Every time I hear the mantra about the disappearing middle class, I want to ask if percentage of households in the middle three quintiles has changed. I am sure, many on Left out of ideological reflex would assure me that it has. Of course, the middle three quintiles of any distribution of income, or grades, or heights, by definition, will always contain 60% of the sample.
Mathematically literate people of any ideology quickly recognize this truth about the fraction of people in the middle quintile. Nonetheless, there many people who are genuinely concerned by the the observation that median household income seems to have stagnated. But this statistic is misleading, because it does not account for the changing nature of households. Households have shrunk in size. Steve Conover has shown that the income per worker has gone up. It is just that the number of workers per household has decreased offsetting this increase. Household, rather than individuals incomes say less about the economy and more about the way people have chosen to live their lives. Perhaps as individual income increase, people are free to opt to live in smaller households.
If you look at the distribution of income per earner as a function of time as shown below:
it appears that the middle class has just been happily pushed into higher income brackets.
Despite these statistics, many people genuinely feel that the economy has changed negatively for the “middle class” over the last few decades. I suspect that the source of this anxiety is associated with two important factors as opposed to the actual income distribution.
(1) It is very difficult to maintain a “middle-class” lifestyle with a job that is low skill. A retail worker like a shoe salesman or a low-skill factory worker used to be middle class. Low skill workers now have to compete with automation or low skill workers of other countries. The fraction of the US economy that is manufacturing is the same that it used to be, but manufacturing is now being performed by fewer and fewer more productive workers. Much like agriculture that dominated the economy in the 1800s’s, fewer and fewer people are required to produce more and more. This is as it should be. Our standard of living would be far lower if we as a country were so unproductive that low skill jobs were typical and people in them were middle income. The goal is arrange for as many people as possible to be prepared for high-skill jobs.
(2) Middle class is not what it used to be. Middle class Americans live in larger homes than their parents, have air conditioning when their parents did not, eat out more often than their parents did, and go on vacation more frequently. This does not even count the gadgets such as cell phones, computers, and large flat panel televisions that were not even available to the wealthy a generation ago. Our expectations are higher than those of our parents.
The real danger is that this anxiety will lead to government policies that reduce the dynamism of the economy in the name of security and make the progress we have already achieved less possible to sustain.
By the Numbers
Sunday, June 21st, 2009Unless you are Babe Ruth, it is risky to point to the fences to predict a homerun. Economic predictions are even more precarious then baseball ones. especially when made by politicians. Nonetheless, in the course of selling their stimulus plan early this year, Obama’s economic team confidently argued that without Obama’s Recovery Plan, unemployment would peak in 2010 at about 9%. If, however, the country adopted the Obama approach, unemployment would peak this year at less than 8%. Why would anyone oppose the Obama Recovery Plan? Congress, dominated by Democrats certainly did not stand in the way and the stimulus package passed.
The evidence is in. As of May 2009, the unemployment rate reached 9.4%, above what the Obama team claimed would be the case without the Recovery Plan at all. The economic predictions were way off even over the very short term. The blog Innocent Bystanders has been following the numbers carefully. The plot below is a reproduction from The Job Impact of the American Recovery and Reinvestment Plan, published January 9, 2009, by Christina Romer, Obama appointee to the Council of Economic Advisors, and Jared Bernstein, from Vice-President Joe Biden’s office. The two lines indicate the Obama team’s prediction of unemployment, earlier this year with and without the Recovery Plan. The points plotted in red are the actual number published recently by the Bureau of Labor Statistics.
From an historic stand point, it is interesting to compare this recession with previous ones. The plot below shows the unemployment rate for the 48 months following the minimum unemployment point for the pass recessions back to 1960. The line for the current recession is plotted in bright yellow.
To even have drawn the first plot above, projecting unemployment rates for a few years, with its implied precision, required an overabundance of arrogance. Prediction is hard, yet Obama’s economic advisers cavalierly assumed that they could make such predictions, and that these predictions could guide them as they expertly steer the economy. As the government seems to be running an ever expanding portion of the economy, we hope that Obama’s adviser’s hubris has been alleviated in the face of evidence of just how complicated and hard it is to predict future of the economy. Somehow, we doubt it.
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