The Truth About The Middle Class

My favorite man of letters and prolific letter writer, Don Boudreaux, usually tells it like it is as he does in this letter to PBS economics reported Paul Solman. The middle-class is NOT shrinking. PBS is nothing if not a leading proponent of what passes for mainstream economics. Enjoy this letter. From Cafe Hayek. — JH

Open Letter to PBS Economics Reporter Paul Solman

Posted: 18 Oct 2012 09:12 AM PDT

Mr. Paul Solman, Economic Correspondent
PBS NewsHour
Washington, DC

Dear Mr. Solman:

Donald Barlett and James Steele assert, in your interview of them, that free trade is causing America’s middle-class to disappear (“What Happened to a Dream ‘Betrayed’? Authors Blame Trade for Middle Class Demise,” Oct. 16).

Overlook the flawed ‘economics’ that leads Messrs. Barlett and Steele to mistakenly conclude that trade with low-wage countries impoverishes ordinary people in higher-wage countries. Focus instead on their assertion that America’s middle-class is in “demise.” Recent data from the Census Bureau show that assertion to be flat wrong. Reckoned in 2009 dollars (that is, adjusted for inflation) the percent of households in America that are poor or lower-middle-income is shrinking while the percentage that are upper-middle-income and wealthy is rising.

Consider that in 1975 the percent of U.S. households that earned annual incomes of less than $75,000 was 80.6; today (or 2009, the latest year for which data are available) the percent of households that earn less than $75,000 annually is 68.4. Put differently, nearly one-third of all households in America today have annual incomes of $75,000 or more, while in 1975 only one-fifth of U.S. households were so well off income-wise. Drilling further down into the data reveals that for each of the Census Bureau’s five income categories below $75,000, the percentages of households earning these relatively modest incomes have fallen, while for each of the two higher-income categories – $75,000 to $99,999 and $100,000 or more – the percentages of households earning incomes in each of these categories have risen.*

And 1975 is no outlier among past years. Compare today’s figures to almost any other year in the past and you’ll find evidence of the same happy trend.

These data are powerful evidence that, to the extent that trade affects America’s poor and middle-class, it’s making them richer.

Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA 22030

P.S. Even these data underestimate the improvement over the past few decades in ordinary Americans’ economic well-being.  The reason is that these data do not account for the decrease in the number of people living in the typical American household; nor do they account for the increase in the portion of employee compensation paid in the form of fringe benefits.

See these data from the U.S. Census Bureau.

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12 comments to The Truth About The Middle Class

  • Marsh Lands

    I’m sorry but this makes no sense $75,000 in 1975 is equivalent to $322,593.40 in 2012, reversing the calculation $75,000 is equivalent to $17,436.81.

    So “Consider that in 1975 the percent of U.S. households that earned annual incomes of less than $75,000 was 80.6; today (or 2009, the latest year for which data are available) the percent of households that earn less than $75,000 annually is 68.4.”

    Does this mean that in 1975 80.6% of households earned less than $17,436.81? Looking at the 1975 census numbers 78.7% of households earned less than $20,000, estimating down to the $17k figure that number falls to 71.3%… its a larger middle class but not by much.

    The median income in 1975 was $11,800, the mean was $13,779 – in 2012 dollars that is $50,754.70/$59,266.86. In real 2012 numbers these are $50,054/$69,677 – showing that median has stayed less than flat but more wealth is concentrated with the top earners.

  • Hans

    Ms Lands, I agree with you that this is a poorly written piece..I really expect more from, Mr Boudreaux…

    Perhaps, he was trying to win a metric Nobell prize…

  • Obiwan

    Really bad article Jeff (I forgive you if you’re drinking heavily). The above comments on the nominal/real value of dollars are spot on. This is ‘correlation is causation’ nonsense. There are many reasons the middle class is vanishing(not the least of which is the cost of higher education and health-care).

    Fair trade enriches nations, not free-for-all trade. China does not just pay its workers less, it exploits them and the global environment.

    What if China killed their workers at the end of each month? Wouldn’t that give China a massive advantage? China is certainly killing the Chinese and global environment. My point is that if you’re a raging sociopath with no values you can become very successful in life and trade.

    Although I do believe Paul Solman is a hack. NPR has really eroded in it news programming in the last few years. It is transparently manipulative.

  • 1. I assumed that he was using inflation adjusted numbers so that there is an equivalency there. But … I wrote him and asked the question. I’ll let you know.

    2. It is a mistake to compare the middle to the top. As he pointed out, the low income cohort is shrinking and the top end is growing. But so what? His point is that there are more folks in the middle now than in 1975 and the idea of free trade is harming us is a red herring.

    3. Free trade (don’t know what “fair trade” is) has enriched individuals, not “nations.” China’s standard of living has grown dramatically since Deng’s famous “get rich is good” doctrine. They can’t solve their massive environmental problems without money and that comes from taxes which comes from businesses. Competition has forced Chinese companies to pay their workers more. That is how economies grow. The more wealth that is created, the more sophisticated the economy becomes, directing workers to higher paying jobs. Free trade has also enriched individual Americans because we get better goods a lower cost. We’ve been trading with China for 30+ years and yet our economy has grown substantially since then in real terms. True the last 10 years have been bad, but because of the Fed, not the Chinese.

    3. Don’t understand Obiwan’s comments. I don’t know any rich sociopaths. The market takes care of them early on.

    4. Not drinking yet.

  • David Pristash

    The real question is not whether the middle class today is better off or bigger that in 1975 but rather is it bigger or better off then it was in say 2005? After a peak is reached and then the trend starts to decline its easy to pick years in the distant past and claim the trend has not changed and is really still up. If we only pick two points in a long series I can probably make them say anything I want.

  • Onlooker

    I agree with Marsh Lands comment. This was very poor. I would have expected you, Jeff, to have screened this out before posting.

    Even if you use nominal dollars it’s B.S. (which I suspect is what he did here; it explains his thesis). Sure the percentage of people earning over $75,000 non-inflation adjusted is much higher today. That’s just a function of inflation, of course, and is misleading, to say the least. This is the kind of mistake made by those he would criticize (i.e. financial illiterates).

  • Onlooker

    Pristash makes a very good point as well. You can manipulate these things lots of ways. And with a paucity of critical thinking in today’s world, you can blow it right by most people. Look at the shallow political arguments we see (not to mention economic, social, etc.)

  • JB McMunn

    “Reckoned in 2009 dollars (that is, adjusted for inflation) . . .”

    What’s the fuss?

  • The tricky about this analysis is the use of “inflation-adjustment”. Unfortunately, even if we consider the government data correct, price inflation is not a homogenous phenomenon. Thus, the “median earner” may be able to afford more food, tele-communications, travel and furniture, but less gasoline, health-care, education etc.

    The comparison is (to the best of my knowledge) unfortunately impossible without a fixed measure of value. And today, since gold has been demonetized, not even gold will suffice due to central bank buying/selling and gold demands from other nations changing etc.

    An analysis per category might make the comparison somewhat better, but its still murky waters. What we can all agree on, using some good ol’ apriori theories is that the negative effect on the US middle class does not come from free trade, it comes from the mad inflationary policies of the Federal Reserve and the associated corruption of the financial sector that has resulted.

    If you are going to blame free trade with China, why not blame free trade with Florida if you are in Colorado? With a gold/commodity-backed currency trade imbalances solve themselves – and the US would have been forced to raise interest rates to prevent outflows of gold. Currently, the US trade situation is a result of paying for foreign goods with an ever-debasing currency. Yes, that makes the nation poorer, but not because of the trade, rather because of the currency debasement.

    Also, due to the cultural decadence, we have to consider the fact that many people have very short time-frames, and thus CHOOSE to live poorer for the immediate satisfaction of always spending their paycheck. Not all poverty is due to the economic system (eventhough statistical aggregates likely are), some is due to plain old stupidity.

  • Stefan Klippenstein

    The reason free trade between Colorado and Florida isn’t as problematic as free trade between Colorado and China is because Colorado and Florida generally play by the same rules where Colorado and China do not.

    I agree that there is generally a culture of decadence in America that is excessive and unsustainable. Regardless of the middle class citizen’s relative wealth today it’s probably fair to say that it would and should be far lower were it not for the unsustainable practices of the Federal Reserve and the banks you berate here with such fervour. Most Americans benefit to varying degrees from borrowed money one way or another whether they like it or not. Yes they are living in a bubble but I hesitate to say they’re stupid for doing so. After all it takes a while for even the most observant of us to realize how contrived and fragile it is.

  • Boudreaux says it was inflation adjusted. End of argument.