Correcting the myth of middle-class stagnation and moving beyond class warfare rhetoric

Last June, I debated the merits of privatizing government programs with Dane Smith, President of Growth & Justice, on MPR’s Midday.  At one point the conversation turned to comparing private sector wages with public sector wages.  In response to a caller that made a strong case for the public sector being overpaid, Smith retorted that the real problem is that the private sector is underpaying the middle class.  He made the familiar claim that middle-class wages have been declining while incomes of the rich are increasing and tax cuts were, in part, to blame.    

Smith had some statistics at the ready to make the point.  I, on the other hand, did not have statistics at the ready.  I admitted that there may be some growing inequality.  However, I made the claim that there has been a rising tide that has lifted most boats in this economy over the past few decades.    The new issue of The American includes an article by Steve Conover with data showing that I may have conceded too much.

You can understand why I conceded that the incomes of the rich have been rising faster and faster relative to everyone else.  It has long been the conventional and unchallenged wisdom of the day.  Just yesterday, in response to President Obama’s proposal to tax the rich, the New York Times published an online debate over the question “Do taxes narrow the wealth gap?”     Not one writer questioned the premise that the income gap continues to grow and grow or that the middle class are being squeezed tighter and tighter.    

Conover challenges the conventional wisdom.  In preparing his doctoral dissertation, he dug into Census data and presents evidence that “middle-class income growth outperformed that for the overall economy as well as that for the rich” in the years following the Bush tax cuts. 

Not surprisingly, whether the middle class performed better than the overall economy and the rich depends on how you define the middle class.  The median income, a common classification of the middle class, did underperform the economy between 2000 and 2007, but Conover shows that that’s not the whole story.  He separates households into income quintiles and measures the growth rate in total income per full-time-employee between 2000 and 2007.  It turns out that no matter how you define the middle class in terms of quintiles—middle 20 percent, 40 percent, 60 percent, or even 80 percent—middle-class income growth beats the top 20 percent, top 10 percent and, yes, the top 5 percent.

Admittedly, the story would be different if we were measuring income growth rates between 1980 and 2007.  The conventional wisdom that income inequality grew in the 1980s and ‘90s is not being disputed here.   

The point, rather, is that incomes of the rich may not be continually outpacing the middle class as everyone seems to assume. 

A more important point may be that the stall in rising income inequality happened as the Bush tax cuts were introduced.  I’m not saying there is, without question, a direct correlation between the two, but I will say that the timing makes it harder to blame income inequality on tax cuts.

Conover draws an important conclusion from this data. 

Because we now know that, if past is prologue, the middle class should automatically get its fair share of future growth under current tax policy, as it did during the Bush years of the recent past—which means it shouldn’t be necessary to spend any of our limited time for national discourse on whether or how to redistribute the benefits of whatever growth our economy can muster. The time we’ll save by sidelining the redistribution argument and the class-warfare rhetoric can be much better spent on the overwhelmingly important problem of how to kick the economy into higher gear, back to robust growth rates approaching 4 percent or more. The debate about our economy can now focus freely on which policies are best in the long run for creating jobs, jobs, jobs.

Of course, the Census data that Conover uses is just one indicator of the relative health of America’s middle class in comparison to the rich.  Other indicators, such as total wealth, add more to the story.  Nonetheless, the fact that middle incomes grew faster than top incomes in the years following the Bush tax cuts offers a new and important insight on America’s middle class.