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The U.S. economy has grown considerably over the past three decades. However, there is a prevailing sentiment that the middle class and the poor have been left behind. Pundits have described a squeeze on the middle class characterized by disappearing jobs, falling or stagnant wages, and rising costs for college tuition and health insurance (Egan 2004). Some polls indicate that the general public agrees with this assessment–nearly 60 percent of Americans believe that things have gotten worse for the middle class during the past decade (CBS News 2007). The conventional wisdom is that things have also gotten worse for those at the bottom, despite efforts to eradicate poverty. As Robert Siegel of National Public Radio recently stated, “it is commonplace to say that we have lost the war on poverty.” Much of this sentiment stems from official measures, which paint a bleak picture of the well-being of the middle class and the poor. Official median household income fell between 1999 and 2004, using the conventional adjustment for inflation. Since then, median income has risen but remains below its 1999 level. Official statistics are even gloomier for the poor–the official poverty rate in 2009 was higher than in 1980.
Our results show evidence of considerable improvement in material well-being for both the middle class and the poor over the past three decades.
This grim picture is inaccurate for several reasons. First, most analyses of economic well-being rely almost exclusively on narrow income measures that do not reflect the resources available to the household for consumption. These measures ignore taxes and in-kind transfers such as food stamps and often rely on underreported measures of income. For example, the official measures, which ignore taxes, fail to capture the benefits of falling marginal tax rates or expanded tax credits. Second, official statistics account for inflation using a price index that is biased upward. This bias implies that official statistics significantly understate improvements in economic well-being over time. Finally, even improved income measures fail to capture important components of economic well-being such as consumed wealth, the ownership of durables such as houses or cars, or the insurance value of government programs. For example, consider the case of a retired couple who own their home outright and who live off of savings. Clearly, their income will not reflect their material well-being.
In this paper, we provide a more accurate assessment of how the material circumstances of the middle class and the poor have changed over the past three decades. We consider several different measures of material well-being. We examine how improved measures of income, which better reflect the resources families have to consume, have changed between 1980 and 2009 for the middle class and the poor, accounting for the overstatement of inflation in standard price indices. Similarly, we analyze patterns of family consumption, which our research suggests is a better indicator of economic well-being than family income. For both middle-class and poor families, we also examine independent indicators of well-being such as housing and car characteristics.
Our results show evidence of considerable improvement in material well-being for both the middle class and the poor over the past three decades. Median income and consumption both rose by more than 50 percent in real terms between 1980 and 2009. In addition, the middle 20 percent of the income distribution experienced noticeable improvements in housing characteristics: living units became bigger and much more likely to have air conditioning and other features. The quality of the cars these families own also improved considerably. Similarly, we find strong evidence of improvement in the material well-being of poor families. After incorporating taxes and noncash benefits and adjusting for bias in standard price indices, we show that the tenth percentile of the income distribution grew by 44 percent between 1980 and 2009. Even this measure, however, understates improvements at the bottom. The tenth percentile of the consumption distribution grew by 54 percent during this period. In addition, for those in the bottom income quintile, living units became bigger, and the fraction with any air conditioning doubled. The share of households with amenities such as a dishwasher or clothes dryer also rose noticeably.
We consider several possible explanations for these patterns in material well-being. Our analyses indicate that tax and transfer policies have played an important role. Changes in tax policy have raised the resources of both the middle class and the poor. The impact of taxes is particularly noticeable for the poor, a substantial share of whom have been lifted out of poverty by more generous tax credits. Social security also accounts for some of the improvements at the bottom as the real value of benefits has grown. However, noncash transfers such as food stamps or housing and school lunch subsidies can account for only small improvements in well-being for the middle class or the poor over the past three decades. While we find that rising educational attainment accounts for some of the decline in poverty over the past three decades, in general, changing demographics account for only a small fraction of the overall improvement in well-being for the middle class and the poor. Together, this evidence suggests that other factors, perhaps most importantly economic growth, played a critical role in the improved living standards of the middle class and the poor.
Accurate measures of economic well-being are essential for evaluating existing policies and for determining the need for policy changes. The extent of economic progress for both the middle class and the poor is an important factor in the debates over key economic policy issues, including income tax policy, immigration, and globalization. Official poverty is frequently cited by those evaluating the need for and consequences of social programs, which account for a substantial amount of government spending. Programs such as Medicaid, Supplemental Security Income (SSI), and Temporary Assistance for Needy Families (TANF), as well as food stamps, housing benefits, educational grants and loans, energy assistance, and job training, cost more than $522 billion in 2002. In his opening comments in the debate on what became the landmark 1996 welfare reform legislation, former House Ways and Means Committee chairman Bill Archer said, “Government has spent $5.3 trillion on welfare since the war on poverty began, the most expensive war in the history of this country, and the Census Bureau tells us we have lost the war.” This sentiment is widespread. A large body of academic research cites poverty statistics to argue for or against specific government policies (Murray 1984; Sawhill 1988; Blank 1997; Burtless and Smeeding 2001; Scholz and Levine 2001; Joint Economic Committee 2004).
Both pundits and policymakers have issued calls to address the middle-class squeeze. Their concerns bring considerable attention to the flawed official statistics that indicate declining incomes for the middle class. President Barack Obama repeatedly cited declining median-income statistics in his 2008 presidential campaign. The middle-class squeeze has been blamed on government policies including open immigration, free trade, and globalization (Dobbs 2006), or on high budget deficits, slowing job growth, and high inflation (U.S. House of Representatives 2006). Others have argued that the declining economic circumstances of those in the middle of the income distribution relative to others was a key underlying force in the financial crisis (Rajan 2010).
The remainder of this paper proceeds as follows. In the next section, we explain how official income statistics for the middle class and the poor are measured. We also discuss the reasons why the price indices used to adjust for inflation in these official statistics are biased upward. In section 3, we argue that consumption does a better job of capturing material well-being than income. In section 4, we describe income- and consumption-based measures of well-being, as well as other indicators including housing and car characteristics. In section 5, we present the results for the middle class, and in section 6 we present the results for the poor. In section 7, we consider the potential effect that policy and demographic changes have had on the material well-being of the middle class and the poor over the past three decades. Finally, we conclude and discuss policy implications in section 8.
Bruce D. Meyer works at the University of Chicago and NBER and James X. Sullivan works at the University of Notre Dame
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