Podcast Transcript: Charles Wheelan

Charles Wheelan

Here's a transcript of the conversation Mike Sante, managing editor of Interest.com, had with Charles Wheelan, author of the new book Naked Statistics, Stripping the Dread from the Data.

Mike Sante: Hi, I’m Mike Sante managing editor of Interest.com. And we’re talking with Charles Wheelan who teaches public policy and economics at Dartmouth College in Hanover, N.H., and has written a new book I have here in my hand called Naked Statistics; Stripping the Dread from the Data.

In the book, Charles talks about the best way to measure what’s really happening to America’s middle class, something that’s a big concern to Interest.com readers.

He starts by looking at one popular measure of the economic progress, average per-capita income, which is actually going up, right Charles?

Charles Wheelan: It is. If you look at that alone, you’d say, boy, the average American must be doing better.

Mike Sante: I’m not sure we think we’re doing better. Why is that?

Charles Wheelan: Because the average American might not be doing better.

Average — you know, much of the book is about how descriptive statistics simplify and how that’s a good thing sometimes if you want to encapsulate your college performance with a grade point average — well, that tells us a lot. It’s a single number as opposed to having it weighed through your transcript or your exams.

On the other hand, reducing your entire college career to a number simplifies, and it leaves out a lot of information. So, to go back to average household income and the average, as a descriptive statistic, is skewed by particularly large observations.

So if you’ve got a basketball player who scores two points and seven points, three points, five points, and then plays a particularly lousy team and scores 87, his average is going to look good. But really, it's being pulled up as just a means being pulled up by one really high game.

Well, you take that back to personal income or household income, and if we’ve got explosive growth and income at the top of the American pyramid, which we do — hedge fund managers, finance, superstars in sports and entertainment and so on — then that’s going to pull up income just like the guy who happened to score 87 points in one game.

And as a result, everybody else could be exactly where they were 10 years ago, but the average is going to go up.

And the example I use in the book is, imagine you've got a bar with 10 barstools, and there are 10 people sitting on those stools, each of whom makes $35,000 a year. The average income in the bar, $35,000.

The median income, which is just a different measure of the middle, is, kind of the middle person, is also $35,000. The guy sitting on the middle seat or between the two middle seats if it’s an even number makes $35,000. That’s really easy.

But now, and this is what makes it interesting, let’s assume that Bill Gates walks into that bar.

Mike Sante: It’s a Seattle bar then.

Charles Wheelan: It’s got to be a Seattle bar. Well, you know, he’s got his own private plane, so really it could be anywhere, right, this is part of the moral of the story.

So you know he flies to Chicago or New Hampshire, and he sits down in the eleventh stool, and we’ll say he’s worth, I don’t know, $1 billion.

Well now, the average income in that bar has gone up to something on the order of a $100 million, right? Its $35,000 plus $35,000 plus $35,000 all the way up to a billion.

You divide by eleven people, you get a big, big number.

Now if I then walk by the bar and say, "Boy, you know the average income in that bar is a $100 million." If I’m just telling you that, and you haven’t been inside, you’re going to think this is where a bunch of rich people hang out.

But it’s not. It’s a bar with a whole bunch of people who make relatively kind of lower middle-class wages and then one rich guy. And that is the inherent problem with using average, whether you’re doing it over the whole country or in the particular bar example.

Mike Sante: So median is a better measure. And what’s happening to the median household income in this country?

Charles Wheelan: The median income is flatter at the household level and at the personal level.

If you look at what’s happening to people who are the median, so the 50th percentile — that’d be like the guy sitting on the sixth bar stool. What happened to his income? That hasn't moved much at all.

And I think that explains some of the political tension that we saw in 2012 where you have folks, particularly folks who are more likely to be defenders of the tax cuts and the Bush administration, and so on, say, "Look, income’s going up, the country is richer overall, GDP growth is higher."

And then you have a lot of other folks saying, "Whoa man. If this is all true, how come I feel like I’m running harder just to stay in place?"

And the reality is both of those things can be true, depending on the statistic that you happen to choose.

Mike Sante: Is there anything else about the middle class here in America that you noted in your studies?

Charles Wheelan: Yeah, it’s even trickier than I’ve just described because let’s suppose you use meeting. Let’s take the 50th percentile, that household right in the middle, the equivalent of the guy sitting on the sixth bar stool and you say, "All right, well, how has income performed in that household?"

You would say, "Oh, it’s gone up a little bit." The household’s doing better than it was doing 20 years ago.

If I’m looking at the overall household income, it’s not just how much you’re being paid, it’s how many hours you’re working. That’s what total household income captures.

So if it turns out that your wage is flat or falling, and you've got to work extra hours or you have a spouse who wasn't working before and doing a lot of things around the house who has to go back to work, both of those things will make your household income bigger because you’re bringing in new money.

On the other hand, you’re working more hours to do it, so you may actually not feel any better off.

So I would urge people to actually look at the wage being paid, the median wage as opposed to total income, because the wage is the amount you’re being paid per hour.

And that is probably the most accurate snapshot of the reward that you’re getting in the labor market per hour of work.

Mike Sante: And what’s happening to that?

Charles Wheelan: That is flat. And for people who are below, like lower middle class, if you go down to like the 25th percentile, or you look at it slightly differently, you look at it, say, for people with only a high school education or a high school dropouts, that’s actually falling in a serious way.

Mike Sante: Wow! Well, thank you very much. We've been talking with Charles Wheelan, who’s the author of the new book Naked Statics; Stripping the Dread from the Data.