Elizabeth Warren, just appointed a special advisor to President Barack Obama for consumer protection, says we are witnessing the “death of the middle class.” Slate’s Timothy Noah, a terrific writer and thinker, believes the rich are running away with the country. This new Census Bureau report, showing a nearly 5% decline in middle-class household income, received banner-headline treatment, with news stories suggesting typical people are being clobbered.
Middle-class life is the soul of the American experiment. Are things really so bad?
All the angst is focused on pretax income — not after tax.
Stated in today’s dollars, median household income was $45,000 in 1985, peaked at $52,500 in 2000 and is $50,000 now. (Absurd precision such as the “$46,269” median for 1991 doesn’t appeal to me.) Nearly all the decline from $52,500 to $50,000 has occurred since 2007 — that is, during a recession. Most likely that loss will bounce back.
But the key point is that the numbers in the Census Bureau report, and in nearly all alarmism about the middle class, are pre-tax income.
Federal income tax rates for the middle class were cut in 2001 and again in 2003. Because of the cuts, in 2000, 29 percent of American households paid no federal income taxes; today, 44 percent pay none. The result is that slightly lower middle-class incomes are being taxed less — and all that matters to the individual is buying power. The Tea Party crowd, which claims taxes are rising, doesn’t like to talk about the reality that taxes are falling. (Tax cuts, not spending increases, are the main reason for rising deficits.) The left doesn’t like to talk about after-tax income — only pre-tax numbers are used, because they’re the only numbers that are disturbing.
After-tax and adjusting for consumer prices, middle class household income is about the same today as a decade ago. That’s not fabulous — but it’s also not the emergency being claimed.
The angst also ignores rising benefits.
A generation ago, about 30 percent of Americans lived in a household where at least one member was drawing federal benefits — now 48 percent do.
In his important new book Rebound, Stephen Rose shows that when middle-class tax cuts, very low inflation, declining real-dollar prices in sectors such as food and electronics, and most of all rising government benefits are taken into account, most middle-class Americans are slightly better off than a decade ago. Nearly all are substantially better off than their parents.
Who is Rose, some Fox News apologist? He’s a labor economist at Georgetown University and a lifelong lefty. Rose has been taking a beating on the hard left for refusing to toe the party line. His work deserves wide attention.
Ever-rising federal benefits may be good or bad for the country’s fiscal management. In most cases, they smooth out income trends for the middle class, leaving most households about where they were previously. Warren, in my experience, doesn’t like to talk about rising benefits, because this subject undercuts alarmism (which can be used to rationalize more benefits).
Federal benefits to typical people are about to take a huge leap.
The new health care rules will function like an income-redistribution plan. The well-to-do will be taxed more, with the proceeds used to reduce health-care costs for average people. This is defensible as social justice. But it sure doesn’t jibe with the trendy notion of average people being shafted by the affluent: the Obama health care legislation represents a fantastic victory for average people over the affluent.
What if we’d done things differently?
Those who believe the middle class is being destroyed generally have two policy prescriptions: soak the rich, and stop globalization. Whether globalization even could be stopped now is far from clear. But if liberal international trade had never happened — say, tariff walls had been erected in the 1970s, a time Warren curiously depicts as the best-ever for the middle class — it’s likely typical people would be worse off today. Economic growth would have been lower, inflation surely higher: and inflation harms typical people more than stagnant wages.
Since roughly 1975, when middle-class income gains began to stagnate, lifespans have improved, material living standards have risen (safer cars, nearly universal air conditioning), education levels have gone up dramatically, women’s freedom and gay and minority rights have expanded — a lot of good things have happened for average people during a period that, to hear some talk, was dominated by a conspiracy against average people. Some conspiracy!
It’s true many European Union nations accomplished about the same with less increase in inequality. But since 1975, the United States has accommodated more than 40 million immigrants, allowing most to escape poverty, whereas European Union nations have accommodated less than a tenth as many immigrants in the same period. Which of the two regions has, in recent decades, produced the greatest good for the greatest number?