Is the Middle Class Better Off Than We Think?

One senator challenged conventional wisdom and tried to make that controversial case.

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The Fiscal Times
March 13, 2014

It seems to be taken as given these days that the American middle class is struggling — perhaps even disappearing — as income gains are concentrated at the high end of the wealth distribution, and the kind of well-paid blue collar jobs that existed for several generations continue to disappear.

However, in a hearing on improving the situation of the American middle class on Thursday, Sen. Orrin Hatch (R-UT) made the counterintuitive argument that the lot of the middle class worker has actually improved much more than most liberals are willing to admit.

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Hatch noted the much-cited finding that median income in the United States grew only three percent between 1979 and 2007, a period covering the last three full business cycles.

“However,” he said, “if you look at post-tax, post-transfer income data that includes valuation of health insurance benefits, and take a size-adjusted household as the unit of measurement, you find that, over the same period, median income has grown by close to 40 percent, which is decidedly less stagnant.”

“I know that I make these observations at great risk of being accused of denying stagnation, inequality, or any number of struggles facing the middle class,” Hatch said.

Hatch also made them at the risk of being nearly incomprehensible, so here’s the gist of his argument, which appears to be based on the paper, A “Second Opinion” on the Economic Health of the American Middle Class, by Richard V. Burkhauser, Jeff Larrimore, and Kosali I. Simon and published by the National Bureau of Economic Research in 2011.

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Hatch is saying that if you consider households — many of which have more than one income-earner — rather than individual taxpayers and add in the effect of tax breaks, the value of employer-provided health insurance benefits, and payments from the government such as food stamps and Workers’ Compensation payments, things don’t look nearly as bad for the middle class as some might think.

Greg Mankiw, chairman of the Harvard Economics Department and former Chairman of the Council of Economic Advisors under George W. Bush wrote on his blog late last year that measurement suggested by Burkhauser et al. seems “more relevant” than a measure that simply looks at median cash income, even though the income model “often gets more attention than it deserves.”

Of course, not all economists feel that the Hatch view of middle class progress is fair. David Madland, managing director of economic policy for the Center for American Progress, said that while it is perfectly reasonable to consider things like government transfer payments, tax breaks, and employee benefits, those added factors don’t tell the whole story.

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Most of the increase in the median income that has taken place over the last three business cycles occurred in the 1980s and ‘90s, Madland said, pointing out that you have to go back 14 years to get to a point where the median wage in the U.S. actually increased.

“At the same time, the cost of core middle class goods: health care, housing, higher education have grown much faster,” Madland said.

Even with tax changes, transfer payments, etc., Madland said, applying the same standards to the people at the top end of the income distribution shows an increase of 260 percent over the same period. “So sure, if you squint right, you can make the middle class look okay, I guess,” he said. “But most people think the middle class has done quite poorly.”

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A longtime reporter on the intersection of the federal government and the private sector, Rob Garver is National Correspondent, based in Washington, D.C. He has written for ProPublica, The New York Times and other publications.