economics

Is Middle Class Stagnation a Myth?

Economics, George Mason University
Economics, CUNY
Genesis
Response
Penultimate
Finale

Branko Milanović

Economics, CUNY

September 11th, 2020
The decline of the American middle class began around the mid- to late-1980s, at the same time as the negative long-run changes in modern American life — increased income and wealth inequality, lower social mobility — began to intensify. The figure below shows the share of the middle four deciles in total market income. (Market income includes all labor and property incomes, plus income from own businesses.) The U.S. was not the only country that experienced the decline, but currently the U.S. middle-class share is the lowest of the four countries considered here. And it is 3 percentage points lower than in 1990.
When one includes social transfers in cash and near cash (like food stamps and the like) and deducts direct taxes, the middle-class decline is less, but it is still real. If you define middle class as everybody with disposable (after-tax) income ranging from 25% below the median to 25% above, the share of such Americans has declined from a third of the population in the mid-1980s to 27% in 2015. For sure, they have not all moved to the poorer groups: 2 out of 5 have moved up, and 3 out of 5 down. But the movement has hollowed out the middle and increased income polarization.
But has real income of the American middle class gone down? Professor Boudreaux thinks it has not. To prove that, he engages into a doubly absurd exercise. He compares income of today’s middle-class Americans with income of the middle-class Americans 40 years ago using the goods that were inexistent 40 years ago. Indeed by that peculiar metric they are better off. It would suffice that one American out of perhaps 100 million middle-class American owns a smart phone today to obtain Professor Boudreaux’s result: since nobody had it 40 years ago, the growth rate of such income would be infinite.
If we equally one-sidedly, but somewhat less absurdly, make a comparison in terms of individual goods or services that existed then and now, like health care, education, and housing, we would find the very opposite result. This is why, if we want to engage into such comparisons, we use Consumer Price Index which includes all goods and services. When we do so and compare real incomes at different percentiles of U.S. income distribution, we get the result shown below. Over the thirty-year period U.S. middle class income has cumulatively increased by between 20 and 30 percent, which on an annual basis gives a rate of growth between 0.6% and 0.9%. This is hardly satisfactory and is especially galling when we compare middle-class growth with that of the top 5 percent, or even better with the top 1-percenters, whose incomes have increased by more than 80% (cumulatively).
But the second absurdity of comparison over a 40-year period using non-existent goods is revealed if we think that in no country or time (especially if the world income is growing), have people judged their situation by comparing their income with that of their grandparents. They compare their income with that of people among whom they live, and perhaps with their foreign peers. In both respects, U.S. middle class is losing: it is losing (as we have just seen) with respect to rich Americans and it is losing with respect to middle-class Asians. The former are getting further and further ahead, while the latter are getting closer and closer.
Had anyone tried Professor Boudreaux’s grand-parental comparison in Eastern Europe in 1989, he would have been laughed out. And yet, there was not a single indicator (income, life expectancy, education level, housing space) that in 1989 was not better than in 1949. But nobody thought that it was relevant, no more than anyone thinks today in the United States that playing a computer game in his pajamas makes him rich.
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