Who suffers in the U.S. economy?

By Edward Hadas
September 26, 2012

Barack Obama and Mitt Romney put the economy at the top of their campaign agendas. They have both focused primarily on labour – the high rate of unemployment. The attention is deserved, but other parts of the economy should not be ignored. There is the worrying decay of the nation’s capital stock – the physical, social and financial infrastructure. There is also something wrong in the consumption side of the economy, but there is a heated debate on just what the problem is.

Many commentators believe that the middle class, which makes up the bulk of the population, has a big problem: a decline in living standards. After all, the Census Bureau reports that the $50,054 median household pre-tax income in 2011 was 9 percent below the all-time peak, adjusted for inflation, reached 12 years earlier. That decline in income is so large that it must have led to some erosion in the typical family’s consumption.

Even if purchasing power really had declined by a few percent, the slide was from such a high starting place that loud complaints about deteriorating lifestyles would be unseemly. In fact, though, the median income measure distorts consumption reality. It omits services received without cost, for example healthcare provided by the government and insurers. It excludes the effects of changing taxes and shrinking household sizes. It underestimates the value of technological improvements – think mobile phones and the internet – and of the vast expansion of new, now-cheaper housing during the bubble.

These adjustments are almost certainly large enough to offset the reported decline. So the middle class doesn’t need a lecture on the virtues of making do with less. The adjustments also explain the lack of massive political indignation, even if there is evidence of minor irritation, at declining incomes. The placidity is not a sign that the American middle class has found stoic fortitude in the face of adversity. Rather, it is a reasonable response to consumption which is not really falling.

On the left, the common view is that the rich, or more precisely the widening gap at the top of the income ladder, is the nation’s leading consumption problem. For the top 1 percent of earners, income – after taxes and government transfers and adjusted for inflation – has multiplied four-fold since 1980, while the median has not even doubled. The disparity might be reduced by statistical adjustments, but the trend is real. The rapid increases in pay for celebrities, top executives and financial professionals are typical.

President Obama sometimes criticises this increase in income inequality in favour of the rich. That may be politically astute, but it dodges the ethical question of whether, and why, this change is undesirable. For egalitarian purists, it is, on principle, but the gains of the wealthy do not necessarily imply that the less well-off have fewer economic opportunities. For those who worry that the country is becoming a plutocracy the increased concentration of wealth is clearly a step in the wrong direction, but the wealthy have always had a great deal of political power in the United States.

There are good reasons not to worry too much. The actual increase in consumption which comes with an increase from very great to awesome wealth adds almost nothing to an already high quality of life. Further, more people have joined what might be called the luxury class. In 2011, 4.2 percent of American households had a pre-tax income of more than $200,000. In 1968, the proportion above that threshold (in 2011 dollars) was a mere 0.7 percent.

Another increase in inequality – against the poor – receives much less attention. For four decades until 2000, poverty was waning; the proportion of households with an income under $15,000 dollars (at 2011 prices) fell steadily. In the new century, though, the trend has clearly reversed. That is a real problem, even though the typical consumption of America’s poorer families is high by global standards.

The median cash measure understates the poor families’ decline. They have also lost out on cost-free services. Compared to richer Americans, today’s poor receive worse health care, leave their free public schools earlier and have less effective police protection. It is also worrying that today’s poor are also socially needier than the poor of their parents’ generation; overall they are less able – or, as some Republicans would have it, less willing – to help themselves.

Only a major social commitment could address this problem, but fixing poverty is low on the agenda of both candidates. Their indifference is politically sound – the bottom of the economic heap will not win them the election – but morally regrettable. Complaints about the supposed income losses of the middle class sound self-serving. Whines about the gains of the rich are often tainted with envy. A serious commitment to the poor would show that generosity still thrives in the world’s richest country.

14 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Thanks for bringing attention to the suffering of the poor. Indeed they are those who suffer the most. That said, the part of the article that describes the middle class as not suffering much does not sustain itself very well. Twelve years ago there was internet and broadband too. Also there were mobiles widely in use. In the Bay Area, California, a good place to measure what is going on, you cannot rent a studio apartment for less than $1200 a month if you are very lucky. Twelve years ago, I rented for $800. Now unemployment is at least 2% higher than when the dot com crash crisis. Everything is much more expensive.. “think Gas prices” AND surprisingly the PAY is the same or less than 12 years ago. Hardly nobody is buying a home! So the suggestion that home prices are making life easy is ridiculous. If people are not complaining much, as the article suggests, it is because people are numb from TV and they have learned over decades to “accept” what there is and the fact that probably by the time they get out of office it is 7pm -after doing extra unpaid work which they didn’t have to do 12 years ago-. By all measures the middle class is worst off. Most importantly as we age, we fall OFF middle class into Poverty Class as we realize 401K’s and other fable’s haven’t done much for us.

Posted by bitlyvideoquell | Report as abusive

A provocative post but somewhat dodgy–if not actually dishonest! Yes, poverty is increasing and it’s good to remind Reuters readers what is happening with the poor. But the angst in the middle class is quite real–and politically explosive. Health care crises and costs are still evidently the leading cause of personal bankruptcy in middle class households. And job security is now almost nil, and if you lose your job you lose health insurance. Obamacare may or may not address this issue. We shall see. Furthermore, the mortgage mess is still a drag on personal finances. Yes, many people probably did buy “too much house” at the wrong time. But many parents were (and are) looking for houses in neighborhoods with “good” public schools, as only the elite can afford private schools. And property in good school districts comes at a premium. So you have that factor. And then there is the need to pay for college…
So the middle class is battered by a double whammy to their budgets–healthcare and education. The proliferation of and lower cost of various tech toys does not compensate for these hits to the family budget.

Posted by bluepanther | Report as abusive

i now need two family incomes to keep up with what used to be one. i now pay large sums for company provided health benefits with large deductibles where i used to have free company provided health care. i now contribute 80% of my 401K without a penny more pay when i used to have a future pension, now gone, completely paid by the company. if i could have predicted the future as yiou suggest i could have sold my 17 year old house in ’07 for 400K and bought it back in ’09 for half that. your “adjustments” argument to the decline of the middle class is bogus at best.

Posted by jcfl | Report as abusive

Perhaps part of the problem is that some of the jobs that once could support a person such as administrative assistant or customer service professional have either been outsourced overseas or had the salary driven down into the minimum wage area. In 2007 an admin assistant could get $15.00 to $20.00 (if seasoned) and that could, even now, support a single person. A salary of $10.00 and below no longer supports the worker doing them even half way. Other higher salaried positions have either been reduced to levels that no longer support families or simply stayed at pre-recession levels. If you have not gone to a supermarket lately then you do not know how high prices have become. I know that I am paying double the amount for some items (meat, personal goods, etc) I paid in 2007. With no raise in pay (or worse a reduction!) how can people manage it and stay above the poverty line?

Posted by TomSuntotheMax | Report as abusive

Mr. Hadas finds that the median income hasn’t shrunk much in recent decades and concludes that, “Complaints about the supposed income losses of the middle class sound self-serving. He needs to do the math again, which wold show that the median gives a false picture when the top of the economic scale has ballooned while the middle and lower parts have been stagnant, increasing only marginally if at all. For example, the median of the following set, 3, 5, 6, 20, 90, is 6, just as it also is for the set 3,5, 6, 200, 5million.

But basic mathematics aside, the main problem presented by the great and increasing wealth disparity is that it overrides our society’s democratic process. When a small group holds more power (money, influence) than the entire remainder of the society, the political decisionmaking process of a democracy will not, does not, exist.

Posted by bcrawf | Report as abusive

I think there are three factors that no one ever talks about.

One, While the baby boomers were working and building pensions and retirements, they had less children to continue the growth to pay for it. The ratio has dwindled. Population isn’t declining, but its rate is. Included are the old 20yr government pensions. Remember those? Go to work for the government at 20, retire at 40, live good for the next 30-40 years. Every one of those retirees got replaced with an equal salary and 20yr retirement. SO the average government salary that is 40k a year actually costs 120k

Two, These unemployment numbers don’t factor in the unemployable. By that I mean the felons, the misdemeanors, the dui’s, etc. With 25% of the global prison population being right here in the US, where are these people supposed to work? If we continue, no one will pass a background check or have a clean driving record. Then what? We import workers? That’s right, we already do that.

Three, We’re full. No more continents to discover, or easy mining close on the surface, resources are getting slimmer and harder to get to. No more land grants. We face this on a global level for the first time in human history. Farm land costs more than the yield from it. We have to start thinking in sustaining terms and not interest/profit terms.

Day after day there are more and more articles attempting to generalize numbers. To declare why this is or that is. The simple fact is that the great “labour question” of the 19th century never got answered. Legal privilege never got resolved. Monopoly still exists. I fear that we, as a world, are heading to the Goldman scenario of “Give us work. If you will not give us work, then give us bread; if you do not give us bread we will take bread.”

Posted by LysanderTucker | Report as abusive

I find the points made so far very interesting, however, I don’t agree with a few. Wealthy people can give millions to any politician they wish but VOTERS choose whom they want to serve. Money may be an influence but it is no sure winner. Second, I have many middle class friends that know every detail about the latest gadgets but have NEVER picked up a book on finance. (“The Intelligent Investor” or ” Rich Dad, Poor Dad” etc.) Like Warren Buffet said,
‘Poor people spend an inordinate amount of time doing the wrong thing.” I miss the Kennedy era democrats, remember, “Ask Not What Your Country Can Do For You, Ask what you can do for your country.” The theme today is “How much can I get without effort, commitment, responsibility, knowledge, accountability or risk.”
We are all responsible for our actions. The more effort we put into it, the easier it will be to succeed. I’m tired of being a target that needs to pay more taxes. Most people that say this have NEVER made a payroll or had the responsibility I have had. We need to take care of people like war veterans and our elderly and our less fortunate. We DONT need to buy cell phones for the 4th generation of welfare recipients or Wall Street Bankers. Sorry to ramble on….. our country is a mess, pray for us all.
- mike

Posted by C23jockey | Report as abusive

When there is not enough food, the people’s attention is suddenly focused on the distribution of what there is and is it “fair”. The same with “income”. The same with “jobs”.

When the “poor” drive (in Western societies or other) and somehow have cable, big screen TVs, “bling” clothes and shoes, etc., you will find few in the “middle class” who believe society should do more for them. By and large, such people have a roof over their head most, if not all of the time. They have endless pure water piped inside their living quarters, and sanitary sewer service.

They seem to have food, beer and cigarettes…maybe some “under the table” employment? By any “world objective measure”, by an accident of birth to be born in the U.S. they would be in the top 10% of the world’s population in comparative terms of prosperity.

They have some food, some money, and a lot more children than they can afford to raise. That may be because our “society” pays them “by the head to keep producing more and more of themselves. Many “don’t want no education” and drop out of school or disrupt the process. By their own choices some thus have no control whatsoever over their lives.

How do the unemployed “poor” use their leisure? I don’t many coupon clippers among those who get whatever they call food stamps today. If they help out at the food banks, they get extra help.

They don’t seem to be reading to improve themselves at the library, or taking free college courses or auditing subjects at the community college. As jobs get fewer and fewer and less desirable, the “go-getters” with a future become entrepeneurs and the dead-enders become drug dealers.

Some deem it indelicate to point out that the vast majority of those in U.S. prisons aren’t political prisoners or otherwise there unjustly. They are paying the price of some really poor choices.

Others(?) cover every visible bit of skin (and more) with tattoos and/or get multiple “in yo’ face” piercings and wonder why they can’t get a decent job. And then there’s those kids that keep stuffing their faces every waking moment until even our military doesn’t want them.

The rules haven’t changed, people. Find a need and fill it. There’s good times and bad times. Some prepare as best they can for life’s ups and downs, others just have to suck it up!

Posted by OneOfTheSheep | Report as abusive

Rather bizarre commentary. Somehow cell phones made in China are a boost to the lower end of the income spectrum? Some how with a decreasing income, the huge middle American populace is going to have enough discretionary income to boost the economy? Somehow with health care costs increasing at double the rate of inflation, people will be able to afford their health care and drive the economy?

Get real!

Posted by Cycledoc2 | Report as abusive

This article also ignores the difficulty of young people like myself. I’m college educated and from a middle class background, but I’m no where near a middle class salary and am not sure I will ever break into that income bracket. All the careers I have looked at have low opportunity to enter, low pay, and are all getting worse. Even law is a dead end for me since unemployment for lawyers is at an all time high, while education is also at its most expensive. For us young people, something needs to be done otherwise we are going to be locked out of the middle class and then the real news story will be about how small that group has become and how large the ranks of the poor will be.

Posted by agsocrates | Report as abusive

In your first paragraph you state, “There is also something wrong in the consumption side of the economy, but there is a heated debate on just what the problem is”.

You should have quit while you were ahead because the rest of your article is not fit to line the bottom of a bird cage.

You spent the rest of the time splitting hairs about who is poor. I suggest you simply state the 1% are egregiously wealthy and the rest are in varying degrees of poor.

The answer to your quandary about what is wrong with the “consumption side” of the economy is simply 30+ years of tax and trade legislation that has bled this nation white, all to increase the profit levels of the wealthy class.

It’s hardly surprising the wealthy class doesn’t understand what is wrong, because they are the problem.

Although “they have both focused primarily on labour – the high rate of unemployment”, neither one will accomplish that goal.

I think it a bit disingenuous when the supposed “best and brightest” in this country can’t seem to figure out that decades of job outsourcing and imported cheap labor have destroyed this once great nation until we are on the verge of economic collapse.

This isn’t rocket science — it’s the greedy wealthy class who are busily destroying this country simply to increase their own wealth at the expense of the 99%.

Let me give you and all those government “bought and paid for” economists out there, the solution to ALL of this is to REVERSE THE TAX AND TRADE POLICIES OF THE LAST 30+ YEARS.

THAT will bring our jobs back and we wouldn’t have to be subjected to his inane article.

The only question at this point is whether reversing the 30+ years of tax and trade legislation that favors only the wealthy would be soon enough to prevent the US economy from crashing into another Great Depression.

My gut feeling says it is far too little, far too late.

Thanks to Bernanke and his truly insane “economic policies”, we are “off the map and there be monsters out there”.

Neither candidate

Posted by Gordon2352 | Report as abusive

It’s good to see your opinion on this @OneOfTheSheep! I agree with you in many ways.
@Gordon2352, It’s not “to late”. You can’t bring back the past . Even if you did change all of those laws and regulations and tariffs or whatever back to what they were 30 years ago they would fail miserable in new and interesting ways as the world has moved on too. How do you put a tariff on a Global R&D Center? A call center? Back Office Processing?

The Middle class of the US is not under attack by the rich, or the republicans, or the democrats. It is under attack, but it is by the global societies. The world is changing at a pace never before seen in human history. We are entering the new information age as it has been coined. I don’t know how the ancient Mayans got the timing down. It may have been shear luck on their part.
The time of the great American Middle Class has come to an end. It has served a great purpose and moved the world into the new age. It has show the world that their can and should be a middle class. Now they are aggressively moving their societies in that direction. Each in its own way, but all slowly and steadily in that direction. In a few generations, I truly believe the world will be a better place for the billions than it is now.
Unfortunately for the American middle class, 5% of the world population cannot maintain its middle class by consuming 25% of the world resources. It just won’t work. So the American middle class must change to accommodate the others. In fact I should say the current world middle class, not just the Americans. These global social changes will happen no matter what small groups of people think or do. When it comes to Seven Billion people, a couple hundred million just doesn’t sway things.

Posted by tmc | Report as abusive

@Gordon2352 – You hit the nail on the head. America must reverse the trade policies of the past 30 years.

First and foremost, America must abrogate its WTO (World Trade Organization) participation.

Then, it must abrogate NAFTA. And then it must reverse all the other trade agreements.

All those trade agreements came about under corrupt pressure from large multinational corporations whose only loyalty is to their shareholders. It is these large multinational corporations who have profited immensely from globalization, while they have betrayed the American people and sold us out.

Their ability to manipulate the press and congress, however, is unfortunately funded by the trillions of profits they are making by selling America out.

It is treason on the largest possible scale. And neither Obamo nor Romney say a word about it. They both allow the wholesale destruction of the American people to continue.

Posted by AdamSmith | Report as abusive

@AdamSmith,

So you would have America return to an isolationist society. Return to the model of the wealthy landowner with his private well-stocked pond of high-quality delicious fish. Keep everyone else away.

Isn’t this a little unrealistic and myopic? America already acquires a quarter of the world’s natural resources for use by perhaps 5% of the world’s population. Would you also have us act like the Romans of old and just take oil, minerals, etc. because we have the best military in the world? What goes around comes around.

Personally, I LIKE seeing China making things to sell here for less than we can make them. That improves the lives of the Chinese, other human beings with hopes and dreams. Back in the fifties, all they could do with their millions and millions of uneducated peasants was make bullets and bombs and keep the pot boiling in Korea. Today China has it’s own economic bleakness approaching of more and more retirees and fewer and fewer workers.

We live in a much safe world when Russian military might is quietly rusting away and the greatest “threat” to Western society comes from those who desire to return to a twelfth century existence that denies the female half of their populations any economic or political participation.

Capitalism, like all of the alternatives, is a system that has winners and losers. Sounds like you’re one of the losers, at least intellectually.

You don’t want to trade with the world, you don’t want to trade with countries south of us (or anywhere else). You believe multinational corporations are corrupt and their shareholders, mostly American people, have betrayed themselves and “sold out” in a manner you believe is “treason”. Huh?

You have heard the parable of “give a fish and feed for a day, teach to fish and feed for a lifetime”? Well, it doesn’t do much good to teach someone how to fish if they cannot fish where the fish are. Grow up. It is folly to believe America can stand alone in singular economic success while the rest of the world starves.

Posted by OneOfTheSheep | Report as abusive