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The myth of the disappearing middle class

By Ron Haskins,March 29, 2012

President Obama, many Democrats and editorial page writers have been working to convince the nation that it is wracked by inequality, a disappearing middle class and a lack of opportunity. The charge of growing inequality is partly correct, mostly because those at the top of the income distribution have pulled away from the rest of us. But the other charges are wrong or misleading.

First, consider the claim that the nation’s economic growth in the past three decades has gone straight to the richest Americans. The focus on the “1 percent” too often leaves out consideration of the overall distribution of income. Economist Richard Burkhauser of Cornell shows in a forthcoming paper in National Tax Journal that, when the insurance value of health care and the value of certain government transfer payments are included in income, the top 20 percent of the income distribution experienced income growth of about 50 percent between 1979 and 2007 (in dollars adjusted for inflation).

He also notes that households near the top of the top 20 percent have achieved income gains of well above 50 percent. But the income of households between the 60th and 80th percentiles grew by 40 percent, and those in the 40th to 60th percentile grew by nearly 40 percent. In these numbers, the disappearing middle class appears pretty healthy.

What about those at the bottom, supposedly floundering? Based only on their market income, the bottom 20 percent lost about one-third of its income between 1979 and 2007. But when Burkhauser calculates the impact of government transfers, the value of health insurance not paid for by households and the decline in household size, the bottom 20 percent had about 25 percent more income in 2007 than 1979. Even the bottom is moving up.

These figures on total income obscure key points about economic well-being. First, health care gets more expensive every year, and the government must pay more through the tax code, Medicare and Medicaid. Those intent on emphasizing income inequality can ignore the value of health-care benefits, but most people consider it at least as great as the value of other types of income.

A second common mistake is ignoring the contribution of government benefits to income. Our federal income tax system sends billions of dollars to poor and low-income households, substantially increasing their income and taking a bite out of inequality. Households in the top 1 percent pay about 40 percent of federal income taxes, and the top 10 percent pays nearly 75 percent.

Put another way, the federal income tax system directly transfers billions in cash from the top to the bottom. Programs for poor and low-income families, including food stamps, the earned-income tax credit, Head Start and Pell Grants, annually transfer more than $900 billion in cash and other benefits to the poor and near-poor.

In the national debate about opportunity and inequality, people tend to talk about opportunity as if it were an omnipotent cosmic force imposed on Americans by a vicious capitalist economy, the effects of which are ignored by our uncaring government. But opportunity in America depends largely on decisions made by people who are free actors.

Consider three decisions that young people make: at what points to stop their education, begin work, and marry and have children. Brookings Institution calculations of census data for 2009, a deep recession year, show that adults who graduated from at least high school, had a job, and were both at least age 21 and married before having children had about a 2 percent chance of living in poverty and a better than 70 percent chance of making the middle class — defined as $65,000 or more in household income. People who did not meet any of these factors had a 77 percent chance of living in poverty and a 4 percent chance of making the middle class (or higher). Unless young Americans begin making better decisions, the nation’s problems with poverty and inequality will continue to grow. Consider also that children of parents whose income was in the bottom 20 percent have a 45 percent chance of remaining in the bottom themselves. But if they get a college degree, they cut those odds by nearly two-thirds and quadruple their chances of earning more than $100,000.

The most shocking failure of individual responsibility is the decline of marriage and rise of nonmarital births. Brookings data show that if the same share of adults were married today as in 1970, poverty would be reduced by more than a quarter. And yet young women who have a high school degree or less education increasingly do not marry, and about 40 percent of their babies are born outside marriage, quadrupling the chance that they and their babies will live in poverty. Children from single-parent families have, on average, more developmental problems, including lower educational achievement, than children of married parents. This perpetuates poverty and lack of mobility into the next generation.

Yes, the nation needs its safety net, but improvements in personal responsibility would have a greater and more lasting impact on poverty and opportunity. This is the message that our presidential candidates, media and educational institutions should emphasize — not the misleading focus on the lack of opportunity in America.