Which Countries Had the Highest After-Tax Income at Each Income Level, Since 1980

The Upshot

A bit of erosion was always inevitable. Not only is there no law dictating that the richest countries should stay the richest countries, at every level of income, forever; but also there is a principle of convergence, which says that less-rich countries should eventually catch up, either by trade, mimicked technology, or the casual discovery of trillions of dollars of subterranean resources on their property (hey, Norway!).

To understand why it's been such a rough few years for the American middle class, it's more useful to find closer comparisons than small, northern European countries. A new report from the Center for American Progress finds that Australia and Canada "have experience continuing middle-class growth," while for the U.S. it has halted. Indeed, when I used the World Top Incomes Database to compare the income growth of the "bottom" 90 percent (not the most precise metric for "middle-class families," perhaps, but a fair approximation for "not-rich families"), I got this:

The Income Growth of the "Bottom" 90 Percent, Indexed to 1980 Incomes

World Top Incomes Database

So, a bunch of squiggles followed by a great divergence around 2001, when the United States falls off a ledge, Canada takes a massive step up, and Australia takes one of those proverbial marsupial hops.

There is no question that policy differences between the U.S., Canada, and Australia play a role (the U.S. does not do as much as other rich countries to redistribute wealth to poorer households), but the fact that our middle-class fortunes have forked so dramatically in just a decade suggests that perhaps there is more to the picture than tax rates. Australia, for example, avoided recession during the financial crisis because a voracious Chinese economy was busy gobbling up its iron and coal exports. Mining accounts for as much as 25 percent of the Australian economy, and the U.S. has no similar crutch. Meanwhile, Canada has been throwing a debt-fueled house party at the very time that the United States has suffered a housing crash. Canada and Australia are lucky—in geography, resources, and business-cycle timing—in ways that the U.S. has not been in the last 15 years.

Indeed, the U.S. middle class in 2015 is the victim of both chronic and acute maladies. Chronically, the bash brothers of globalization and technology have clobbered middle-class jobs, hacking away at manufacturing employment and hollowing out routine-based work that paid okay wages. (At the same time, low-skill immigration in the late 1980s and 1990s reduced the average income of the poorest American families.) More acutely, the Great Recession delivered the mother of all housing crunches, which has been terrible news for the lower and middle classes. Five years into the recovery, construction and manufacturing employment is still in a six-million-job hole (24 million in 2000; 18 million today).