The Misguided Revenge of the Middle Class

It’s obvious why the fixed pie and group pie assumptions about wealth would lead us to view economic inequality with a skeptical eye. But given that these assumptions are false, perhaps there is another indication that the rich are guilty of economic injustice. If we’re all boats floating in a pool of wealth and only the rich are rising, perhaps we are right to at least be suspicious of sabotage. If the rich are guilty they should at the very least repair our boats. So how do we determine whether the middle class has stagnated at the hand of the rich?

The Factors of Growth

According to the critics of economic inequality, incomes for the poor and middle class have stagnated. The following research and data was compiled by Don Watkins in his book, Equal is Unfair.

The sheer abundance and quality of things like housing, cars, medicine, food, and electronics today makes it utterly implausible that we’ve stagnated over the last four decades. The popularity of $ 4 lattes, $ 10 craft beers, $ 120 tennis shoes, $ 400 cell phones, and $ 20,000 SUVs suggests that Americans have more disposable income than ever. General observations can be deceiving, of course, but in this case other evidence is overwhelmingly consistent with the conclusion that life has improved for the vast majority of Americans. — Don Watkins

Inequality critics give the impression that they are simply telling the facts.

But those “facts” are in truth controversial interpretations of murky statistics.

Our data comes from the Current Population Survey (CPS) and IRS tax records, each with its strengths and weaknesses in assessing the growth of the economy.

To get a sense of how important the choice of the data source is, consider this: According to the approach taken by Piketty, the median U.S. income in 2007 was $ 30,000. The CPS data puts it at $ 52,650. And the CBO data gives us $ 77,200 — more than double Piketty’s number.
…depending on which measures you use, you can arrive at totally opposite conclusions: that the middle class is stagnating (3.2 percent growth since 1979) or that it has seen strong if not extraordinary growth in income (36.7 percent since 1979).

There are at least eight major hurdles to overcome when attempting to objectively assess economic progress:

The Aggregate Problem

Asking what’s happening over time to “the 1 percent” or the “bottom 20 percent” ignores the fact that the composition of these groups is constantly changing…The claim that the middle class has stagnated since 1979 does not mean that someone who started working in 1979 is making the same amount of money today. That is seldom true.

Household Composition

…imagine a household in which a married couple each earns $ 25,000 a year, for a total household income of $ 50,000. Now let’s say they get divorced. Even if they both get a substantial raise, say to $ 35,000 a year, the change in households will drag down median household income: instead of one household making $ 50,000 there are now two households making only $ 35,000 a year. Everyone is better off financially, and yet it appears they’re doing worse. Given that divorce rates rose dramatically during the 1970s, the effects of this factor alone could be profound. What’s more, household sizes have fallen in recent decades as people have had fewer children, which means that, all else being equal, a given income provides for a higher standard of living today than it did in the past.

Immigration Trends

Immigrants now make up about 13 percent of the population, versus only 5 percent in 1965, and they are twice as likely to be poor as native-born Americans.

Employer Benefits

If employers become more flexible with hours or working arrangements, or offer more pleasant working conditions, this can entice employees to accept lower wages: they’ll seem poorer even though on net they’re better off.

Inflation Adjustments

There are several different methods for adjusting for price inflation, none of which is perfect, and you can reach very different results depending on which method you use.

Taxes and Transfers

In analyzing incomes, it makes a huge difference whether the analysis is pre-tax, pre-transfer or post-tax, post-transfer, or some other combination.

Changes in the Tax Code

Changes in the tax code can alter how individuals, especially high earners, report income. This means that using IRS data to track high earners’ incomes over time (as Piketty does) can be misleading. Economist Alan Reynolds, for instance, estimates that “more than half of the increase in the top 1 percent’s share of pretax, pretransfer income since 1983, and all of the increase since 2000, is attributable to behavioral reactions to lower marginal tax rates on salaries, unincorporated businesses, dividends and capital gains.”

The Economic Unit

In a four-person household in which one parent works, treating the individual as the unit of well-being would show one well-off individual, and three people living in dire poverty. The tax unit, which is what IRS tax data measures, is slightly better, but it too can produce misleading results…The final economic unit is the household, i.e., people living under one roof. The main drawback here is that unless you adjust for household size, you can misleadingly equate households that have radically different standards of living (e.g., a childless couple making $ 100,000 and a family of ten making $ 100,000). Indeed, one of the more quirky facts of the inequality debate is that most people have household incomes above the median. It sounds bizarre, but it’s simply a product of the fact that higher-income households tend to have more people in them than lower-income households.

What’s it all mean?

Given all of the challenges involved in assessing economic well-being, it would be a mistake to rely on any single statistic. But when common-sense observation, big-picture data about living standards, and most reasonable interpretations of statistical data all point in the same direction… it is hard to conclude anything other than that an overwhelming majority of Americans today are far better off than they were in the 1970s — not only because of life-cycle gains, but because economic progress has in fact lifted most if not all boats. Inequality is increasing (probably), yet most Americans are doing better.
For all the disagreements, this much is indisputable: the only numbers that support the middle-class stagnation thesis are pre-tax, pre-transfer wages that don’t include all forms of market compensation, that don’t take into account the changing composition of households and the workforce, and that don’t adjust accurately for inflation. By every other conceivable measure, there has been substantial progress — the only debate is over exactly how much.

So the middle class has not “stagnated” and has not been “pushed down” by the 1%. Whatever further potential there was for growth in prior years, there is no evidence to suggest that it has been stifled by the rich.