Debunking the "Decline of the Middle Class" Myth

On this CD post about this Skeptical Optimist post, Bobble writes (with grammar/punctuation corrected):

You might want to check Steve's latest revisions. They are inflation adjusted and the income trends look pretty flat. Real income increased from 1994-2007 at approximately 1%. He still compares the period of 1994-2007 with the period 2001- 2007. If he showed the increase from 2001 to 2007 I *think* it would be around zero. He still doesn't show the increase for the top quintile. So how can we tell how the middle class did compared to the top earners? I think this guy and his charts are busted. That you are ignoring this reflects negatively on you and your website. I hope you are more diligent in your teachings.

1. If you look at the actual Census data, you'll see that: a) the datasets for household income are available from 1994 to 2007, and b) household income is NOT reported by quintile or decile, but by income categories in increments of $2,500 UP TO $100,000: e.g. under $2,500, $2,500 to $4,999..... $97,500 to $99,999, and THEN $100,000 AND OVER.

As Steve explains, "The bottom 4 quintiles of household income are easy to analyze, but the 5th (top) quintile is not. Each quintile has the same number of households in it, but only 4 out of 5 quintiles have easy-to-calculate, weighted-average income per household, and income per earner. That's why the charts don't show the highest one."

Certainly, if Census had reported income by quintile, and Steve Conover left that quintile out of his analysis, that omission would be subject to criticism. But if you look at the data, and read Steve's explanation, you'll see that it was not possible to report the top quintile because of the way Census organized the income data.

And adding the top quintile would not change the fact that "income per earner" for all four of the bottom quintiles increased between 1994-2007. In other words, the "middle class" did not disappear and income for that group and even income for the "lower class" did NOT stagnate. And if income inequality per earner did increase during that period (which we can't tell without the top quintile), it was NOT because the income of the middle and lower income groups stagnated or declined.

2. Adjusting for inflation doesn't change the original analysis that showed "income per earner" for all four bottom quintiles increasing between 1994 and 2007, at about the same rate, but with a slightly higher rate for the bottom quintile than the other three (see top graph above). Subtracting 2.5% average annual inflation from each quintile doesn't change the fact that real income per earner for each of the four groups increased between 1994 and 2007 at about the same rate (1%), except that the LOWEST QUINTILE increased at a significantly HIGHER rate of 1.5% (see bottom chart above).

Bottom Line: The value of Steve Conover's analysis is that he has converted the Census Bureau's raw data on "Household Income" from 1994-2007 to INCOME PER EARNER, BY QUINTILE, to investigate the often-reported stories about "the decline of the middle class" (305,000 Google hits), "the war on the middle class" (515,000 Google hits), etc. Whether we look at nominal income or real income, the result is the same: all income groups have experienced gains in "income per earner" from 1994-2007, and the lowest income quintile did even better than the next highest 3 quintiles. Therefore, the rich got richer, the middle class got richer, and the poor got richer.

Any analysis of household income over time will always be distorted by the facts that: a) the number of "persons per household," and b) the number of "earners per household," vary significantly by quintile, and change over time.

My own analysis showed this in a previous post, when I adjusted real median household income over time by the average number of persons per household, which has declined significantly from about 3.3 persons per household in 1967 to about 2.55 in 2007. After adjusting for household size, the real median income per person reached an all-time high in 2007, see charts below:

Comments

[venividivici:]

Oh God help me, it's you again. Just what do you hold a Ph.d. in because you are doing inestimable damage to the cause of doing such higher education.
Look I haven't had the courage to go back and look at your earlier offerings but what I do remember is that they all revolved around the theme that things were not nearly as bad they were being made out to be. Now I know you have a Ph.d. but even you should have worked out that the truth is they are far worse. In other words, you were dead wrong.
One of the signs of intelligence is realising that you made a mistake, learning from the error and trying not to make the same mistake again.
You never seem to learn from your mistakes. Look the fact is America and Americans are getting poorer and poorer with every passing day. When you are hoplessly in debt, the answer never lies in borrowing larger and larger amounts of money. That applies to a nation every bit as much as it does to an individual. But that is the solution America is adopting for its latest woes. It will only make things worse.

2008 Oct 12 09:25 AM

[Paul Killinger:]

Sagging wages and struggling wage earners are all great fodder for media tales and their blatant push for an Obama presidency. Besides, why let facts get in the way of a good story?

Meanwhile, the Detroit 3 are folding their tent in the wake of decades of mismanagement, union greed and record high gas prices. As Obama's mentor would tell us, America's chickens have come home to roost!

Now $25 billion is on its way to Detroit, with another $25 certain to follow next year. Unfortunately, it won't make any difference. They can print all the cash they want to in Washington, and while it may buy votes it won't build better vehicles.

Someday all those poor souls will learn that government handouts weren't the answer, or more likely their children will. In the meantime,
it's too bad they can't see it's the government itself (through its idiotic regime of mandates and over regulation) that's doing its best to put them out of business.

Too bad for the rest of us taxpayers and car buyers, too.

2008 Oct 12 09:25 AM

[carey_jim:]

www.cbpp.org/12-14-07i...

2008 Oct 12 01:13 PM

[CLH:]

You shouldnt have to write those well known facts (the middle class is doing well). Never the less, the middle class is disappearing because they are becoming rich. However, there so much socialistic lies put out by leftist teachers in schools that it is necessary to reeducate everyone.

Yes Carey there is income inequality between the lazy and the ambitious--thank god.

2008 Oct 12 01:52 PM

[GaryBG:]

If a person is hopelessly in debt, does that person have any responsibility for the choices made that got them there? Or, was the person forced to buy things not needed, not stay current on CC payments, not improve their education and competency in order to learn more? Is there something actually unusual about a recession and a strain on personal finance? Has no one been told that they should save for a rainy day?

Any government big enough to give you all you want is big enough to take everything you have. Lesson of the current crisis...personal responsibility is the missing behavior.

2008 Oct 12 02:44 PM

[lokiman72:]

I think the problem with the Census statistics and with our author's conclusions is pretty simple. The Census Bureau and thus Mark are taking the face value of the Income as a measure of our well-being..Presumably the data is taken from payroll data and deflated by CPI or the GNP deflator (it makes a huge difference here). However, if you do a simple balance sheet exercise and assume that many of those households were borrowing at the same time as their income was rising the estimated 1-2% real. So let's say they were consuming at a 4-5% increasing rate. At some point the interest expense starts to affect them (it grows much faster than income) and they reach a point where their outstanding debt and interest payments start to lower their ability to consume. You can see by my feeble attempt to introduce the borrowing function into the income equation that two households, one that doesn't borrow and one that does might be treated equally by the Census Bureau, yet the outcome 10 years later is quite different for the individual or family that added borrowing to his/her consumption.

2008 Oct 12 07:13 PM

[Phil Anthropy:]

It disappoints, but doesn't surprise, that choosing statistics selectively is still the most popular hobby of economists and analysts. It is absolutely clear that if the super rich become every super richer, everybody's boat rises with the tide (assuming the super rich don't trickle all their money down overseas and make the foreigners rich rathern than their American colleagues). The question is whether the rising tide in the middle class will really float a boat, or is just a wave in a bathtub.

Regardless if one's income increases by 1% per year in constant dollar terms, it decreases by several percent in terms of purchasing power against various other measures: healthcare, education, food, gasoline, housing (until the last few years), and various foreign currencies. The middle class is much better off each year in terms of dollars earned, and much worse off in terms of purchasing power.

To those who would tout this as a victory for the capitalist system, I can only say: I don't think so.

There is nothing wrong with the rich getting richer, and they will always get richer than the middle class or the poor, because that's what the "magic of compounding" does. An oak tree adds more wood each year than a sapling. Nothing can stop it. Whoever got here first-est with the most-est does better than the laggards, for a long time, with few exceptions.

The problem is that the free market is being distorted. Economies of scale would dictate that as universities grow, the courses should become cheaper in constant dollar terms. That's not happening. As healthcare becomes more automated and efficient, prices should go down, but they don't. In a free market system, estate attorneys should compete, lowering hourly fees. Instead, some states pass "acceptable" fees as part of their laws. What we have in American is a modified guild system, with barriers to entry and high pay for the anointed. This is fine, but those fees are rising much faster than per capita income, in terms of percentage.

By showing a limited selection of pretty graphs, one can gain applause for the artwork, but a more correct analysis would include a broad range of other measures and statistics, to give a well-rounded picture of economic activity and the implications of the trends.

When renowned economists can come on CNBC and vigorously disagree, it's clear that the "dismal science" is well named. Economics is a field involving nonlinearities and "butterfly effects," boundary conditions and catastrophic discontinuities, interacting rates in complex differential equation models, human behavior and psychology, and potential manipulations on a scale unparalleled in history.

However, if data is going to be presented and conclusions drawn, it is better to paint all four walls of the barn and not just the facade, if we're going to have a good picture of what's going on. Please excuse the mixed metaphor. Given our current economic climate I think that barn door was closed after the financial horse was gone.

2008 Oct 13 12:10 AM