Both President Obama and Mitt Romney say they’ll support it. Many Americans say they’re in it. And virtually everyone says something must be done to help it. It’s the American middle class, and it’s the biggest talking point of the 2012 election – and one of the most misunderstood.
• Myth No. 1: Today’s middle-class Americans are worse off than their parents.
The standard of living for Americans in the broad middle of the income ladder – households with incomes higher than the bottom 20 percent and lower than the top 20 percent – hasn’t stagnated or worsened in the past generation. It has improved.
Analyzing data from the Panel Study of Income Dynamics, a long-running survey of U.S. households, the Pew Charitable Trusts’ Economic Mobility Project found that as of 2000-08, 86 percent of Americans who grew up in a middle-class household had a higher income (adjusted for inflation) than their parents. This share has surely decreased in the years since, but probably not by much: Median household income fell by just $1,500 between 2008 and 2010.
Moreover, income changes alone don’t capture the enhanced quality of life that stems from greater access to information and entertainment through personal computers, smartphones, the Internet and cable TV; advances in medical care such as MRIs and new surgical techniques; and more choices for all kinds of goods and services.
• Myth No. 2: All the middle class needs is a return to solid economic growth.
During the three decades after World War II, the U.S. economy grew rapidly, and so did the incomes of middle-class households. So if we just get our economy growing at a decent clip, will all be well for the middle class?
Sadly, that’s wishful thinking. Since the 1970s, the American economy has continued to grow fairly quickly, yet the middle class has seen a relatively small gain in income. Between 1979 and 2007, two peak years in the business cycle, the country’s per capita gross domestic product increased by 50 percent. During that same period, the average income of the middle three-fifths of households rose by less than 30 percent, from $44,000 to $57,000, according to calculations by the Congressional Budget Office. The richest Americans have gotten a bigger share of the income gains from economic growth, leaving less for those in the middle.
Wage levels in the middle and below have barely budged since the 1970s because of a barrage of shifts in our economy and economic institutions – from globalization and technological advances to the decline of unions and new corporate practices that emphasize value for shareholders. Most of the increase that did happen in middle-class incomes was not because of rising wages but because households added a second earner.
For a while, slow growth in incomes was offset in part by expanding wealth, thanks to rising home prices and stock values. From 1989 to 2007, according to the Federal Reserve, the net worth of the median American family jumped from $79,000 to almost $127,000. But then the housing bubble burst, and the entire gain disappeared. By 2010, median family wealth had fallen all the way to $77,000.
• Myth No. 3: Once you reach the middle class, more income doesn’t make you any happier.
In the mid-1970s economist Richard Easterlin posited, based on a pattern he observed across nations, that income boosts happiness only to a point, after which it yields no further benefit. (His paper reverberated in academic circles and helped drive the development of economic research on happiness.) So if slow middle-class income growth is of little consequence to our subjective well-being, why should we fret about it?
New research, however, has called into question the “Easterlin paradox.” We now have better data to assess the effect of income on happiness. Those data tell us that happiness increases in line with household income up to about $75,000. Beyond that, we get less of a happiness bump from each additional buck, but it does continue to rise.
• Myth No. 4: Almost all Americans think they’re middle class.
If Americans are asked what class they think they’re in, most will say the middle class. But if asked to choose between the upper, middle working and lower class, only 45 percent say the middle class, according to the General Social Survey. Roughly the same share choose the working class. Few pick upper or lower.
More striking, this pattern hasn’t changed since the 1970s. The United States is now a much richer country, more Americans attend and complete college, and more work in white-collar jobs. Yet, perhaps because of sluggish income growth over the past generation, the share of Americans who consider themselves middle class hasn’t budged.
• Myth No. 5: In the long run, the decline of middle-class living standards is inevitable.
There are grounds for worry. It’s possible that middle-class wages will continue to stagnate, given the powerful economic forces at work. And employment growth – the source of middle-class income gain in recent decades – might not help, either. After rising steadily in the 1980s and 1990s, job growth stalled in the 2000s, even before the 2008 crash.
Yet there are reasons for hope. Technological advances and globalization will continue to bring us new goods and services and lower prices, and they’ll create some jobs even as they destroy others. And stagnating wages and job growth are not foreordained.
Our best bet for increasing employment over the long run is more and better education. Just three-quarters of a typical American cohort completes high school, and the share getting a four-year college degree has risen only modestly since the 1970s. Expanded public support for early education would be particularly valuable; it helps parents balance work and family and improves school readiness for children in disadvantaged households.
In addition, we ought to explore new ways public policy can compensate for stagnant or slowly rising household incomes. One way would be to extend the earned income tax credit well into the middle class and to index it so that it rises along with average compensation levels across the economy. This would provide all households that have earnings with a bit more money. And because average compensation tends to rise with per capita GDP, it would help to restore the link between the growth of the economy and increases in household incomes.