“The middle class has been screwed.”
No, that’s not the grievance of a 20-something Wall Street protester. It’s the bleak recent assessment of Vice President Biden.
His view is broadly shared by the public – and backed up by official government data. Indeed, the belief that things have gotten worse for middle-income Americans, not only during the Great Recession but over the past three decades, has cemented into the kind of conventional wisdom that could drive the 2012 presidential campaign.
There’s just one problem: It’s not true.
Our research of consumption and income patterns suggests that both the poor and middle classes, lifted by a rising economic tide, have actually made substantial gains in the past 30 years. And while the Great Recession has certainly taken a harsh toll in recent years, these long-term gains hold vital lessons for politicians to uphold pro-growth policies at a time when they’re hearing populist cries to remake the economic order.
Those looking for bad news about the middle class can find plenty of it in standard measures of economic status.
The most recent figures from the Census Bureau suggest a level of income today that is no higher than two decades ago. Numbers such as these have prompted Washington Post pundit Harold Meyerson to declare, “Post-industrial America turned out to be a bust.” Others have called the past three decades the “Great Regression.”
But when you account for taxes and measure inflation correctly, there has actually been considerable improvement in the material well-being of the middle class over the past three decades. Median income and consumption have both risen by more than 50 percent in real terms.
In addition, for families with income in the middle 20 percent, there have been noticeable improvements in the homes they live in and the cars they drive. Living units are bigger and are much more likely to have air conditioning and other features. The quality of the cars that these families own has also improved considerably. The data are clear: middle-class Americans are better off today than they were three decades ago.
This improvement is due, in part, to policy changes including lower tax rates and a more-generous child tax credit that leave middle-class families with more disposable income. But the most important factor is economic growth.
When the economy grows, the middle class is better off. To be sure, some groups (most notably very rich households) have benefited from economic growth more so than the middle class, but this does not cancel out the substantial progress that the middle class has made.
Both Republicans and Democrats are guilty of confusing policies appropriate to fight a recession with those to promote continued, long-run progress.
The Republicans are overly worried about additional deficit spending when the economy is sluggish and government borrowing costs are low.
The Democrats are emphasizing declining living standards and a battered middle class, when living standards for the vast majority of people have risen and the long term changes in the material circumstance of the middle class have been good.
The slow recovery has left millions of Americans without jobs – and without good prospects. Our evidence of long term progress provides little comfort to those hit the hardest by the Great Recession—such as the 6 million Americans who have been unemployed for more than 6 months. For them, infrastructure spending, a payroll tax cut, or other programs that cut hiring costs for the long-term unemployed would provide some relief.
The overwhelming reason for the recent plight of the middle class is a sluggish economy. But a recession, even one that’s both severe and prolonged, is not a justification for turning our backs on sound economic policy.
Calls for a “neo-industrial America” or counter-productive restrictions on trade or immigration in order to rebuild the middle class should be resisted. Instead, we should continue to reduce trade barriers and keep spending on Social Security and Medicare in check.
History tells us that by encouraging economic growth, we can revitalize the path of progress for the middle class.
Bruce D. Meyer is McCormick Foundation professor at the Harris School, University of Chicago. James X. Sullivan is an associate professor of economics at the University of Notre Dame. This essay is drawn from a paper prepared for the American Enterprise Institute, “The Material Well-Being of the Poor and the Middle Class Since 1980.”