I’m not of the opinion that the American economy is doing amazingly well. However, I’m also not of the opinion that it is falling apart, or that the American middle class is disappearing before our eyes. Nor is there is no one, single, magic statistic we can point to and say “see, we’re all worse off — or better off — now.” Aggregate economic data is by its very nature lacking in nuance.
Moreover, different measures of economic growth and prosperity can be conflicting and woefully incomplete. This doesn’t mean all such measures are worthless, but it does mean we can’t responsibly point to, say, a single jobs statistics and declare “happy days are here again!” or “the middle class is disappearing!”
The fact that the economy may be getting better or worse doesn’t necessarily help me as a proponent of laissez-faire one way or the other.
Since we live in a very complex economy with both a sizable private sector and an enormous government sector, I could easily spin statistics on income and economic growth either way.
For example, we live in a time of ever-increasing government intervention in terms of tax collections, government spending, and regulation of the private sector. Given the enormous size of both state and federal governments, I could claim bad economic news proves big government is ruining the economy.
At the same time, markets — that is to say, workers and entrepreneurs — have historically shown an amazing amount of resilience in delivering a higher standard of living in the face of enormous intervention through gains in productivity and innovation. Thus, I could also claim good economic news is evidence markets are making us better off.
All else being equal, of course, real wealth and income — i.e., not just wealth and income measured in dollars — goes up the more the state leaves people alone. But given that all else is not equal, a correlation between two data points doesn’t — by itself — prove anything. That’s why we need good economic theory. Data by itself is never good enough.
We’re Becoming Better Off, but Only Very Slowly
But before we can start to blame the state of the economy on any particular thing, we have to try to figure out what the state of the economy is.
Over the years, I’ve concluded the available data strongly suggests the American standard of living for most Americans has slowly increased in fits and starts over the past twenty years. As I’ve noted here, here, and here, the American standard of living is clearly up considerably from where it was in the days of our grandparents’s middle-age — i.e., the 1950s and 1960s. The size of homes, the quality and number of automobiles, the the number of hours worked have all sizably improved if we look at a time horizon longer than twenty years. The American standard of living also improved considerably from the late 1980s through the Dot-Com Boom.
Since the Dot-Com Bust of 2000, however, improvements are less clear. This is especially the case for men.
Household and Personal Income
So, is income going up for ordinary American households?
At the household level, the good news is the median income does indeed appear to be doing up.1 The bad news is it’s only up from 2000’s peak level since 2016. In other words, for most of the decade following the Great Recession, the median household income was actually down from both 2007’s and 2000’s peak levels.2 With the exception of the period since 2016, household income has basically gone sideways over the past eighteen years. As of 2018, household median income was only up 3.6 percent from the 2007 peak. We could compare that to the 8.5 percent growth that occurred from 1989 to 1999.3
Some critics of the household measure point out that the composition of households has changed over time, and thus household income is not a great measure.
That’s fair enough, but personal median income doesn’t show a very different trend.
Median personal income shows that — unlike with household income — 2007’s peak is higher than the 2000 peak. However, it is only since 2016 that personal median income has exceeded the 2007 peak. That is, over the past decade the median income has only shown growth in the past three years, and median personal income was up only 4.2 percent from 2007 to 2018. That’s compared to 15.8 percent growth from 1989 to 2000.
Much of the lackluster growth is due to real declines in median incomes for men. Median income for men began to fall in 2001, and it did not exceed the 2000 level again until 2018. In other words, by this measure, the median income for men went sideways for 17 years. It fell 2.7 percent during the economic expansion from 2002 to 2007. It finally topped 2000’s median-income level in 2018, rising 0.4 percent over the 2000 peak.4
What growth we do find in median incomes is being driven in part by gains in incomes for women.
From 2007 to 2018, the median income for women rose 6.6 percent, although it only exceeded the 2007 peak after 2015. The median income for women rose an amazing 24.4 percent from 1989 to 2000.5
The Middle Class Isn’t Disappearing, So Far
Clearly, not every group is getting richer at the same rate. Moreover, median incomes took a long time to recover from the Great Recession. Yes, median incomes are now up from where they were a decade ago. But for eight years after the 2007 peak, the median household found itself worse off in real terms.
Not everyone is at or near the median, however, and many contend that larger numbers of households are slipping into lower income levels while median numbers are buoyed by a relatively small number of wealthy individuals and households.
In response to this, we should note that median numbers — as opposed to average numbers — are not easily pulled upward by a small number of very wealthy persons or households.
Moreover, if we break out households and individuals by income categories, we find little evidence that more people are joining the ranks of the low-income. Indeed, if anything, more and more people are moving into income categories we think of as being toward the high end of middle class — or even upper-middle class.
Over the past forty years, for example, the proportion of households making less than $50,000 per year has continued to decline. The percentage of households with incomes under $50,000 fell from 49.5 percent to 39.9 percent, from 1969 to 2018. It’s true that households in the $50,000 to $100,000 range also went down, dropping from 38.2 percent to 29.7 percent over the same period. But where did those people go? They weren’t going into the under-$50,000 group because that group was shrinking. In fact, there are now more households in the over-$100,000 than in the $50,000-$100,000 category.
Indeed, it looks like many of them moved up into the over-$100,000 income category because the size of that group more than doubled from 12.3 percent of households in 1968 to 30.4 percent of households in 2018. (All of these categories are measured in constant 2018 dollars.)
Breaking out the categories further, we find that the under-$35,000 category fell from 34 percent of households in 1970, to 27.9 percent of households in 2018. The middle categories, from $35,000 to $100,000 were largely flat while the over-$100,000 category more than doubled. The middle-income group isn’t disappearing any time soon, but we do find significant growth in the number of households entering the highest-income levels. Those households have to come from somewhere, any many are coming from the middle class. Contrary to the narrative that the middle class is becoming impoverished, this suggests the middle class is actually getting richer.
Gains have been less pronounced for men, although the same trend still holds. The proportion of males in the under-$25,000 income category fell from 52.6 percent in 1969 to 45.5 percent in 2018. Meanwhile, the proportion of males in the over-$75,000 category almost doubled from 13.1 percent in 1969 to 25 percent in 2018.
The proportion of men in the middle-income categories has been largely unchanged in recent decades, although the great recession appears to have pushed many men back into the lower-income category in the immediate wake of the Great Recession. Since then, the low-income category has shrunk again, and both the over-$75,000 category and the over-$100,000 category rose to all-time highs in 2018:
Women gained more than men, however, and women showed more of a shift from lower-income categories to higher ones. The proportion of women in the under-$25,000 category plummeted over forty years, dropping from over 73 percent in 1969 down to 46.4 percent in 2018. Meanwhile, the percentage of women workers making over $75,000 increased by more than twelve times over the same period. The Great Recession slowed these trends, but did not end them.
Broken out into smaller categories, we find the low-income category is falling while the $25,000 to $50,000 category has flattened. Meanwhile, the three top categories for income have increased sizably:
For women, the lowest income category has fallen considerably, while the income categories above $25,000 have all increased in recent decades. The highest income categories have increased the most, by far.
In spite of the many claims being made by both leftists and conservatives that the middle class is disappearing, and that basic amenities and comforts are becoming unaffordable. Nor are Americans separating into a bifurcated population of very-rich and very-poor groups, with only a small middle class in between. The more likely reality is that the lowest-income groups are getting smaller while the “middle class” now more frequently includes people and households in low-six-figures territory.
This isn’t to say no one is becoming worse off. Declining real incomes are a reality for many people who lack schooling, job skills, and proximity to employment. Moreover, a rising cost of living in some parts of the country can be devastating. But expensive markets like California, Boston, and New York are not the entire country, and a great many Americans have managed to realize income increases in real terms in recent years. This is now true even when compared to the peak reached before the Great Recession.
The bad news, however, is the fact that incomes took so long to recover from the last recession. More than a decade of income gains were lost in many cases after 2007, and those losses were not fully reversed for nearly nine years in some cases. Moreover, we’re now a decade into the current expansion, and even a moderate recession in the near future is likely to set income levels back twenty years.
by Ryan McMaken via Mises