So, I see where the NYT is introducing a series on the economic challenges facing the American middle class. That’s good news—it’s obviously a topic of great concern, yet there’s surprisingly little systematic analysis of the economic plight of middle-income families.
I wanted to offer a bit of orientation or background material from my own perspective, having worked on this question for decades by now.
First, what do we mean by middle class? Back when I was at the White House (and could get smart people to do cool stuff), our middle-class taskforce asked colleagues at the Commerce Department to take a whack at this question. I thought what they came up with was great and didn’t get nearly enough attention.
Instead of a mechanical explanation (e.g., “the middle-class is the 40-60th percentiles of the family income distribution”), they start by recognizing that “middle-class” is:
…a combination of values, expectations, and aspirations, as well as income levels. Middle class families and those aspiring to be part of the middle class want economic stability, a home and a secure retirement. They want to protect their children’s health and send them to college. They also want to own cars and take family vacations. However, aspirations alone are not enough; middle class families know that to achieve these goals they must work hard and save.
If you make a reasonable list of these aspirations—think of it as the consumption, investment, and saving budget of the American middle class family—you can then price it and compare it to family incomes. That’s basically what the Commerce study does (see their Table 2), and the findings provide some insight into what’s come be known as the middle-class squeeze.
Basically, the costs of certain components of the middle-class budget, like housing, health care, and college, have gone up a lot faster than a) the rest of the budget, and b) for many families, their incomes (regional variation is very important here, btw—see Commerce’s Fig 2). In fact, as the NYT’s first post shows, middle class incomes have seriously sagged for awhile, but were especially whacked in the recent recession and subsequent slog.
[A few remarkable data points re that last observation: The picture in the NYT shows real median family income, i.e., adjusted for inflation. Towards the end of the figure, you see a 6% decline in real family income, down more than $4,000 in 2010 dollars. But what you don’t see there is that even in nominal dollars, median family income was lower in 2010 than in 2007, by almost $1,000. Such weak growth, before you even account for inflation, never occurred before in a series that begins in 1947.]
At any rate, I’m hoping the NYT looks at these budgetary issues–they provide an important granular dimension to the analysis of the squeeze.
I’m sure they’ll get to the usual suspects that always show up in these discussions (as they should): trade, technology, education, inequality, mobility…but I wanted to make sure that those interested in this don’t forget a factor so important yet so obvious that it sometimes gets overlooked: full employment.
I discuss the issue at some length here, and at greater length in this book, co-authored with Dean Baker. There’s a bunch of statistical evidence to wade through (the first link provides a friendly summary), but as regards middle-class income growth, the important thing to internalize is quite simple: when labor markets were very tight, the middle class did much better than when labor markets were slack.
I know, a lot has changed over the decades in terms of family type, trade, immigration, skill demands, and so on. Neither would I want to reduce the middle-class squeeze down to one variable—there are many moving parts to this (costs of college, health care, housing, as in the Commerce report).
But the relationship between middle-class economic well-being and labor market slack has remained remarkably important. In fact, the last time median (and low) incomes grew at the pace of productivity, instead of lagging behind it, was in the latter 1990s, when the job market hit full employment for at least a New York minute.
I’ll end for now by repeating one figure from the earlier post cited above because it riffs off of the series of real median family income in the NYT post. I created a simple model of middle-income growth as a function of labor market slack, and then simulated how the median family would do under full employment and “half-full employment” (a pretty tight job market) compared to the actual outcomes.
Source: Census data, my calculations.
From the earlier post:
In the first simulation, by 2007, right before the Great Recession, middle-class incomes under “pure full employment” were $9,200 above the actual; under “half-full employment,” they were $4,400 higher. Where would this extra income come from? In fact, we’re sacrificing output when we run slack labor markets, so some would come from missing growth. But another source would be more equitable distribution of growth, such as prevailed throughout the first few postwar decades when median family income tracked productivity growth.
I expect the scholarly folks at the NYT will get to this in their series, to which I’m quite looking forward. But I wanted to get out in front with some aspects of this debate I’ve found to be particularly germane.
[BTW, a great full employment anecdote for you: The other day I’m sitting in an airport in a northeastern city, reading about full employment (Hyman Minsky on Keynes), when I hear my name. Turns out Bob Pollin, old friend and great lefty economist, was heading for a flight. He stopped for a quick chat and next thing you know he hit me with his new book, called…wait for it…Back to Full Employment. I’ve just started it and it’s great so far, both on the economics and especially the politics. That’s got to be a sign, right?!]
There is a nice graph on Wikipedia showing the median income versus GDP per capita (http://en.wikipedia.org/wiki/File:Gdp_versus_household_income.png).
Looking at that graph it becomes obvious that income inequality has dramatically increased – all that extra GDP had to go somewhere!
EASY TAX FIX:
Tax the millionaires and billionaires for capital gains income (earned from stocks, dividends, SWAG investments, carried interest, etc.) as ordinary wages, and also tax capital gains income for Medicare and Social Security, while removing the $110,000 “cap” for Social Security taxes; and then create a 0.5 percent tax on stock trades over $1,000.
The Republicans and the banker Andrew Mellon created the preferential tax treatment of capital gains for the wealthy back in 1921, and this should be repealed. That way, the actual marginal tax brackets could be left as they are, the rich would be taxed like everyone else, and we could fund government, fix our infrastructure, and pay off our debt without cutting defense or Social Security.
We could also hire more auditors to go after tax evaders, bringing in more revenue.
I’ve often said that, should I ever become middle class, someone should put me out of my misery. Is there anyone who doesn’t want a home and secure retirement, college for their children, and a vacation (with or without family)? And many who don’t really want a car know they can’t get along without one.
As for hard work and saving, I once laughed at a piece on NPR, which tried to suggest that having middle class people around would show the value of hard work. The working class person who was supposed to be suitably impressed by the middle class neighbors was a home health worker. I think it likely that she knows a great deal more about hard work than middle class office workers. She also knows that hard work doesn’t pay very much.
If middle class people want to reduce inequality, they first need to understand that they aren’t special after all.
The “middle class” of which pundits and politicians wax lyrical and with which less bellicose citizens identify themselves has been a myth since some time in the late 1950’s when that first person, a bit weary of saving for this, saving for that; bored with driving a 4 year old automobile that he owned out right and making payments on an affordable but, perhaps, less than roomy home turned on his first television set and discovered, the as yet unknown pleasures available to him in the land of credit consumerism. “Keeping up with the Jones’” was no longer just a catch phrase, it was a possibility. “Where do I sign up?”, Mr. and Mrs. Middle Class wondered. Well, in a short time, the answer was they could sign up anywhere. Payment books, credit card statements, and “beneficial” finance institutions replaced the savings passbook, the piggy bank and the mattress. Saving for a rainy day became passé. Maybe it was never going to rain again! Our mythic middle class, the creation of post World War II prosperity , common purpose and personal self-restraint sailed into the fog of avarice, acquisition and usury to emerge as a debtor class that sustains its place in that mythical middle class by borrowing and a survivor class that lays its claim to middle class membership by making ends meet. One gets along, the other gets by. Neither prospers.
NYT would do well by viewing Elizabeth Warren’s Berkeley talk from 2007: http://www.youtube.com/watch?v=akVL7QY0S8A
If we say “full employment,” that will become a catch phrase. Jared said it differently in his post in Dec 2011 http://tinyurl.com/95v93sk – bargaining power in the labor market.
Bargaining power would also include the political backdrop, which is more or less invisible when we speak about full employment.
Jared sets a standard of proof regarding causality. “What changed,” about the time inequality started to broaden? And has that mechanism remained in force, since then?
Many time records of inequality show a break in slope around 1975, plus or minus a few years. Jared’s blue line, above, is a case in point.
I mark that point in time as the end of the New Deal/Great Society political climate, and the beginning of the trickle-down/supply side/Reaganomics me-first-screw-you political regime that continues to this day.
What changed around the mid-70’s and have remained in place since then? The substantial shift in public policy to more trust in unregulated markets, compliance to the interests of the top 1%, and less interest in raising standards of living generally.