We'll be hearing a lot about the middle class in the coming months. That’s one sure bet for 2016, as both parties compete for votes. What’s less sure is whether we'll get an accurate assessment of the middle class’ condition.
By now, the conventional wisdom is familiar: The top 1 percent has skimmed most income gains for itself, producing decades of stagnant living standards for most Americans. Wall Street has slaughtered Main Street.
Now comes a report from the Pew Research Center that paints a more complex picture. It’s not that the Pew study contradicts all the conventional wisdom. It finds (as have others) that economic inequality is increasing. One of the study’s main conclusions is that the middle class is being hollowed out, as more Americans find themselves in either upper- or lower-income households. The extremes grow at the expense of the center.
Consider. In 1971, about 61 percent of adults lived in middle-income households (defined as three-person households with incomes from $41,869 to $125,608 in today’s dollars). By 2014, that share had dropped to 50 percent. Meanwhile, the share of low-income households (households with incomes of $41,869 or less) grew from 25 percent to 29 percent, and the share of upper-income households (incomes above $125,608) increased from 14 percent to 21 percent.
But the study convincingly refutes the notion that the living standards of most Americans had stagnated for many decades. Pew calculated household incomes, adjusted for inflation, all along the economic spectrum and found that, until the early 2000s, most households reaped slow but steady increases. Growing inequality did not siphon off all gains for the non-rich. Here’s how Pew describes this period:
“Households typically experienced double-digit gains in each of the three decades from 1970 to 2000. Middle-income household income increased by 13 percent in the 1970s, 11 percent in the 1980s and 12 percent in the 1990s. Lower-income households had gains of 13 percent in the 1970s, 8 percent in the 1980s and 15 percent in the 1990s. Upper-income households registered a 10 percent gain in the 1970s (and) … 18 percent in both the 1980s and 1990s.”
What’s happened since, of course, is that the Great Recession erased some of these gains. Unemployment rose, overtime pay declined and many of the unemployed had to accept lower wages to get new jobs. Pew estimates that household incomes dropped to levels of the late 1990s. That’s a steep decline. Still, it left intact most gains achieved since 1970. In 2014, typical middle-income households had incomes 34 percent higher than in 1970; in 2000, the advance had been 40 percent.
Indeed, these figures probably understate actual gains. Like many others, the Pew study relies on pre-tax cash incomes. It ignores taxes and non-cash government transfer programs to the poor (food stamps, Medicaid) and employer-provided fringe benefits for workers (mainly health insurance and vacations). These blunt inequality and raise recipients’ living standards, as Cornell University economist Richard Burkhauser and others have argued.
The good news is this: Despite the top 1 percent’s outsized incomes, this hasn’t yet shut down the upward march of living standards for most of the population. We’ve mistaken what is plausibly a one-time setback – the response to the Great Recession – for long-term stagnation. People have understandably but wrongly taken their recent experience and projected it onto the past.
Still, greater inequality threatens future living standards. That’s the bad news. The middle-class spirit is central to the American tradition. By Pew’s definitions, middle-income households still dominate. This is a unifying force in an era of growing fragmentation. But if present trends continue, it will weaken. Class warfare, already rising, will intensify.
What can be done?
We need a prudent agenda – not a vendetta against the rich or the poor but a purging of policies that abet inequality with few offsetting benefits. Tax breaks that favor the rich, starting with the infamous “carried interest” subsidy, should be abolished. Limits on unskilled immigrants, who inflate the ranks of the poor, should be enacted as part of comprehensive immigration legislation. Half of Hispanic immigrants have low incomes, Pew says.
The hollowing of the middle class is simply not in America’s best interest. The biggest boost to middle-class fortunes could be a tight job market that raises wages without triggering an inflationary wage-price spiral. Whether this ideal outcome can be achieved in the real world may be one of 2016’s big stories. We'll see.