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The US Middle Class Hasn’t Stagnated for Decades — And Democrats Should Stop Saying it Has
In my new The Week column, I explore “What Democrats Get Wrong About the Middle Class.” Here is a bit:
The problem is that Census data paints an incomplete picture. A University of Chicago poll of top economists earlier this year found that 70 percent agreed that the Census conclusion “substantially understates how much better off people in the median American household are now economically, compared with 35 years ago.” How far off are those numbers? Maybe quite a bit. Feldstein argues that they fail to take into account shrinking household size, the rise in government benefit transfers, and changes in tax policy. They also measure inflation in a way some experts thinks overstates the true rise in living costs. He notes that when the Congressional Budget Office took all those factors into account, it found median household income had risen by 53 percent since 1980, five times as much as the narrower Census figures.
And it could be even higher. A lot higher. A growing number of economists are questioning whether our existing measures of economic growth and inflation are suited to the digital economy. A recent Goldman Sachs analysis suggests we may be understating annual economic growth by nearly a third due to our inability to accurately measure how vastly improved software and hardware are boosting productivity. Likewise, government data ignores the consumer value of free internet services like Facebook, Google, and Twitter. Put it all together, and Feldstein thinks real median household income may have risen by 2.5 percent a year over the past 30 years, not 0.3 percent. That would suggest a doubling of living standards over the past generation. And even those figures ignore welfare gains from rising life expectancy, which economists Charles Jones and Peter Klenow think could equal a full percentage point a year.
If you’re still not convinced, consider this simple thought experiment from Washington Post reporter Matt O’Brien: “Adjusted for inflation, would you rather make $50,000 in today’s world or $100,000 in 1980’s?” Is that added dough enough for you to give up your flat-screen television, smartphone, and internet access? If it isn’t, or if the answer isn’t obvious, that would suggest living standards aren’t stagnant or anything close to it.
Now, none of this is to suggest that the 2000s have been a boom time, much less the Not-So-Great Recovery. Nor were the 1980s and 1990s a golden age. For one thing, the 2000s were years that marked the beginning of our Too-Big-To-Fail banking system. And I think we need to take seriously polls that suggest two-thirds of Americans think the nation on the wrong track. People have legitimate fears about the evolving IT economy and their place — and that of their children — in it. (Though pols may be exacerbating those worries with scare stories, such as this one about the “gig economy.”) Concerns about whether a rising tide will adequately lift all boats should be on the mind of policymakers. But on the other side, American innovation and productivity could be stronger than we think and what the official stats say. Policymakers should remember that, too.
Published in Economics
Shorter “top economists” – who are you going to believe, us or the US census and your lying eyes. I agree the average person has a lot more surveillance and security guard service in the mall parking lot; she has a lot more assistance from diversity awareness outreach people at work, school or government bureaucracy; she may even have imputed income on her iPhone as long as she trades it in every six months for a more powerful model… but the “average person” where I live does not feel these contributions are worth as much as if the money spent on them were in our pockets, and still stubbornly refuse to get with the top economist’s program.
I vote for $100,000 in 1980’s.
I would take the $100k in the eighties over the $50k today. No question. No doubt. No amount of cell phones, internet, or flat screen TV technology would change my mind. Heck for the price of a flat screen TV today I could have paid for a semester or two of college at non-elite schools.
It seems like we’re mixing different concepts here. What does it mean to be better off? I suppose there’s a tipping point where I’d rather be poor today than rich in some prior era, but generally it’s better to be rich than not, especially when any given dollar back then will buy more than it does now. Innovations and inventions are great and we get used to them, but they’re not always a good indicator of being better off, let alone better off at a given salary range at a given era.
Then again, we also know that being fat, happy, and stupid is a pretty great way to live – right up until the downsides become apparent or the tradeoffs become unsustainable. Yes we have cell phones, internet, and flat screen TV’s for the common man, but we also have inflation, massive debt at all levels, and a steep increase in two earner households even as households have shrunk steeply.
Sowell’s Basic Economics did a great treatment on the problems associated with calculating inflation. 35 years is an eternity in the modern world and 2015 and 1985 are simply not comparable in terms of quality of life. IMHO, the internet alone makes it much better to live now than in the 80’s at 2x today’s nominal income.
-E
I suppose the other underlying assumption I have trouble with is that things like cell phones and internet come only at the expense of stagnation and inflation. Otherwise, I want to make $100k in the ’80s AND have cell phones and internet. Are they mutually exclusive? More likely, the fact that they’re considered must-haves now probably must come with the debt and increased earners per household in order to pay for it all. I still don’t understand why inflation is required to get from there to here, though.
@CandE:
1985 was not too bad for quality of life for a middle class American. We had TV, cassette tapes, VHS, CDs – enough toys to keep us entertained. What’s more, we were 30 years younger! I don’t quite understand what you mean when you say that quality of life was not comparable. Now I would not care to be the richest man in the Roman Empire. That’s a big difference in quality of life as Ed G suggested.
There are some things that have changed in significant ways. Pittsburgh, for instance, was once the Steel City, but most of the mills have disappeared. It was once one of the major cities for corporate headquarters. Now-not so much, yet the air is cleaner and there are still a lot of things to do in town and around the area.
These are excellent points, especially the one about “median household income.” If household composition changes drastically — and it has — then changes in median household income become meaningless.
It is mathematically possible for the median income of every type of household to increase — e.g. for income to increase for people living alone, for married couples with and without children, for single parents with children — and yet for overall median household income to decline because of demographic shift toward the types of households with lower median income.
The OP is also correct about the usual inflation measure, the CPI, systematically overstating inflation. Yet Social Security COLAs are still based on the CPI.
Overstating inflation? I don’t see it. Housing, education, healthcare, food, fuel – haven’t all of these experienced inflation more than the official rate would indicate? Don’t we spend a larger proportion of income on these things than we used to?
Public schools are far more expensive and produce worse (at best equivalent) results. Other goods delivered by government monopolies (roads, buses, rail) show similar results.
But just about everything that comes from mostly free markets is cheaper and more accessible to middle and lower classes. What % of low income households had air conditioning, a second car, or cable tv in 1980 as compared to today? 0% had iPhones, the internet, and Amazon next day delivery. Think about all the consumer goods available at Mega Walmart. You can furnish an apartment for a fraction of the cost of 35 years ago, and if you want to pay a premium for higher quality goods those are still available.
Healthcare (and insurance) is very expensive, but it covers far better and more effective treatments that did not exist in 1980. Would you rather get cancer now or in 1980? Of course expect this to follow the path of government schools (costs rise, quality/technology stagnates) over the next few decades as govt becomes payer for ever more services.
Hmmm…I agree completely on the substance of your comment, but I don’t get the sense that they were suggesting any of that. IOW, they are not saying that cell phones come at the cost of inflation, but rather that the presence of cell phones, internet, etc. simply renders inflation comparisons between decades almost meaningless. That’s my reading anyway.
-E
I didn’t mean it as a slam on the 80’s, just a statement of preference. I’m a millennial, and one that’s rather accustomed to the instant gratification made possible in our internet age. As far as quality of life goes, it something of a definition problem. If quality of life is just about things like health, life expectancy, financial security, recreational time then I suppose that one can still compare now to the 80’s – and incidentally, I think we fare far better now using those metrics. However, there is much in our lives that we take so much for granted: instantaneous communication, personalized media, productivity, etc. then modern technology puts us in a whole category apart from the rest of history.
-E
Does the increase in the consumption of these things make us better off, though? Sure, air conditioning gave us more consistent comfort, but was worse economic performance the stopper back then or was it that in 1980 it didn’t yet make economic sense to refurbish or replace properties built in the ’50s or earlier? Sure a second car affords a family some flexibility, but did we need it as much in 1980 when two earner households weren’t as common and when the communities that had developed in the earlier decades were still mostly intact? Sure cable TV gives us more entertainment options, but I wouldn’t exactly call it an improvement when we still receive mediocrity (in many ways lower quality tv) with commercials only now we have the privilege of paying a monthly subscription for it.
Is any of that related to the strength of the dollar or stagnating wages?
Perhaps he got the hypothetical wrong: should it be trading $100k in today’s dollars for $50k in 1980’s dollars? I’d have to think on that one a bit more.
I don’t see how we fare better now with health or financial security. There was no obesity problem in the ’80s and the debt level was nowhere near where it is now. Life expectancy – how much better is it now?
Otherwise, things like productivity is more of a concern of businesses and economists. Workers care about being productively – gainfully more like it – employed. As far as instantaneous communication and personalized media, I think that’s more of a cultural thing when it isn’t a business concern; I do not like being ever-connected, for instance.
I’m having trouble articulating it, but I think there is a fundamental error in conflating technological progress/advancement with economic health, in conflating increased consumption of better things with economic health. That, and a term like “better off” is pretty malleable.
Yes, I like the amenities we have now, and I’d rather have them than not have them. But that doesn’t mean that we’re “better off” in an economic sense than we were in the past. It certainly doesn’t mean we’re better off in a cultural sense. As I say, I want all the advances PLUS more in real compensation and working less than I do now and without the debt (public and private).
Otherwise, does having more things make us better off despite the changing way of life and the increased debt? I’m not so sure.
What I remember from the 1980s was we had two middling, not high, incomes, and we had to have taxes withheld at the higher “single” rate, plus have extra withheld from our paychecks in order to satisfy Uncle Sam. Very discouraging at tax time for one newly-minted engineer and a pharmacy technician. Marriage penalty, anyone?
You’ve got more stuff, peasants. Be glad and know your place.
Yeah, and the debt and poor retirement prospects to match.
I was 10 years old in 1984, so I didn’t have any income – and no tax to pay either. Just baseball cards (baseball stickers!) and knocking about the neighborhood. The ’80s were great for me. No phone, text, or email always interrupting my thoughts. Nothing but possibilities as I was unknowingly entering a two decade period of abundance and growth. Thirty years later and the debt and spending picture looks bleak; the economic prospects too.
Perhaps it’s a regional thing. The economy can be considered from an infinite number of reference frames. My region, Chicago, seems to be inexorably shrinking. Other areas, e.g. Texas, seem to be growing. This is the problem with only viewing the economy from a national perspective – one is likely to be speaking gibberish to large portions of the population whose particular region is experiencing different conditions than other regions. And, frankly, I don’t much care about other regions – I want my region to do well. Other regions can worry about themselves.
Very likely. The fact that your costs are 20-25% higher than mine could certainly explain a big difference in our view of the economy. Being in East Texas, the future seems pretty bright to me.
-E
No brainier $100000 in 1980, I could have saved over half and would have enough not to starve if my income were only $50,000 today.
Great post! Everyone, Troy’s on fire!
Capitalism is doing fine, everybody. Because we’ve got socialism!
Diminishing household size is not socialism. Some people’s families just do not like them so much as to live with them & some people are just going to have be nicer people or deal with it-
I don’t think The Reticulator was taking shrinking household size as a sign of socialism, but rather the part about “the rise in government benefit transfers”. First, it’s odd to point to benefit transfers as evidence of economic health. Second, measures like household size and tax rates are tangential to underlying economic health of a particular segment. Either wages and cost of living are stagnating or they’re not – and that’s true whether households are big or small and whether the tax is 15% or 25%.
I think the point is, households are used by the government in some way to calculate wealth. Variation in what a household is as opposed to what the government calculation thinks it is should then be considered.
As for the point about benefit transfers–is it that people get more stuff than their income would indicate? I’m not sure that’s meant to show economic health, but rather how well off people really are.
Or how does it seem to you that this talk of factors not taken into calculation is meant?
It seems to me that there is much confusion in the OP and referenced article. Conflation of different concepts. Dubious use of indicators, like government benefits, to make a case for economic health of a particular segment. Reliance on malleable terms liek “well off” or “better off”.
If I’m out of work but receive a generous portion from the dole, am I well off? I suppose anything that prevents startvation and even allows me to go see a movie once a year might count as well off in some sense, but I don’t think it counts in the sense he wants to use it – i.e. as proof that the middle class isn’t stagnating.
You have a point, or more. I’m not sure I believe Mr. Pethokoukis–by the way, Great Post! Troy’s on fire!–but I’m interested in the argument.
Great post.
There is another factor affecting GDP calculation – the internet has facilitated a lot of transactions that would have been captured in GDP numbers before, but no longer are.
For example, my entertainment last night was watching YouTube videos created by amateurs. I paid nothing for them, and the creator earned nothing. But I certainly got an evening’s worth of value out of it. In the past I might have rented a movie from Blockbuster, or gone out to the local bar for a drink, or gone to see a movie or a show. All of that activity would have been captured in the GDP numbers, but the Youtube watching won’t.
Look at the size of the ‘open source’ software movement. Billions of dollars of value have been created by volunteers. None of it captured in GDP calculations. 20 years ago I had to buy every significant piece of software I used. Now I have advanced editing software, scientific software, CAD programs and other large, complex packages that would have cost hundreds or thousands of dollars in the old economy, and which cost me nothing at all.
The average person used to have a monthly long-distance bill. Now we can skype for free. The former transaction was tracked, the latter one isn’t. But the value they create is the same.
This is going to get a lot ‘worse’ (better for us, worse for the government stats collectors). Virtual reality is just around the corner. Suddenly travel becomes free, and the possibilities for free entertainment will grow exponentially. 3D printing will allow us to share physical components like we do software.
If you need a plastic gadget and go to Home Depot and buy it for $10, that shows up in the GDP numbers. If instead you download a free 3D model for that gadget and print it at home for .25 cents worth of PLA, it doesn’t. But the value is still there.
And so it goes. This is good news in general – I’d rather have an economy the government can’t track and mess about with. But it’s going to make the GDP numbers look worse than they truly are.