The headlines are blaring incomplete analysis again this morning.

Associated Press: “Middle class share of America's income shrinking,” citing a new Pew Research study that says “middle class suffers ‘worst decade in modern history,’” is “receiving less of America's total income” as “median wages stagnate and wealth concentrates at the top."

US News & World Report: “Pew Study: Middle Class Losing Ground -- A new report shows a middle class growing smaller and poorer.”

The Pew Research headline claims: “The Lost Decade of the Middle Class-Fewer, Poorer, Gloomier.”

The news headlines based on this report are all about the middle class shrinking and having trouble making ends meet. But that’s half the story. The question is: Where did the middle class really go? And what is the reality behind income inequality?

Left unsaid, unnoticed and unreported is that the middle class is shrinking not only because people are getting poorer, but because they are also getting wealthier. These headlines are part of the reason why the national conversation on income inequality is so distorted in this election year, as it has been.

Instead, capturing headlines is this from the Pew Research Center: “Since 2000, the middle class has shrunk in size, fallen backward in income and wealth,” based on a survey of  1,287 adults who self-reported themselves as middle class. Pew supplemented the survey with data from the U.S. Census Bureau and Federal Reserve.

Pew defines median middle class income as $70,000. The income range for the middle class is fairly wide here, $39,418 to $118,255 in 2011.

Pew goes on to say: “In 2011, this middle-income tier included 51% of all adults,” versus 61% back in 1971. It cites “rising income inequality pushing a growing proportion of families into low-income brackets.”

So about 10% of the middle income crowd fell out of bed. But into which bed? 

A greater proportion moved into the upper-income crowd versus lower-income -- six percentage points versus four.

It says: “Over the same four decades, the share of the adult population living in upper-income households rose to 20% from 14%; for middle-income households, it fell to 51% from 61%; and for lower-income households, it rose to 29% from 25%.”

What is happening to median incomes? Here’s what Pew says: “From 1970 to 2010, median incomes rose 43% for upper-income households, 34% for middle-income households and 29% for lower-income households.”

So incomes are rising across the board -- another reality deeper than the headlines that the middle class has "fallen backward in income for the first time since the end of World War II,” as the AP story says.

Pew goes on to say that in 2010: “The upper income now takes in 46%, up from 29% four decades ago. The middle tier now takes in 45%, down from 62% four decades ago. The lower tier takes in 9%, down from 10% four decades ago.”

But perhaps wouldn’t this income data square with more people moving into the upper income bracket?

Here’s the problem: Every day, month and year in America, the poor join the ranks of the rich, and the rich fall out of the upper brackets. The poor don’t have lifetime membership in the poverty club. And the majority of those who are affluent don’t start out life on third base, nor do they enjoy lifetime membership in an exclusive club.

Many have worked hard as entrepreneurs, creating small businesses that provide the majority of jobs and job growth in this country -- as well as hefty federal tax revenues for government bureaucrats to spend.

A 2007 Treasury Department study based on IRS data shows that almost 58% of U.S. households in the lowest-income quintile in 1996 rose to a higher level by 2005. And 57% of the households in the top 1% in income in 1996 dropped to a lower-if income group by 2005.

Another problem with the income inequality debate are the distorted numbers that leave out all sorts of benefits the lower- to middle-income brackets get.

The stats are usually based on IRS and Census data, which don't include the noncash income received by the lowest-income households, such as food stamps, housing subsidies, earned income tax credits, or Medicare, Medicaid payments for things like hospital or doctor care, school meal programs; and the Supplemental Food Program for Women, Infants, and Children.
America is a very generous country that really does make a valiant, noble attempt to help the poor, as do its numerous charities.

Another problem with the national conversation about income inequality is that it doesn’t include noncash fringe benefits middle-class workers get, such as health, 401(k) and pension retirement funds, medical disability coverage, or life insurance.

As health costs rise, benefit costs go up, and wages stay flat. And watch how Pew fiddle faddles with the income data, and skips over the hit to net worth for the upper income stratus from the Great Recession and housing crash. It says the net worth of middle-income families “took a hit during the past decade..Median net worth fell 28%, to $93,150, erasing two decades of gains.”

But it adds that: “Wealth of middle-income families had been unchanged from 1983 to 1992, then grew sharply -- by 43% -- from 1992 to 2001, and continued to grow in the 2001-2007 period, by 18%.”

That’s the housing bubble.

Then Pew says the “net worth of middle-income families dropped 39% in the later years of the decade as the housing market crash and Great Recession wiped out the previous advances.”

It then says: “Over the 1983 to 2010 period, only upper-income families registered strong increases in wealth.”

Wait a second, what happened to the net worth of the upper-income category from 2007 to 2010? It dropped 17%, to $574,788, though overall it grew 8.6% from 2001 to 2010.

The Pew research harkens back to similar analysis last November, when the New York Times ran this story: “Middle-Class Areas Shrink as Income Gap Grows, New Report Finds.”

This story said: “The portion of American families living in middle-income neighborhoods has declined significantly since 1970, according to a new study, as rising income inequality left a growing share of families in neighborhoods that are mostly low-income or mostly affluent.”

First of all, the report was based on a study by Stanford University that relied on data that at that time four years old, before the housing crash and Great Recession.

Here’s a link to that study.

Specifically, the Stanford study relied on U.S. Census data for 117 large and moderate-sized metropolitan areas, home to 197 million people in 2007.

But check out the data readily available in a table on page 28 of this study, that shows yet another, deeper reality not reported in the Times.

The Times reported: In 2007, “44 % of families lived in neighborhoods the study defined as middle-income, down from 65% of families in 1970. At the same time, a third of American families lived in areas of either affluence or poverty, up from just 15% of families in 1970.”

Specifically, the Stanford study says in 1970, “only 15% of families were in neighborhoods that we classify as either ‘affluent’ or ‘poor.’”

But by 2007, “31 % of families lived in such neighborhoods.” This is called mushing the numbers together so you get the result you want to hear.   

A closer look at the study results shows this: “The proportion of families living in affluent neighborhoods doubled from 7% in 1970 to 14% in 2007.” So that means upward income mobility, a good thing, right?

And then the study says: “Likewise, the proportion of families in poor neighborhoods doubled from 8% to 17% over the same period.” That’s a bad thing right?

Hold on one second. Tallying its data for just the poor to low-middle income, you get 49.4% sitting there in 1970 -- and nearly the same 48.7% in 2007.

No movement. Effectively the same percentage of families in poor to low-middle-income categories in 2007 as there were in 1970.

Now do the same for the high-middle income to affluent categories, you’ll see 50.6% of these families were in these income brackets in 1970. You’ll see 51.3% of those families were still in those categories by 2007.

Again, no movement. Effectively the same percentage of families in high-middle income to affluent categories in 2007 as there were in 1970.

If you tally just the middle income categories -- the low-middle income to the high-middle income categories -- you get 65.2% in 1970, but 43.5% there in 2007.

So where did they go? Either to the upper or lower brackets.

Elizabeth MacDonald joined FOX Business Network (FBN) as stocks editor in September 2007 and is the author of Skirting Heresy: The Life and Times of Margery Kempe (Franciscan Media, June 2014).
Follow Elizabeth MacDonald on Twitter @LizMacDonaldFOX.