What Has Happened To Our Middle Class?

First let’s talk about the meme that the “rich get richer and the poor get poorer”. That the rich are getting richer is without a doubt true. So, I won’t even go there. But, what about the poor? Are they really getting poorer? That would be a difficult case to make in America.

In Entitlement America, The Head Of A Household Of Four Making Minimum Wage Has More Disposable Income Than A Family Making $60,000 A Year. So, why does it seem that the percentage of our population that is classified as being poor never changes? Bruce McQuain of Questions and Observation uses a recent CATO Institute study to give us the answer.

The federal poverty rate is the percentage of the population below the federal poverty threshold, which varies based on family size.

A point that needs to be raised here is the poverty rate isn’t going to change no matter how much we spend because revisions to the threshold will always be such that about 15% of the population will be considered poor.

But are the people classified as being poor really poor?

Well, I’m not sure and neither is anyone else.  That’s because of the way poverty is measured in the US.  Essentially it is based solely on income.

The official poverty measure counts only monetary income. It considers antipoverty programs such as food stamps, housing assistance, the Earned Income Tax Credit, Medicaid and school lunches, among others, “in-kind benefits” — and hence not income. So, despite everything these programs do to relieve poverty, they aren’t counted as income when Washington measures the poverty rate.

So guess what remains the same?  The poverty rate.  If “in-kind benefits” were included in income calculations for those receiving them, a lot fewer of them would be considered “poor”.   And since it’s only based on income, many elderly who receive retirement incomes below the “poverty” threshold are considered to be poor despite the fact that they own paid off assets like houses and cars and live comfortably on that retirement income.  But they pad the stats and help to continue to justify the programs and expenditures.

I don’t question that there are some Americans who have fallen through the cracks and are definitely poor by any definition. However, it is not 15% or anything close to 15%.

What about the middle class?

Rick Moran at American Thinker wrote last month: Middle class wages dropping faster under Obama than Bush. Although that is true, back in 2010 The Daily Reckoning quoted this from a Financial Times article:

“Dubbed ‘median wage stagnation’ by economists, the annual incomes of the bottom  90 per cent of US families have been essentially flat since 1973 – having risen  by only 10 per cent in real terms over the past 37 years. [...] In the last  expansion, which started in January 2002 and ended in December 2007, the median  US household income dropped by $2,000 – the first ever instance where most  Americans were worse off at the end of a cycle than at the start. Worse is that  the long era of stagnating incomes has been accompanied by something profoundly  un-American: declining income mobility…

And, last year CNN Money put out this graph:

income inequality

From the CNN link they wrote:

Incomes for 90% of Americans have been stuck in neutral, and it’s not just because of the Great Recession. Middle-class incomes have been stagnant for at least a generation, while the wealthiest tier has surged ahead at lighting speed.

In 1988, the income of an average American taxpayer was $33,400, adjusted for inflation. Fast forward 20 years, and not much had changed: The average income was still just $33,000 in 2008, according to IRS data.

CNN being CNN, you won’t be surprised that they put the blame on the decline of unions. Do you agree?  I spent a lot of years in the corporate world of the mining industry. All of our mines were non-union and we worked hard to create an environment for are workers so they would not want to unionize.  There were five attempts to unionize our workers and each time they were voted down. In part this was due to the fact that we always tried to keep our wages and benefits a little better than our unionized competition. maybe the company I worked for was an exception. Maybe there is an element of truth that the decline in unions has  reduced the competition in the labor market. How much of a factor that would be, I have no idea. But, competition in the labor market doesn’t come solely from unions. Low unemployment causes competition for labor as well and over the last thirty years America has seen periods of low unemployment but there is no evidence that wages raised during those periods.

So, what is going on? Are the Occupy crowd correct? Are the one percenters nothing but a bunch of greedy bastards?  The CNN article linked above had this to say:

Meanwhile, the richest 1% of Americans — those making $380,000 or more — have seen their incomes grow 33% over the last 20 years, leaving average Americans in the dust.

Maybe there is something to what the Occupy folks say. Corporations keep setting records for their profits and upper management is being well taken care of; but the rest of their employees are seeing their wages stagnate at best.

There is, however, well defined labor market prices. There are a number of companies whose business is to produce wage data for almost every class of worker for every region of the country. It is reasonable that no company wants to be the price leader in the labor market; yet they know they must be competitive. I recall a young women who I had recently promoted to the position of Chief Account back in the early eighties. She was doing a first class job, she was very efficient and, she put in all the hours necessary without any prodding from me. In her new position, she was privy to the salaries of all our staff. One day she came to me to complain that she had a college degree and was a professional accountant and she didn’t understand why a maintenance supervisor without a highschool degree was making more than she was. I had to explain the job market to her. I told her that I could replace her, if she left, with an equally qualified person at the same pay than I could if the maintenance supervisor were to leave. The maintenance supervisors position, due to supply and demand, commanded a higher salary. That is the way the world works. But, I am not willing to let our so-called “capitalist captains of business” off the hook. While making record profits, they are missing out on what i believe would be a good business decision by not reinvesting some more in their workforce. A thriving middle class would be could for all businesses. If they don’t want to be a price leader in the labor market, I think they should consider giving vacation bonuses or Christmas bonuses. More money in the pockets of the corporate workforce would indeed stimulate our economy and they would probably see their profits grow even more. If the current trends continue, the one percent will be fine and the rest of us will be on food stamps. That would make Obama happy.

Well, that’s what I’m thinking. What are your thoughts?

17 thoughts on “What Has Happened To Our Middle Class?

  1. It’s a complex question. Out economy is in transition, and the capitalists hold on to their capital because they don’t know what’s going to happen. Regime uncertaintly explains much.

  2. I think that they are done with us. They aren’t going to reinvest crap into the middle class. Look at what these super-billionaire rich say and where they put their support: into population control. That’s what I call a hint.

  3. I believe the standard answer taught in our textbooks would be: “Let compassionate conservative and their allies in the Democratic-socialist party redistribute income.” It’s only fair, as our current president might say.

  4. That graph is misleading. It looks to me like median income has gone up about 5x, while top 1% income has done about the same. Looking at percentage changes I don’t see much of a difference.

      1. The problem is that it’s looking at total numbers instead of percentage change over time. If you look at the proportional change in income rather than the total change, you get a completely different story.

        It’s like the difference in doubling of 100 vs. 1. If they both double, then 100 becomes 200 and 1 becomes 2. Looking at it algebraically, you’d say that 100 gained 100 while 1 gained only 1, that’s not fair! But looking at percentage change, you’d say that both increased by 100%. That’s my point.

  5. And more importantly, if you don’t want the rich to get even more rich, then why would you ever support the Fed, which is the institution that hands out money at discount rates to the well-connected.

  6. Consider a quick calculation using the alternative minimum tax as a baseline when thinking about the “poor get poorer” side of the wealth equation…

    In 1992 the marred filing jointly minimum income before they had to pay the “rich person’s tax” was $40,000. In 2011 that amount had been gradually raised by Congress to $74,450.

    According to the CPI index calculator costs of $40,000 in 1992 rose to $64,131 in 2011… 10K less than the alternative minimum tax.

    That implies that the poor are, indeed, are getting richer; not poorer… just not getting richer as fast as the rich are. ;)

  7. Jim, as a fan of Thomas Sowell, I can’t believe you fell for the “income percentage” thing. I’m sure you’ve read his many pieces talking about this issue. The outcome of looking at income quintiles is completely different than if you look at individuals over time (which the IRS can do and is the data Sowell uses). “The Rich” are not a stagnant group of individuals who are getting richer. People move into and out of that group. The same is true for the poor. A very small percentage of people who are poor are chronically poor. If you look at it in terms of individuals over time, you see what experience tells you that you’ll see… people start low on the income ladder and rise as they gain experience, knowledge, and seniority until they are making far more money at the end of their working life, at which point they take a drastic cut in pay when they retire.

    A friend of mine (a Dem) was taking about this stagnation. How the middle class is not making any more now than they were in the seventies. I asked if his income is the same as it was when he first started working. Of course it wasn’t. He was making many multiples of what he’d made when he first entered the workforce. I asked if any of his friends were making the same amount as they had at the beginning of their working lives. None of them were either. How can the middle class’ income be stagnant if darned near everyone in it is making more now than they were 5, or 10, or 20 years ago? How can the middle class be stagnant when you drive to the suburbs in almost any major city and see subdivision after subdivision of McMansions? Those aren’t homes of the very rich. They’re the homes of people who’ve worked their way up the income ladder. But, for each of them, there’s someone new in the workforce, and there’s someone who retired whose income dropped.

    Sowell’s point is that when you take a demographic slice you get a very different perspective than if you look at what actually happens to people over time. Starting positions will always pay poorly because the employer is paying someone with little knowledge or experience–a person who is simply not going to be all that productive. But, it’s different people who have those jobs, because people who start eventually gain the knowledge and experience to be productive and they become more valuable. But, if you look at it demographically, incomes can appear to be stagnant, even though in reality they are not. It’s one of Sowell’s more brilliant points, I think. I love it when he challenges statistical manipulation with reality.

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