was not practiced in Canada.

    Plus–as I understand it–mortgages are recourse loans in Canada. I’d imagine I’d view my home purchase more circumspectly if I knew Scotia Bank was going to pursue me into Hell to get its money back. A US no-down subprime loan on a home, properly viewed, was a free lottery ticket.

    • #12
    • April 27, 2014, at 9:47 AM PDT
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