The Agenda

Alan Krueger’s Definition of the Middle Class

In his speech to the Center for American Progress, Alan Krueger observes that the middle class has shrunk:

President Obama summarized the rise of inequality very succinctly in his Osawatomie, Kansas speech, when he said, “over the last few decades, the rungs on the ladder of opportunity have grown farther and farther apart, and the middle class has shrunk.”  

Krueger then carefully documents a few important trends, e.g., 

The figure shows that all quintiles (fifths) of the income distribution grew together from the end of World War II to the late 1970s, but since the 1970s income has grown more for families at the top of the income distribution than in the middle, and it has shrunk for those at the bottom.  


This next chart shows the level of income earned by the median household each year, after adjusting for inflation [Figure 3].  Half of all households earn more than the median and half earn less.  You can see that the median household saw a decline in real income in the 2000s.  If in the first decade of the 2000s the income of the median household had grown at the same rate as it did in the 1990s, middle class households would have an extra $8,900 a year to spend on their mortgages, rent, cars, food, and clothing, or to add to their savings.   


The next chart shows how much after-tax income has grown for different parts of the income distribution since 1979, after adjusting for inflation [Figure 4].  As the Congressional Budget Office noted in a recent report, the top 1% of families saw a 278 percent increase in their real after-tax income from 1979 to 2007, while the middle 60% had an increase of less than 40 percent.   

To be sure, it would be helpful to know something about the composition of these households, but Krueger is offering important, valuable information. What is really strange is what comes next:

A consequence of the momentous shifts in the income distribution that I have just documented is that the middle class has shrunk.  The next chart illustrates this development by showing the percentage of households whose income falls within 50 percent of the median [Figure 6].  That is, we place a +/-50% band around the household that is exactly in the middle, and then we see what fraction of all households fall within this band each decade.  We have gone from having just over 50 percent of households with incomes within 50 percent of the median in 1970 to 44 percent in 2000, and 42.2 percent last year.   

This would obviously be a problem if households were falling out of the middle class were falling out of this range and into the lower end of the scale. But what if households were falling out of this range and into the higher end of the scale? As the social policy scholar Scott Winship has observed, the picture looks somewhat different if we consider households earning at least 50% of the median. The share of households earning at least 50% of the median has gone from 76% to 75%. This represents some erosion, though a 1% shift could just be statistical noise. (And as we say ad infinitum around these parts, the foreign-born proportion of the U.S. population increased from 3.8% in 1970 and it was 12% as of 2010. The notion that this would have no impact on the income distribution seems somewhat unlikely.)

Now, it is possible that there is something intrinsically significant about the number of households between 50% and 150% of the middle class. As of 2010, the median household income was $49,445, a decline of 2.3 percent from its 2009 level. 

150% of $49,445 is $74,992.50. 50% of $49,445 is $24,722.50. So perhaps Krueger believes that the middle class constitutes all households within this range — $24,722.50 to $74,992.50. If that is indeed the case, consider the following exchange between Krueger and Ezra Klein of the Washington Post:

EK: During your speech, you repeatedly note that the economy accelerated under the Clinton-era tax rates. But the White House doesn’t favor restoring them for anyone save those in the top two percent. There seems to be a bit of a disconnect there.

AK: The president has promised not to raise taxes for people making less than $250,000, and he’s adhered to that. The situation for the middle class has gotten to be so severe that I think it makes a lot of sense to avoid raising taxes on the middle class. The reason why I pointed to the performance of the ’90s is to show that a return to taxes that will be lower than they were in the ’90s should not be expected to stymie the economy. The evidence suggests the ’90s were much better years than when we went through the experiment of the tax cuts in the 2000s.

Krueger is making the case for protecting households earning up to $250,000 as reflective of the plight of the middle class, which has gotten to be so severe that he thinks “it makes a lot of sense to avoid raising taxes on the middle class.”

But of course his use of households between 50% and 150% suggests that we should really be protecting all households earning below $74,992.50 from tax increases, because those households constitute the middle class and those with less earning power, another group I think most of us, with the possible exception of Michele Bachmann, would agree should be protected from tax increases.

So why exactly would we protect households earning between $75,992.50 to $250,000 from tax increases? A few explanations come to mind:

(1) It is possible that the situation for households earning $75,992.50 to $250,000 has gotten so severe that it makes a lot of sense to avoid raising taxes on them;

(2) it is also possible that households earning $75,992.50 to $250,000 are a crucial political constituency for the president, and that Krueger’s analysis and his reply to Ezra Klein is informed by that.

But let’s instead say that Krueger is offering two definitions of the middle class: in one, the erosion of the middle class (households earning 50% to 150% of the median income) looks dramatic; in another, in which we include households earnings $24,722.50 to $250,000, i.e., in which we embrace the new political definition of the middle class, the erosion presumably looks somewhat less dramatic. 


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