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The American middle-class certainly has reason to be bummed. The worst downturn since the Great Depression has been followed by an unusually weak recovery. Unemployment remains high. Median wages are still below their pre-recession peak. And if all of that weren’t bad enough, the New York Times’ new Upshot site offers this additional bit of discouraging news: “The American Middle Class Is No Longer the World’s Richest.”
Although economic growth in the United States continues to be as strong as in many other countries, or stronger, a small percentage of American households is fully benefiting from it. Median income in Canada pulled into a tie with median United States income in 2010 and has most likely surpassed it since then. Median incomes in Western European countries still trail those in the United States, but the gap in several — including Britain, the Netherlands and Sweden — is much smaller than it was a decade ago.
In other words, this is another story about income inequality and redistribution. Well, not just that. The piece also cites a slowdown in educational attainment versus other advanced economies. But given the high level of chatter these days about inequality, most readers will see the piece as more disturbing evidence of the growing 1%-99% gap. The US and UK, for instance, grew at about the same pace in the 2000s. But UK median incomes are up by 20% vs. 0.3% for the US. Where did the money go? To the rich, Upshot suggests.
But there are some problems here. First of all, the way you want to calculate these numbers is from business-cycle peak to business-cycle peak, not by decades. This is particularly true if you are doing cross-country comparisons. For instance, researcher Richard Bukhauser calculates US middle-income growth in the 2000-2007 business cycle at 5%. Now, this also includes health benefits, which the Upshot figures do not include. This is an important omission since a big chunk of US worker compensation goes to employer-provided health benefits.
And, hey, what about the recession and housing bust? As Derek Thompson nicely summarizes: “The U.S. is emerging from a catastrophic collapse of the housing market that obliterated household wealth for millions of middle-class families. Canada, however, is in the midst of a delirious housing boom and a personal debt craze that reminds some economists of the U.S. market exactly a decade ago (before you-know-what happened).” And as Reihan Salam writes:
Couldn’t it just be a coincidence that Canada has fared well and that it has yet to experience a housing price correction — while the U.S. housing boom came to a miserable close in 2006–7, the Canadian housing boom has continued more or less without interruption? Should we ignore the fact that house prices are still overvalued in Britain, the Netherlands, and Sweden, the countries where, according to Leonhardt and Quealy, the gap in median incomes with the United States is closing?
I wonder how these income numbers would have been different had the Fed reacted more aggressively in the 2008-2010 period to counter the huge demand shock experienced by the US economy. And I also wonder what exactly Upshot is supposed to conclude about the health of the American middle-class from such an imprecise and incomplete international comparison.Published in