The Case That The Middle Class Is Doing Better Than We Think

Manhattan Institute scholar Scott Winship argues that the economy is actually still working for the middle class.

I would start with the basic point that a decline in a rate in which we improve is much less worrisome than a decline in actual living standards. It certainly is the case that we've had a slowdown in income growth since the 1970s. But the case that we've had a decline in living standards is really weak.

People tend to look at the working population along with the aging population. When they do that, they see a story of (government) transfers doing a lot of work. That's' really a story of the aging of the boomers. It's not a story about unemployment benefits becoming more important, or means-tested benefits becoming more important, for the working-age population.

Folks tend to use what I think is an inappropriate inflation adjustment. Most experts on price measure agree that pretty much all the adjustments that we have tend to overstate inflation. The one that does it the least is called the PCE deflator. It better accounts, going all the way back to the 1920s, for consumers' ability to switch between goods and services when the relative price changes. Using it really makes a difference for how you account for income growth.

There's a tricky issue of how you value health care benefits. It certainly shouldn't be zero, that value. When the (nonpartisan Congressional Budget Office) accounts for them, that makes the picture look a lot better for incomes for the middle class. It works out to a 40 percent increase since the 1970s.

There are more controversies around the research around the hollowing out of the middle class than people realize. Rather than a lot of people falling out of the middle class and becoming worse off, it was almost entirely people becoming better off. Similarly, claims about compensation not keeping pace with productivity are based on mis-analyses of pretty technical data. The argument that workers ought to be paid in proportion to the value of what they produce suggests that certain things should be taken out of productivity. Included in GDP are things like imputed rents to homeowners. That has nothing to do with what should go to workers and what should go to owners, so it really ought to be taken out of productivity when you compare productivity and compensation.

Household structure changes definitely change things in ways that I don't think people have teased out. There's a lot more subtle change. There's a lot more single-person households than there used to be. Obviously, that puts downward pressure on trends in income, because smaller households have smaller incomes than bigger households. And then you have this issue of people of similar incomes tending to marry each other, which has exacerbated inequality

Another issue is that Americans have fewer kids than they had even 35 years ago. So if you have fewer mouths to feed, even if you have lower income, that's easier to do.

It's certainly the case that median male incomes haven't grown that much. I certainly doubt that they peaked in 1973. The most optimistic scenario that I could come up with was that in 2007, median male earnings were 10-15 percent higher than they were in 1969. Even if that rosy scenario is right, that's pretty mediocre growth for men. Earnings for women have grown much more. I think there's a relationship between the two. For a long time, married women were prevented from working.

(The 2000s appear to have been quite weak economically) and I'm not sure anyone really has an answer for it. One is that there was a really short recovery between the two pretty bad recessions. There are some ways that the 00s look worse than what actually happened. There was slow job growth in the 2000s, but part of that was because of slowing labor force growth. Unemployment was relatively low for the decade until the Great Recession. You had a lot of immigration in the aughts before the Great Recession, which may have had an impact on wages and earnings.

[Going forward] more economic growth is going to be better than less, regardless of how well we're doing or how badly we're doing. With rising inequality, it is the case that more of the growth goes to the top than the bottom than in the past, but in the 90s, we had rising inequality and people in the middle were doing pretty well. I think it's unlikely that we're going to get back to the growth rates of the 1950s and 60s, but we should try what we can.

Republicans have no interest in going up to voters and saying, you're doing a lot better than you think. It's a political loser. On the other hand, there has to be room for more sunny optimism that Ronald Reagan had, or Bill Clinton had.

Hope – I think that's really important for politicians to frame their policies on that.

This piece originally appeared in Washington Post

This piece originally appeared in The Washington Post