The Free Market; D. Mathews

A good way to determine how the poor fare in the free market is to examine how the standard of living of the poor has changed over time. One factor to consider is real income. Between 1900 and 1990, the growth in real (inflation-adjusted) income-gen erated by the free market-was enormous: Real income in 1990was 15 times greater than it was in 1900. Real per capita income was over four and one-half times greater in 1990 than in 1900. Another important measure of income is real money earnings from employment. Real earnings were almost four times greater in 1990 than in 1900. But statistics on real earnings mask significant changes in work hours and the way workers are compensated. In 1900 nonfarm workers toiled 60 hours a week; by 1990 they worked 39.3 hours a week, a decrease of over one-third. Moreover, in 1900 workers received almost all of their compensation in wages; by 1990 workers received nonwage benefits· accounting for almost 40 percent of their total compensation.

Professor Mathews teaches economics at Coastal Georgia Community College. That means an hour of work in 1990paid well over eight times what it did in 1900. Still, one might argue that real per capita income and money earnings tell us little about the status of the poor. Did the poor share in the economy's growth? Since real income in the United States has increased, we know that the real income of the poor has increased if the share of income received by the poor is stable or increasing. In 1900, the poorest 20 percent of income earn ers received 4.8 percent of the nation's in come; in 1990, they collected 4.6 percent. Thus, the real incomes of the poor have risen significantly this century. Another way of determining whether the poor have benefited from income growth is to look at changes in the percentage of families classified as livingin poverty over time. By our current definition of poverty, 56 percent of families in the United States were poor in 1900.By 1947,even after the economic shocks of the Great Depression and World War II, the percentage of families in poverty had been reduced by more than half, to 27 percent. By 1967, the percentage was halved again, to 13 percent. Notably, the decrease in poverty between 1900 and 1967 occurred before the advent of the greatly expanded welfare state.

In other words, it was the free market, not government welfare, that caused the poverty rate to fall from 56 percent in 1900 to 13 percent in 1967. 192 THE FREE MARKET: LIFTING ALL BOATS 193 Sources: Lebergott, Pursuing Happiness and The Americans: An Economic Record; Statistical Abstract of the U.S., 1994. Source: Stanley Lebergott, Pursuing Happiness (Princeton University Press, 1993). These extraordinary gains were shared by the poor. Consider some conveniences that we consider to be essential today: What has happened to real incomes and poverty rates demonstrates that the free mar ket does not leave the poor behind. Yet another measure of the standard of living is the level of goods and services consumed. Real per person spending on consumer goods rose dramatically between 1900 and 1990. (See the table below.) 1990 0.70 0.05 0.05 0.05 0.05 32.00 1.00 Percent of Poor All households households households with ... 1984 1994 1971 Washing machine 58.2 71.7 71.3 Clothes dryer 35.6 50.2 44.5 Dishwasher 13.6 19.6 18.8 Refrigerator 95.8 97.9 83.3 Freezer 29.2 28.6 32.2 Stove 95.2 97.7 87.0 Microwave 12.5 60.0 <1.0 Color television 70.3 92.5 43.3 VCR 3.4 59.7 0 Personal computer 2.9 7.4 0 Telephone 71.0 76.7 93.0 Air conditioner 42.5 49.6 31.8 One or more cars 64.5 71.8 79.5 Source: Federal Reserve Bank of Dallas, 1995 Annual Report, p.22.