What Middle Class?

11 May

Is the middle class doing worse or better since the 1970s? Depends, but if so, just barely. Is this the right question to ask? No. Let us explain.

Recently, a number of commentators have begun pushing back against the claim that the past thirty years have seen stagnating fortunes for the middle class. The claim comes from a variety of sources, perhaps most prominently from Piketty and Saez’s work on inequality. They have argued that median incomes have stagnated and that, from 1979-2007, the median income is up just 3% in real terms. But other mainstream economists think the data answers a poorly framed question. Meyer and Sullivan, two mainstream economsits, argue that “material well-being” for poor and middle income households has increased. Burkhauser et al. claim that if we look at post-tax and transfer household income, rather than pre-tax and transfer individual tax unit income, then the median household had seen a gain of 36.7% in their overall income.

Can everyone be right? Oddly, yes. The reason is that the difference here is not about the data – which we for the moment assume is more or less accurate – but the interpretation of the data. It is true that, as P-S say, the median, pre-tax and transfer individual median income is up just 3%. It is also true that, as Burkhauser et al. say, the median household post-tax and transfer income is up 37%, and that it is also true, as Meyer and Sullivan argue, that the material well-being of the poor is better than it was thirty years ago. That everyone can be right is only the beginning of the story.

Let’s take Meyer and Sullivan first. Note that material well-being or ‘standard of living’ can improve even as the poor take home a decreasing share of the overall social product. It is perfectly reasonable for Meyer and Sullivan to point out that economic growth over the past thirty years has made more high quality goods and certain amenities (like air conditioning) cheaper, and thus available to those who couldn’t afford them. It would be hard to imagine capitalism surviving if it did not improve material conditions. But this improvement in the standard of living is perfectly compatible with increasing exploitation of workers. At least since Marx we have known that immiseration is not an absolute but relative process. We can have increasing living standards for many, while those same many control less of their time than before. If $100 used to buy a black and white TV and now it buys an HDTV, then that qualitative improvement in material human well-being is perfectly consistent with stagnating compensation, declining bargaining power and more injustice. It might take only three hours for society to produce all the things I can buy with $100 rather than the four hours it used to. And so, if all I have is $100, my overall claims on society have been reduced, even if the quality of my goods have improved. Put another way, if originally I had $100 and GDP was $10000, and now I have $100 but GDP is $20000, then just because I have higher quality goods doesn’t mean that my fortunes are increasing.

It would of course be wonderful if we organized production for the sake of human needs, not profits. But it is pretty clear that is not Meyer and Sullivan’s interest in offering material human well-being rather than income and wealth as the measure of growth. Terry Eagleton once said that ideology works by being true in what it affirms but false in what it denies. It is true that standards of living have improved since 1970s, but it is false to think that refutes the concerns people have regarding inequality and growth.

Burkhauser et al. are taking a different tack. They argue that, if we want to know how the poor and middle class (whatever exactly the ‘middle class’ is) are doing, then we need to look at “real compensation.” We have to factor in not just pre-tax and transfer ‘market income’ but all the sources of compensation. After all, why should we care about what people take home before they pay taxes and claim benefits? Surely we care what households take home all things considered. And the real compensation by household has grown over the past 30 years, by about 37%. In fact, even in the worse period, from 2000-2007, while individual market income (pre-tax and transfer) declined by 5.5%, real compensation still grew by 4.8% because of elements of the tax code and public benefits, like welfare, earned income tax credit, unemployment benefits, and so on. Burkhauser supplies the following graph to illustrate his point:

Again, his own terms, Burkhauser is right. Real compensation has grown. Though note, two things. First, real compensation has grown very slowly: 1% per year, and has slowed to a near stop in the past decade. Further, “real compensation” has grown mainly because redistributive state measures have been large enough to cancel out declining individual wages and stagnating household wages. In other words, the market has been unable to produce jobs at the median level that compensate any better than they did thirty years ago (and below the median, real wages are decidedly worse.) Without progressive taxation and redistribution, real compensation would be down. In fact, the implication of Burkhauser’s data is that, for most people, the market has not created better jobs than thirty years ago. The bottom end is hanging on through transfers, not bargaining power and quality work. So when Burkhauser says “the notion that we as a society are not doing as well as we were 30 years ago, I think by virtually any reasonable measure, is just false,” this is not even true by his own measures. It’s certainly not true by the conventional conservative standard that people not be dependent on the state.

So far, we have just been considering the arguments on their own terms. In both cases, the authors do not prove that the economic situation over the past thirty years has been desirable or improving, which was their central intent. But that does not mean that the mainstream, default focus on median market income is still the right way to evaluate economic development. The median unit, whether it is an individual or household, is a narrow concern. It says nothing about class structure, how the worst off are doing, nor about economic possibilities and alternatives. For one, changes in wealth, not just compensation, are better indicators of class structure and advantage. In our society, it is wealth, especially financial wealth, more than income that confers security, greater bargaining power, and overall social power. And by that measure, our society is more unjust and exploitative. Recall this graph, showing decline in wealth for the lowest 60% of the population:

When we combine this graph, with some data on the actual distribution of financial (non-real estate) wealth, we are reminded why ‘median’ and ‘middle class’ are more ideological than they are analytical concepts.

Those who have no reasonable alternative but to sell their labor, as diverse a group as they are, still constitute roughly 80% of the population. These statistics suggest that behind ‘median’ income and compensation there is a much different distribution of wealth, and thus a different class structure than concepts like ‘middle class’ can make sense of.

We can ask even further questions – what kinds of jobs are being created, or could be created? Who controls job creation? Who has the freedom to ‘innovate’ and ‘create,’ and who serves the creators? An economy, after all, is never just about making new things, it is always about making new things under specific social conditions. Those social relationships always have to be reproduced, along with the goods and services that get produced. These are concerns about class structure and social power that mainstream economists are rarely interested in, but which cannot be dismissed by gesturing at living standards and compensation.

3 Responses to “What Middle Class?”

  1. philmader May 11, 2012 at 1:31 pm #

    Excellent work, people at TCM. I assume all of the figures used here refer to wealth and compensation in the USA? A country with a rather peculiar understanding of “middle class” to begin with; see: “Two In Ten Americans Expect To Be Millionaires Within Next Decade” (http://www.huffingtonpost.com/2011/09/19/millionaires-in-us_n_969787.html). There was a better statistic a few years ago, which had a full quarter of Americans believing they were among the richest 1 percent in the country; sadly that stat appears to have now disappeared under the flood of “1 percent” statistics on the Internet.

    Anyhow it would be fascinating to perform the same sort of analysis for the global “middle class”, since following Branko Milanovic “The richest 1 percent of people in the world receive as much as the bottom 57 percent, or in other words, less than 50 million richest people receive as much as 2.7 billion poor.” (http://ideas.repec.org/p/wpa/wuwphe/0305002.html) which by wealth must be even more shocking.

  2. JH May 11, 2012 at 3:38 pm #

    Your response to these economists seems to lump alot of separate questions together.

    Here is one question:

    (1) Has the real income of people at the bottom of the distribution increased in the past 30 years?

    I don’t see why the economists you criticize are wrong to answer “yes” to this question. You’re right that this may only be because these people received transfers from the state. But that doesn’t show that Burkhauser et al.’s answer is wrong. Maybe it’s bad to take money from the state, but that’s a separate issue. The charts you cite about wealth do not refute their answer because these are relative changes in wealth, not absolute changes. Maybe these relative changes in wealth show that society is more exploitative. Or maybe not. I don’t see how we can answer this question just by looking at the distribution of wealth.

    Here is a separate question:

    (2) Is the distribution of income is just?

    You can answer “yes” to (1) and “no” to (2). I doubt that these economists take an explicit stand on (2). Here is another question:

    (3) Is average or aggregate well-being higher now than 30 years ago?

    Meyer and Sullivan explicitly concede in their paper:

    “While our results provide strong evidence that the well-being of the middle class and the
    poor has improved considerably over the past thirty years, we should emphasize that all of our measures of well-being focus on material circumstances. Clearly, overall well-being depends on more than just consumption or the resources available for consumption. For example, our analyses do not capture changes in leisure time, health, or other factors that are important determinants of well-being. These alternate indicators of well-being provide an interesting area for future research.”

    Burkhauser et al. say something similar. They are not trying to answer the question that you are imputing to them. My own opinion is that the answer to (3) is clearly yes. But that does not answer question (2).

    • JH May 11, 2012 at 3:53 pm #

      I should add that maybe you’re right to say that we should not focus too much on question (1). But it seems to me that question (1) is at least relevant to answering questions (2) and (3), even if other questions are even more important. So it seems to me like it is worth asking question (1).

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