Blog Post

AEIdeas

In last night’s Democratic debate from Las Vegas, Bernie Sanders highlighted a key bit of modern Democratic economic theory: “The middle class of this country for the last 40 years has been disappearing.” Things have been going to hell since Nixon! (It always goes back to Nixon, doesn’t it, progressives?)

But things have not been going to hell for decades. Sure, the middle class – defined as households earning between $35,000 and $100,000 — probably has been shrinking. But through 2000, a New York Times analysis reveals, “the shift was primarily caused by more Americans climbing the economic ladder into upper-income brackets.”

I might also point out that, according to CBO, the “cumulative growth in the inflation adjusted after-tax income [including transfers] of households in the 21st to 80th percentiles” was an estimated 40% from 1979 though 2011. Could-should be better, but that’s not flat.

How about the American Dream of upward mobility? A landmark 2014 study from the Equality of Opportunity Project examined millions of tax records and found that mobility has change little in nearly half a century.

And as I wrote in my The Week column recently:

Stagnationists often point to U.S. Census Bureau data as proof that the typical American family is little better off than when Reagan took office in 1981. As economist Martin Feldstein recently pointed out, that data show real median incomes rose just 0.3 percent a year from the middle 1980s through 2013, or about 10 percent total. Not flat, exactly, but pretty darn close. And that performance looks especially weak when one considers real per person economic growth rose by 1.8 percent annually over the period, reflecting widening inequality. Again, the rich got richer, everyone else not so much. It sounds convincing. The problem is that Census data paints an incomplete picture. A University of Chicago poll of top economists earlier this year found that 70 percent agreed that the Census conclusion “substantially understates how much better off people in the median American household are now economically, compared with 35 years ago.” How far off are those numbers? Maybe quite a bit. Feldstein argues that they fail to take into account shrinking household size, the rise in government benefit transfers, and changes in tax policy. They also measure inflation in a way some experts thinks overstates the true rise in living costs. He notes that when the Congressional Budget Office took all those factors into account, it found median household income had risen by 53 percent since 1980, five times as much as the narrower Census figures. And it could be even higher. A lot higher. A growing number of economists are questioning whether our existing measures of economic growth and inflation are suited to the digital economy. A recent Goldman Sachs analysis suggests we may be understating annual economic growth by nearly a third due to our inability to accurately measure how vastly improved software and hardware are boosting productivity. Likewise, government data ignores the consumer value of free internet services like Facebook, Google, and Twitter. Put it all together, and Feldstein thinks real median household income may have risen by 2.5 percent a year over the past 30 years, not 0.3 percent. That would suggest a doubling of living standards over the past generation. And even those figures ignore welfare gains from rising life expectancy, which economists Charles Jones and Peter Klenow think could equal a full percentage point a year.

Now none of this is to say the 2000s have been some economic golden age or that high-end inequality has not risen. But what Sanders and many other progressives are doing is painting a distorted economic picture that smears American-style capitalism and the pro-market turn that began in the late 1970s. Why? To argue for a high tax and spending social democracy here just like in Scandinavia. (Of course, the Scandinavia as a “social democratic paradise” is a myth.)

Let me again point out what Obama economic adviser Jason Furman wrote in 2006 remarking on an economic debate between pessimist Larry Mishel and optimist Stephen Rose: