The Wall Street Journal
By: Neil Gilbert
May 16, 2014
Countless reports now claim that the middle class is being crushed by inequality, declining mobility and diminishing income. A closer look at the facts suggests otherwise: Members of America's middle class are better off than they were 30 years ago, and they live much more comfortably than counterparts in other countries.
The problem with the research showing middle-class stagnation is that it looks at market incomes, which exclude taxes, government transfers and adjustments for household size. Market income is an accurate gauge of employment compensation but a misleading way to consider a family's financial resources. It overlooks the welfare state's enormous power to redistribute income.
The Congressional Budget Office's 2011 report on income inequality trends offers a more precise accounting, dispelling the notion that the past three decades have been characterized by the rich getting richer at the expense of the poor while the middle class stays about the same. The CBO adjusts market income by subtracting taxes and adding the cash value of social benefits. When households are then divided into five equal income groups, the data reveal that average disposable household income has increased across all groups since 1979. The average household income grew by 40% for the middle quintile and increased by 49% for the bottom quintile.
The CBO data also show, however, that the top quintile did much better than everyone else. From 1979 to 2010, the average after-tax income of the top 1% increased by 201%, to $1,013,100 from $337,700. The top 1% also took home almost 13% of all after-tax income in 2010. (Many of these families, though, are not ultra-rich, as the starting pretax income for the 1% in 2011 was $388,905.)
Yet even here there's more to the story. Between 1979- 2011, young workers entered the labor force as older employees retired. A 25-year-old who began working in 1979 may have started in the bottom quintile, but the worker very likely reached a higher income bracket by age 53 in 2007. So not only did entry-level incomes rise, but many who started at the bottom also climbed toward the top. Between 1996- 2005, for example, the Treasury Department estimates that about half of the taxpayers in the bottom 20% moved into a higher income bracket.
And how has the middle class fared amid the changing mobility? One might judge not well when compared with the top 1%. But consider everyone else on the planet: The American middle class boasts the fourth-highest disposable household income in the world. The U.S. finishes behind only Luxembourg (a country of 500,000 people), oil-rich Norway, and Switzerland, which stayed out of both World Wars and imposes the strictest immigration laws on the continent.
The average U.S. family has 38% more disposable income than a family in Italy, 25% more than a family in France and 20% more than a household in Germany, when adjusted for purchasing power, according to the Organization for Economic Cooperation and Development. Inequality in the U.S. is not a struggle between the "haves" and the "have-nots," but a social friction between those who have a lot and others who have more.
The public often agrees with politicians who declare that the middle-class struggles to make ends meet. But this is a quest to satiate our desires for material consumption within our limited resources, not a struggle for survival. Americans have long accepted inequality as a necessary consequence of a system that rewards merit, productivity and, often, luck. This process is sometimes distorted by discrimination, exploitation and larceny, which the government exists to address.
Movements like Occupy Wall Street have accomplished so little because members of the 99% realize that things at home are still pretty good. The fair, reliable income data reinforce that instinct with fact.