Tag Archives: Americans

Is the American Middle Class in Decline?

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Many political commentators have been complaining recently about the financial difficulties of the American middle class.  For example, a recent report from Bill Moyers and Company, “By the Numbers: The Incredibly Shrinking American Middle Class”, has a chart showing that the median middle class salary, adjusted for inflation, is now no better than it was in 1989 and not much higher than in 1979:
CaptureBut there is another point of view, very well described by the two economists, Donald Boudreaux and Mark Perry, in the Wall Street Journal just about a year ago, “The Myth of a Stagnant Middle Class”.  They make several pertinent points:

  • The Consumer Price Index overestimates inflation by underestimating the value of improvements in product quality and variety.
  • Wage figures ignore the rise over the past few decades in the portion of worker pay taken as (nontaxable) fringe benefits.  Health benefits, pensions, paid leave, etc. now amount to almost 31% of total compensation according to the Bureau of Labor Statistics.
  • The average hourly wage has been held down by the great increase of women and immigrants into the workforce over the past three decades.  Because the economy was (before the Great Recession) so strong, it created millions of jobs for the influx of often lesser skilled workers into the workforce.

Messrs. Boudreaux and Perry point out several other improvements in the quality of life which Americans enjoy:

  • Life expectancy has increased to 79 years for an American born today, five years longer than in 1980.  And the gap in life expectancy between whites and blacks has narrowed.
  • Spending by households on the basics of food, housing, utilities, etc. has shrunk from 53% of income in 1950, to 44% in 1970 to 32% today.
  • Although income inequality is rising when measured in dollars, it is falling when measured in terms of our ability to consume.  For another example, air travel is now as common as was bus travel in an earlier era.  And another: the latest electronic products are available to even middle class teenagers.

Conclusion: We should stop complaining about inequality and thank our lucky stars for the free enterprise system which has been so successful in improving our quality of life.

More on Inequality: What Does the Data Mean?

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In yesterday’s Wall Street Journal, the economist Robert Grady addresses “Obama’s Misguided Obsession With Inequality”.  The basic problem is that an important Congressional Budget Office report in 2011, “ Trends in the Distribution of Household Income Between 1979 and 2007”, is easy to misrepresent and misinterpret.  Here are three basic pieces of data from the CBO report:
Capture3CaptureCapture1The first chart shows that yes, between 1979 and 2007 the rich did indeed get richer relative to the rest of the population.  The second chart shows, however, that median household income increased by 62% during this same time period.  And the third chart shows that all five income groups made substantial gains at the same time.
As Mr. Grady says, “Here is the bottom line.  In periods of high economic growth, such as the 1980s and 1990s, the vast majority of Americans gain and have the opportunity to gain.  In periods of slow growth, such as the past four and a half years since the recession officially ended, poor people and the middle class are hurt the most, and opportunity is curbed. … The point is this: If the goal is to deliver higher incomes and a better standard of living for the majority of Americans, then generating economic growth – not income inequality or the redistribution of wealth – is the defining challenge of our time.”
So then, what is the best way to address income inequality?  Should we concentrate on raising taxes on the rich and increasing spending on social programs like we have done in the last five years?  Or should we rather concentrate on speeding up economic growth, as Mr. Grady says, in order to create more jobs and more opportunities for advancement?
Compare the enormous growth in the period from 1979 to 2007 with the stagnation of the past five years.  Isn’t it obvious which is the better way to proceed?

Can We Solve Our Fiscal Problems by Taxing the Rich? II. Robert Reich’s View

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One of America’s foremost liberal writers, Robert Reich, a Professor of Public Policy at UC Berkeley, argues in his latest book, “Beyond Outrage”, that “America’s economy and democracy are working for the benefit of ever-fewer privileged and powerful people.”  He presents “a plan for action for everyone who cares about the future of America.”  Mr. Reich’s tax policy:

  • Raise the tax rate on the rich to what it was before 1981

“Sixty years ago Americans earning over $1 million in today’s dollars paid 55.2 percent of it in income taxes, after taking all deductions and credits.  If they were taxed at that rate now, they’d be paying at least $80 billion more annually.”

  • Put a two percent surtax on the wealth of the richest one-half of one percent

“The richest on-half of one percent of Americans, each with over $7.2 million of assets, own 28 percent of the nation’s total wealth.  Given this almost unprecedented concentration, and considering what the nation needs to do to rebuild our schools and infrastructure, as well as tame the budget deficit, a surtax is warranted.  It would generate another $70 billion a year.”

  • Put a one-half of one percent tax on all financial transactions

“This would bring in more than $25 billion per year.”

These new tax provisions would together raise tax revenue by $175 billion per year.  But our deficit this fiscal year, ending September 30, 2013, is about $700 billion.  In a few years, without significant changes in either discretionary or entitlement spending, annual deficits will be back up over a trillion dollars per year and climbing.  Mr. Reich’s steep taxes on wealth and wealth creation are not enough to seriously tame deficit spending, let alone end it.
Let’s be honest and admit that some new tax revenue is probably going to be necessary in the future if we are ever going to be able to eliminate the deficit.  But it makes no sense to start out with a tax increase which will be strongly opposed anyway.  It is far more sensible to first wring out the hundreds of billions of dollars in wasteful federal spending which now exists.  After this is done there likely will still be a big deficit.  Then, and only then, would it be appropriate to generate significant new revenue by raising taxes.