Tag: household income

The Middle Class Shrinks as the Number of High Income Households Grows

The day before yesterday, The Washington Post ran a piece with the alarming headline, “The middle class is shrinking just about everywhere in America.” Although you wouldn’t know it from the first few paragraphs, a shrinking middle class isn’t necessarily a bad thing. As HumanProgress.org Advisory Board member Mark Perry has pointed out, America’s middle class is disappearing primarily because people are moving into higher income groups, not falling into poverty. label Data from the U.S. Census Bureau shows that after adjusting for inflation, households with an annual income of $100,000 or more rose from a mere 8% of households in 1967 to a quarter of households in 2014.

According to the Pew Research Center, 11% fewer Americans were middle class in 2015 than in 1971, because 7% moved into higher income groups and 4% moved into lower income groups. The share of Americans in the upper middle and highest income tiers rose from 14% in 1971 to 21% in 2015. 

One has to read fairly far into the Washington Post’s coverage before seeing any mention of the fact that a shrinking middle class can mean growing incomes: 

“[In many] places, the shrinking middle class is actually a sign of economic gains, as more people who were once middle class have joined the ranks at the top. [For example, in] the Washington, D.C. metropolitan area, the share of adults living in lower-income households has actually held steady [from 2000 to 2014]. The households disappearing from the middle-class, rather, are reflected in the growing numbers at the top.”

Other cities with a shrinking middle class, a growing upper class and very little change in the lower class include New York, San Francisco and New Orleans. So the next time you hear someone bemoan the “shrinking middle class,” take a closer look at the data and keep in mind that it may actually be a sign of growing prosperity. 

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The Middle Class Fared Better Than You Think

We’ve all heard it said that the “rich are getting richer” while the middle class suffers. Political figures on both the right and left frequently speak about the need to “bring back” or “restore” the “disappearing” middle class. Pew Research Center just put out a report that calls those ideas into question, according to a recent Washington Post opinion piece.

The report shows that from 1971 to 2014, middle-income households (meaning three-person households making from $41,869 to $125,608 annually in inflation-adjusted dollars) decreased from 61 to 50 percent of U.S. households. Why the 11 percentage point difference?

Seven of those 11 percentage points can be explained by households moving into a higher income bracket. High-income households grew from 14 percent to 21 percent of all households during the same period.

The Pew report also stated that all income groups have typically made double-digit pre-tax income gains since the 1970s:

Middle-income household income increased by 13% in the 1970s, 11% in the 1980s, and 12% in the 1990s. Lower-income households had gains of 13% in the 1970s, 8% in the 1980s and 15% in the 1990s. Upper-income households registered a 10% gain in the 1970s [and] 18% in both the 1980s and 1990s.

Then the Great Recession struck in the late 2000s. But even the Great Recession only removed 6 percentage points from the gains made by the middle class. In 2000, an average middle-income household earned 40 percent more than in 1970. In 2014, an average middle-income household earned 34 percent more than in 1970.

The Washington Post piece opines that “We’ve mistaken what is plausibly a one-time setback—the response to the Great Recession—for long-term stagnation. People have understandably but wrongly taken their recent experience and projected it onto the past.” We cannot predict the future, but it certainly seems as though the middle class has fared better than many people believe.

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Bernanke’s Anti-Stimulus

One of the direct results of the Federal Reserve’s zero interest rate policies has been a massive reduction in interest income going to households. Since 2008, household interest income has fallen by about $400 billion annually. That’s $400 billion each year that families have not had to spend.

Now of course you can also argue that families interest expenses have also fallen, and that would be true, but that just serves to illustrate that much of monetary policy is not about creating wealth, but re-distributing it. Since interest payments are one’s person expense and another’s income, Fed driven changes in the interest rate should not increase household income in the aggregate.

As interest income/expense is not the only item on the household balance sheet, the Fed does try to make us feel richer via changes in asset prices. The problem, however, is that the change in many asset prices can also have little more than distributional effects. If owners feel richer because their house prices have gone up, or not fallen as much as they would have otherwise, then renters are poorer as they need to save more to by the same house. The same holds for commodity prices. Monetary driven increases in the price of food might be great for farmers, or speculators, but it makes households poorer by the same amount it increases the wealth of commodity holders. If the Fed truly wished to help our economy get back to “normal” then it would allow the free choices of individual borrowers and savers to determine the interest rate. It would also end its implicit practice of picking winners and losers in our economy. Unlike Fed driven changes in asset prices and interest payments, voluntary exchange between savers and borrowers increases the welfare of all parties involved.