Economy & Business

The Myth of the Stagnating Middle Class

(Image: Dreamstime)
More Americans have easier lives today than in years past.

The American middle class is disappearing.

We hear it from everybody. Senator Bernie Sanders (D., Vt.) focused throughout his campaign on what he termed the “disappearing middle class” — disappearing, Sanders said, thanks to income inequality. Sanders explained, “If you have seen a massive transfer of wealth from the middle class to the top one-tenth of 1 percent, you know what, we’ve got to transfer that back if we’re going to have a vibrant middle class.” From the other side, Donald Trump has echoed the same message: “The American worker is being crushed. . . . The great American middle class is disappearing.”

No matter the messenger, the message is the same: Those in the middle of the income spectrum have been squeezed out, and the beneficiaries have been those at the top. The answer, too, seems to be the same from all sides: more government intervention. Use the bulldozer of government to move the mountainous earth of upper-class income into that ever-widening income gap, evening the playing field. Erect massive trade barriers designed to punish businesses and benefit specific groups of workers; cram through massive redistributionist health-care schemes to alleviate pressures on the middle class; raise taxes at the top, but lower them for the people in the middle; subsidize massive infrastructure projects.

The middle class, we hear, must be restored. And government can seize the wealth of some to rectify the great imbalance of the last several decades.

There’s only one problem: What if the middle class isn’t disappearing?

In actuality, the American middle class has been doing just fine. In 1967, 33.7 percent of all American households earned between $50,000 and $100,000; by 2014, that number (in constant 2014 dollars) had fallen to 28.5 percent of American households. That means the death of the middle class, right? Wrong. It turns out that everybody just got wealthier. In 1967, the households earning an annual income of $50,000 or less constituted 58.2 percent of all Americans; as of the end of 2014, just 46.8 percent fell into this group. And while only 8.1 percent of American households earned more than $100,000 a year in 1967, today, 24.7 percent do. That’s not a collapsing middle class. That’s a growing upper middle class.

By the same token, in 1971, 61 percent of American households fell into the middle-class income tier; just 50 percent did in 2015. Where did those 11 percent go? They nearly all went to the upper-middle or highest income bracket: Just 14 percent of Americans households were in that category in 1971, but 21 percent were in that category as of 2015. And as Edward Conard points out, three of the four percentage points moving downward come from Hispanic immigrants, meaning that the rest of America saw a massive increase in wealth.

That’s not all.

Statistics show that we’ve out-earned all of our foreign competitors. In his book The Upside of Inequality, Conard states that “the U.S. economy has grown employment two to three times faster than the more manufacturing-oriented economies of Germany, France, and Japan, while providing families with median disposable incomes that are 15 percent to 30 percent higher than that of those countries.”

Income statistics are also skewed by the fact that so many Americans are alive and retired — they’re retired because they don’t require more income, but their income statistics naturally decline with retirement. If we compare full-time workers ages 25 to 64 in 1979 with that same subset of workers in 2013, income exceeded inflation and grew 33 percent total.

The great myth of middle-class income stagnation, as Conard explains, springs from the fact that advocates of that myth count pass-through tax entities (many of which reportedly have little or no income) as households, and that there are more households with fewer people today. If a household of five people in 1970 earned $50,000, and a household of two people earns that amount today (in constant dollars), that looks, on paper, like income stagnation. But the two-person $50K-earning household today is in fact far better off. Income statistics are also skewed downward because they do not count income that goes toward employer-provided heath care. Conard summarizes: “In total, all of these uncontested adjustments — size-adjusted households, health care, taxes, and government-transfer payments — increased median household income growth between 1979 and 2007 . . . from 20 percent to 34 percent — in line with the earnings growth of full-time workers.”

Income is a poor indicator of economic wealth in any case. Consumption is a better way of determining how people live — for example, poor Americans consume far more than they make thanks to government benefits. Suggesting that their income measures their wealth is intellectually dishonest. It turns out that people live far better now than they did in 1980, on every rung of the income scale.

Suggesting that the income of poor Americans measures their wealth is intellectually dishonest. Consumption is a better way of determining how people live.

Even this doesn’t take into account all of the unmeasured economic benefits we experience thanks to innovation. Take, for example, social media. The benefits you experience from social media are likely great — but those aren’t measured by GDP. As Paul Starr writes at The New Republic: “New technologies . . . have become so cheap that they are pervasive and now enable ordinary people and the smallest of enterprises to do things that were once the stuff of science fiction. As a result, a yawning disparity has opened up between the subjective experience of innovation and the objective measures of its economic impact.”

Erik Brynjolfsson and Andrew McAfee make a similar argument in their book The Second Machine Age: “There’s a huge layer of the economy unseen in the official data and, for that matter, unaccounted for on the income statements and balance sheets of most companies.”

And yet demagogues on all sides of the political aisle insist that Americans are living worse than they did years ago, or that they’ve stagnated in their progress. Never mind that they have nicer things, that they live longer, that their lives are easier, that they even live in bigger houses — the median size of a new home in the United States is 2,467 feet as of 2016, a 61 percent increase over the past 40 years.

No, Americans must be having it rough.

Part of this perception is the tendency to romanticize the past. Americans, by the same token, think that crime has been increasing year over year for decades, even during one of the great historic downtrends in crime since 1990. But part of it is politicians constantly drilling into Americans that they’re being screwed by the guy at the top, and that only government can fix that problem.

Government can’t fix that problem, because that problem doesn’t really exist. Government can only exacerbate that problem by destroying free markets that make better products more cheaply available, inhibiting the free movement of labor, and insisting that artificial redistribution of income can substitute for the free exchange of goods and services.

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