The Economy

The Death of the American Dream?

Measured by household wealth, the middle class is worse off now than it was 20 years ago.

Is the American Dream alive? Opinions vary. Interpretations either way coalesce around the fate of middle-class incomes. If you identify the middle class based on how much money a family has in the bank rather than their income in a given year, however, the answer is a resounding “No.”

The chart above shows the median income for two measures of the middle class. The first measure is the more common: the household income smack at the middle of the income distribution. The second is the household income smack at the middle of the distribution of household net worth, a measure of wealth.

Economically, a household’s wealth says more than its reported income in any one year. Incomes can be volatile from year to year. Wealth reflects a whole lifetime of annual incomes up to that point. To identify America’s middle class by wealth rather than income is therefore to discern it based on a richer and fuller piece of information. Wealth also confers financial stability. A measure of wealth, then, comports with the intuition that whether a family is middle class relates, at least in part, to its ability to weather fluctuations in annual income.

As the chart shows, the household income at the middle of the wealth distribution in 2019 remained below what it was in 2001, adjusted for inflation. By this metric, the last twenty or so years have been a disaster for America’s middle class. If identified by the middle of the income distribution itself, by contrast, the middle class has made a recent recovery and is now better off than it was in 2001. The data on incomes among the wealth and income distributions are from the Federal Reserve’s Survey of Consumer Finances, which releases updates every three years but does not have this data for years before 2001.

Many have debated what happened to the middle class in recent decades and whether, in light of that, the American Dream is still alive. Many still do. Almost all parties in this debate discern the middle class in the data by looking at the middle of the distribution of incomes. If they focus instead on the middle of the wealth rather than income distribution, a perspective that makes more economic sense, they may not need to continue the debate.

Joseph W. Sullivan served at the White House Council of Economic Advisers as the special adviser to the chairman, as well as a staff economist, from 2017 to 2019.


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