Home > Uncategorized > The fall of the US middle class

The fall of the US middle class

from Steven Pressman and RWER no. 78

According to Thomas Piketty (2014), between 1980 and 2010 the share of total US income going to the top 10% of earners rose from around 30-35%, where it stood for several decades, to nearly 50%. These are very conservative estimates. Piketty’s figures come from the distribution of adjusted gross income (AGI), reported by the US Internal Revenue Service. AGI subtracts from income things like investment losses, retirement account contributions and their returns (see Pressman 2015, Chapter 2). With large adjustments, someone can make a lot of money but have little AGI; or, as in the case of Donald Trump, you can report a negative AGI of nearly $1 billion. In addition, tax-free income (such as unrealized capital gains and interest on municipal bonds), as well as returns on money hidden in tax havens, are not reported to the IRS and do not appear in AGI. Like the adjustments helping Trump avoid taxes, this income mainly goes to the wealthy and has been growing for several decades (Zucman, 2015).

As the rich received a bigger piece of the pie, everyone else got relatively less. We can see this in the falling share of income going to the middle-three income quintiles (Figure 1).

One standard economic argument for great inequality is that it generates incentives to make money and contributes to economic growth, which increases average living standards. Even if this is true, not everyone benefits from growth. Saez and Piketty (2013) estimate that since the late 1970s nearly 60% of all gains from growth have gone to the top 1%, roughly those making $500,000 or more in 2016.[1] Consequently, a typical US household has seen little improvement in their absolute standard of living for several decades. We can see this in figures on real median household income, which increased only slightly over the past quarter century – growing from $54,432 in 1988 to $56,516 in 2015.[2]

We focus here on another distributional measure – the size of the middle class. A thriving middle class is important for a number of reasons. First, there are political factors. Rothstein & Uslaner (2005, p. 52) argue that inequality reduces social capital or the trust needed to sustain democracy. Second, Robert Malthus (2008[1803], p. 594) noted: “Our best grounded expectations of an increase in the happiness of the mass of human society are founded in the prospect of an increase in the relative proportions of the middle parts.” For Malthus, the additional income that moves one from poverty into the middle class is what makes life worthwhile. Finally, a large middle class improves economic performance. Alfred Marshall (1920, pp. 529-32, 566-9) noted that higher earnings may improve the habits of working people, thereby improving productivity and everyone’s standard of living. From a Keynesian perspective, a large middle class increases consumption, effective demand and economic growth because middle-class households tend to spend larger fractions of their income than wealthy households.   read more

[1] The thresholds in Saez and Piketty (2013) need to be increased due to inflation and income not included in AGI.

[2] Remarkably, the 2014 figure was below the 1988 figure.

  1. Tom Welsh
    March 23, 2017 at 7:18 pm

    “And yet, what has the Senate done – the Senate, with its high-flown pretences of reverence for the Constitution? It has so legislated and so refrained from legislating that half of all the wealth created by the American people belongs to less than 1 per cent of them; that the income of the average American family has sunk to less than six hundred dollars a year…”
    – David Graham Phillips: The Treason of the Senate, 1906

    As a rough rule of thumb, multiply that $600/year by 100 to get a present-day equivalent, just to allow for inflation. It’s sobering to think that 111 years ago, a family earning less than the equivalent of $60,000/year was considered badly off. Now that’s what I call progress in the world’s wealthiest country.

  2. Risk Analyst
    March 23, 2017 at 9:12 pm

    In the paper your touch briefly on CEO pay and other places it is highlighted that this alone makes up a huge percent of the one-percenters misallocation. Instead of a confiscatory tax, however, I think legal improvements should be invoked. The point of the joint stock company structure has been outlived. Unlike the shared ownership aspect of why it was started, today’s shares are held on average for about only four months so share owners do not participate in pay issues. They just buy or sell for profit. One solution suggested by Glyn Holton is to separate out the voting aspect of the shares and trade that separately from the dividend and appreciation aspect of the shares. I would like to see ownership based on stakeholders and not shareholders. Either way, I’m guessing the vast majority of shareholders do not approve of CEO pay so there is market failure that could be addressed with a better market mechanism. Confiscatory taxes seem to be too blunt of an instrument.

  3. March 25, 2017 at 7:24 am

    The middle-class is a cultural category. Much more than just a focus on wealth or salary. Neo-Weberian and neo-Marxist perspectives emphasize the importance of market capacities in shaping life chances and how the middle classes differ from the working and upper class on this dimension. Neo-Marxist arguments also focus on the relationship to the means of production in terms of differentiating middle from other classes. Other perspectives emphasize studying tastes, consumption patterns, and cultural boundaries in defining class structure. This perspective is particularly important in American literature and movies. Empirically, the social sciences, apart from economics focus on the structural and cultural factors through which the middle class emerged in different national contexts and how the political, economic, and social trends of the time shape the experiences of the middle class. Since the late 20th century a major focus is analyzing the “new middle class” and uncovering in what ways members of this class differ from other classes in terms of political orientations and activities. Other work focuses on how the changing landscape of the postindustrial economy has led to economic and cultural uncertainty for many members of the middle class, resulting in an increase in consumer debt, bankruptcies, and downward mobility, as well as increases in divorce, alcoholism and other drug abuse, and loss of faith in liberal democracy. The notion of social reproduction and middle-class advantage (vis-à-vis the working class) is a theme running throughout studies of the education system and studies examining religion. Also, many studies focus on the stability of the middle class. Additional topics of research on the middle class include the intersection of gender, race, and ethnicity; the importance of geospatial dimensions of space and place; and cross-national comparative work and case studies of various subpopulations and nations. In other words, the middle-class is much more complex and layered than most economic theories can even conceptualize, much less study.

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