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An Economist Looks at the Numbers
The Myth of the Declining Middle Class

Stephen Rose Ph.D, June 2, 2008
Have the richest ten percent of Americans reaped all the benefits of recent economic growth at the expense of the middle class?

Being middle class is very much part of America’s self-identity. When a 2008 Pew poll on the state of the middle class asked people to describe what social class they belonged to, nine out of 10 Americans saw themselves as middle class (53 percent said they were middle class, 19 percent described themselves as being “upper-middle class,” and another 19 percent described themselves as lower-middle class). Just 2 percent of respondents considered themselves upper class, six percent said lower class, and 1 percent did not answer the question. This overwhelming self-identitificion as middle class means that talking about the conditions and problems of the middle class resonates with most Americans.

And there are many people who think that there are problems with the middle class. Harvard Law professor Elizabeth Warren, author of the "The Two-Income Trap" and the presiding voice of a popular blog on the state of the middle class, has repeatedly argued that the middle class is vanishing.

Robert Kuttner, founder and co-editor of the American Prospect, succinctly describes the middle-class-in-decline theory, writing that over the past three decades, “all of the [income] gains went to top 10 percent (most to the top 1 percent), because the right has so relentlessly undermined institutions of opportunity and security long championed by Democrats.” In his 2007 book, "The Squandering of America," Kuttner calls the years from 1979 to the present a “silent depression.”

Other authors who subscribe to the theory that the American middle class is fighting for its life include such prestigious thinkers as Paul Krugman ("The Conscience of a Liberal"), Robert Reich ("Supercapitalism"), David Cay Johnston ("Free Lunch"), Kevin Phillips ("Bad Money"), and Jeff Faux ("The Global Class War"). Finally, Lou Dobbs’ nightly CNN news program gives wide airing to the to the war on the middle class.

Writers define middle class decline in one of two ways: Some argue that inequality has risen considerably since 1979 and that most of the income gains have gone to the very rich. As Larry Bartels wrote in a recent issue of the New York Times Magazine: “The past three decades have seen a momentous shift: The rich became vastly richer while working-class wages stagnated. Economists say 80 percent of net income gains since 1980 went to people in the top 1 percent of the income distribution, boosting their share of total income to levels unseen since before the Great Depression.”

Others argue that the absolute standard of living has declined for the middle class. This, however, is a more difficult argument to make because the median household income adjusted for inflation has risen by 13 percent since 1979, according to the most commonly cited Census numbers. Two studies (one by Elizabeth Warren and one by Christian Weller of the Center for American Progress) counter this rise by using “simulations of representative families” to show that discretionary income is down.

Since earnings are the primary source of family incomes, many stories of middle class decline also describe the quality of jobs worsening, as good-paying manufacturing jobs are replaced with low-paying service jobs (sometimes derisively referred to as “McJobs"). And with increased outsourcing to China and India, the future promises worse. For these writers, the response to declining male earnings has been for more wives to go to work and for families to go deeper into debt. Consequently, it is claimed that current income levels are a bit deceptive because they require Americans to work longer and carry higher debt burdens.

There are a significant number of specific claims that need to be addressed, and my goal in this column and future columns will be to show that many of the most common assumptions about the health of the middle-class and the state of the economy are actually not supported by the data. In refuting the myths put forward by “gloom-and-doomers,” I will show that socioeconomic analysis requires great care if one is to avoid simplistic apples-and-oranges comparisons. Because so many things are changing at the same time (e.g., increased labor-force participation of women, increased prevalence of single-adult households, and improved access to education), it is necessary to be rigorous in isolating the true causes and effects of economic forces.

Did most of America's income gains go to richest ten percent?
For now, let me briefly confront the claim that “all of the income gains over the last several decades have gone to the richest 10 percent of the population”. This is certainly an understandable conclusion when we hear so much about the billions of dollars accumulated by CEO’s, entertainers, and top financiers. But one must remember that this is a small slice of the population.

Let's start witha back-of-the-envelope calculation to estimate where the gains in income have gone. From 1979 to 2007, the real Gross Domestic Product (GDP) per person has grown by 63 percent (note 1 ). This means that the 1979 GDP was 61 percent of the current GDP (1/1.63 = .61). The remaining 39 percent of today's income represents the growth that has occurred since then.

In 1979, 30 percent of all U.S. income went to the ten percent of the population who earned the highest incomes. That left 70 percent of all income for the remaining 90 percent of the population. If all the growth since then went to that top ten percent, the other 90 percent would now have only 43 percent of current US income (.70*.61=.43). Conversely, the remaining 57 percent of total income would now go to the richest ten percent of the population.

In other words, the top ten percent's share of total U.S. income today would be 57 percent. This figure is considerably out of the range of percentage estimates for growth (all in the mid thirties) from many other data sources (the Current Population Survey, the March Supplement, the Panel on Income Dynamics, and the Survey of Income and Program Participation), and in the case of Bartels claim that 80 percent of growth went to richest one percent, it would mean that virtually no other Americans experienced increases in their standards of living over the last 25 years.

Where did the growth go?
This leaves the question — where did the growth go? In a paper published by the Information Technology and Innovation Foundation, I address this question and allocate the growth dividend from 1979 to 2005.

According to published census data, for those years, real median household income adjusted for inflation was up by 13 percent — which is considerably lower than the 63 percent rise of real GDP per person. But by adjusting the data to reflect the household demographics of 1979, a very different story emerges (note 2).

Since the late 1970s there has been a substantial decline in the number of adults living in husband-wife couples. At the same time, there was a small rise in the share of single adults with children and a large rise in the number of single adults living alone (primarily adults in their twenties and those over the age of 70). Thus, while GDP per capita was up by 63 percent, personal income per household rose by just 48 percent. This reflects the fact that newer households were small and tended to have relatively low incomes; fewer people per household means that household income is not going to increase as much as per capita income.

After adjusting for demographic changes and for rising employee benefits (counted in GDP accounts but not by the Census Bureau), median household incomes rose by 33 percent rather than 13 percent over these 26 years. If the median (the number where half of households earn more and half earn less) was the same as the mean (the average household), then the median household income would have increased 48 percent. Thus households above the median (the richer half) did rise faster than 48 percent — but it is also clear that not all the growth went to the top decile. A substantial part of the growth dividend was shared by the masses of the middle class.

It is, perhaps, no surprise that for all its popularity with the pundits, the "vanishing middle class" meme doesn't quite have a purchase on the public: According to a 2008 Pew Research Center survey on intergenerational mobility, two out of three Americans who describe themselves as middle class rate their standard of living as better than that of their parents.

Dr. Stephen Rose is the principal at Rose Economic Consulting and is writing a book on changing social conditions (Mythonomics: Ten Things That You Think That You Know About The Economy That Are Wrong).

Data on for 2007 are available for GDP (total per capita growth since 1979 was 66 percent) but not for median income. But median income has hardly moved so the same analysis as presented here would apply.

Let’s start with a community of five families each with married with two children. Their incomes are $20,000, $30,000, $40,000, $50,000, and $60,000 respectively. Now the older son of the family with $60,000 moves out with his $12,000 of earnings, and the family of $40,000 gets a divorce and forms a two separate households — a single male making $25,000 and a female with two children making $15,000. Now we have seven households with incomes of $12,000, $15,000, $20,000, $25,000, $30,000, $48,000, and $50,000. Compared with previous arrangements, the median income has dropped from $40,000 to $25,000 and the number of households with incomes under $40,000 (the former median) has increased from two to four. This simple example explains the profound effects that changes in demographics can have on the income distribution.


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