Edward Hadas

Barack Obama and Mitt Romney put the economy at the top of their campaign agendas. They have both focused primarily on labour – the high rate of unemployment. The attention is deserved, but other parts of the economy should not be ignored. There is the worrying decay of the nation’s capital stock – the physical, social and financial infrastructure. There is also something wrong in the consumption side of the economy, but there is a heated debate on just what the problem is.

Many commentators believe that the middle class, which makes up the bulk of the population, has a big problem: a decline in living standards. After all, the Census Bureau reports that the $50,054 median household pre-tax income in 2011 was 9 percent below the all-time peak, adjusted for inflation, reached 12 years earlier. That decline in income is so large that it must have led to some erosion in the typical family’s consumption.

Even if purchasing power really had declined by a few percent, the slide was from such a high starting place that loud complaints about deteriorating lifestyles would be unseemly. In fact, though, the median income measure distorts consumption reality. It omits services received without cost, for example healthcare provided by the government and insurers. It excludes the effects of changing taxes and shrinking household sizes. It underestimates the value of technological improvements – think mobile phones and the internet – and of the vast expansion of new, now-cheaper housing during the bubble.

These adjustments are almost certainly large enough to offset the reported decline. So the middle class doesn’t need a lecture on the virtues of making do with less. The adjustments also explain the lack of massive political indignation, even if there is evidence of minor irritation, at declining incomes. The placidity is not a sign that the American middle class has found stoic fortitude in the face of adversity. Rather, it is a reasonable response to consumption which is not really falling.

On the left, the common view is that the rich, or more precisely the widening gap at the top of the income ladder, is the nation’s leading consumption problem. For the top 1 percent of earners, income – after taxes and government transfers and adjusted for inflation – has multiplied four-fold since 1980, while the median has not even doubled. The disparity might be reduced by statistical adjustments, but the trend is real. The rapid increases in pay for celebrities, top executives and financial professionals are typical.

Revolution was not on the agenda when the Second Vatican Council of the Catholic Church opened on Oct. 11, 1962, almost exactly 50 years ago. However, the gathering marked the start of a new era, not only for the world’s largest centrally-run religion. During the following years, the hope for a better, freer world led to everything from the sexual revolution to the Prague Spring, from African independence to the hippie culture of Woodstock. A half-century on, it seems a good time for an economist to take stock.

The economy was not the top concern of the ’60s would-be revolutionaries, but calls for a new society had two revolutionary economic implications.

First, like so many other parts of the established order, the economic “system” was to be overthrown. The target was clear enough in Eastern Europe – the Communist planned economy. Elsewhere, the economic villain was harder to pin down, although it was often assumed that “capitalism” was intrinsically evil – heartless corporations and excessive materialism in the West and post-colonial exploitation in the Third World. It was time for radical change; if not a return to some imagined pre-industrial communal paradise then at least a massive refusal to become cogs in the machine. It hardly seemed to matter then that dissidents in the East were longing for what protesters in the West were loathing.

It is circa 1900. A young girl from a simple fishing village has been sold as a ’practice wife’ to the Bendoro, or local lord. When the Bendoro tires of her and expels her from his house, the girl retires from his presence the way peasants are supposed to: backwards, and on her knees.

The scene is from the novel “The Girl from the Coast”, and is based on the life of the grandmother of the Indonesian author, Pramoedya Ananta Toer. The girl suffered because the absolute authority of a petty local ruler and the accompanying indignities were considered normal. And this in a land which, by the standards of the age, was relatively refined. The Bendoro’s rules did not hold in the Netherlands, which ruled the land, but many Europeans would have shared his belief that sharp social stratification was part of the natural order of things. The Victorian author of All Things Bright and Beautiful, the childrens-favourite hymn, expressed the same sentiment a few decades earlier: “The rich man in his castle, the poor man at his gate, God made them, high or lowly, and ordered their estate.”

Times have changed. Pramoedya’s story comes from a vanished world, one in which the privileged elites were considered superior beings to the masses of ’ordinary people’. To the modern reader, the Javanese peasant bride’s humility looks demeaning and disgusting, not pre-ordained. The Bendoro’s worldview has been superseded by that of the Universal Declaration of Human Rights, which takes it as self-evident that, “all human beings are born free and equal in dignity and rights”. And the verse about “the rich man in his castle” is usually excluded from editions of modern hymnals.

Around 100 BC, a Roman nobleman calculated that it took about 100,000 sesterces a year to live comfortably. That was roughly 200 times the amount of money a poor city dweller needed to eke out a living. If an American needed the same multiple of the subsistence income to join the upper middle class today, the threshold would be $3.5 million. The United States economy has become less equal lately, but it remains much more egalitarian than the ancient Roman Republic.

The modern news on economic inequality is much more good than bad. The good news is very good. The greatest moral problem caused by inequality – the unequal access to the most basic economic goods, those which support life – has become less severe. The portion of the total population that suffers from this bottom-inequality is probably the lowest ever in history.

True, we do not know how many ancient Romans were on the wrong side of the bottom-inequality, but statistics for the most recent decades are encouraging. In 1970, 26 percent of the world’s population suffered from hunger, according to the UN’s Food and Agriculture Organisation. The proportion is now 13 percent – still scandalously high, but the gain in food-equality is clear. Nor is food an isolated example. Electricity is a relative new development, but the Soviet dream of universal electrification has already nearly become a reality; more than 80 percent of the world’s population can plug in, according to the International Energy Agency. Health care and sanitary living conditions are now considered basic goods – and access to them has become more equal. The average life expectancy at birth is 65 or above in countries accounting for roughly 80 percent of the world’s population.