Is the American Middle Class Rising or Falling?

Joseph Stiglitz, a winner of the Nobel Prize in economics and a professor at Columbia University, writes in Vanity Fair that income inequality in the United States has become so extreme that the people may soon rise in the streets the way they have in Tunisia and Egypt. That’s rather hysterical, of course, and most of Stiglitz’s column is simple assertion unsupported by the kind of argument that characterizes his scholarly publications (to be fair, he is writing in Vanity Fair , after all). In the key paragraph, however, Stiglitz does make a serious argument, and since it’s important, often-repeated, and wrong, I call it to your attention:

The upper 1 percent of Americans are now taking in nearly a quarter of the nation’s income every year . . . . Twenty-five years ago, the corresponding figure[] [was] 12 percent . . . . One response might be to celebrate the ingenuity and drive that brought good fortune to these people, and to contend that a rising tide lifts all boats. That response would be misguided. While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall.

This argument is in one respect misleading and in another respect simply wrong. It’s misleading because it suggests that the top 1 percent are not paying their fair share of taxes (Stiglitz says as much elsewhere in the article), but this is demonstrably false. According to IRS data for 2008 (the latest year for which such data are available), although the top 1 percent of income earners enjoyed about 20 percent of the income (not quite the “nearly a quarter” Stiglitz mentions), they also paid 38 percent of the income taxes. In other words, their share of the taxes is almost twice their share of the income. Incidentally, the bottom 50 percent of income-tax payers paid less than 3 percent of the income taxes, and since about 10 percent of the population does not file income tax returns at all, it is probably the case that the bottom 50 percent of Americans (including non-filers) paid close to zero percent of the income taxes (although they do pay other taxes, such as payroll taxes).

More important, however, is Stiglitz’s claim that “those in the middle have actually seen their incomes fall,” for without this claim, there is indeed a rising tide lifting all or most boats, and Stiglitz’s argument loses virtually all its force. Stiglitz cites no sources in his Vanity Fair column, but he is likely referring to statistics reported in the U.S. Census Bureau’s March Current Population Survey (CPS), which show that, although median household income rose over the 1979-1989 and 1989-2000 business cycles, such income declined about 1.2 percent over the most recent 2000-2007 cycle.

But consider this new paper by Richard Burkhauser (Cornell University), Jeff Larrimore (Joint Committee on Taxation), and Kosali Simon (Indiana University) and published by the National Bureau of Economic Research. Entitled A “Second Opinion” on the Economic Health of the American Middle Class , it shows that, as a measure of the overall economic resources available to middle-class Americans, the CPS data have at least two serious flaws. First, although the data include as income various forms of market income (such as wages, salaries, interest, dividends, and retirement pensions) as well as welfare and Social Security payments, they do not include Medicare and Medicaid benefits or employer-provided health insurance benefits. Since health insurance benefits, whether from the government or an employer, are clearly very valuable, the CPS data systematically understate the resources available to individuals.

Second, the CPS data do not account for the number of persons in a household. Thus, under the CPS approach, a single individual living alone with a $50,000 income and an individual in a family of four that collectively has a $50,000 income are treated as having the same economic resources, which is obviously not the case. If we are going to use household data, we should control for the number of individuals in the household as well as the efficiencies generated when people live together in a single household.

Using some sophisticated statistical techniques, Burkhauser, Larrimore, and Simon then correct for these factors, and find that, using this more accurate measure of economic resources, the American middle class has done quite well over time, including during the last business cycle of 2000-2007. They write, “When using our broadest measure of available resources—post-tax, post-transfer size-adjusted household income including the ex-ante value of in-kind health insurance benefits—median income growth of individual Americans improves to 36.7 percent over the period from 1979 to 2007, and by 4.8 percent between 2000 and 2007.” In other words, contra Stiglitz, middle class Americans have made substantial gains over the relevant periods. They have gotten richer—in fact, quite a bit richer—and not poorer.

This is just the headline result. There is much more in this fascinating paper, and I urge you to download it and read it in its entirety. As with many publications of the National Bureau of Economic Research, the paper is available for free to institutional subscribers (which includes many colleges and universities, meaning you can probably get it for free if you have a .edu email address), journalists, government employees, and residents of developing countries. All others can download a copy for five dollars, from either the National Bureau of Economic Research or the Social Science Research Network .