Wednesday, August 07, 2013

Just Grow Baby

The problems facing the middle class and possible solutions have now become a staple of American political conversation. Politicians and pundits of all stripes now acknowledge the challenges faced by “working Americans” even though most of the proposals voiced to overcome them are stale policy prescriptions that are either irrelevant or unlikely to make a difference. In fact, some would likely make things worse for the middle class.

In today’s WSJ, William Galston looks into what is Behind the Middle-Class Funk:

Four decades later, the middle class share had declined by 10 percentage points to just 51%, while the upper class share increased by six points and the lower class by four. The U.S. income distribution is still a bell curve, but the left and right tails are fatter and the hump in the middle is lower.

This means that the middle class is less economically and socially dominant than it once was. Relatively speaking, more Americans are enjoying affluent lives at the same time that more are just barely making it (if at all). But that doesn't mean the middle class got poorer. During those 40 years, Pew calculates, the median income of middle-class households (adjusted for inflation) grew by 34%. The median grew for the others as well—by 43% for upper-income households and 29% for those with incomes below the middle class. This isn't surprising, because the median income for all U.S. households rose by 32% during that period, from $44,845 in 1970 to $59,127 in 2010. Indeed, 86% of middle-class Americans, and 84% of all Americans, enjoy higher incomes than their parents did.

By some measures the middle class has done better, and by others worse, than the Pew study suggests. Pew uses a definition of income that excludes employer-provided health insurance, non-cash transfers such as food stamps and the redistributive effect of taxes. If these additional sources are included, the rate of increase in median household income between 1979 and 2007 is significantly higher. The increase looks substantially smaller if, as some economists suggest, we use the rate of medical-cost inflation rather than the consumer price index to determine the real value of employer-provided health insurance.

Another complication: Forty years ago, average household size was 3.2 persons. Today, it is only 2.5, a drop of 20%. Most analysts (including Pew's) adjust for this change, because a smaller number of persons per household means that income per person rises faster than the overall household income numbers would suggest. But some researchers disagree, on the ground that smaller households reflect, in part, lower birth rates, which are in turn influenced by gloomier economic realities and expectations.

Finally, rising household incomes reflect increasing hours of work per year to a greater extent than wage and salary increases. Between 1979 and 2007, on average, annual hours worked by middle-income households rose from 3,007 to 3,335—fully 10%, a larger increase than for any other income group. Some of the additional work reflects expanding opportunities for women. But much of it came in response to economic pressure and represents time that men as well as women reluctantly diverted from their children—hardly an unambiguous improvement in family well-being.

Galston doesn’t offer any simple solutions to the myriad problems that are afflicting the middle class. However, he does end his piece with one prescription which would undeniably improve the situation:

We can argue about how squeezed the middle class was in the decades between the end of the postwar expansion and the onset of the Great Recession. But two things are clear: The coping mechanisms the middle class employed in those decades (fewer children, more hours worked, more borrowing against home equity) are played out, and it will take middle-class households years to recover from the recession-induced blow to their income and wealth. If we cannot restore a vigorously growing economy whose fruits are widely shared, the struggles of the middle class will persist, and our democratic distemper will deepen.

There’s an economic maxim that says “growth solves all problems.” While that might be a bit of exaggeration, it is true that a period of solid and sustained economic growth would be the best single way to help middle class families. Now, we just need to figure out how to make that happen.