Why the U.S. Middle Classes Feel Squeezed

Why the U.S. Middle Classes Feel Squeezed



Broad division of labor is mankind’s greatest economic innovation ever, and globalization is its greatest fruit. Nothing spurs more growth and innovation. Nothing intertwines civilization more. Yet every upside comes with a downside, and the main current downside of globalization is the squeeze on the middle class in the world’s leading globalizers. Their real incomes have hardly increased in a generation, their jobs have become less secure, and their prospects have dimmed.


A recent publication of the U.S. Census Bureau gives crisp evidence of this. Called Income and Poverty in the United States: 2015, it grabbed unusual attention thanks to its claim that

“Real median household income increased 5.2 percent between 2014 and 2105.” That’s a huge and welcome one-year change in a slow-growth economy.


However, when we probe into the data, a far more disturbing picture emerges. The one-year change is an outlier in several ways, and the Census Bureau presents it more optimistically than it deserves. Here are some of the problems:


At least 30% of the 2015 surge represents what the Census Bureau previously dismissed as noise. In last year’s report, the Census Bureau dismissed the corresponding change from 2013 to 2014 as “statistically insignificant”. One has to dig into the tables to find the number: -1.5%. If that’s how they want to play it, fine, but then for consistency admit that 1.5% of this year’s surge is likely just noise.


The gain since 2013 is far less dramatic, at 1.8% per year. While a respectable three times the average pace from 1967 to 2007, that’s a relatively normal pace during a rebound. What’s most striking historically is the long deterioration before rebound. This is the first significant improvement in eight years.


The gains for citizens are even less, averaging 1.0% per year since 2013. The rest reflects huge gains for immigrant noncitizens. Median income in their households jumped by 10.5% in 2015, the sharpest gain on record for any group.


Median household incomes haven’t yet recovered to pre-crisis levels. According to the Census Bureau, they remain 1.6% below 2007 levels.


The cumulative decline since 2007 is 4.6%. The Census Bureau changed its methodology in 2013, in a way that boosted the estimated median by 3.1%. Instead of re-adjusting pre-2013 and post-2013 figures to match – the normal procedure when splicing price or income series tighter – it simply posts the two series side by side without correction.


Immigrants non-citizens have fared far better than Black citizens. In 2007 median household income was 10.9% higher for the former than for the latter. By 2015 the gap doubled to 22.3%.


Median incomes downplay growing disparities. Median incomes tell us only that half of households receive less pre-tax and half receive more. One measure of disparity is the differential between average and median household income. The Census Bureau estimates it at 40.2% – that is, the ratio of average to median is 1.402 – up four points from the 36.0% in 2008. Granted, the increase under Obama is less than half the corresponding difference under Clinton, when it rose to 36.1% from 26.8%. However, the ostensibly inegalitarian Bush administration left the ratio roughly flat.


Does this prove that profit-seeking globalization is bad in general, or opposed to middle classes in particular? Of course not. The world’s middle classes are growing at the fastest rate in history, mainly because China and India have enthusiastically joined the global economy. In absolute terms, even the underprivileged in profit-oriented America are privileged, Median Black household income in the U.S. is $37,000 per year. That’s five times average Bulgarian household income, with a cost of living about twice as high. In terms of purchasing power, average Black household incomes are about 3.5 times average Bulgarian levels.


By international standards, even the well-known ethnic disparities in the U.S. are moderate. Ratios of median household incomes are 59% for Blacks versus Whites, 79% for noncitizens versus native-born, and 108% for naturalized citizens versus native-born. The differentials across the European Union are much wider, with households averaging at least three times more prosperous in the northwest EU than in the southeast EU. Households in the southeast EU in turn tend to be far more prosperous than households in the Muslim Middle East or North Africa.


Yet that doesn’t mean that the differences within the U.S. are inconsequential. On the contrary, history shows that nearby differences matter more than remote ones, and that a common polity promotes demands for common treatment. History also shows that inequity rankles most when people feel they’re slipping and have little opportunity to advance.


Hence, the Census Bureau’s statistics undercuts the headline message of its report. The U.S. middle classes are stagnating. They are chafing at the enrichment of the upper classes and the perceived encroachments from immigrants. Dismiss them if you want as alienated or deplorable know-nothings, oblivious to the larger global picture. That’s what most intellectual and political elites thinks, both in America and across the world. Their neglect and contempt is what Trump feeds on, and key to his galvanizing middle class support.


By Kent Osband

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