The middle class is shrinking! The middle class is shrinking! So argues a report from the Pew Research Center. The report claims that the median U.S. household’s income dropped 8 percent between 1999 and 2014. Even right-leaning commentators have reacted with alarm.
As it turns out, however, the Pew researchers made several data errors. The Great Recession and weak recovery hit America hard, but the middle class has still gained ground since the late 1990s.
Pew’s analysis makes two major mistakes: It uses income from two different data sources, and uses a less accurate measure of inflation. On the first point, Pew compared household income from the 2000 Census (which asks about 1999 income) with household income from the 2014 American Community Survey (ACS). These income data are not directly comparable. The ACS asks its income questions slightly differently than the Census does. The Census Bureau investigated to see if these differences affect income reported. It found Census respondents report about 5 percent more income than those answering the ACS. Consequently the Census Bureau explains (in bold) to use caution when comparing ACS and decennial Census income data
The Pew researchers did not do this. They simply juxtaposed the two. Thus the survey differences make middle-class incomes appear 5 percent smaller in their data. This drop does not exist in the real world.
Second, the Pew researchers adjusted for inflation using the Consumer Price Index (CPI). The CPI adjusts for changes in what Americans buy quite slowly. Two alternative measures — the chained CPI (C-CPI) and the Personal Consumption Expenditures (PCE) index — both regularly account for changing consumption. Economists widely consider the C-CPI and the PCE more accurate (and they report almost identical rates of inflation). Both the Congressional Budget Office and the Federal Reserve use the PCE as their preferred measure of inflation for this reason.
The more accurate inflation measures report slower inflation than the base CPI. Between 1999 and 2014, the CPI grew 42 percent, while the PCE grew 35 percent. Adjusting for inflation with the CPI thus makes after-inflation incomes appear artificially small. Using a less accurate measure of inflation has nothing to do with real differences in living standards.
Fortunately, the Congressional Budget Office produces household income estimates that do not suffer from these problems. Table 5 of CBO’s estimates show median household incomes grew about 6 percent between 1999 and 2011 (the most recent year in their data). Median after-tax income grew slightly faster (13 percent), thanks to the Bush tax cuts.
Of course 6 percent income growth over more than a decade is not great. The Great Recession inflicted massive economic pain that many families have not fully recovered from. But modest income growth is much better than losing ground. Contrary to Pew’s report, the typical middle class family has more resources available to them today than they did at the turn of the century.