In part one, I focused on personal data and experience to address the main complaint of other generations in America today: the American dream is unaffordable. My thesis was that the problem may feel real to younger people, but the problem is one of perception and desire, not economics. In part two, let’s zoom out and look at nation-wide data to sharpen the point. In this post. I’ll rely on research by two distinguished, nonpartisan institutions: The Pew Research Center (hereafter Pew) and the American Enterprise Institute (AEI). I’ll point out the challenges to their data and interpretation, where pertinent.
Pew has been tracking the movement of people between the various income classes (lower, middle, upper) since 1970, using large, representative data samples. You can see their full report here. What they have found is the American middle class is shrinking! Both the lower and upper tiers have grown, but the upper income has grown the fastest. Note that no matter how you slice it, more Americans are better off than ever before. This does not mean everyone has done better; there are winners and losers hidden inside the data. An “upper income” person could have made disastrous financial decisions and ended up in the lower income tier, or a middle income person might have lost a job and done the same. But the overall trend is toward fewer people in the middle class, slightly more in the lower tier, many more in the upper tier. The Pew data also shows (in other charts) that the upper income tier is growing faster than the other two (I’ll come back to that).
One concern about this trend is that the erosion of the middle class removes a traditional “stepping stone,” eventually leaving just rich and poor, although the data only supports a 16% drop over fifty years, which is not exactly dramatic. One concern about the Pew data stems from their methodology and definitions. They use income as the measuring stick (which is fine), but they define middle income as income that is two-thirds to double that of the U.S. median household income, after incomes have been adjusted for household size. Lower income is the amount below that, upper income the amount above that.
That sounds–and is–reasonable. Here’s the problem, illustrated with a hypothetical: if tomorrow Bernie Sanders shook his magic money tree and rained dollars on every American, such that they doubled their income, the Pew data would remain unchanged. But the poor would not be poor, the middle class no longer middle. Thus if everybody gets equally richer, the Pew data still shows no improvement, because its definitions are relative. And one thing that is not in doubt is that Americans in general have more than ever before.
AEI has done similar research starting from a 1979 baseline and using five tiers. Their full report is here. AEI’s critics point out it uses an absolute standard to determine its tiers, meaning it treats an income in New York City as equivalent to one in Newburgh, New York, when clearly they afford different levels of economic activity. Also, such a standard allows the highest levels to”pull up” the standard, making everyone seem better off when in fact the rich are doing the best.
AEI’s data also shows a hollowing out of the middle class, but clarifies that it is primarily as a result of movement up, not down. If you look at the “all-blue” chart (below), the lower-middle and poor/near-poor are both shrinking, while an all-new category of “rich” appears and is growing.
Finally the venerable Federal Reserve reported that wealth (not just income, but the sum total of all valuable things one owns) is growing across all the income tiers, but that the wealthiest have grown the fastest! This is very important data, as I believe it explains the differences between what the economic data shows, and how people feel about affordability.
The dollars referenced in this final chart are constant ones, meaning they account for inflation (and thus the price rises that accompany it). What they show is that everybody has much more wealth than they did back in 2010, but a group of the super-wealthy (top .1%) and wealthy (top 1%) have done the best.
These three data sources do not make the argument that all is well with the wealth distribution in the United States. But they do demolish the notion that there is an affordability crisis reflected in the oft-repeated meme “the American dream in unaffordable.”
What accounts for the difference? I’ll address that in part three!