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Democratic Presidential Candidates Hold First Debate In Las Vegas
Democratic presidential candidates Sen. Bernie Sanders (I-VT) (L) and Hillary Clinton take part in a presidential debate sponsored by CNN and Facebook at Wynn Las Vegas Photograph by Joe Raedle — Getty Images

How screwed is America’s middle class, anyway?

Oct 15, 2015

If viewers took away anything from Tuesday night's Democratic primary debate, it was the idea that the middle class is getting the short end of the stick.

The five candidates on stage repeatedly made references to a shrinking middle class and stagnant or shrinking incomes for most Americans. These ideas were used to justify policy proposals like raising the minimum wage to $15 per hour, investing in infrastructure, and subsidizing the cost of college.

Despite the heated rhetoric on the plight of the middle class, economists are divided on what the data tell us about the financial health of the typical American family. There are more than 115 million households in the United States, and each goes through its own unique economic journey. Any attempt to make a blanket statement about the middle class with one or two statistics is dangerous, and that's even before you account for the fact that the concept of the middle class is nebulous to begin with. Here's what we know:

Real Median American Household Income Has Been Stagnant For 20 Years

This is the main statistic used to argue that the middle class is struggling mightily. If you take inflation into account, the typical family's income is lower today than it was in 1995, according to analysis of census data by the Economic Policy Institute:

real-median-household-income

That's during a period when GDP per capita has nearly doubled, underscoring the fact that while great economic gains have been made in the United States, the benefits of that growth have gone to just a small slice of already well-off Americans.

But these statistics ignore the changing nature of the American household. As Harvard University economist Martin Feldstein points out, while household income has stagnated, the size of the typical household has shrunk. He writes, "From 1980 to 2010, the share of 'households' that consisted of just a single man or woman rose from 26% to 33%, while the share that contained married couples declined from 60% to 50%." With fewer people in a household, that same income goes much further than it otherwise would.

Government support for the middle class has also increased

Feldstein also points to to a 2014 Congressional Budget Office report that tries to factor in the effect of federal income taxes and government benefits on the median American household's income. He writes:

When the nonpartisan Congressional Budget Office (CBO) conducted a detailed study of changes in household incomes from 1979 to 2011, it expanded the definition of income to include near-cash benefits like food stamps and in-kind benefits like health care. It also subtracted federal taxes, which fell from 19% of pretax income for middle-income households in 1980 to just 11.5% in 2010...

With the traditional definition of money income, the CBO found that real median household income rose by just 15% from 1980 to 2010, similar to the Census Bureau’s estimate. But when they expanded the definition of income to include benefits and subtracted taxes, they found that the median household’s real income rose by 45%. Adjusting for household size boosted this gain to 53%.

Improved technology has made middle class life more comfortable

Few people would argue that the technological advances of the past 20 or 30 years haven't made life better. But figuring out just how much better is the job of government economists who estimate inflation. To do that, economists adjust their estimates based on the invention of better-quality products. For instance, if Samsung sells you a television next year at the same price as the one you own now, but with a bigger screen or a higher definition picture, economists would consider that somewhat similar to Samsung selling you the same TV for a lower price. The more of these quality improvements there are, the lower inflation will be. And the lower inflation is, the higher real income growth is.

A majority of economists recently polled by the University of Chicago agreed that "The 9 percent cumulative increase in real U.S. median household income since 1980 substantially understates how much better off people in the median American household are now economically, compared with 35 years ago." Many of these economists pointed to the fact that inflation is actually being understated because we are not accounting for the launch of Google or even the Internet itself, which we don't pay for directly. If inflation is being overstated, then so is the lack of middle-class income growth.

At the same time, inflation for some of the most important purchases, like education and healthcare, is obviously spiraling out of control. Furthermore, if inflation is actually being overstated, that would be an argument for looser monetary policy and increased government spending to boost the economy.

Individual results may vary

And finally, lost in all this talk of median income growth is the fact that every middle-class person's trajectory is different. Research has shown that the typical American spends time in the relative upper echelons of the income spectrum, as well as time being pretty poor. As I wrote back in March, research by sociologists Thomas Hirschl of Cornell University and Mark Rank of Washington University show that by age 60:

  • 70% of the population will have experienced at least one year within the top 20th percentile of income;
  • 53% of the population will have experienced at least one year within the top 10th percentile of income; and
  • 11.1% of the population will have found themselves in the much-maligned 1% of earners for at least one year of their lives.

While it is very rare for a person to reach the top 1% and stay there, this variation shows why members of the so-called middle class can have such differing opinions on what if anything ails the middle class.

So while there is plenty of evidence that the typical American is having a tougher time today than he was a generation ago, the story is not cut and dry. Furthermore, what is true for one middle class family is not for another. Which is, of course, is why the American political scene has room for views as diametrically opposed to one another as Bernie Sanders and Ben Carson.

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